COMPANY ANNOUNCEMENT

The following is a Company Announcement issued by Lombard Bank Malta p.l.c. (the 'Bank') pursuant to the Listing Rules issued by the Listing Authority.

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Further to the Bank's Company Announcement issued on 21 March 2019 (LOM 233), attached hereto is the Bank's 2018 Annual Report.

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Dr Helena Said LL.D. Company Secretary

25 March 2019

Head Office 67, Republic Street, Valletta VLT 1117 MALTA. Tel: 25581117 Fax: 25581151 e-mail: [email protected] www.lombardmalta.com

ANNUAL REPORT 2018

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Chairman's Statement to the Members

During the past year the Lombard Bank Group again achieved satisfactory results given the prevailing business conditions, recording a pre-tax profit of €13.8 million. The main driver of this positive outcome was the performance of Lombard Bank Malta p.l.c. (the Bank) as MaltaPost p.l.c., the other member of the Group, registered a small decline in profitability.

At the Bank, the benefits of strategic policy decisions taken in recent years continued to show through in spite of a challenging operating environment. At a time when suspicious transactions at a few licenced credit institutions have cast a shadow over the domestic banking industry, it is reassuring that the increase in the Bank's profits in 2018 was achieved without compromising its traditionally prudent approach to business. This includes limiting relations to those customers who meet our demanding standards, not only in deposit taking and in lending operations but also in international banking business; prioritising capital protection over short-term financial gain in our treasury activity; and avoiding exposure to economic sectors which have proved to be inherently risky. The fact that we continue to enjoy the confidence of our correspondent banks is no accident.

The Bank's adoption of a low-risk business model also explains why the introduction last year of a new International Accounting Standard, which was widely expected by the industry to result in higher levels of provisioning against estimated future losses on financial exposures, in fact required a much-reduced claim on our financial resources than in previous years. As a result of this smaller topping up of provisions, the year's profit figure was able to reflect almost entirely the contribution of the Bank's income-generating activities to the bottom line.

Among the latter, three in particular drove the acceleration in operating income, which exceeded the target set for the year. The first was the Bank's loan book, which again grew strongly in 2018 as the portfolio became more diversified, including an encouraging take up of home loans. The fact that total lending has expanded by almost half since 2016 testifies to the Bank's concrete contribution to the development of the Maltese economy. This credit expansion produced a marked increase in net interest income, and this notwithstanding a fifty-basis point reduction in the average loan interest rate to its lowest level in recent years. Furthermore, it was also accompanied by another contraction in the amount of credit facilities which in technical banking terms are considered as 'Non-Performing Exposures'.

The second source of increased income were the Bank's placements with other banks, where judicious treasury management designed to lessen the impact of negative interest rates on euro-denominated deposits proved rewarding. A third contributing factor was higher income generated mainly by our lending and transaction and international banking business activities. The latter experienced strong demand in response to continued investment in this sector.

The Bank's operating expenses rose at a slower pace in 2018 such that the cost-to-income ratio fell after rising the previous year. Employee compensation and benefits, the major cost item, increased somewhat even though the average size of the staff complement was broadly unchanged, reflecting the need to recruit more specialized expertise and to retain existing staff in a tight labour market characterised by wage inflation. Investment in information technology hardware and software, in staff training programmes as well as the hiring of legal and other professional services also entailed higher outlays.

The outcome of the Bank's operations during 2018 was an increase in the profit before tax to €12.6 million, and this has made it possible for the Board to recommend a gross dividend of five cent per share. As a result of this solid performance, which reflects a return on equity at Group level of 8.3%, shareholders' funds rose to €108.3 million. At the same time, the total capital ratio reached 14.7% and the liquidity coverage ratio 385.6%, both higher than the previous year and already well above the statutory thresholds that had been set to be achieved in 2019. The leverage ratio, meanwhile, at 10.4%, was more than three times the required level. These

Chairman's Statement to the Members

financial buffers suggest that the Bank has the potential to expand its operations further while remaining within the parameters of the risk appetite set by the Board as well as complying with regulatory requirements.

With regard to MaltaPost p.l.c., the company's operations during the past year were conditioned by particularly unfavourable circumstances. The continuing decline in Letter Mail volumes combined with postal rates which have remained static, and the lowest in the EU, for five years, on the one hand, and sharply increased costs associated with recruiting and retaining staff in a competitive labour market while servicing an extensive delivery and retail network, on the other, resulted in a 14% drop in profits to €2.6 million. While continuing to argue the case for more realistic postal rates, therefore, the company will seek to further develop revenue generating activities and products in related business areas such as logistics, document management and financial services.

During the year the Board continued to closely monitor developments concerning the 49.01% shareholding acquired by the National Development and Social Fund (NDSF) from the Cyprus Popular Bank Public Co. Ltd The Board took note of the announced intention of the NDSF not to increase its holding in the Bank nor to act in concert with any other shareholders, but rather to seek to reduce it in an orderly manner, at the right market conditions and by agreement with the regulatory authorities. The NDSF further confirmed that it has no intention of exerting influence on the operations of the Bank. In this regard the Board believes that it would be in the best interests of all stakeholders if the shares were to be widely spread among the public as this would ensure that the Bank remained focused on serving the Maltese economy in the long-term.

Going forward, the Board is aware that sustaining profitability, even in a fast-growing economy, is especially challenging with persistently low interest rates eating into net interest margins, increasingly demanding and costly regulatory and compliance obligations, stricter provisioning and capital requirements and growing competition from new technology players, at times operating under a different regulatory regime. In these circumstances the Board draws comfort from the Bank's established brand and robust balance sheet fundamentals to continue building on a growth strategy which, as this Annual Report testifies, is consistently producing added shareholder value. In particular, we envisage further diversification into new products and services and continued investment in IT and proven technologies, including cyber security systems, and qualified human resources.

In this regard, however, we believe that a balance needs to be kept between the introduction of innovative means of delivering banking services productively and a prudent approach to risk-taking in the deployment of stakeholders' funds. While keeping a close watch on fintech developments so as to exploit potential opportunities for efficiency gains, therefore, the Bank will continue to play its intermediation role, providing a safe haven for bone fide customers' deposits and deploying these funds to finance the economic activities of creditworthy borrowers.

The encouraging financial results achieved by the Bank during 2018 owe much to the professional competence and dedication of the staff and the management team ably led by the Chief Executive Officer, Joseph Said. On behalf of the Board I would like to thank them, as well as you the Bank's shareholders for your support and all our customers for their continued loyalty.

Michael C. Bonello Chairman

The results for the Group combine the financial performance of Lombard Bank Malta p.l.c. and Redbox Limited, which is the company holding the Bank's shares in MaltaPost p.l.c.

Summary Overview

This has been a positive year for the Bank. Our financial performance continued to improve and maintained the upswing experienced over the last four years. This consistency over the longer term is a particularly satisfying aspect of our performance, which was achieved without compromising our prudent and conservative approach to business.

In view of positive economic indicators, the European Central Bank proceeded with its strategy of winding down its non-standard monetary policy measures in anticipation that the Eurozone economic recovery would last. Although growth was not as strong as that in 2017 and slowed down in the latter part of 2018, expansion is expected to continue into the coming months albeit at a slower pace than previously forecast. In this current scenario, the historic low interest rates brought in by the ECB after the 2011 sovereign crises, are expected to be held at current levels at least through the summer of 2019.

The Maltese economy continued performing at a sustained rate, with GDP growth well above the Eurozone average. Growth is forecast to continue into 2019 and 2020, driven mainly by domestic demand also buoyed by investment in the health, technology and telecoms sectors and private consumption.

This favourable economic environment positively influenced our revenue streams, despite our operations remaining conditioned by cost and competitive challenges - not least insofar as resourcing of staff is concerned.

Our transaction banking activities remained robust even in the face of added competition for payments and money transmission services. Growth in our commercial loan book, where we enjoy excellent relationships and reputation, offset lower average rates resulting in tight interest margins. In managing this growth, we paid careful attention to ensure that our strict credit assessment criteria and management processes were adhered to at all times.

In retail banking, particularly home loans and card products, we continued to invest in systems and people, in what were essentially greenfield business lines for the Bank. In addition, preparations for launching our new investment services offerings are nearing completion. We took time to ensure that the proposed product mix is simple and appealing.

Our subsidiary, MaltaPost p.l.c., faced highly challenging operating conditions, as tariffs, determined by the Universal Service Obligation, have stood unchanged for over four years with related expenses increasing, particularly labour costs. In this respect we continued liaising closely with the Malta Communications Authority with a view to maintaining the longer-term sustainability of the Universal Service Obligation.

Review of Financial Performance

Group Profit before Tax for FYE 2018 was €13.77 million, an increase of 55.3% over that of 2017. Net Interest Income at €17.51 million was up by 13.5%.

Fee and commission income also rose as a result of increased credit facilities, wealth management services and transaction banking activity.

MaltaPost again experienced declines in Letter Mail volumes, though this factor was offset to some extent by the benefits derived from diversification. Growth in eCommerce was significant and document management services recorded encouraging results. Group Postal Sales and Other Revenues increased by 5% to €39.25 million with corresponding increases in relative costs included under Other Operating Costs. In 2018 MaltaPost announced a Profit before Tax of €2.64 million.

Other Operating Costs for the Group rose by 7.2% mainly, though not exclusively, attributed to risk and compliance costs.

Employee Compensation and Benefits increased by 4.1% to €20.77 million. We consider competitive and sustainable remuneration as important factors to retain our investment in human capital.

Investment in the Group's ICT systems and infrastructure remains driven by the dynamic nature of our business and our determination to continually improve resilience across all our technology platforms. Considerable resources were also spent on areas relating to compliance and regulation. The Bank's Cost Efficiency Ratio was 47.4% (FYE 2017: 51.4%). That of the Group stood at 77.8% (FYE 2017: 79.6%), a reflection of the high-volume, low-margin, network and labour intensive postal services business. These ratios remain satisfactory when compared to other entities in the respective industry segments.

From 2018 onwards, Impairment Allowances are to be based on statistical methods prescribed by the new accounting standard IFRS 9. As we expected, calculations following the new methodology did not reveal any significant divergences in the required level of provisioning from previous estimates. This reflects the high quality of the Bank's financial assets as well as the collateral cover held. The Change in Expected Credit Losses and Other Credit Impairment Charges was a charge of €0.23 million in 2018, compared to a charge of €2.83 million in 2017. Significant improvements continued to be registered in the repayment patterns of customers who are now more sensitive to the need of abiding by the agreed terms and conditions of their borrowings.

Loans and Advances to Customers increased by 19.3% to €511.12 million from €428.61 million. Advances to Deposits Ratio stood at 64.9% compared to 58.5% at the start of the year.

Liquidity and Own Funds

Total assets as at FYE 2018 stood at €950.07 million (2017: €882.75 million), while Equity Attributable to the Shareholders of the Bank increased by a further 12.7% to €108.31 million. Net Asset Value (NAV) per share stood at €2.45 (2017: €2.18). Group Earnings per Share (EPS) increased to 19.1 cents. Return on Assets (ROA) increased to 0.9% from 0.6% while post tax Return on Equity (ROE) was 8.3% (2017: 5.4%).

The Bank's prudent approach resulted in a Total Capital Ratio of 14.7% on a CRD IV basis, well over the minimum 8% requirement. Customer deposits increased by €54.89 million (7.5%) to €788.04 million.

Treasury Management

When determining the placement of funds our main objective remained capital protection, thus we engaged mostly in short-term interbank transactions and only with reputable counterparties and local government, where our positions consisted mainly of Government of Malta Treasury Bills and Stocks.

We continued to dedicate efforts in maintaining healthy counterparty relationships, which are important for our access to international currency and money markets via our network of correspondent banks.

Risk Management

The identification, assessment and acceptance or controlling of risks is the primary role of the Risk function and as a process is incorporated in all activities of the Bank. Through quantitative techniques or qualitative analysis, where practicably possible, all risks inherent in the Bank's operations are identified, quantified, mitigated or accepted. Risk assessments were carried out in various departments.

These exercises provide an evaluation of operational risks within the areas examined and where necessary also propose mitigating measures against identified risks. Risk assessments constituted the main input in the collation of a Bank-wide risk register which is expected to continue during 2019.

Our Risk function reports regularly to the Audit & Risk Committee. These reports are complemented with various stress tests on the Bank's main financial indicators to ensure we have in place appropriate measures and processes to minimise the impact of simulated events, were these to occur. Monitoring of Non-Performing Loans continued so as to ensure that we remained in line with the targets set by the Regulator.

'Pillar I' requirements of the Capital Requirements Regulation/Capital Requirements Directive IV (CRR/ CRD IV) and any additional regulatory buffers were fully met. Moreover, our Internal Capital Adequacy Assessment Process (ICAAP) established that 'Pillar II' risks were also fully complied with. Through its Internal Liquidity Adequacy Assessment Process (ILAAP), the Bank showed that it had the necessary current and future liquidity to ensure sufficient funding.

We believe that the Bank has ample liquidity as evidenced from its Liquidity Coverage and Net Stable Funding ratios. At FYE 2018 these stood at 385.6% and 133.1%, respectively. While such ratios ensure financial stability, our prudent policies guarantee that regulatory requirements are met at all times.

Human Resources

The year closed with the signing of a new Collective Agreement for period 2019 – 2022 with the Malta Union of Bank Employees. This latest Agreement includes improved terms and benefits for staff. At the Bank, as at end of year, we increased the headcount to 175, while the total number of staff of the Group increased to 938. We are aware that attracting, motivating and retaining staff is a challenge in a labour market which is increasingly mobile and tight. To this end we intensified our recruitment programmes, which remain based on searching, selecting and engaging a mix of suitably experienced staff with others just starting out on their careers. We also intensified our efforts to retain staff and encourage communication between staff and their managers / leaders to foster exchange of views, concerns and ideas. We provided learning opportunities for staff to improve their skills and technical qualities. Our training programmes range from lecture room sessions to on-the-job learning. Training in the areas of Risk and Compliance was ongoing also through external training programmes.

Our staff remain key in the achievement of results and the success of the Group.

Projects

Projects were predominantly related to technology, premises and numismatics. New management systems were implemented delivering a wider range of services through our ATMs. The ATM network was extended with additional ATMs installed in a select number of MaltaPost outlets. In the coming year we intend to continue deploying offsite ATMs in locations that are suited to assist us extend our reach. Systems were also implemented to facilitate delivery of new products and services and improve existing ones. Other technology projects relate to satisfying requirements arising from new and updated regulatory obligations. We also started looking at ways to improve the efficiency of cash handling both in branches and at our ATMs.

We also embarked on a number of projects to improve our infrastructure and retail reach. These include the acquisition of new sites and improvements of current offices. Other investments in the network continue to be considered.

In a joint project with the Central Bank of Malta three gold bullion coins were issued in late 2018. These legal tender

coins, classed as investment gold, were issued in three weights and denominations. A limited edition of sets of these bullion coins was issued and sold out shortly after issue. We look forward to further cooperation with the Malta Coin Centre of the Central Bank of Malta.

Community Involvement

We are aware that all Group stakeholders endorse our commitment to actively support the local community and are proud of the emphasis placed on supporting socially meaningful initiatives. We do this in various ways and preferably in an unobtrusive manner.

We also continue to cooperate with the Malta Postal Museum, thus assisting in safeguarding Malta's postal heritage.

Outlook

While it would be unwise to expect next year's results to match this year's rate of growth, we are cautiously optimistic and shall continue on our path of measured growth.

The consistency of our performance confirms the robustness of our time-tested business model and this should allow us to register further sustainable growth albeit at a slowlybut-surely pace. Rather than be distracted by the prospect of short-term and opportunistic gains, we prefer to focus on what we know and do best – namely, the building of longterm customer relationships and serving responsibly the Maltese community at large.

We therefore enter 2019 with enthusiasm and determination supported by a solid set of results, healthy ratios, a strong balance sheet, a loyal customer base and a fine team of staff members.

Joseph Said Chief Executive Officer

The Group

The Lombard Bank Group (the Group) consists of Lombard Bank Malta p.l.c. (the Bank), Redbox Limited and MaltaPost p.l.c., a subsidiary of Redbox Limited. Tanseana Limited is a subsidiary of MaltaPost p.l.c.

Principal Activities

The Bank was registered in Malta in 1969 and listed on the Malta Stock Exchange (MSE) in 1994. It is licensed as a credit institution under the Banking Act, 1994 and is an authorised currency dealer and financial intermediary. It also holds a Category 2 Investment Services licence issued by the Malta Financial Services Authority (MFSA) in terms of the Investment Services Act, 1994. It is a member of the Depositor Compensation Scheme and the Investor Compensation Scheme set up under the laws of Malta. The Bank is also a member of the MSE for the purpose of the carrying out of stockbroking on the MSE. The Bank has a network of branches in Malta and Gozo providing an extensive range of banking and financial services. A list of branches, outlets and departments is found on page 29 of this Annual Report.

Redbox Limited, a company virtually wholly owned by the Bank, was registered in 2006. During the year under review, Redbox Limited continued to serve as the special purpose vehicle holding, as at 31 December 2018, the Bank's 71.5% shareholding in MaltaPost p.l.c., with the remaining 28.5% of the ordinary share capital of MaltaPost p.l.c. being held by the general public. MaltaPost p.l.c. was listed on the Malta Stock Exchange on 24 January 2008. MaltaPost p.l.c. is Malta's leading postal services company, being the sole licensed Universal Service Provider of postal services in Malta.

Tanseana Limited was established in 2016 to carry out document management services and other related services being offered by MaltaPost p.l.c.

Review of Performance

An overview of the development in the Bank's business and that of its subsidiaries during the year under review together with an indication of likely future developments may be found in the 'Chief Executive Officer's Review of Operations' of this Annual Report.

Results for 2018

Profits after taxation of €8.9 million and €8.2 million for the Group and the Bank, respectively were registered for the twelve months ended 31 December 2018.

A gross dividend of 5 cent per nominal 25 cent share (net 3.25 cent) for the twelve months ended 31 December 2018 is being proposed for approval by the shareholders. A resolution to this effect will be proposed to the Annual General Meeting.

Board of Directors, Senior Management and Heads of Department

The composition of the Bank's Board of Directors, Senior Management and Heads of Department is shown in the section on 'Company Information' on page 28 of this Annual Report and further information is given in the 'Statement of Compliance with the Principles of Good Corporate Governance'.

Risk Management

The Financial Risk Management note to the Financial Statements (note 2), illustrates the process of how the Group identifies and manages its risks and uncertainties. The main categories of risk described in this note are credit risk, market risk, liquidity risk and operational risk. The same note includes extensive detail of the processes undertaken by the Bank to manage these risks.

Statement of Directors' Responsibilities for the Financial Statements

The Directors are required by the Companies Act, 1995 to prepare financial statements which give a true and fair view of the state of affairs of the Group and the parent company as at the end of each reporting period and of the profit or loss for that period.

In preparing the financial statements, the Directors are responsible for:

ensuring that the financial statements have been drawn up in accordance with International Financial Reporting Standards as adopted by the EU;
selecting and applying appropriate accounting policies;
making accounting estimates that are reasonable in the circumstances; and
ensuring that the financial statements are prepared on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business as a going concern.

The Directors are also responsible for designing, implementing and maintaining such internal controls as they deem necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and that comply with the Companies Act, 1995 and the Banking Act, 1994. They are also responsible for safeguarding the assets of the Group and the parent company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The financial statements of the Bank for the year ended 31 December 2018 are included in this Annual Report, which is being published in printed form and made available on the Bank's website. The Directors are responsible for the maintenance and integrity of the Annual Report on the website in view of their responsibility for the controls over, and the security of, the website. Access to information published on the Bank's website is available in other countries and jurisdictions where legislation governing the preparation and dissemination of financial statements may differ from requirements or practice in Malta.

Statement of the Directors pursuant to Listing Rule 5.68

The Directors confirm that, to the best of their knowledge:

the financial statements give a true and fair view of the financial position of the Bank as at 31 December 2018, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU; and
the Annual Report includes a fair review of the development and performance of the business and the position of the Bank, together with a description of the principal risks and uncertainties that they faced.

Investment Services Rules for Investment Service Providers

In accordance with Rule R4-5.3.5 of the Investment Services Rules for Investment Service Providers regulated by the MFSA, licence holders are required to disclose any regulatory breaches of the Rules or other regulatory requirements in this Annual Report. Accordingly, the Directors confirm that no breaches of the Rules and no other breach of regulatory requirements, which were subject to an administrative penalty or other regulatory sanction, were reported.

Information provided in accordance with Listing Rule 5.70.1

There were no material contracts to which the Bank, or any of its subsidiaries were a party, and in which any one of the Bank's Directors was directly or indirectly interested, except for transactions disclosed in the notes to the financial statements.

Going Concern

In compliance with Listing Rule 5.62 and after having duly considered the Bank's performance, the Directors declare that they expect the Bank will continue to operate as a going concern for the foreseeable future.

Listing Rules – Disclosures

In terms of Listing Rule 5.64, the Directors are required to disclose the following information.

As at the Annual General Meeting held on the 26 April 2018, the authorised share capital of the Bank was €20,000,000 made up of 80,000,000 ordinary shares of a nominal value of 25 cent each. As at that date the issued and fully paid up share capital of the Bank was €11,044,479 divided into 44,177,914 ordinary shares of a nominal value of 25 cent each, all of one class. As at 31 December 2018 the authorised and issued share capital remained the same.

Equity attributable to shareholders of the Bank as at 31 December 2018 stood at €108.3 million.

Amendments to the Memorandum and Articles of Association of the Bank are effected in conformity with the provisions in the Companies Act, 1995. Furthermore, in terms of the Articles of Association:

Directors may be authorised by the Bank to issue shares subject to the provisions of the Memorandum and Articles of Association and the Companies Act;
Directors may decline to register the transfer of a share (not being a fully paid share) to a person of whom they do not approve;
Directors may decline to recognise any instrument of transfer, unless accompanied by the necessary evidence;
no registration of transfers of shares shall be made and no new particulars shall be entered in the register of members when the register is closed for inspection; and

• the Bank may, from time to time, by extraordinary resolution reduce the share capital, any Capital Reserve Fund, or any Share Premium Account in any manner.

Currently there are no matters that require disclosures in relation to:

holders of any securities with special rights;
employee share schemes;
restrictions on voting rights or relevant agreements thereto; or
significant agreements to which the Bank is a party and which take effect, alter or terminate upon a change of control of the Bank.

The Remuneration report on page 25 refers to the financial contributions towards Retirement Gratuities that the Board of Directors approves from time to time. The same Board has resolved that a retirement gratuity be eventually paid on an ex gratia basis to the Chief Executive Officer on his retirement.

The rules governing the changes in Board membership are contained in the 'Statement of Compliance with the Principles of Good Corporate Governance'.

Shareholders holding five per cent (5%) or more of the share capital of the Bank:

	Shares in Lombard Bank Malta p.l.c.
National Development	at 31 December 2018	at 5 March 2019
& Social Fund (NDSF)	49.01%	49.01%
Virtu Holdings Ltd	9.41%	9.41%
GlobalCapital Life
Insurance Ltd	5.55%	5.55%
First Gemini p.l.c.	5.31%	5.31%

Directors' Interest in Group Companies

Joseph Said, who is a Director of the Bank, is also a Director of the following companies that have a shareholding in the

Group as follows: Shares in Lombard Bank Malta p.l.c. at 31 December 2018 at 5 March 2019 Safaco Ltd 42,188 42,188 First Gemini p.l.c. 2,344,134 2,344,134 Shares in MaltaPost p.l.c. at 31 December 2018 at 5 March 2019 Safaco Ltd 44,745 44,745 First Gemini p.l.c. 36,341 36,341

In addition Joseph Said holds preference shares in Safaco Ltd.

Other Matters

On 16 March 2018, the Board of Directors was notified that pursuant to a share purchase agreement of the same date, the National Development and Social Fund (the NDSF) agreed to acquire from Cyprus Popular Bank Public Co. Limited (CPB) 21,651,746 ordinary shares in the issued share capital of the Bank, representing 49.01% of the total issued share capital of the Bank. This purchase was to be subject to a number of conditions.

(Company Announcement LOM223).

On 10 August 2018, the Bank received notice from the NDSF that further to its previous notification referred to above, all the conditions contained in the share purchase agreement between the NDSF and CPB had been satisfied, including the approval of the Malta Financial Services Authority (and the European Central Bank) for the acquisition of the shareholding in the Bank by the NDSF. The NDSF further notified the Bank that the transfer of shares between the NDSF and CPB pursuant to the above-mentioned share purchase agreement took place that same day by means of an off exchange transaction.

The NDSF reaffirmed that:

it did not intend increasing its holdings in the Bank;
it would not act in concert with any other shareholders;
it would seek to reduce its shareholding in the Bank in an orderly manner, at the right market conditions and
by agreement with the regulatory authorities; • it had no intention of exerting any influence on the operations of the Bank; and
this acquisition would not result in a change in control of the Bank.

(Company Announcement LOM228).

On 9 November 2018, the Bank was notified by the NDSF of its firm intention to dispose of all or part of its shareholding in the Bank and to commence the process for the disposal in an orderly manner. The NDSF informed the Bank that the completion of the disposal would be conditional and dependent on market conditions, regulatory approvals and other conditions which are currently being evaluated by the NDSF.

(Company Announcement LOM230).

Audit & Risk Committee

The Audit & Risk Committee is composed of non-executive Directors and is intended to ensure effective internal controls, compliance and accountability. The Committee also acts to ensure that high ethical standards are maintained, as explained in the 'Statement of Compliance with the Principles of Good Corporate Governance' in another section of this Annual Report.

Auditors

PricewaterhouseCoopers have expressed their willingness to continue in office as auditors of the Bank and a resolution proposing their reappointment will be put at the forthcoming Annual General Meeting.

Non-Financial Statement

The Companies Act requires that a non-financial statement be included in this report containing information on the

Group's development, performance, position and impact of its activity, relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters and this in the form of particular disclosures on certain aspects. In seeking to comply with these obligations, guidance was sought from the European Commission Guidelines on non-financial reporting (methodology for reporting non-financial information) (2017/C 215/01).

The Bank is a Malta-based bank and for financial stability purposes is considered by the Central Bank of Malta as a core domestic bank, catering mostly for the local economy, and therefore actively supporting economic actors in their activities. The Bank's loan book is largely characterised by lending selectively to the commercial sector, although with the Bank's continued execution of its strategic priorities in respect of broadening of its product and services portfolio, growth in the mortgage lending book gathered momentum.

Lending is funded by a diversified deposit base and underpinned by solid capital and liquidity ratios. The Bank has never relied, and does not intend to rely, on the interbank market for its funding requirements, and retains ample liquidity from its retail operations. This approach to business underpins the Bank's image and facilitates pricing decisions. In this respect the Bank seeks to progress slowly, prudently yet surely, as evidenced by the quality of its assets and relationships. The Bank follows risk review processes to ensure that business is in line with risk appetite frameworks, which themselves are also reviewed periodically in light of developments and emerging risks.

The Bank's plans to broaden its product and services portfolio in a manner which complements rather than crowds out its traditional business focus remain in implementation.

As a result the Bank continues to invest in the development of business along three main lines, viz commercial lending, retail and transaction banking and investment services. The Bank's business model is based on building stakeholder value by delivering financial services and solutions in a prudent, yet innovative and cost effective way and by setting the highest standards in professional behaviour. The Bank's competitive strengths are in its unique business operating model, its conservative outlook towards risk and its robust fundamentals. The characteristics of its business model give the Bank a competitive advantage, enabling it to continue to deliver value to all its stakeholders in a challenging environment which remains highly competitive and increasingly regulated. The Bank's brand, which stands for the provision of personalised and tailored financial services, remains strong.

The Bank's subsidiary, MaltaPost p.l.c. ('MaltaPost') was registered in 1998 and listed on the Malta Stock Exchange (MSE) in 2008. MaltaPost is Malta's leading postal services company, being the sole licensed Universal Service Provider of postal services on the Maltese Islands in terms of the Postal Services Act (Chapter 254 Laws of Malta) and under the terms of the Universal Postal Union Convention and Constitution on behalf of the Government of Malta. It is regulated by the Malta Communications Authority and has a network of 40 Post Offices and 32 Sub Post Offices around Malta and Gozo providing an extensive range of postal and financial services.

Postal services remain characterised by a decline in Letter Mail volumes and in the relative income. This business line however still requires the company to maintain a labour intensive and extensive delivery and retail network in order to meet its Universal Service Obligation. MaltaPost therefore continues to pursue its diversification into logistics, document management and financial services. In respect of logistics, MaltaPost's strategy will necessitate closer concentration on this area of business and the related eCommerce market so as to keep up with demand and higher expectations. MaltaPost therefore remains committed to be the trusted postal and logistics operator offering a comprehensive product portfolio.

Tanseana Limited, a company wholly owned by MaltaPost, was established to enter into any agreement or make any arrangement relating to the company's business to provide document management services and to carry on such services

which include, but are not restricted to, scanning, printing, shredding, storage and retrieval of digital and/or physical documents.

The Bank's acquisition of the majority shareholding of MaltaPost facilitates its induction to financial services, intended to target a market segment different from that of the Bank and this within the diversification strategy adopted by MaltaPost. The Bank has itself successfully executed a focused market strategy targeting specific retail and corporate financial services market segments, with a reputation for delivering personalised services. MaltaPost similarly intends to follow a focused market strategy as a 'low cost financial services' provider. MaltaPost is well placed to execute this strategy in view of its widespread network of outlets, many in core community locations which benefit from high footfall and walk-in custom.

The Group Boards of Directors pursue policies and practices designed to meet all regulatory and legal requirements and also to assist in the discharge of responsibilities and in the execution of business models and strategy. The Boards' functions are fully described in respective charters, which are reviewed periodically.

The purpose of the charters is to promote high standards of corporate governance and clarify the role and responsibilities of the Boards and their committees, which enable the Boards to provide strategic guidance for the companies and provide effective management oversight. The oversight function concerns the review of management decisions, including approval of major decisions, the adequacy of systems and controls and the implementation of policies.

The effectiveness of the adopted policies is evidenced by, among other things:

the Group's strong ethical culture based on trust, integrity and professional behaviour;
the rigorous custodianship of property entrusted to the companies by customers in the normal course of

business and shareholder capital;

the pursuit of long-term corporate and financial objectives as against short-term gains;
assurance of ongoing compliance with all applicable laws and regulations;
risk awareness and oversight in the determination of risk appetite and risk profile;
adoption of the four eyes principle in a manner which pervades all operations; and
accountability through suitable reporting frameworks.

The Boards are confident that the companies benefit from satisfactory diversity of views and expertise allowing for proper discharge of responsibilities.

The Group's strong governance framework is supplemented by clear organisation structures and reporting lines, and welldefined procedures embedded in processes throughout the Group and is subject to ongoing review.

As stated above, the Financial Risk Management note to the Financial Statements (note 2) sets out the process by which the Group identifies and manages its risks. The principal risks discussed in the note are credit risk, market risk, liquidity risk and operational risk. The processes undertaken by the Bank to manage these risks are explained therein.

Social and employee matters are given full attention by the Group. The Group's human capital is a key resource for the carrying out of business. The ability to attract and retain human resources of the right skill, mix and experience condition to a large extent the Group's performance. The risk of not attracting or retaining the appropriate quality staff in line with the Group's business needs is mitigated generally by the approach to managing this resource and specifically through a number of measures. Information on employees is found in note 30 to the Financial Statements.

Collective Agreements are in place at the Bank and MaltaPost, setting the conditions of work and generally, regulating the employer / employee relationship. The prevailing Agreements contain a number of measures of assistance to staff including

days of special paid leave additional to those stipulated at law. The Bank also extends a number of products and services to Group staff on favourable terms.

During the year under review the Bank took action on a number of points following a review of results of a staff engagement survey held the previous year. A number of staff social events are organised and Group staff associations are supported through funding and other initiatives.

The Group is committed to ensuring the highest levels of health and safety and physical security of staff in accordance with the Occupational Health and Safety Authority Act, 2000. Occupational health awareness training is also provided.

The Group carries out health and safety risk assessments to ensure that situations that may pose risks to the health and safety of staff and others on Group premises are identified and mitigated. Some Group staff benefit from personal accident insurance cover and others benefit from private health care insurance, as well as death in service.

Investing in learning and development equips staff members with the knowledge and expertise to work in line with applicable internal policies and handbooks. Fully fledged training facilities are in place with a training manager responsible for keeping staff members well trained. As in previous years, during 2018 Group staff members attended classroom training and followed on-the-job training programmes.

All staff is treated on equal terms with regard to training, career development and appointments and the Group supports and practices gender equality and diversity. Remuneration levels are regularly reviewed to ensure that they are in line with the Group's Remuneration Policy.

Positive conduct is reinforced and Group culture promoted. The Group abides by all applicable laws, rules and regulations relating to employment. While conscious of the fact that the legal obligations are the minimum acceptable standard, the

Group strives to surpass standards in this area and continues to increase awareness among staff. The Group, for example, well exceeds the obligation to have 2% of the total staff complement composed of persons with disabilities. This reaffirms the Group's social outlook and its commitment to create a positive impact in society.

The Group holds and processes confidential data and for this purpose has the necessary data protection policies, procedures and safeguards to prevent the unlawful use of data, whether this might be as a consequence of data protection and / or human rights considerations. Regulatory data protection is given high importance, and similar to other aspects governed by regulatory frameworks, developments are monitored, analysed and resulting changes adopted as necessary.

The Group is satisfied with its non-financial performance in respect of staff related matters in areas such as work flexibility and well-being. Group staff members make use of family friendly measures which the Group commits to developing further. Performance in the area of adoption by staff of the Group's culture and values is considered satisfactory and is manifested in the interaction with customers, among colleagues and in the general manner in which staff members conduct themselves.

The Group strives to conduct business in a way that not only protects but also values and respects the human rights of all stakeholders. For example, economic sectors that may be linked to violation of human rights or to social vices are avoided and services that promote financial inclusion have been introduced. Financial inclusion is considered to improve people's overall welfare and social development.

The Group has a zero tolerance policy to bribery and corruption and breaches of the relative laws and regulations. Bribery and corruption are serious criminal acts and the Group strives to act with integrity, care and diligence in all its undertakings.

Policies, procedures and controls such as those deriving from anti-bribery and corruption and whistle-blowing policies, are embedded in the Group's structures in order to ensure that staff members act responsibly within the work place and outside. The same standards are expected from any third parties providing services for or on behalf of the Group. Staff members who fail to comply with the Group's policies and standards may face disciplinary action, up to and including dismissal or termination of employment. Training sessions keep staff members abreast of their obligations at all times.

The Group is mindful of its obligations to safeguard the environment as much as possible and aims to minimise the environmental impact of its business particularly when assessing applications for financing of certain projects. Besides assisting in the reduction of costs, being environmentally friendly and taking measures to reduce its carbon footprint fits within the overall corporate social responsibility objectives of the Group. Measures are in place to reduce and recycle waste, procure energy efficient equipment, and periodically update the Group's motor vehicle fleet with reduced fuel emissions and electrically powered models. Installation of PVA panels and other energy efficient installations such as air conditioning systems and light fittings is carried out where practical. In addition, the Bank launched a scheme to encourage the main categories of its staff members to use

public transport. The scheme effectively provides for free public transport during office hours.

The Group continues with its efforts to preserve buildings of architectural importance now serving as modern and functional branches / offices. 'Restoration with respect' continues to be the Group's motto when acquiring and renovating buildings of architectural heritage and value, delivering them back to society in their original splendour. In past years, awards were received for outstanding and significant contributions to Maltese cultural and architectural heritage. The Group is committed to continuing its work in this regard. MaltaPost runs a postal museum in a restored building in Valletta housing an extensive collection of artefacts related to Malta's history as depicted in postal material from the 15th century. The museum is now firmly established as part of Malta's heritage.

Premises, including self service areas and ATMs, meet all accessibility regulations, apart from where physical restrictions make this impossible, in which case discussions with the relevant regulating bodies are held.

The Group remains committed to dedicating resources to the matters outlined above which it considers to be important aspects of its varied and extensive business activities.

Approved by the Board of Directors on 6 March 2019 and signed on its behalf by:

Michael C. Bonello Joseph Said

Chairman Director and Chief Executive Officer

A. Introduction

In terms of the Listing Rules of the Listing Authority (Listing Rule 5.97), Lombard Bank Malta p.l.c. (the Bank), as a company having its securities admitted to trading on a regulated market, is obliged to report on the extent to which it has adopted the 'Code of Principles of Good Corporate Governance' (the Principles) embodied in Appendix 5.1 to Chapter 5 of the same Listing Rules, as well as the measures which have been taken by the Bank to ensure compliance with these Principles.

While the Principles are not mandatory, the Board of Directors of the Bank has endeavoured to ensure that they are upheld to the fullest extent possible, and this while acknowledging that good corporate governance is indeed beneficial to all the Bank's stakeholders. The instances in which the Bank has departed from the Principles are explained below under Section C - 'Non-Compliance with the Code'.

After having carried out a review of the extent to which the Bank has been compliant with the Principles throughout the financial year ended 31 December 2018, the Board of Directors, in terms of listing Rule 5.94, presents its report as follows:

B. Compliance with the Code

Principle 1: The Board

The Board of Directors of the Bank consists of five (5) Directors, four (4) of whom are non-executive Directors together with the Chief Executive Officer of the Bank who is also a Director. The Directors, individually and collectively, are considered fit and proper to direct the business of the Bank, having the necessary skills and experience to be able to do so.

In order to assist it in the execution of its duties and responsibilities, the Board of Directors has set up a number of committees and these include the Audit & Risk Committee, the Assets & Liabilities Committee, the Credit Committee and the Suitabilities & Evaluations Committee, all of which are regulated by their own Terms of Reference as approved and periodically reviewed by the Board.

Principle 2: Chairman and Chief Executive Officer

Different individuals occupy the positions of Chairman and Chief Executive Officer. A clear division of responsibilities exists between the Chairman's responsibility for the running of the Board of Directors and the Chief Executive Officer's responsibility for the running and managing of the Bank's business. This separation of roles of the Chairman and Chief Executive Officer avoids concentration of power, authority and unfettered discretion in one individual alone and differentiates leadership of the Board from the running of the Bank's business.

The Chairman's responsibilities, inter alia, include: (i) leading the Board and helping it reach its full potential, particularly by facilitating the effective contribution of Directors and encouraging discussion; (ii) setting of the Agenda for Board meetings; (iii) ensuring that the Directors receive precise, timely and objective information so that they can take sound decisions and effectively monitor the performance of the Bank; (iv) ensuring that all strategic and policy issues are appropriately discussed and formally approved; and (v) maintaining effective communication with the Bank's shareholders at all times.

As stated below, the Chairman meets the independence criteria set out in the Principles.

On the other hand, the Chief Executive Officer is responsible for managing the day-to-day business of the Bank in conformity with the agreed plans, policies and strategies approved by the Board.

Principle 3: Composition of the Board

The following Directors served on the Board during the period under review:

Michael C. Bonello Graham A. Fairclough Kimon Palamidis Joseph Said Michael Zammit

All Board members are non-executive Directors who are not engaged in the daily management of the Bank, with the exception of Joseph Said who is also Chief Executive Officer of the Bank. Furthermore, the Board considers Michael C. Bonello, Michael Zammit, and Kimon Palamidis as independent Directors. Mr. Zammit is still considered to be independent despite the fact that he has served on the Board for more than twelve consecutive years. In determining the independence of its members, the Board has taken into consideration the relevant criteria and Principles as well as what are generally considered sound, acceptable standards. All non-executive Directors have declared in writing to the Board that they undertake:

• to maintain in all circumstances their independence of analysis, decision and action;
• not to seek or accept any unreasonable advantages that could be considered as compromising their independence; and
• to clearly express their opposition in the event that they find that a decision of the Board may harm the Bank.

It is considered that, in the circumstances, the size of the Board is sufficient for the requirements of the business and that the balance of skills and experience therein is appropriate to enable the Board to carry out its duties and responsibilities.

The composition and election of the Board of Directors is determined by the Bank's Articles of Association wherein it is established that it is the shareholders who must appoint Directors to serve on the Board. In addition, however, the Bank, by virtue of the Board-appointed Suitabilities & Evaluations Committee, carries out suitability assessments of its existing Directors and any new nominated Directors and the MFSA undertakes due diligence exercises in order to ensure that the suitability, fit and proper criteria are observed, pursuant to all applicable laws, rules, regulations, guidelines etc.

The Suitabilities & Evaluations Committee when carrying out suitability assessments of existing or nominated Directors takes into account a number of attributes in terms of applicable laws, rules, regulations, guidelines etc. The overall composition of the Board and the collective knowledge and expertise required are evaluated during each individual suitability assessment so as to ensure that the Board is effectively discharging all its duties and obligations at all times.

Taking into account the Bank's size, complexity and business model, the Board considers that as a policy and as reflected in its Board of Directors' Charter, it endeavours to have a varied board, particularly in terms of diverse educational and professional backgrounds and extensive and specialised experience of its members. The Board is confident that for this reason, and in light of the current circumstances in which it is operating, it benefits from a satisfactory diversity of views and expertise which allows for a good understanding of current affairs, the environment in which the Bank operates and longer-term risks and opportunities related to the Bank's business. It also benefits from international expertise.

The Board continues to remain committed to achieving further diversity among its members particularly in terms of number, age, gender, experience, educational and professional backgrounds. However, since the appointment of Directors to the Board is a matter that is reserved entirely to the Bank's shareholders in terms of the Memorandum and Articles of Association, this depends on the profiles of nominees proposed and their suitability in terms of applicable laws, rules, regulations, guidelines etc. The Board will also consider formalising its diversity policy in this regard.

Principle 4: The Responsibility of the Board

In pursuing the execution of the four basic roles of corporate governance, namely, accountability, monitoring, strategy formulation and policy development, the Board of Directors, having the first level of responsibility for such execution:

regularly reviews and evaluates corporate strategy, major operational and financial plans, risk policy, performance objectives and monitors implementation and corporate performance within the parameters of all relevant laws, regulations and codes of best business practice;
applies high ethical standards and takes into account the interests of stakeholders and acts responsibly and with integrity and on a fully informed basis, in good faith, with due diligence and in the best interests of the Bank and its shareholders;
recognises that the Bank's success depends upon its relationship with all groups of its stakeholders, including employees, suppliers, customers and the wider community in which the Bank operates;
monitors effectively the application and implementation by Management of its policies and strategy;
recognises and supports enterprise and innovation within Management and examines how best to motivate the Bank's Management;
seeks to establish an effective decision-making process in order to develop the Bank's business efficiently; and
ensures that a balance is struck between enterprise and control in the Bank.

Furthermore, the Board of Directors:

defines in clear and concise terms the Bank's strategy, policies, management performance criteria and business policies and effectively monitors the implementation of such by Management;
establishes a clear internal and external reporting system so that the Board has continuous access to accurate, relevant and timely information;
has established an Audit & Risk Committee;
continuously assesses and monitors the present and future operations' opportunities, threats and risks;
evaluates the Management's implementation of corporate strategy and financial objectives;
ensures that the Bank has appropriate policies and procedures in place to assure that the Bank and its employees maintain the highest standards of corporate conduct, including compliance with applicable laws, regulations, business and ethical standards;
ensures that the financial statements of the Bank and the annual audit thereof are completed within the stipulated time periods; and
requires Management to constantly monitor performance and report fully and accurately to the Board.

Furthermore, Directors are informed on an ongoing basis of their statutory and fiduciary duties, the Bank's operations and prospects, the general business environment and skills and competences of Senior Management. The expectations of the Board are also discussed regularly.

Principle 5: Board Meetings

The Board convened eight (8) times during the period under review with attendance as follows:

Michael C. Bonello	8
Graham A. Fairclough	8
Kimon Palamidis	6(1)
Joseph Said	8
Michael Zammit	8
(1) K. Palamidis appointed an Alternate Director when he was unable to attend.

The dates when the Board meetings are scheduled to be held are determined at the beginning of the year. When required, further meetings are scheduled. Board members, at times, participate in meetings by appointing an Alternate Director or attend via teleconference.

Ahead of Board meetings an agenda and supporting documentation is sent to all Directors. Other than in the case

of meetings specially convened to discuss particular matters, generally, the agendas of regular Board meetings balance items of a long-term strategic nature, as well as performance-related issues together with credit applications which fall within the discretionary limits of the Board. During meetings, Directors are encouraged to present their views pertinent to the subject matter and are given every opportunity to contribute to the relevant issues on the agenda. Following each meeting, minutes which record attendance as well as all decisions taken are circulated to all Board members.

Principle 6: Information and Professional Development

The Board of Directors appoints the Chief Executive Officer.

Each newly appointed Member of the Board is briefed by the Chief Executive Officer and Senior Management officials on all aspects of the Bank's business, while the Company Secretary provides each newly appointed Director with a dossier containing reference to the more important relevant Legislation, Rules, Guidelines, the Bank Statute as well as policy documents.

Board members are reminded that the Company Secretary is at their disposal to provide any advice or service that may be required in the discharge of their duties and responsibilities. The Company Secretary is responsible for advising the Board, through the Chairman, on all governance matters. The Secretary is responsible for ensuring that Board procedures are complied with as well as that effective information flows within the Board, its committees and with Senior Management. The Secretary also facilitates induction and assists with professional development, as required.

Directors are given the opportunity to update and develop their skills and knowledge, particularly through detailed presentations, briefings and training by senior executives and other relevant Bank officials. They are invited to attend training sessions organised specifically for the Board and are also informed of and encouraged to attend externally run seminars throughout their directorship. In addition, all Board members may obtain independent professional advice at the Bank's expense.

Furthermore, Directors have access to the advice and services of the external auditors who are invited to attend Audit & Risk Committee meetings as well as Board meetings when required, including the meetings at which the Bank's financial statements are approved.

The Board continues to be mindful of the crucial importance of recruiting, retaining and motivating quality management. The ongoing training and development of staff at all levels is considered of the utmost importance and this also in the light of the need for orderly succession.

Principle 7: Evaluation of the Board's Performance

An assessment exercise of the Board's performance was carried out through a 'self-evaluation' questionnaire in which Board members participated. Furthermore, assessment exercises of performance of the committees were also carried out by virtue of 'self-evaluation' questionnaires completed by the members of the Audit & Risk Committee, the Assets & Liabilities Committee and the Credit Committee. These exercises also included an evaluation of the Chairman of each respective Committee. These 'self-evaluation' questionnaires were then set to be analysed by the Suitabilities & Evaluations Committee established by the Board to report to the Board accordingly. This exercise did not reveal the need for any material changes in the Bank's governance structures and organisation.

Principle 8: Committees

The Board has appointed the following committees:

Audit & Risk Committee

The primary purpose of the Audit & Risk Committee is to protect the interests of the Bank's shareholders and to assist the Directors in conducting their role effectively so that the Bank's decision-making capability and the accuracy of its reporting and financial results are maintained at a high level at all times. The Committee assists the Board in fulfilling its supervisory and monitoring responsibility for effective financial reporting, risk management, control and governance and this by, inter alia, reviewing any financial information, statements and disclosures to be issued, systems of governance, systems of internal control established by Management and the Board, the risk management processes as well as the external and internal audit processes. The Audit & Risk Committee met six (6) times during the period under review.

With respect to Risk Management, the Committee, inter alia, reviews reports from Management which enable the Committee (and the Board) to consider the process of risk identification and management, to assess the risks involved in the Bank's business and to understand how they are controlled and monitored by Management. The Committee also advises the Board on the Bank's overall current and future risk appetite and strategy and assists the Board in overseeing the implementation of that strategy by Management.

The Audit & Risk Committee is currently composed of the following four (4) non-executive Board members three (3) of whom are independent: Michael C. Bonello (Chairman), Graham A. Fairclough, Kimon Palamidis and Michael Zammit in accordance with the Audit & Risk Committee's Terms of Reference.

Michael C. Bonello is considered by the Board to be independent and competent in accounting and/or auditing in terms of the Listing Rules, having previously served in various senior positions within other institutions, including as Governor of the Central Bank of Malta for a number of years. The Bank's Head of Internal Audit attends meetings of the Audit & Risk Committee. The Bank's External Auditors and members of Senior Management and others, including, inter alia, the Chief Executive Officer, Chief Financial Officer, Risk Management officials and the Compliance Officer, are also invited to attend meetings as is deemed necessary by the Committee. The Company Secretary acts as Secretary to the Audit & Risk Committee.

Assets & Liabilities Committee (ALCO)

Membership of this Committee is made up of a number of Chief Officers and senior officers, including from the Finance and Treasury departments. The Chief Executive Officer chairs the ALCO whose main objective is to manage risks within approved limits at the same time as maximising the Bank's returns by efficient and judicious management of the Bank's assets and liabilities. Risk Management officials are also invited to attend meetings. A Secretary is appointed by the Committee.

Credit Committee

The Credit Committee is responsible for considering and approving credit applications within delegated limits of authority and is composed of a number of Chief Officers and senior officers. The Chief Executive Officer chairs this Committee and a Secretary is appointed by the Committee.

Suitabilities & Evaluations Committee

This Committee is responsible for carrying out suitability assessments of nominated/existing Directors, Key Function holders or any other persons as may be required and also

assesses the Board's annual performance and that of its committees following the completion of the self-evaluations by the Board and committee members. The chairman of the Committee is selected by the Board of Directors (currently the non-executive Director and Committee member, Graham A. Fairclough) and the Company Secretary acts as Secretary.

Remuneration Committee

The functions of the Remuneration Committee are carried out by the Board of Directors in view of the fact that the remuneration of Directors for the holding of their office on the Board is not performance-related.

A separate 'Remuneration Report' features on page 25 of this Annual Report in compliance with the Principles.

Principle 9 and 10: Relations with Shareholders and Markets and Institutional Shareholders

The Bank fully appreciates the importance of maintaining open lines of communication with shareholders, the markets and institutional shareholders. The Board, in this regard, considers that throughout the period under review the Bank has continued to communicate appropriately by means of regular company announcements.

Specifically, the Bank communicates with its shareholders during the Annual General Meetings when Directors and senior officers are also present in order to answer any questions that may arise. The Annual Report and Financial Statements are sent to all shareholders at least twenty-one (21) days prior to the holding of the Annual General Meeting.

The Bank's website (www.lombardmalta.com), contains information about the Bank and its business and is updated regularly.

It is therefore the Bank's policy:

to publish information that can have a significant effect on the Bank's share price through the MSE and immediately after on the Bank's website;
to make other published information available to the public on the Bank's website;
to strive for open, transparent communications;
to ensure continuity and high quality in the information disclosed; and
to be accessible to all stakeholders.

Minority shareholders are entitled to call special meetings should a minimum threshold of share ownership be established in accordance with the Bank's Memorandum and Articles of Association.

Furthermore, minority shareholders may formally present an issue to the Board if they own the predefined minimum threshold of shares.

Principle 11: Conflicts of Interest

The Board of Directors recognises that its members have a primary responsibility to always act in the interest of the Bank and its shareholders as a whole, irrespective of who appointed them to the Board.

Strict policies are in place, particularly in the Board of Directors' Charter, to enable the management of conflict of interest, both actual as well as potential, should the occasion arise.

In addition, the 'Code of Conduct for Dealing in Financial Instruments' was adopted and implemented in conformity with Market Abuse laws and regulations. Directors and staff members are regularly reminded of their obligations when dealing in securities of the Bank and other scheduled financial instruments.

Joseph Said, who is a Director of the Bank, holds a directorship in two companies that have a shareholding in the Group, as disclosed in the Directors' Report.

Principle 12: Corporate Social Responsibility

Directors are fully aware of the need to adhere to accepted principles of corporate social responsibility. The Bank remains fully committed to behaving ethically at all times and to contributing to economic development while at the same time improving the quality of life of the work force and their families, as well as of the local community and society at large. The Bank puts into practice the principles of corporate social responsibility through its extensive contributions and initiatives and direct community involvement as well as the support it gives to a number of causes.

C. Non-Compliance with the Code

Principle 4: (Code Provision 4.2.7)

The above Code Provision states, 'The Board should develop a succession policy for the future composition of the Board of Directors and particularly of the executive component thereof, for which the Chairman should hold key responsibility'.

The appointment of Directors to serve on the Board is a matter which is entirely reserved to the shareholders of the Bank in terms of its Memorandum and Articles of Association (except where the need arises to fill a casual vacancy). Therefore, the Board does not at this stage consider it necessary to develop a succession policy for the future composition of the Board.

Principle 8A: (Remuneration Committee)

The Board did not establish a Remuneration Committee as specified in Code Provision 8.A.1. In terms of Code Provision 8.A.2 of the Principles, given that the remuneration of Directors for the holding of their office on the Board is not performance-related, the functions of the Remuneration Committee are carried out by the Board of Directors.

Principle 8B: (Nomination Committee)

A Nomination Committee has not been set up since the appointment of Directors to the Board is a matter that is reserved entirely to the Bank's shareholders in terms of the Memorandum and Articles of Association.

In this connection every member of the Bank holding in the aggregate at least fifteen percent (15%) of the ordinary issued share capital of the Bank shall be entitled to appoint one (1) Director for each and every fifteen percent (15%) of the ordinary issued share capital owned by that member. Any fractional shareholding in excess of fifteen percent (15%) not applied in appointing such a Director or Directors, and only that fraction, shall be entitled to vote in the election of the remaining Directors together with the remaining body of shareholders. These are entitled to appoint the remaining Board members in accordance with the provisions of the Bank's statute.

This notwithstanding, in light of regulatory requirements, the Suitabilities & Evaluations Committee referred to above was set up specifically to carry out suitability assessments of nominated/existing Directors, Key Function holders or any other persons as may be required and also to assess the Board's annual performance and that of its committees.

Principle 9: (Code Provision 9.3)

There are no procedures disclosed in the Bank's Memorandum or Articles as recommended in Code Provision 9.3 to resolve conflicts between minority shareholders and controlling shareholders.

D. Internal Control (Listing Rule 5.97.4)

The Board is ultimately responsible for the Bank's internal controls as well as their effectiveness, while authority to operate the Bank is delegated to the Chief Executive Officer.

The Bank's system of internal controls is designed to manage all the risks in the most appropriate manner. Such controls, however, cannot completely eliminate the possibility of material error or fraud. The Board, therefore, assumes responsibility for executing the four basic roles of corporate governance, i.e. accountability, monitoring, strategy formulation and policy development.

In summary, the Board is therefore responsible for:

reviewing the Bank's strategy on an ongoing basis as well as setting the appropriate business objectives in order to enhance value for all stakeholders;
appointing and monitoring the Chief Executive Officer whose function it is to manage the operations of the Bank; and
identifying and ensuring that significant risks are managed satisfactorily.

Given the fiduciary responsibility involved, the Board of Directors also sets high business and ethical standards for adoption right across the organisation.

The Board upholds a policy of clear demarcation between its role and responsibilities and those of Management. It has defined the level of authority that it retains over strategy formulation and policy determination together with delegated authority and has vested accountability for the Bank's day-to-day business in the Assets & Liabilities Committee, Credit Committee and in the management team comprising of the:

Chief Executive Officer; and
Chief Officers and other senior officers.

Approved by the Board of Directors on 6 March 2019 and signed on its behalf by:

Michael C. Bonello Joseph Said

The Board frequently participates in asset allocation decisions as well as credit proposals above a certain threshold, after the appropriate recommendations have been made.

E. General Meetings (Listing Rule 5.97.6)

General meetings are called by giving at least twenty-one (21) days' notice and conducted in accordance with the provisions contained in the Bank's Articles of Association.

The 'Ordinary Business' which is dealt with at the Annual General Meeting consists of the adoption of the annual financial statements, declaration of a dividend, appointment of Board members, appointment of auditors and the fixing of their remuneration together with the voting of remuneration to the Directors for the holding of their office. All other business shall be deemed 'Special Business'.

All shareholders registered in the shareholders' register on record date as defined in the Listing Rules have the right to attend, participate and vote in the general meeting.

A shareholder or shareholders holding not less than five per cent (5%) of the voting issued share capital of the Bank may: (i) request the Bank to include items on the agenda and; (ii) table draft resolutions for items included in the agenda of a general meeting. Such requests shall be submitted to the Bank at least forty-six (46) days before the date set for the general meeting.

Every shareholder shall be entitled to appoint only one (1) person to act as proxy holder to attend and vote at a general meeting instead of him. The proxy holder shall enjoy the same rights to speak and ask questions in the general meeting as those to which the member thus represented would be entitled.

Chairman Director and Chief Executive Officer

Remuneration Report

As indicated in the 'Statement of Compliance with the Code of Principles of Good Corporate Governance', in terms of the 'Code of Principles of Good Corporate Governance' within the Listing Rules issued by the Listing Authority, the Board of Directors performs the functions of a Remuneration Committee on the basis that the remuneration of the Bank's Directors for the holding of their office on the Board, is not performance-related and does not include share options, pension benefits, profit-sharing arrangements or any emolument related to the performance of the Bank. Amongst the obligations established in the Listing Rules, the Board, where applicable, carries out the main duties established in the Supporting Principles enshrined in Principle 8A of the 'Code of Principles of Good Corporate Governance'. This Remuneration Report was approved by the Board of Directors at the Board Meeting held on 6 March 2019.

Remuneration Policy

Directors

There were no changes effected in the Remuneration Policy for the Bank's Directors during the financial year under review. In terms of the Bank's Memorandum and Articles of Association, the Bank's shareholders determine the maximum annual aggregate remuneration of the Directors. The maximum amount is established by resolution at each Annual General Meeting of the Bank. The aggregate amount fixed for this purpose during the last Annual General Meeting was seventy thousand euro (€70,000).

No Board committee fees were payable to any of the Directors during the year under review.

It is confirmed that none of the Directors in their capacity as Directors of the Bank are entitled to profit sharing, share options, pension benefits, variable remuneration or any other remuneration or related payments from the Bank. Only one of the Directors has a service contract with the Bank.

The fees paid to Directors for the holding of their office during 2018 amounted to €48,900. This amount is within the limit of €70,000 approved by the Annual General Meeting of 26 April 2018.

Directors' fees attributable to the current financial year are disclosed in note 32 to the financial statements. During the year, Directors received fees as follows:

Total	48,900
Kimon Palamidis	6,985
Michael Zammit	6,985
Joseph Said	6,985
Graham A. Fairclough	6,985
Michael C. Bonello (Chairman)	20,960
	€

Remuneration (other than directors' fees) paid to the executive member of the Board of Directors is included with the emoluments to Senior Management detailed below.

Remuneration Report

Senior Management

There were no changes effected in the Remuneration Policy for the Bank's Senior Management during the financial year under review which warrant reporting. The Board of Directors is satisfied that the packages offered to senior management continue to ensure that the Bank attracts and retains management staff with the necessary qualities and skills. The Bank's policy remains that of engaging its senior management staff on the basis of indefinite contracts of employment, and this after a period of probation. The terms and conditions of employment of senior management are established in the relative employment contracts. The applicable notice periods, after probation, are those provided for in the relevant legislation.

Share options, share incentive schemes and profit sharing do not feature in the Bank's Remuneration Policy, and the individual contracts of employment of senior management do not contain provisions for termination payments and/or other payments linked to early termination other than as determined by the Law.

From time to time the Board of Directors of the Bank approves the allocation of a financial contribution towards Retirement Gratuities that it may decide to grant and/or a Staff Pension fund that may be formally established in the future. Gratuities that it may make, on an ex gratia basis, to its employees, including its Chief Executive Officer, are made upon retirement. Amounts contributed for this purpose in 2018 amounted to €100,000 (2017: €100,000). Once contributed, these amounts are held in a separate bank account which is not controlled by the Bank and is therefore not included in the Bank's financial statements. The Board of Directors has resolved that a retirement gratuity be eventually paid on an ex gratia basis, to the Chief Executive Officer on his retirement. Amounts intended as a contribution to an eventual pension fund will be regulated by rules yet to be determined in light of relevant legislation. No other pension benefits are currently payable by the Bank.

Senior management staff are eligible for annual salary increases, which are not directly performance-related. Annual bonuses are paid to senior management staff members according to individual overall performance during the previous financial year. Bonus payments do not exceed 100% of the fixed component of the total remuneration for each individual.

Non-cash benefits include private health care insurance as well as death-in-service benefits and personal accident insurance cover. The Chief Executive Officer is entitled to the use of a company car.

Total emoluments received by senior management during the period under review are as detailed below, in terms of Code Provision 8.A.5.

Fixed Remuneration	Variable Remuneration	Share Options	Others
€800,430	€79,000	None	Non-Cash benefits referred to above

Other

For other employees, fixed pay is determined by a Collective Agreement and annual bonuses are differentiated by individual performance and grade.

The Bank does not plan to effect any changes in its Remuneration Policy in the upcoming financial year, unless required to do so in terms of any regulatory obligations.

Range	Shareholders	Shares
1 – 500	154	24,546
501 – 1000	98	69,813
1001 – 5000	484	1,257,040
5001 and over	687	42,826,515
Total	1,423	44,177,914

Range	Shareholders	Shares
1 – 500	152	24,293
501 – 1000	95	67,906
1001 – 5000	486	1,262,695
5001 and over	680	42,823,020
Total	1,413	44,177,914

Independent Auditor's Report

To the Shareholders of Lombard Bank Malta p.l.c.

Report on the Audit of the Financial Statements

Our opinion

In our opinion:

Lombard Bank Malta p.l.c.'s consolidated and parent company financial statements (the "financial statements") give a true and fair view of the Group and Bank's financial position as at 31 December 2018, and of the Group and Bank's financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the EU; and
The financial statements have been prepared in accordance with the requirements of the Banking Act (Cap. 371) and the Maltese Companies Act (Cap. 386).

Our opinion is consistent with our additional report to the Audit & Risk Committee.

What we have audited

Lombard Bank Malta p.l.c.'s financial statements, set out on pages 42 to 166, comprise:

the consolidated and parent company statements of financial position as at 31 December 2018;
the consolidated and parent company income statements and statements of comprehensive income for the year then ended;
the consolidated and parent company statements of changes in equity for the year then ended;
the consolidated and parent company statements of cash flows for the year then ended; and
the notes to the financial statements, which include a summary of significant accounting policies.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Group and the Bank in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements of the Accountancy Profession (Code of Ethics for Warrant Holders) Directive issued in terms of the Accountancy Profession Act (Cap. 281) that are relevant to our audit of the financial statements in Malta. We have fulfilled our other ethical responsibilities in accordance with these codes.

To the Shareholders of Lombard Bank Malta p.l.c.

To the best of our knowledge and belief, we declare that non-audit services that we have provided to the parent company and its subsidiaries are in accordance with the applicable law and regulations in Malta and that we have not provided non-audit services that are prohibited under Article 18A of the Accountancy Profession Act (Cap. 281).

The non-audit services that we have provided to the Group and its subsidiaries, in the period from 1 January 2018 to 31 December 2018, are disclosed in Note 32 to the financial statements.

Our audit approach

Overview Overall Group materiality: €680,000, which represents 5% of profit before tax. The audit procedures carried out covered all the components within the Group namely Lombard Bank p.l.c., Redbox Limited, Maltapost p.l.c. and Tanseana Limited which are all based in Malta. Impairment of loans and advances to customers of Lombard Bank p.l.c. Revenue recognition of Maltapost p.l.c. Materiality Group scoping Key audit matters

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

Materiality

The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.

Independent Auditor's Report (continued) To the Shareholders of Lombard Bank Malta p.l.c.

Overall Group materiality	€680,000
How we determined it	5% of profit before tax
Rationale for the materiality benchmark applied	We chose profit before tax as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured by users, and is a generally accepted benchmark. We chose 5% which is within the range of acceptable quantitative materiality thresholds in auditing standards.

We agreed with the Audit & Risk Committee that we would report to them misstatements identified during our audit above €68,000 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matter	How our audit addressed the Key audit matter

Impairment allowances in respect of loans and advances to customers represent management's best estimate of Expected Credit Losses ('ECLs') within the loan portfolios at the balance sheet date.

Impairment of loans and advances to customers of the bank

On 1 January 2018, the Bank transitioned to IFRS 9, which is a new and complex accounting standard triggering a conceptual shift in the measurement of impairment allowances from an incurred loss model under IAS 39 to an expected loss model.

A considerable level of judgement is required in the development of the new models designed to measure ECLs on loans measured at amortised cost in accordance with IFRS 9. As this is the first year of adoption of IFRS 9, there is limited experience available to back-test the ECL charge with actual results.

As IFRS 9 was adopted at the start of the year, we performed audit procedures on the opening balances to gain assurance on the transition from IAS 39 and related disclosures in this respect. This included discussions with the Audit & Risk Committee and management on the policies and methodologies used by the Bank in respect of impairment of loans and advances and changes to risk factors and other inputs within the Bank's models.

ECL calculation for non-defaulted loan exposures

We understood and critically assessed the models used for ECL estimation for the Bank's loan portfolio. Since modelling assumptions and parameters are based on historic data, we assessed whether historic experience was representative of current circumstances and of the recent losses incurred within the portfolios. The appropriateness of management's judgements was also independently considered in respect of

To the Shareholders of Lombard Bank Malta p.l.c.

Key audit matter	How our audit addressed the Key audit matter
Impairment allowances relating to all loans and advances are

determined at an instrument level. For non-defaulted (Stage 1 and 2), the Bank uses an internally developed model based on the Bank's own experience as available at the reporting date.

In the process of determining the ECLs, three main components are considered:

i. Probability of Default ('PD'): the likelihood of a borrower defaulting on its financial obligation either over the next 12 months or over the remaining lifetime of the obligation.
ii. Loss Given Default ('LGD'): the expected losses taking into account, among other attributes, the mitigating effect of collateral value (if any) at the time it is expected to be realised and the time value of money.
iii. Exposure at Default ('EAD'): the expected exposure in the event of a default (including any expected drawdowns of committed facilities).

For defaulted (Stage 3) exposures, discounted cash flow models are utilised in order to estimate ECLs. Judgement is required to determine when a default has occurred and then to estimate the expected future cash flows related to the loan, under multiple scenarios, which are dependant on parameters/assumptions such as the valuation of collateral (including forced sale discounts and assumed realisation period) or forecasted operating cash flows.

Under the new impairment model, ECLs are required to incorporate forward-looking information, reflecting management's view of potential future economic environments. The complexity involved requires management to develop multiple scenarios involving the use of significant judgements.

The credit environment has remained relatively benign for an extended period of time, in part due to low interest rates and relative strength of the local economy. However, whilst the

calculation methodologies, calibration of PDs and LGDs, segmentation, selection of macroeconomic variables and post-model overlays.

Our audit procedures in respect of the Bank's loan portfolio included:

Performing an overall assessment of the ECL provision levels by stage to determine if they were reasonable considering the Bank's portfolio, risk profile, credit risk management practices and the macroeconomic environment.
Testing the completeness and accuracy of the critical data used in the year-end ECL calculation.
Testing of a sample of exposures to independently review the borrower's financial performance and ability to meet loan repayments and assess the appropriateness of the credit rating assigned by management.
Risk based testing of models including independent re-build of certain assumptions, such as, the estimation of PDs for each sub-portfolio and the calculation of EAD based on the amortisation profile of facilities.
Reviewing the multiple economic scenarios and variables using our experts to assess their reasonableness.
Reviewing and challenging the valuation of collateral applied by the Bank in the ECL calculations, including the application of certain parameters considered by the Bank in the LGD calculation such as the time to realise the collateral and costs associated with such process.

Based on the evidence obtained, we found that the model assumptions, calculations and data used within the model to be reasonable.

Independent Auditor's Report (continued) To the Shareholders of Lombard Bank Malta p.l.c.

current levels of delinquencies and defaults remain low, the risk of impairment remains significant.

In order to meet the requirements of the new standard, significant changes have been made to systems, processes and controls with effect from 1 January 2018.

There is also a significant increase in the number of data inputs required for the impairment calculation. The data is sourced from a number of systems that have not been used previously for the preparation of accounting records. This increases risk around the accuracy and completeness of certain data used to create assumptions and operate the ECL model. In some cases, data is unavailable and reasonable alternatives have been applied to allow calculations to be performed.

Since the estimation of ECLs is subjective in nature and inherently judgemental, in this respect, the IFRS 9 requirements for impairment is deemed to be an area of focus.

Relevant references in the Annual Report and Financial Statements:

Accounting policy: note 1.7;
Credit risk management: note 2.3;
Note on credit impairment losses: note 31;
Note on loans and advances to customers: note 8; and
Critical accounting judgements and estimates: note 3.2.

Key audit matter How our audit addressed the Key audit matter

ECL calculation for defaulted loan exposures

For defaulted exposures within the Bank's loan portfolio, the appropriateness of the methodology to estimate ECLs, together with the processes for identifying defaults within the portfolio, was independently assessed.

Our substantive procedures in respect of defaulted exposures comprised the following:

Discussions with management on selected loan exposures to understand the latest developments at the level of the borrower and the basis of measuring the impairment provisions and considered whether key judgements were appropriate given the borrower's circumstances.
Challenging the severity of scenarios being applied for these exposures, together with their respective probability weights by forming an independent view of the recoverability of the selected loan exposures under different scenarios, assigning probabilities independently and comparing the outcomes to that of the Bank.
Testing key inputs to and reperformed the impairment calculation used to derive expected cash flows under different scenarios.
Assessing the appropriateness of a sample of property valuations used to determine the LGD through the use of our valuation experts.

In the case of some impairment provisions, we formed a different view from that of management, but in our view the differences were within a reasonable range of outcomes.

Independent Auditor's Report (continued) To the Shareholders of Lombard Bank Malta p.l.c.

Revenue recognition

ISA 240 presumes that there is a risk of material misstatement due to fraud related to revenue recognition and requires the auditor to treat this assessed risk of material misstatement due to fraud as a significant risk, thus requiring special audit consideration.

This comprises the risk that sales revenue is misstated due to fraud as individuals may have incentive to manipulate revenue, and hence results. The risk of fraud in revenue recognition entails the risk that sales revenue is not recognised in accordance with IAS 18 requirements, and that revenue is not completely or accurately reflected or that fictitious sales revenue is recorded or that the cut-off point at which risks and rewards are transferred is not correctly reflected in the financial statements.

The subsidiary's revenue consists of revenue from retail sales, comprising sale of stamps, philatelic sales, sale of non-postal stationery and provision of non-postal services, and sales revenue comprises terminal dues, consisting of remuneration for processing and delivering post items received from other territories.

Terminal dues are invoiced on a quarterly basis in arrears on the basis of volume data accumulated throughout the respective quarter. Accordingly the risk of fraud in revenue recognition in respect of terminal dues is principally attributable to the unbilled revenue at year end in respect of the last quarter of the financial year.

Revenue from retail sales is attributable to a large volume of low value transactions handled through an operational retail system in an automated manner, whereby inventory items are updated with sales taking into account standing data in respect of unit prices. In this respect, the risk of fraud in revenue recognition is mainly in respect of the output of the operational retail system not being properly reflected within the accounting system.

Key audit matter How our audit addressed the Key audit matter

We confirmed our understanding and evaluation of the subsidiary's control processes and procedures in respect of revenue recognition, including IT and system controls.

Specifically in respect of revenue from retail sales, we evaluated the relevant systems and the design of controls, and tested the operating effectiveness of automated and non-automated controls over the:

capture and recording of revenue transactions comprising products or services supplied to customers;
authorisation of price changes and updating this information within the operational retail system; and
calculation of amounts invoiced to customers.

Accordingly we validated key controls including automated control procedures in respect of the operational retail system. We tailored our final audit plan based on the results of our assessment of the control environment and operating effectiveness of such controls. We utilised computer assisted audit techniques to recalculate aggregate revenue recognised by extracting independently volume data from the operational retail system and taking into account independently sourced or verified sales prices to address accuracy and existence. We also tested reconciliations between the operational retail and accounting systems to address completeness and cut-off. We have also carried out audit procedures, comprising validation of controls and tests of detail, in respect of cash counts and stock counts covering the retail sales business.

In respect of terminal dues, we have carried out tests of detail by recalculating revenue recognised during the year on the basis of volume data accumulated over time. We have validated volume data to third party documentation or documentation duly approved by third parties. We have also validated volume data by carrying out such tests as sequence checks and other data validation tests. We have validated terminal dues rates to contractual arrangements or other supporting documentation.

To the Shareholders of Lombard Bank Malta p.l.c.

Key audit matter	How our audit addressed the Key audit matter
Relevant references in the Annual Report and Financial Statements:	We have also tested revenue recognised in respect of terminal dues within the accounting system to amounts invoiced and the subsequent receipt of payment.
• Accounting policy: note 1.27; and • Note on postal sales and other revenues: note 27	In respect of these key audit matters, we found no significant exceptions in our controls testing and no material misstatements were identified in our substantive testing.

How we tailored our group audit scope

The Group is composed of four components: Lombard Bank Malta p.l.c. (the parent company), and its subsidiaries Redbox Limited, MaltaPost p.l.c. and Tanseana Limited. MaltaPost p.l.c. has been determined to be a financially significant entity. We tailored the scope of our audit in order to perform sufficient work on all components to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates, and local statutory requirements.

The Group audit team performed all of this work by applying the Group overall materiality, together with additional procedures performed on the consolidation. This gave us sufficient appropriate audit evidence for our opinion on the Group financial statements as a whole.

Other information

The directors are responsible for the other information. The other information comprises the Directors' Report, the Chairman's Statement to the Members, the Chief Executive Officer's Review, the Remuneration Report, the Company Information, the Additional Regulatory Disclosures, and the Five Year Summary.

The other information does not include the financial statements and our auditor's report thereon.

Our opinion on the financial statements does not cover the other information, including the Directors' Report.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

With respect to the Directors' Report, we also considered whether the Directors' Report includes the disclosures required by Article 177 of the Maltese Companies Act (Cap. 386).

To the Shareholders of Lombard Bank Malta p.l.c.

Based on the work we have performed, in our opinion:

The information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
The Directors' Report has been prepared in accordance with the Maltese Companies Act (Cap. 386).

In addition, in light of the knowledge and understanding of the Group and the Bank and its environment obtained in the course of the audit, we are required to report if we have identified material misstatements in the Directors' Report and other information that we obtained prior to the date of this auditor's report. We have nothing to report in this regard.

Responsibilities of the directors and those charged with governance for the financial statements

The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with IFRSs as adopted by the EU and the requirements of the Banking Act (Cap. 371) and the Maltese Companies Act (Cap. 386), and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Group's and the Bank's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Bank or to cease operations, or have no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group's and the Bank's financial reporting process.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

To the Shareholders of Lombard Bank Malta p.l.c.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's and the Bank's internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's or the Bank's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group or the Bank to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Independent Auditor's Report (continued) To the Shareholders of Lombard Bank Malta p.l.c.

Report on other legal and regulatory requirements

Report on the statement of compliance with the Principles of Good Corporate Governance

The Listing Rules issued by the Malta Listing Authority require the directors to prepare and include in their Annual Report a Statement of Compliance providing an explanation of the extent to which they have adopted the Code of Principles of Good Corporate Governance and the effective measures that they have taken to ensure compliance throughout the accounting period with those Principles.

The Listing Rules also require the auditor to include a report on the Statement of Compliance prepared by the directors.

We read the Statement of Compliance and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements included in the Annual Report. Our responsibilities do not extend to considering whether this statement is consistent with any other information included in the Annual Report.

We are not required to, and we do not, consider whether the Board's statements on internal control included in the Statement of Compliance cover all risks and controls, or form an opinion on the effectiveness of the Company's corporate governance procedures or its risk and control procedures.

In our opinion, the Statement of Compliance set out on pages 17 to 24 has been properly prepared in accordance with the requirements of the Listing Rules issued by the Malta Listing Authority.

Opinion on other matters prescribed by the Banking Act, 1994

In our opinion:

we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit;
proper books of account have been kept by the Bank, so far as appears from our examination of those books;
the Bank's financial statements are in agreement with the books of account; and
to the best of our knowledge and according to the explanations given to us, the financial statements give the information required by any law in force in the manner so required.

To the Shareholders of Lombard Bank Malta p.l.c.

Other matters on which we are required to report by exception

We also have responsibilities under:

The Maltese Companies Act (Cap. 386) to report to you if, in our opinion:
- returns adequate for our audit have not been received from branches not visited by us; and
- certain disclosures of Directors' remuneration specified by law are not made in the financial statements, giving the required particulars in our report.
The Listing Rules to review the statement made by the Directors that the business is a going concern together with supporting assumptions or qualifications as necessary.

We have nothing to report to you in respect of these responsibilities.

Appointment

We were first appointed as auditors of the Bank on 10 April 2010. Our appointment has been renewed annually by shareholder resolution representing a total period of uninterrupted engagement appointment of 9 years.

PricewaterhouseCoopers

78, Mill Street Qormi Malta

Simon Flynn Partner

6 March 2019

Financial STATEMENTS

2018

For the Year Ended 31 December 2018

Statements of Financial Position

As at 31 December 2018

	Group			Bank
	Notes	2018	2017	2018	2017
		€ 000	€ 000	€ 000	€ 000
Assets
Balances with Central Bank of Malta,
treasury bills and cash	5	128,726	215,133	128,143	214,500
Cheques in course of collection		1,422	1,755	1,422	1,755
Investments	6	100,070	75,895	96,245	72,282
Loans and advances to banks	7	140,581	97,048	125,819	90,258
Loans and advances to customers	8	511,124	428,611	511,124	428,611
Investment in subsidiaries	9	-	-	15,732	15,732
Investment in associate	10	1,684	1,575	1,645	1,645
Intangible assets	11	1,701	1,648	375	480
Property, plant and equipment	12	38,554	31,753	21,449	17,676
Assets classified as held for sale	8	778	822	778	822
Current tax assets		865	1,557	681	1,557
Deferred tax assets	13	9,221	8,980	8,639	8,369
Inventories	14	1,360	1,164	754	407
Trade and other receivables	15	5,010	8,826	1,812	1,526
Accrued income and other assets	16	8,973	7,979	4,618	4,218
Total assets		950,069	882,746	919,236	859,838

Statements of Financial Position (continued)

As at 31 December 2018

			Group	Bank
	Notes	2018	2017	2018	2017
Equity and Liabilities		€ 000	€ 000	€ 000	€ 000
Equity
Share capital	17	11,044	11,044	11,044	11,044
Share premium	18	18,530	18,530	18,530	18,530
Revaluation and other reserves	18	17,356	12,662	15,490	12,624
Retained earnings		61,380	53,904	59,097	51,887
Equity attributable to equity
holders of the Bank		108,310	96,140	104,161	94,085
Non-controlling interests		7,525	6,734	-	-
Total equity		115,835	102,874	104,161	94,085
Liabilities
Amounts owed to banks	19	854	5,362	854	5,362
Amounts owed to customers	20	788,044	733,151	790,073	736,695
Provisions for liabilities and other charges	21	3,135	3,177	1,107	1,064
Current tax liabilities		-	229	-	-
Deferred tax liabilities	13	5,264	3,914	4,236	3,136
Other liabilities	22	27,138	23,217	14,070	15,076
Accruals and deferred income	23	9,799	10,822	4,735	4,420
Total liabilities		834,234	779,872	815,075	765,753
Total equity and liabilities		950,069	882,746	919,236	859,838
Memorandum items
Contingent liabilities	24	14,148	9,078	14,167	9,093
Commitments	24	202,384	247,737	202,384	247,737

The notes on pages 51 to 166 are an integral part of these financial statements.

These financial statements on pages 42 to 166 are approved and authorised for issue by the Board of Directors on 6 March 2019 and signed on its behalf by:

Michael C. Bonello Joseph Said

Chairman Director and Chief Executive Officer

Income Statements

For the Year Ended 31 December 2018

	Group			Bank
	Notes	2018 € 000	2017 € 000	2018 € 000	2017 € 000
Interest receivable and similar income
- on loans and advances, balances with Central
Bank of Malta and treasury bills	25	21,470	19,490	21,430	19,462
- on debt and other fixed income instruments	25	1,718	1,936	1,594	1,823
Interest expense	25	(5,677)	(5,992)	(5,677)	(5,997)
Net interest income		17,511	15,434	17,347	15,288
Fee and commission income	26	5,051	4,431	3,889	3,357
Fee and commission expense	26	(335)	(298)	(336)	(299)
Net fee and commission income		4,716	4,133	3,553	3,058
Postal sales and other revenues	27	39,254	37,371	425	172
Dividend income	28	369	326	1,970	1,880
Net trading income	29	880	619	862	699
Other operating income		55	-	377	177
Operating income		62,785	57,883	24,534	21,274
Employee compensation and benefits	30	(20,765)	(19,945)	(6,368)	(6,269)
Other operating costs	32	(26,477)	(24,695)	(4,634)	(4,052)
Depreciation and amortisation	11,12	(1,588)	(1,411)	(625)	(622)
Provisions for liabilities and other charges	21	(60)	(23)	(20)	(22)
Credit impairment losses	31	(234)	(2,835)	(258)	(2,831)
Operating profit		13,661	8,974	12,629	7,478
Share of profit/(loss) of investment accounted
for using the equity method, net of tax	10	109	(106)	-	-
Profit before taxation		13,770	8,868	12,629	7,478
Income tax expense	33	(4,831)	(3,165)	(4,448)	(2,632)
Profit for the year		8,939	5,703	8,181	4,846
Attributable to:
Equity holders of the Bank		8,447	5,129	8,181	4,846
Non-controlling interests		492	574	-	-
Profit for the year		8,939	5,703	8,181	4,846
Earnings per share	34	19c1	11c6

Statements of Comprehensive Income

For the Year Ended 31 December 2018

Group	Notes	2018 € 000	2017 € 000
Profit for the year		8,939	5,703
Other comprehensive income
Items that may be reclassified subsequently to profit or loss Investments measured at FVOCI (2017: available-for-sale) Net loss in fair value, before tax	6	(1,621)	(1,591)
Net loss on financial assets reclassified to profit or loss on disposal, before tax		(59)	(81)
Net loss attributable to change in credit risk Income taxes	33	107 538	- 540
Items that will not be reclassified to profit or loss
Net gains on investments in equity instruments measured at FVOCI	6	2,846	-
Surplus arising on revaluation of land and buildings		5,564	-
Remeasurements of defined benefit obligations		(11)	(528)
Income taxes	33	(1,855)	304
Other comprehensive income for the year, net of income tax		5,509	(1,356)
Total comprehensive income for the year, net of income tax		14,448	4,347
Attributable to:
Equity holders of the Bank		13,228	3,874
Non-controlling interests		1,220	473
Total comprehensive income for the year, net of income tax		14,448	4,347
Bank
Profit for the year		8,181	4,846
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Investments measured at FVOCI (2017: available-for-sale)
Net loss in fair value, before tax	6	(1,587)	(1,460)
Net loss on financial assets reclassified to profit or loss on disposal, before tax		(59)	(81)
Net loss attributable to change in credit risk		107	-
Income taxes	33	538	540
Items that will not be reclassified to profit or loss
Net gains on investments in equity instruments measured at FVOCI	6	2,847	-
Surplus arising on revaluation of land and buildings		2,717	-
Income taxes	33	(1,608)	-
Other comprehensive income for the year, net of income tax		2,955	(1,001)
Total comprehensive income for the year, net of income tax		11,136	3,845

For the Year Ended 31 December 2018

Group
	Note	Share capital € 000	Share premium € 000	Revaluation and other reserves € 000	Retained earnings € 000	Total € 000	Non controlling interests € 000	Total equity € 000
At 1 January 2017		11,044	18,530	13,723	50,541	93,838	6,510	100,348
Comprehensive income
Profit for the year		-	-	-	5,129	5,129	574	5,703
Other comprehensive income
Fair valuation of available for-sale financial assets:
Net changes in fair value arising during the year		-	-	(1,044)	-	(1,044)	(37)	(1,081)
Reclassification adjustments - net amounts reclassified
to profit or loss		-	-	(52)	-	(52)	-	(52)
Remeasurements of deferred benefit obligations		-	-	(159)	-	(159)	(64)	(223)
Transfers and other movements		-	-	191	(191)	-	-	-
Total other comprehensive income for the year		-	-	(1,064)	(191)	(1,255)	(101)	(1,356)
Total comprehensive income for the year		-	-	(1,064)	4,938	3,874	473	4,347
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends to equity holders	35	-	-	-	(1,149)	(1,149)	(433)	(1,582)
Changes in ownership interests in subsidiaries that do not result in a loss of control
Change in non-controlling interests in subsidiary		-	-	3	(426)	(423)	184	(239)
Total transactions with owners		-	-	3	(1,575)	(1,572)	(249)	(1,821)
At 31 December 2017		11,044	18,530	12,662	53,904	96,140	6,734	102,874

For the Year Ended 31 December 2018

Group
	Notes	Share capital € 000	Share premium € 000	Revaluation and other reserves € 000	Retained earnings € 000	Total € 000	Non controlling interests € 000	Total equity € 000
At 31 December 2017		11,044	18,530	12,662	53,904	96,140	6,734	102,874
Changes on initial application of IFRS 9	1.2	-	-	36	53	89	-	89
At 1 January 2018 - restated balance		11,044	18,530	12,698	53,957	96,229	6,734	102,963
Comprehensive income
Profit for the year		-	-	-	8,447	8,447	492	8,939
Other comprehensive income
Fair valuation of land and buildings, net of tax Fair valuation of financial		-	-	3,962	-	3,962	739	4,701
assets measured at FVOCI: Net changes in fair value arising during the year Reclassification adjustments		-	-	794	-	794	(11)	783
- net amounts reclassified to profit or loss Net change attributable to		-	-	(38)	-	(38)	-	(38)
changes in credit risk		-	-	70	-	70	-	70
Remeasurements of deferred benefit obligations		-	-	(5)	-	(5)	(2)	(7)
Transfers and other movements		-	-	(125)	125	-	-	-
Total other comprehensive income for the year		-	-	4,658	125	4,783	726	5,509
Total comprehensive income for the year		-	-	4,658	8,572	13,230	1,218	14,448
Transactions with owners, recorded directly in equity Contributions by and distributions to owners
Dividends to equity holders	35	-	-	-	(1,149)	(1,149)	(427)	(1,576)
Total transactions with owners		-	-	-	(1,149)	(1,149)	(427)	(1,576)
At 31 December 2018		11,044	18,530	17,356	61,380	108,310	7,525	115,835

For the Year Ended 31 December 2018

Bank	Note	Share capital € 000	Share premium € 000	Revaluation and other reserves € 000	Retained earnings € 000	Total € 000
At 1 January 2017		11,044	18,530	13,434	48,381	91,389
Comprehensive income
Profit for the year		-	-	-	4,846	4,846
Other comprehensive income
Fair valuation of available-for-sale financial assets:
Net changes in fair value arising during the year		-	-	(949)	-	(949)
Reclassification adjustments - net amounts reclassified to profit or loss		-	-	(52)	-	(52)
Transfers and other movements		-	-	191	(191)	-
Total other comprehensive income for the year		-	-	(810)	(191)	(1,001)
Total comprehensive income for the year		-	-	(810)	4,655	3,845
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends to equity holders	35	-	-	-	(1,149)	(1,149)
Total transactions with owners		-	-	-	(1,149)	(1,149)
At 31 December 2017		11,044	18,530	12,624	51,887	94,085

For the Year Ended 31 December 2018

Bank	Notes	Share capital € 000	Share premium € 000	Revaluation and other reserves € 000	Retained earnings € 000	Total € 000
At 31 December 2017		11,044	18,530	12,624	51,887	94,085
Changes on initial application of IFRS 9	1.2	-	-	36	53	89
At 1 January 2018 - restated balance		11,044	18,530	12,660	51,940	94,174
Comprehensive income
Profit for the year		-	-	-	8,181	8,181
Other comprehensive income
Fair valuation of land and buildings, net of tax Fair valuation of financial assets measured at FVOCI:		-	-	2,105	-	2,105
Net changes in fair value arising during the year Reclassification adjustments - net amounts reclassified to profit or loss		- -	- -	818 (38)	- -	818 (38)
Net change attributable to changes in credit risk		-	-	70	-	70
Transfers and other movements		-	-	(125)	125	-
Total other comprehensive income for the year		-	-	2,830	125	2,955
Total comprehensive income for the year		-	-	2,830	8,306	11,136
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends to equity holders	35	-	-	-	(1,149)	(1,149)
Total transactions with owners		-	-	-	(1,149)	(1,149)
At 31 December 2018		11,044	18,530	15,490	59,097	104,161

Statements of Cash Flows

For the Year Ended 31 December 2018

		Group			Bank
	Notes	2018	2017	2018	2017
		€ 000	€ 000	€ 000	€ 000
Cash flows from operating activities
Interest and commission receipts		27,546	24,052	27,871	24,238
Receipts from customers relating to postal
sales and other revenue		51,778	34,484	425	172
Interest and commission payments		(5,844)	(6,238)	(5,844)	(6,243)
Payments to employees and suppliers		(51,464)	(41,509)	(11,070)	(10,189)
Cash flows from operating profit before changes in operating assets and liabilities		22,016	10,789	11,382	7,978
(Increase)/decrease in operating assets:
Treasury bills		(16,549)	47,116	(16,549)	47,115
Deposits with Central Bank of Malta		(529)	(917)	(529)	(917)
Loans and advances to banks and customers		(84,792)	(97,713)	(83,792)	(94,820)
Other receivables		(394)	(726)	(284)	(717)
Increase/(decrease) in operating liabilities:
Amounts owed to banks and to customers		54,893	11,615	53,378	11,335
Other payables		(899)	6,259	(1,007)	6,247
Net cash used in operations		(26,254)	(23,577)	(37,401)	(23,779)
Income tax paid		(4,628)	(4,309)	(3,860)	(3,221)
Net cash flows used in operating activities		(30,882)	(27,886)	(41,261)	(27,000)
Cash flows from investing activities
Dividends received		369	326	1,970	326
Interest received from investments		2,011	2,196	1,845	2,038
Purchase of investments		(27,850)	(906)	(27,350)	(879)
Investment in subsidiary		-	-	-	(1,500)
Proceeds on maturity/disposal of investments		4,406	3,285	4,156	2,850
Purchase of property, plant and equipment		(2,921)	(2,943)	(1,576)	(1,396)
Acquisition of non-controlling interests		-	(429)	-	-
Net cash flows (used in)/generated from
investing activities		(23,985)	1,529	(20,955)	1,439
Cash flows from financing activities
Dividends paid to equity holders of the Bank	35	(1,149)	(1,149)	(1,149)	(1,149)
Dividends paid to non-controlling interests		(427)	(244)	-	-
Net cash flows used in financing activities		(1,576)	(1,393)	(1,149)	(1,149)
Net decrease in cash and cash equivalents		(56,443)	(27,750)	(63,365)	(26,710)
Cash and cash equivalents at beginning of year		268,636	296,386	263,213	289,923
Cash and cash equivalents at end of year	36	212,193	268,636	199,848	263,213

For the Year Ended 31 December 2018

Notes		Page	Notes
1	Summary of significant accounting policies	52	20 Amounts owed to customers	152
2	Financial risk management	78	21 Provision for liabilities and other charges	153
3	Accounting estimates and judgements	133	22 Other liabilities	155
4	Segmental information	135	23 Accruals and deferred income	155
5	Balances with Central Bank of Malta,		24 Commitments and contingent liabilities	156
	treasury bills and cash	136	25 Net interest income	157
6	Investments	136	26 Net fee and commission income	157
7	Loans and advances to banks	138	27 Postal sales and other revenues	158
8	Loans and advances to customers	139	28 Dividend income	158
9	Investment in subsidiaries	140	29 Net trading income	158
10	Investment in associate	140	30 Employee compensation and benefits	158
11	Intangible assets	141	31 Credit impairment losses	159
12	Property, plant and equipment	143	32 Profit before taxation	160
13	Deferred tax assets and liabilities	148	33 Income tax expense	161
14	Inventories	150	34 Earnings per share	163
15	Trade and other receivables	150	35 Dividends	164
16	Accrued income and other assets	150	36 Cash and cash equivalents	164
17	Share capital	151	37 Related parties	164
18	Reserves	151	38 Investor Compensation Scheme	166
19	Amounts owed to banks	152	39 Statutory information	166

For the Year Ended 31 December 2018

1 Summary of significant accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below. Unless otherwise stated, these policies have been consistently applied to all the years presented and relate to both the Group and the Bank.

1.1 Basis of preparation

The consolidated financial statements include the financial statements of Lombard Bank Malta p.l.c. (the Bank) and its subsidiary undertakings (together referred to as 'the Group' and individually as 'Group entities'). The Bank's financial statements have been prepared in accordance with the requirements of International Financial Reporting Standards (IFRSs) as adopted by the EU and with the requirements of the Banking Act, 1994 (Chapter 371 of the Laws of Malta) and the Companies Act, 1995 (Chapter 386 of the Laws of Malta). These consolidated financial statements are prepared under the historical cost convention, as modified by the fair valuation of financial assets and financial liabilities.

The preparation of financial statements in conformity with IFRSs as adopted by the EU requires the use of certain accounting estimates. It also requires the Directors to exercise their judgement in the process of applying the Group's accounting policies (see note 3.1 – Critical accounting estimates, and judgements in applying the Group's accounting policies).

1.2 Standards, interpretations and amendments to published standards effective in 2018

In 2018, the Group adopted new standards, amendments and interpretations to existing standards that are mandatory for the Group's accounting period beginning on 1 January 2018.

In 2018, the Group has adopted IFRS 9 as issued by the IASB in July 2014 with a date of transition of 1 January 2018, which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements. The Group did not early adopt any of IFRS 9 in previous periods.

As permitted by the transitional provisions of IFRS 9, the Group has elected not to restate comparative figures. Any adjustments to the carrying amounts of financial assets and liabilities at the date of transition were recognised in the opening retained earnings of the current period.

The Group has also elected to continue to apply the hedge accounting requirements of IAS 39 on adoption of IFRS 9.

Consequently, for notes disclosures, the consequential amendments to IFRS 7 disclosures have also only been applied to the current period. The comparative period notes disclosures repeat those disclosures made in the prior year.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

The adoption of IFRS 9 has resulted in changes in our accounting policies for recognition, classification and measurement of financial assets and financial liabilities and impairment of financial assets. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 'Financial Instruments: Disclosures'.

Set out below are disclosures relating to the impact of the adoption of IFRS 9 on the Group. Further details of the specific IFRS 9 accounting policies applied in the current period (as well as the previous IAS 39 accounting policies applied in the comparative period) are described in more detail in section 2 below.

(a) Classification and measurement of financial instruments

The measurement category and the carrying amount of the Group's financial assets and liabilities in accordance with IAS 39 and IFRS 9 at 1 January 2018 are compared as follows:

	IAS 39		IFRS 9
Financial assets	Measurement category	Carrying amount € 000	Measurement category	Carrying amount € 000

Balances with Central Bank of Malta and cash	Amortised cost (loans and receivables)	135,043	Amortised cost	135,043
Cheques in course of collection	Amortised cost (loans and receivables)	1,755	Amortised cost	1,755
Loans and advances to banks	Amortised cost (loans and receivables)	97,048	Amortised cost	97,048
Loans and advances to customers	Amortised cost (loans and receivables)	428,611	Amortised cost	428,748
Financial investments	FVOCI (available-for-sale)	155,985	FVOCI	155,985

Instruments which were previously classified as available-for-sale are now classified as measured at fair value through other comprehensive income (FVOCI) with no changes to their measurement basis.

There were no changes to the classification and measurement of financial liabilities.

(b) Reconciliation of statement of financial position balances from IAS 39 to IFRS 9

The Group performed a detailed analysis of its business models for managing financial assets and analysis of their cash flow characteristics. Please refer to note 1.7 for more detailed information regarding the new classification requirements of IFRS 9.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

The following table reconciles the carrying amounts of financial assets, from their previous measurement category in accordance with IAS 39 to their new measurement categories upon transition to IFRS 9 on 1 January 2018:

	IAS 39 carrying amount	Remeasurements	IFRS 9 carrying amount
	31 December 2017		1 January 2018
	€ 000	€ 000	€ 000
Amortised cost
Balances with Central Bank of Malta and cash	135,043	-	135,043
Cheques in course of collection	1,755	-	1,755
Loans and advances to banks	97,048	-	97,048
Loans and advances to customers	428,611	137	428,748
Total financial assets measured at amortised cost	662,457	137	662,594

FVOCI: (2017: available-for-sale)
Financial investments	155,985	-	155,985
Total financial assets measured at FVOCI	155,985	-	155,985

Remeasurement gain of €137,000 relates to impairment loss allowance recognised in opening retained earnings on 1 January 2018 upon transition to IFRS 9. On 1 January 2018, the Group also recognised an Expected Credit Loss allowance of €56,000 on investment securities classified as FVOCI in opening retained earnings.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

(c) Reconciliation of impairment allowance balance from IAS 39 to IFRS 9

The following table reconciles the prior period's closing impairment allowance measured in accordance with the IAS 39 incurred loss model to the new impairment allowance measured in accordance with the IFRS 9 expected loss model at 1 January 2018:

	Loan loss allowance under IAS 39/ Provisions under IAS 37	Remeasurements	Loan loss allowance under IFRS 9
	€ 000	€ 000	€ 000
Loans and receivables (IAS 39)/ Financial assets at amortised cost (IFRS 9)
Balances with Central Bank of Malta and cash	-	-	-
Cheques in course of collection	-	-	-
Loans and advances to banks	-	-	-
Loans and advances to customers	22,848	(137)	22,711
Total	22,848	(137)	22,711
Available-for-sale financial instruments (IAS 39)/ Financial assets at FVOCI (IFRS 9)
Investment securities	-	56	56
Total	-	56	56
Loan commitments and financial guarantee contracts
Loan commitments	-	-	-
Financial guarantee contracts	-	-	-
Total	-	-	-

Further information on the measurement of the impairment allowance under IFRS 9 can be found in note 2.3.4.

1.3 Standards, interpretations and amendments to published standards that are not yet effective

Certain new standards, amendments and interpretations to existing standards which are mandatory for accounting periods beginning after 1 January 2019 have been published by the date of authorisation for issue of this financial information. The Group has not early adopted these requirements of IFRSs as adopted by the EU and the Group's directors are of the opinion that, there are no requirements that will have a possible significant impact on the Bank's financial statements in the period of initial application.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

1.3.1 IFRS 16 'Leases'

IFRS 16, 'Leases' is effective for annual periods beginning on or after 1 January 2019. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for a consideration. IFRS 16 requires lessees to recognise a lease liability reflecting future lease payments and a 'right-of-use' asset for virtually all lease contracts. The assets will be amortised over the length of the lease, and the financial liability measured at amortised cost. An optional exemption is available for certain short-term leases and leases of low-value assets. Lessor accounting remains substantially the same as under IAS 17.

At 1 January 2019, the Bank expects to adopt the standard using a modified retrospective approach where the cumulative effect of initial application is recognised as an adjustment to the opening balance of retained earnings and comparatives are not restated. The implementation is expected to increase assets and increase financial liabilities by the same amount with no effect on net assets or retained earnings. The Bank is still in the process of quantifying the impact of IFRS 16.

1.4 Consolidation

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The Group manages and administers investment vehicles on behalf of investors. The financial statements of these entities are not included in these financial statements, except when the Group controls the entity.

The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any noncontrolling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets.

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If this aggregate is less than the fair value of the identifiable net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in profit or loss.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The accounting policies of the subsidiaries are consistent with the policies adopted by the Group. In the Bank's separate financial statements, investments in subsidiaries are accounted for by the cost method of accounting, i.e. at cost less impairment. Provisions are recorded where, in the opinion of the Directors, there is an impairment in value. Where there has been an impairment in the value of an investment, it is recognised as an expense in the period in which the diminution is identified. The results of subsidiaries are reflected in the Bank's separate financial statements only to the extent of dividends receivable. On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to profit or loss.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

1.5 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the Board of Directors which is the Group's chief operating decision-maker.

An operating segment's operating results are reviewed regularly by the Board of Directors to make decisions about resources to be allocated to the segment and to assess its performance executing the function of the chief operating decision-maker.

1.6 Foreign currency translation

The financial statements are presented in euro (€), which is the Group's presentation currency.

1.6.1 Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in euro, which is the Group's functional and presentation currency.

1.6.2 Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

1.7 Financial assets

1.7.1 Initial recognition and measurement

The Group recognises a financial asset in its statement of financial position when it becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial assets are recognised on the trade date, which is the date on which the Group commits to purchase or sell the asset. Accordingly, the Bank uses trade date accounting for regular way contracts when recording financial asset transactions.

At initial recognition, the Bank measures a financial asset at its fair value plus or minus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are incremental and directly attributable to the acquisition or issue of the financial asset, such as fees and commissions. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. With effect from 1 January 2018, immediately alter initial recognition, an Expected Credit Loss allowance (ECL) is recognised for financial assets measured at amortised cost and investments in debt instruments measured at FVOCI, which results in an accounting loss being recognised in profit or loss when an asset is newly originated.

When the fair value of financial assets differs from the transaction price on initial recognition, the Group recognises the difference as follows:

when the fair value is evidenced by a quoted price in an active market for an identical asset (i.e. a Level 1 input) or based on a valuation technique that uses only data from observable markets, the difference is recognised as a gain or loss;

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

in all other cases, the difference is deferred and the timing of recognition of deferred day one profit or loss is determined individually. It is either amortised over the life of the instrument, deferred until the instrument's fair value can be determined using market observable inputs, or realised through settlement.
1.7.2 Classification and subsequent measurement (applicable from 1 January 2018)

From 1 January 2018, the Group has applied IFRS 9 and classifies its financial assets in the following measurement categories:

Fair value through profit or loss (FVPL);
Fair value through other comprehensive income (FVOCI); or
Amortised cost.

1.7.2.1 Debt instruments

Debt instruments are those instruments that meet the definition of a financial liability from the issuer's perspective, such as loans, government and corporate bonds and trade receivables purchased from clients in factoring arrangements without recourse.

With effect from 1 January 2018, classification and subsequent measurement of debt instruments depend on:

the Group's business model for managing the asset; and
the cash flow characteristics of the asset.

Based on these factors the Group classifies its debt instruments into one of the following three measurement categories:

Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest (SPPI), and that are not designated at FVPL, are measured at amortised cost. The carrying amount of these assets is adjusted by any Expected Credit Loss allowance recognised and measured as described in note 1.7.4. Interest income from these financial assets is included in 'Interest and similar income' using the effective interest rate method.
Fair value through other comprehensive income (FVOCI): Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets' cash flows represent solely payments of principal and interest, and that are not designated at FVPL, are measured at fair value through other comprehensive income (FVOCI). Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the instrument's amortised cost which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in 'net investment income'. Interest income from these financial assets is included in 'interest income' using the effective interest rate method.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

Fair value through profit or loss (FVPL): Assets that do not meet the criteria for amortised cost or FVOCI are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognised in profit or loss and presented in the profit or loss statement within 'net trading income' in the period in which it arises, unless it arises from debt instruments that were designated at fair value or which are not held for trading, in which case they are presented separately in 'net investment income'. Interest income from these financial assets is included in 'interest income' using the effective interest.

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

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability.

The calculation does not consider Expected Credit Losses and includes transaction costs, premiums or discounts and fees and points paid or received that are integral to the effective interest rate, such as origination fees. For purchased or originated credit-impaired (POCI) financial assets - assets that are credit-impaired at initial recognition - the Bank calculates the credit-adjusted effective interest rate, which is calculated based on the amortised cost of the financial asset instead of its gross carrying amount and incorporates the impact of Expected Credit Losses in estimated future cash flows.

When the Bank revises the estimates of future cash flows, the carrying amount of the respective financial assets or financial liability is adjusted to reflect the new estimate discounted using the original effective interest rate. Any changes are recognised in profit or loss.

The Bank reclassifies debt instruments when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent and none occurred during the period.

(a) Business model assessment

Key management personnel determine the Group's business model by considering the way financial instruments are managed in order to generate cash flows. That is, whether the Group's objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these is applicable (for example, financial assets are held for trading purposes), then the financial assets are classified as part of 'other' business model and measured at FVPL. Such assessment is performed at a 'portfolio level' as it best reflects the way the business is managed and information is provided to management.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

The information that will be considered in such assessment includes:

the objectives for the portfolio including whether management's strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of assets;
the method for the evaluation of the performance of the portfolio and how such performance is reported to the Group's management;
the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; and
the frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Group's stated objective for managing the financial assets is achieved and how cash flows are realised.

Financial assets that are held for trading and those that are managed and whose performance is evaluated on a fair value basis will be measured at FVPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. Securities held for trading are held principally for the purpose of selling in the near term or are part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.

The Bank may also irrevocably designate financial assets at fair value through profit or loss if doing so significantly reduces or eliminates a mismatch created by assets and liabilities being measured on different bases.

(b) Cash flows that represent solely payment of principal and interest (SPPI)

In respect of assets where the intention of the business model is to hold the financial assets to collect the contractual cash flows or to hold to collect and to sell, the Group assesses whether the financial instruments' cash flows represent solely payments of principal and interest (the SPPI test). In making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending agreement. 'Principal' is the fair value of the financial asset at initial recognition. It is not the amount that is due under the contractual terms of an instrument. 'Interest' is the compensation for time value of money and credit risk of a basic lending-type return. A basic lending-type return could also include consideration for other basic lending risks (for example, liquidity risk) and consideration for costs associated with holding the financial asset for a particular period of time (for example, servicing or administrative costs) and/or a profit margin. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at fair value through profit or loss.

Unlike the business model assessment, the SPPI assessment is performed for each individual product or portfolio of products. The following considerations are made when assessing consistency with SPPI:

contingent events that would change the amount and timing of cash flows such as contractual term resetting interest to a higher amount in the event of a missed payment;
leverage features, being contractual cash flow characteristics that increase the variability of the contractual cash flows with the result that they do not have economic characteristics of interest;
contractual terms that allow the issuer to prepay (or the holder to put a debt instrument back to the issuer) before maturity and the prepayment amount substantially represents unpaid amounts of principal and interest, which may include reasonable compensation for early termination of the contract;

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

contractual terms that allow the issuer or holder to extend the contractual term and the terms of the extension option result in contractual cash flows during the extension period that are solely payments of principal and interest, which may include reasonable compensation for the extension of the contract; and
features that modify consideration for the time value of money (for example, periodic reset of interest rates).

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

1.7.2.2 Equity instruments

Equity instruments are instruments that meet the definition of equity from the issuer's perspective, that is, instruments that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer's net assets. Examples of equity instruments include basic ordinary shares.

The Group subsequently measures all equity investments at fair value through profit or loss, except where the Group's management has elected, at initial recognition, to irrevocably designate an equity investment at fair value through other comprehensive income. The Group's policy is to designate equity investments as FVOCI when those investments are held for purposes other than to generate investment returns. When this election is used, fair value gains and losses are recognised in OCI and are not subsequently reclassified to profit or loss, including on disposal.

Impairment losses (and reversal of impairment losses) are not reported separately from other changes in fair value. Dividends, when representing a return on such investments, continue to be recognised in profit or loss as other income when the Group's right to receive payments is established.

Gains and losses on equity investments at FVPL are included in the 'net trading income' line in the income statement.

1.7.3 Classification and measurement under IAS 39 (applicable until 31 December 2017)

Until the period ended 31 December 2017, the Group classified its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available-for-sale investments. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

The classification requirements for debt and equity investments are described below.

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

This category comprised two sub-categories: financial assets classified as held for trading, and financial assets designated by the Group as at fair value through profit or loss upon initial recognition.

A financial instrument was classified as held for trading if it was acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it was part of a portfolio of identified financial instruments that were managed together and for which there was evidence of a recent actual pattern of short-term profit-taking.

Derivatives were also categorised as held for trading unless they were designated and effective as hedging instruments.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

Financial instruments included in this category were recognised initially at fair value; transaction costs were taken directly to profit or loss. Gains and losses arising from changes in fair value were included directly in profit or loss and are reported as part of 'net trading income'. Interest income and dividend income on financial assets held for trading are also included in 'net trading income'.

The Group may have designated certain financial assets upon initial recognition as at fair value through profit or loss (fair value option). This designation was not subsequently changed. According to IAS 39, the fair value option was only applied when the following conditions are met:

the application of the fair value option reduces or eliminates an accounting mismatch that would otherwise arise; or
the financial assets are part of a portfolio of financial instruments which is risk managed and reported to senior management on a fair value basis; or
the financial assets consist of debt hosts and embedded derivatives that must be separated.
(b) Loans and receivables

Loans and receivables were non-derivative financial assets with fixed or determinable payments that were not quoted in an active market, other than:

those that the Group intends to sell immediately or in the short-term, which are classified as held for trading, and those that the Group upon initial recognition designates as at FVPL;
those that the Group upon initial recognition designates as available-for-sale; or
those for which the holder may not recover substantially all of their initial investment, other than because of credit deterioration.

Loans and receivables arose when the Group provided money, goods or services directly to a debtor with no intention of trading the asset. Loans and receivables mainly consisted of balances with Central Bank of Malta, loans and advances to banks and customers, other debt securities classified as loans and receivables together with other assets.

Loans and receivables were initially recognised at fair value – which is the cash consideration to originate or purchase the loan including any transaction costs – and measured subsequently at amortised cost using the effective interest rate method.

Amortised cost was the initial measurement amount adjusted for the amortisation of any difference between the initial and maturity amounts using the effective interest method. Interest on loans and receivables was included in profit or loss and was reported as 'interest receivable and similar income'. In the case of an impairment, the impairment loss was reported as a deduction from the carrying value of the loan and receivable and recognised in profit or loss as 'credit impairment losses'.

(c) Held-to-maturity

Held-to-maturity investments were 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, other than:

those that the Group upon initial recognition designated as at fair value through profit or loss;
those that the Group designated as available-for-sale; and
those that met the definition of loans and receivables.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

These were initially recognised at fair value including direct and incremental transaction costs and measured subsequently at amortised cost, using the effective interest method.

Interest on held-to-maturity investments was included in profit or loss and reported as 'interest and similar income'. In the case of an impairment, the impairment loss was reported as a deduction from the carrying value of the investment and recognised in profit or loss.

(d) Available-for-sale investments

Available-for-sale investments were financial assets that were intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices, or that were not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss.

Available-for-sale financial assets were initially recognised at fair value, which is the cash consideration including any transaction costs, and measured subsequently at fair value with gains and losses being recognised in other comprehensive income, except for impairment losses and foreign exchange gains and losses (in case of monetary assets), until the financial asset was derecognised. If an available-for-sale financial asset was determined to be impaired, the cumulative gain or loss previously recognised in other comprehensive income was reclassified to profit or loss.

Interest income was calculated using the effective interest method, and was recognised in profit or loss as are foreign currency gains and losses on monetary assets classified as available-for-sale. Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale were analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security.

Translation differences related to changes in amortised cost were recognised in profit or loss, and other changes in carrying amount were recognised in other comprehensive income. Dividends on available-for-sale equity instruments were recognised in profit or loss in 'dividend income' when the Group's right to receive payment was established.

The fair values of quoted investments were based on current bid prices. If the market for a financial asset was not active (and for unlisted securities), the Group established fair value by using valuation techniques. These included the use of recent arm's length transactions, reference to other instruments that were substantially the same, discounted cash flow analyses, and option pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs.

1.7.4 Impairment of financial assets
1.7.4.1 Applicable as from 1 January 2018

The Group assesses on a forward-looking basis the Expected Credit Losses (ECLs) associated with its debt instruments carried at amortised cost and FVOCI and with the exposure arising from loan commitments and financial guarantee contracts. The Group recognises a loss allowances for such losses at each reporting date. The measurement of ECLs reflects:

an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;
the time value of money; and
reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

Note 2.3.4 provides more detail of how the Expected Credit Loss allowance is measured.

Expected Credit Loss allowances are presented in the statement of financial position as follows:

financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;
loan commitments and financial guarantee contracts: generally, as a provision;
financial instrument with both a drawn and undrawn component, whereby the Group cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Group presents a combined loss allowance for both components, as a deduction from the gross carrying amount of the drawn component; and
debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position against the carrying amount of the asset because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in the fair value reserve, i.e. presented within other comprehensive income.

1.7.4.2 Applicable until 31 December 2017

(a) Assets carried at amortised cost

The Group assessed at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets was considered impaired and impairment losses were incurred only if there was objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event (or events) had an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The criteria that the Group uses to determine that there is objective evidence of an impairment loss included:

significant financial difficulty of the issuer or obligor;
a breach of contract, such as a default or delinquency in interest or principal payments;
the lender, for economic or legal reasons relating to the borrower's financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;
it becomes probable that the borrower will enter bankruptcy or other financial reorganisation;
the disappearance of an active market for that financial asset because of financial difficulties; or
observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:
- adverse changes in the payment status of borrowers in the portfolio; and
- national or local economic conditions that correlate with defaults on the assets in the portfolio.

The estimated period between a loss occurring and its identification was determined by management for each identified portfolio. In general, the periods used varied between three months and twelve months; in exceptional cases, longer periods were warranted.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

The Group first assessed whether objective evidence of impairment existed individually for financial assets that were individually significant, and individually or collectively for financial assets that were not individually significant. If the Group determined that no objective evidence of impairment existed for an individually assessed financial asset, whether significant or not, it included the asset in a group of financial assets with similar credit risk characteristics and collectively assessed them for impairment. Assets that were individually assessed for impairment and for which an impairment loss was or continued to be recognised were not included in a collective assessment of impairment.

The amount of the loss was measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset was reduced through the use of an allowance account and the amount of the loss was recognised in profit or loss. If a loan or held-to-maturity investment had a variable interest rate, the discount rate for measuring any impairment loss was the current effective interest rate determined under the contract. As a practical expedient, the Group could measure impairment on the basis of an instrument's fair value using an observable market price.

The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflected the cash flows that could result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure was probable.

For the purposes of a collective evaluation of impairment, financial assets were grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Group's grading process that considered asset type, collateral type, past-due status and other relevant factors). Those characteristics were relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated.

Future cash flows in a group of financial assets that were collectively evaluated for impairment were estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience was adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience was based and to remove the effects of conditions in the historical period that did not currently exist.

Estimates of changes in future cash flows for groups of assets reflected and was directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows were reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

If, in a subsequent period, the amount of the impairment loss decreased and the decrease could be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the previously recognised impairment loss was reversed by adjusting the allowance account. The amount of the reversal was recognised in profit or loss.

Granting a concession to a customer that the Bank would not otherwise consider, as a result of their financial difficulty, was considered objective evidence of impairment and impairment losses were measured accordingly.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

Forborne loans

A forborne loan was categorised as impaired when:

there has been a change in contractual cash flows as a result of a concession which the Group would otherwise not consider; and
it is probable that without the concession, the borrower would be unable to meet contractual payment obligations in full.

Forbearance activity is undertaken selectively where it has been identified that repayment difficulties against the original terms already have, or are very likely to materialise. Accordingly, taking cognisance of the principles highlighted above, forborne loans are treated as impaired loans where: the customer is experiencing, or is very likely to experience, difficulty in meeting a payment obligation to the Group (i.e. due to current credit distress); and the Group is offering to the customer revised payment arrangements which constitute a concession (i.e. it is offering terms it would not normally be prepared to offer).

Forborne loans were typically assessed for impairment individually. The individual impairment assessment took into account the higher risk of the non-payment of future cash flows inherent in forborne loans. Loans subject to individual impairment assessment, which had been subject to a forbearance measure, were subject to ongoing review to determine whether they remained impaired.

Loans subject to collective impairment assessment which had been subject to a forbearance measure were segregated from other parts of the loan portfolio for the purposes of collective impairment assessment, to reflect their risk profile and the higher rates of losses often encountered in these cases. Evidence indicated an increased propensity to default and higher losses on such accounts; these factors were taken into account when calculating impairment allowances. A basic formulaic approach based on historical loss rate experience was used by the Group. When the Group considered that there were additional risk factors inherent in the portfolio that may not be fully reflected in the historical experience, these risk factors were taken into account by adjusting the impairment allowances derived solely from historical experience.

The forborne loan would continue to be disclosed as impaired until there was sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, and there were no other indicators of impairment. For loans that were assessed for impairment on a collective basis, the evidence typically comprised a history of payment performance against the original or revised terms, as appropriate to the circumstances. For loans that were assessed for impairment on an individual basis, all available evidence was assessed on a case-by-case basis. The minimum period of payment performance required depended on the nature of the loan in the portfolio, but was not less than twelve months. The period of performance would vary depending on the frequency of payments to be made by the customer under the amended agreement and the extent to which the customer's financial position was considered to have improved. Forborne loans could not be returned to a non-impaired grade when a specific impairment allowance remains against any of the customer's credit facilities.

Forborne loans were not classified as impaired where the forbearance had resulted from significant concern about a borrower's ability to meet their contractual payment terms but the modified terms were based on current market rates and contractual cash flows were expected to be collected in full following the renegotiation. Non-impaired forborne loans also included previously impaired forborne loans that had demonstrated satisfactory performance over a period of time or had been assessed based on all available evidence as having no remaining indicators of impairment.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

Loans that had been identified as forborne retained this designation until payment performance had been observed for an extended period of time. When principal payments were modified resulting in permanent forgiveness, or when it was otherwise considered that there was no longer a realistic prospect of recovery of outstanding principal, the affected balances were written off.

A loan that was subject to forbearance measures was derecognised if the existing agreement was cancelled and a new agreement made on substantially different terms, or if the terms of an existing agreement were modified, such that the renegotiated loan was substantially a different financial instrument. When determining whether a loan that was restructured should be derecognised and a new loan recognised, the Group considered the extent to which the changes to the original contractual terms resulted in the renegotiated loan, considered as a whole, being a substantially different financial instrument. Circumstances that were likely to result in this test being met and derecognition accounting being applied comprise modified terms under the new or modified contract that were substantially different from those under the original contract.

When a loan was restructured as part of a forbearance strategy and the restructuring results in derecognition of the existing loan, the new loan was disclosed as forborne.

(b) Assets classified as available-for-sale

The Group assessed at each reporting date whether there was objective evidence that a financial asset or a group of financial assets was impaired taking cognisance of the criteria referred to in note 1.7.4.2.

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 was objective evidence of impairment resulting in the recognition of an impairment loss.

If any such evidence existed for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost (or amortised cost as applicable) and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – was removed from equity and recognised in profit or loss. Impairment losses recognised in profit or loss on equity instruments were not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase could be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss was reversed through profit or loss.

In devising its accounting policy in relation to the impairment of available-for-sale financial assets, more specifically the significant or prolonged decline in fair value below cost, the Bank had considered the fact that its available-for-sale equity instruments comprise a limited number of investments.

1.7.5 Modification of loans and advances to customers

The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

The Group renegotiates loans and advances to customers in financial difficulties (referred to as 'forbearance activities') to maximise collection opportunities and minimise the risk of default. Under the Group's forbearance policy, loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms, and the debtor is expected to be able to meet the revised terms. The revised terms usually include extending the maturity, revision of interest rate and changing the timing of interest payments. Both retail and corporate loans are subject to the forbearance policy.

When modification happens, the Group assesses whether or not the new terms are substantially different to the original terms. The Group does this by considering, among others, the following factors:

if the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to amounts the borrower is expected to be able to pay;
whether any substantial new terms are introduced;
significant extension of the loan term when the borrower is not in financial difficulty;
significant change in the interest rate; and
insertion of collateral, other security or credit enhancements that significantly affect the credit risk associated with the loan.

If the terms are substantially different, the Group derecognises the original financial asset and recognises a 'new' asset at fair value, and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes, including for the purpose of determining whether a significant increase in credit risk has occurred. However, the Group also assesses whether the new financial asset recognised is deemed to be credit-impaired at initial recognition, especially in circumstances where the renegotiation was driven by the debtor being unable to make the originally agreed payments. Differences in the carrying amount are also recognised in profit or loss as a gain or loss on derecognition.

If the terms are not substantially different, the renegotiation or modification does not result in derecognition, and the Group recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognises a modification gain or loss in profit or loss.

The new gross carrying amount is recalculated by discounting the modified cash flows at the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets). The impact of modifications of financial assets on the Expected Credit Loss calculation is discussed in note 2.3.9.

1.7.6 Derivative financial instruments

The Group deploys no hedging strategies that achieve hedge accounting in terms of IAS 39.

Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into, and are subsequently remeasured at their fair value. Fair values are obtained from valuation techniques for over-the-counter derivatives, including discounted cash flow models. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. Fair values for currency forwards are determined using forward exchange market rates at the end of the reporting period. Discounting techniques, reflecting the fact that the respective exchange or settlement will not occur until a future date, are used when the time value of money has a significant effect on the fair valuation of these instruments.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in profit or loss.

The Group uses derivatives such as cross currency swaps and forward foreign exchange contracts.

1.8 Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is possible that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.

1.9 Investments in subsidiaries

The Group classifies investments in entities which it controls as subsidiaries.

The Group's investments in subsidiaries are stated at cost less impairment losses in the Group's stand-alone financial statements. Impairment losses recognised in prior periods are reversed through profit or loss if there has been a change in the estimates used to determine the investment's recoverable amount since the last impairment loss was recognised.

1.10 Investment in associate

Associates are all entities over which the Group has significant influence but not control or joint control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting in the consolidated financial statements, after initially being recognised at cost. Under the equity method of accounting, the investment is initially recognised at cost, and the carrying amount is adjusted thereafter to recognise the Group's share of the post-acquisition profits or losses of the investee in profit or loss, and the Group's share of movements in other comprehensive income of the investee in other comprehensive income. The Group's investment in associates includes goodwill identified on acquisition. Dividends received or receivable from associates are recognised as a reduction in the carrying amount of the investment.

When the Group's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate.

The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount adjacent to 'share of profit/(loss) of associates' in the income statement.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

Profits and losses resulting from upstream and downstream transactions between the Group and its associate are recognised in the Group's financial statements only to the extent of unrelated investor's interests in the associates. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to profit or loss where appropriate.

Dilution gains and losses arising in investments in associates are recognised in the income statement.

In the Bank's separate financial statements, investments in associates are accounted for by the cost method of accounting, i.e. at cost less impairment. Provisions are recorded where, in the opinion of the Directors, there is impairment in value. Where there has been impairment in the value of an investment, it is recognised as an expense in the period in which the diminution is identified. The results of the associate are reflected in the Bank's separate financial statements only to the extent of dividends receivable. On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to profit or loss.

1.11 Intangible assets

1.11.1 Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the identifiable net assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in 'intangible assets'.

Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segment. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit. The recoverable amount is the higher of fair value less costs to sell and value in use.

1.11.2 Computer software

Costs incurred to acquire and bring to use specific software are capitalised and amortised on the basis of the expected useful lives. Software has a maximum expected useful life of four years.

1.12 Property, plant and equipment

All property, plant and equipment used by the Group is initially recorded at historical cost, including transaction costs and borrowing costs. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

Land and buildings comprise mainly branches and offices. Land and buildings are shown at fair value based on periodic valuations by external independent valuers, less subsequent depreciation for buildings. Valuations are carried out on a regular basis such that the carrying amount of property does not differ materially from that which would be determined using fair values at the end of the reporting period. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset, and the net amount is restated to the revalued amount of the asset.

All other property, plant and equipment is stated at historical cost less accumulated depreciation.

Borrowing costs which are incurred for the purpose of acquiring or constructing a qualifying asset are capitalised as part of its cost. Borrowing costs are capitalised while acquisition or construction is actively underway. Capitalisation of borrowing costs is ceased once the asset is substantially complete, and is suspended if the development of the asset is suspended.

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.

Increases in the carrying amount arising on revaluation of land and buildings are credited to other comprehensive income and shown as a revaluation reserve in shareholders' equity. Decreases that offset previous increases of the same asset are charged to other comprehensive income and debited against the revaluation reserve directly in equity; all other decreases are charged to profit or loss.

Land is not depreciated as it is deemed to have an indefinite life. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows:

Buildings	100 or over period of lease/arrangement
Leasehold property	Over period of lease/arrangement
Computer equipment	4
Other	4 – 8

Years

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (see note 1.13).

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in profit or loss. When revalued assets are sold, the amounts included in the revaluation reserve relating to that asset are transferred to retained earnings.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

1.13 Impairment of non-financial assets

Assets that have an indefinite useful life, for example goodwill or certain intangible assets, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units). The impairment test also can be performed on a single asset when the fair value less costs to sell or the value in use can be determined reliably. Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

1.14 Repossessed property

In certain circumstances, property is repossessed following the foreclosure on loans that are in default. Repossessed properties are measured at the lower of carrying amount and fair value less costs to sell.

1.15 Non-current assets held for sale

Non-current assets are classified as assets held for sale and are stated at the lower of carrying amount and fair value less costs to sell when their carrying amount is to be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable.

1.16 Current and deferred income tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period.

Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

1.17 Inventories

Inventories are stated at the lower of cost and net realisable value. The cost of postal stationery and inventories held for resale is determined on a weighted average cost basis. The cost of inventories is determined on a first-in first-out basis. The cost of inventories comprise the invoiced value of goods sold and in general includes transport and handling costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.

1.18 Trade and other receivables

Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.

Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provisions for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the receivable is impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the 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 profit or loss. When a receivable is uncollectible, it is written off against the allowance account for trade and other receivables. Subsequent recoveries of amounts previously written off are credited in profit or loss.

1.19 Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of tax, from the proceeds.

1.20 Financial liabilities
1.20.1 Initial recognition and measurement

The Group recognises a financial liability on its statement of financial position when it becomes a party to the contractual provisions of the instrument. Financial liabilities not at fair value through profit or loss are recognised initially at fair value, being the fair value of consideration received, net of transaction costs that are directly attributable to the acquisition or the issue of the financial liability.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

1.20.2 Classification and subsequent measurement (applicable as from 1 January 2018)

Financial liabilities are classified as subsequently measured at amortised cost, except for:

financial liabilities at fair value through profit or loss: this classification is applied to derivatives, financial liabilities held for trading (for example, short positions in the trading booking) and other financial liabilities designated as such at initial recognition. Gains or losses on financial liabilities designated at fair value through profit or loss are presented partially in other comprehensive income (the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability, which is determined as the amount that is not attributable to changes in market conditions that give rise to market risk) and partially profit or loss (the remaining amount of change in the fair value of the liability). This is unless such a presentation would create, or enlarge, an accounting mismatch, in which case the gains and losses attributable to changes in the credit risk of the liability are also presented in profit or loss;
financial liabilities arising from the transfer of financial assets which did not qualify for derecognition, whereby a financial liability is recognised for the consideration received for the transfer. In subsequent periods, the Group recognises any expense incurred on the financial liability; and
financial guarantee contracts and loan commitments (see note 1.30).

The Group's financial liabilities were classified as financial liabilities which were not at fair value through profit or loss (classified as 'other liabilities') under IAS 39. These liabilities were subsequently measured at amortised cost.

Financial liabilities measured at amortised cost comprise principally amounts owed to banks, amounts owed to customers, debt securities in issue together with other liabilities.

1.20.3 Derecognition

The Group derecognises a financial liability from its statement of financial position when the obligation specified in the contract or arrangement is discharged, is cancelled or expires.

The exchange between the Group and its original lenders of debt instruments with substantially different terms, as well as substantial modifications of the terms of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability.

In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in covenants are also taken into consideration. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.

1.21 Repurchase and reverse repurchase agreements

Securities sold under agreements to repurchase at a specified future date are not derecognised from the statement of financial position as the Group retains substantially all of the risks and rewards of ownership. The corresponding cash received is recognised in the statement of financial position as an asset with a corresponding obligation to return it, including accrued interest as a liability, reflecting the transaction's economic substance as a loan to the Group. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of agreement using the effective interest rate.

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1 Summary of significant accounting policies (continued)

When the counterparty has the right to sell or repledge the securities, the Bank reclassifies those securities in its statement of financial position to financial assets held for trading pledged as collateral or to financial investments available-for-sale pledged as collateral, as appropriate.

Conversely, securities purchased under agreements to resell at a specified future date are not recognised in the statement of financial position. The consideration paid, including accrued interest, is recorded in the statement of financial position, reflecting the transaction's economic substance as a loan by the Bank. The difference between the purchase and resale prices is recorded in net interest income and is accrued over the life of the agreement using the effective interest rate.

If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded as a short sale within financial liabilities held for trading and measured at fair value with any gains or losses included in net trading income.

1.22 Trade and other payables

Trade payables comprise obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

1.23 Provisions for legal and other claims

Provisions for legal and other claims are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.

1.24 Provision for pension obligations

A subsidiary of the Bank provides for the obligation arising in terms of Article 8A of the Pensions Ordinance, (Chapter 93 of the Laws of Malta), covering those former Government employees who opted to become full-time employees of the subsidiary of the Bank, and who continued to be entitled to pension benefits which go beyond the National Insurance Scheme.

The pension related accounting costs are assessed using the projected unit credit method. Under this method, the cost of the subsidiary's obligation is charged to profit or loss so as to spread the cost over the years of service giving rise to entitlement to benefits in accordance with actuarial techniques. The obligation is measured as the present value of the estimated future cash outflows using interest rates of long-term Government bonds which have terms to maturity approximating the terms of the related liability. Subsequent to the adoption of IAS 19 (revised 2011), all actuarial gains and losses are charged or credited to equity in other comprehensive income in the period in which they arise.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

1.25 Interest income and expense

Interest income and expense for all interest-bearing financial instruments are recognised within 'interest income' and 'interest expense' in the profit or loss using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period.

1.25.1 Applicable as from 1 January 2018

The calculation does not consider Expected Credit Losses and includes transaction costs, premiums or discounts and fees and points paid or received that are integral to the effective interest rate, such as origination fees. For purchased or originated credit-impaired (POCI) financial assets - assets that are credit-impaired at initial recognition - the Group calculates the credit-adjusted effective interest rate, which is calculated based on the amortised cost of the financial asset instead of its gross carrying amount and incorporates the impact of Expected Credit Losses in estimated future cash flows.

1.25.2 Applicable until 31 December 2017

The effective interest rate is the rate that exactly 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 estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points 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.

Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for:

POCI financial assets, for which the original credit-adjusted effective interest rate is applied to the amortised cost of the financial asset; and
financial assets that are not POCI but have subsequently become credit-impaired (or 'Stage 3'), for which interest revenue is calculated by applying the effective interest rate to their amortised cost (i.e. net of the Expected Credit Loss provision).

1.26 Fees and commissions

Fee and commission income and expense that are an integral part of the effective interest rate on a financial asset or liability are included in the calculation of the effective interest rate and treated as part of effective interest. Other fees and commissions are generally recognised on an accrual basis when the service has been provided.

Fee and commission income, comprising account servicing fees, investment management fees, placement fees and other similar fees, are recognised as the related services are performed.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan. When a loan commitment is not expected to result in the drawdown of a loan, the related loan commitment fees are recognised on a straight-line basis over the commitment period. Fee and commission expense, relating mainly to transaction and service fees, are expensed as the services are received.

1.27 Postal sales and service income

Postal sales and service revenue comprises the fair value of the consideration received or receivable for the sale of services in the ordinary course of the subsidiary's activities. Revenue is shown net of sales taxes and discounts. It comprises revenue directly received from customers, commissions earned on postal and non-postal transactions and income from foreign outbound mail receivable from overseas postal administrators.

Income from sale of stamps, commission earned on postal and non-postal transactions and revenue from foreign outbound mail from overseas postal administrators is recognised when the service is rendered. Allowance is made for the assessed amount of revenue from prepaid product sales at the end of the reporting period for which the service has not yet been provided. In the case of services rendered to postal administrators in countries subject to severe exchange control restrictions and undue delays in settlement, revenue is not recognised until the subsidiary is in a position to ensure that the economic benefits associated with the transaction will flow to it, which is often upon or shortly before actual receipt.

1.28 Dividend income

Dividends are recognised in profit or loss in 'dividend income' when the entity's right to receive payment is established.

1.29 Leases
1.29.1 When a Group company is the lessee

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

1.30 Financial guarantee contracts and loan commitments

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers.

In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees and acceptances.

1.30.1 Applicable from 1 January 2018

Financial guarantee contracts are initially measured at fair value and subsequently measured at higher of:

the amount of the loss allowance (calculated as described in note 1.7.4); and
the premium received on initial recognition less income recognised in accordance with the principles of IFRS 15.

For the Year Ended 31 December 2018

1 Summary of significant accounting policies (continued)

'Loan commitments' are the Bank's commitments to provide credit under pre-specified terms and conditions, and are measured as the amount of the loss allowance (calculated as described in note 1.7.4).

For loan commitments and financial guarantee contracts, the loss allowance is recognised as a provision. However, for contracts that include both a loan and an undrawn commitment and the Bank cannot separately identify the Expected Credit Losses on the undrawn commitment component from those on the loan component, the Expected Credit Losses on the undrawn commitment are recognised together with the loss allowance for the loan. To the extent that the combined Expected Credit Losses exceed the gross carrying amount of the loan, the Expected Credit Losses are recognised as a provision.

1.30.2 Applicable until 31 December 2017

Financial guarantees were initially recognised in the financial statements at fair value on the date the guarantee was given. The fair value of a financial guarantee at the time of signature was zero because all guarantees were agreed on arm's length terms and the value of the premium agreed corresponds to the value of the guarantee obligation. No receivable for the future premiums was recognised. Subsequent to initial recognition, the Bank's liabilities under such guarantees were measured at the higher of the initial amount, less amortisation of fees recognised in accordance with IAS 18, and the best estimate of the amount required to settle the guarantee. These estimates were determined based on experience of similar transactions and history of past losses, supplemented by the judgement of management. The premium received was recognised in the income statement in 'fees and commission income' on a straight line basis over the life of the guarantee. Any increase in the liability relating to guarantees was recognised in profit or loss.

1.31 Cash and cash equivalents

Cash and cash equivalents are carried in the statement of financial position at face value. Cash and cash equivalents comprise balances with less than three months' maturity from the date of acquisition, including cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.

1.32 Dividend distribution

Dividend distribution to the Bank's shareholders is recognised as a liability in the Group's financial statements in the period in which the dividends are approved by the Bank's shareholders.

2. Financial risk management

2.1 Introduction
2.1.1 Preamble

The Group's business involves taking on risks in a targeted manner and managing them professionally. The core functions of the Group's risk management are to identify all key risks for the Group, measure these risks, manage the risk positions and determine capital allocations. The Group regularly reviews its risk management policies and systems to reflect changes in markets, products and best market practice. The Group's aim is to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Group's financial performance. The Group defines risk as the possibility of losses or profits foregone, which may be caused by internal or external factors.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The Group considers risk management a core competency that helps produce consistently high returns for its various stakeholders. The Group aims to manage all major types of risk by applying methods that meet best practice. The Group considers it important to have a clear distribution of responsibilities within the area of risk management. One of the main tasks of the Group's executive management is to set the framework for this area. An understanding of risk-taking and transparency in risk-taking are key elements in the Group's business strategy and thus in its ambition to be a strong financial entity. The Group's internal risk management processes support this objective.

Risk management within the Bank is mainly carried out on a unified basis, using an integrated and entity-wide framework. This framework is based on local and international guidelines, such as the Basel III Accord, corresponding Directives and Regulations of the European Union, including technical standards, as well as contemporary international banking practices. The Bank has adopted the Standardised Approach and the Basic Method with respect to the calculation of capital requirements in relation to, and management of, credit and market risks, and the Basic Indicator Approach with respect to operational risk. The Bank regularly updates its Internal Capital and Liquidity Adequacy Assessment Processes (ICAAP and ILAAP), that are approved by the Board of Directors.

2.1.2 Organisation

The Bank's Board of Directors is responsible for ensuring that adequate processes and procedures exist to ensure effective internal control systems for the Group. These internal control systems ensure that decision-making capability and the accuracy of the reporting and financial results are maintained at a high level at all times. The Board assumes responsibility for:

setting business objectives, goals and the general strategic direction for Management with a view to maximise value;
selecting and appointing the Chief Executive Officer who is entrusted with the day-to-day operations of the Group;
management of the Group's operations;
ensuring that significant business risks are identified and appropriately managed; and
setting the highest business standards and code for ethical behaviour, and monitoring adherence with these.

In deciding how best to discharge its responsibilities, the Board upholds a policy of clear demarcation between its role and responsibilities and those of Management. It has defined the level of authority that it retains over strategy formulation and policy determination, and delegated authority and vested accountability for the Bank's day-to-day business in the Assets & Liabilities Committee and Credit Committee, and, for the Group's day-to-day operations, in an Executive Team comprising the Chief Executive Officer and Chief Officers. The Audit & Risk Committee reviews the processes and procedures to ensure the effectiveness of the Group's system of internal control, as well as the implementation of the Board's risk strategy by management. The Audit & Risk Committee is supported by the Internal Audit and the Bank's Risk Management functions.

Authority to operate the Bank and its subsidiaries is delegated to the Chief Executive Officer within the limits set by the Board. The Board is ultimately responsible for the Group's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide only reasonable, and not absolute, assurance against material misstatement or loss.

The Group is committed to the highest standards of business conduct and seeks to maintain these standards across all operations. Group policies and procedures are in place for the reporting and addressing of fraudulent activities.

The Group has an appropriate organisational structure for planning, executing, controlling and monitoring business operations in order to achieve Group objectives.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

2.1.3 Risk policies

The Bank's Board of Directors is empowered to set out the overall risk policies and limits for all material risk types. The Board also decides on the general principles for managing and monitoring risks. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments.

Internal controls, procedures and processes are managed within the following areas:

Finance
Treasury
Credit
Internal Audit
Risk Management
Compliance
Anti-Money Laundering

2.1.4 Risk appetite

The risk appetite determines the maximum risk that the Group is willing to assume to meet business targets. To ensure coherence between the Group's strategic considerations regarding risk-taking and day-to-day decisions, from time to time, the Group formulates and updates its risk appetite for the purposes of strategic direction. The Group's risk appetite is set in a process based on a thorough analysis of its current risk profile. The Group identifies a number of key risk components and for each, determines a target that represents the Group's view of the component in question. The following are the key risk components:

Financial strength
Earnings robustness
Core markets
Credit risk
Concentration risk
Market risk
Liquidity risk
Operational risk
Compliance

2.1.5 Reporting

The Group allocates considerable resources to ensure the ongoing compliance with approved limits and to monitor its asset portfolio. In particular, the Bank has a fixed reporting cycle to ensure that the relevant management bodies, including the Board of Directors and the Executive Team, are kept informed on an ongoing basis of developments in the asset portfolio, such matters as non-performing loans and other relevant information.

2.2 Risk exposures

In terms of the CRR, 'an exposure' is the amount at risk arising from the reporting credit institution's assets and offbalance sheet items. Consistent with this, an exposure would include the amount at risk arising from the Bank's:

For the Year Ended 31 December 2018

2 Financial risk management (continued)

claims on a customer including actual and potential claims which would arise from the drawing down in full of undrawn advised facilities, which the Bank has committed itself to provide;
contingent liabilities arising in the normal course of business, and those contingent liabilities which would arise from the drawing down in full of undrawn advised facilities which the Bank has committed itself to provide; and
other on and off-balance sheet financial assets and commitments.

The Group is exposed to a number of risks, which it manages at different organisational levels.

The main categories of risk are:

Credit risk: Credit risk stems from the possible non-prompt repayment or non-payment of existing and contingent obligations by the Group's counterparties, resulting in the loss of equity and profit. It is the risk that deterioration in the financial condition of a borrower will cause the asset value to decrease or be extinguished. Country risk and settlement risk are included in this category. Country risk refers to the risk of losses arising from economic or political changes that affect the country from which the asset originates. Settlement risk refers to the risk of losses through failure of the counterparty to settle outstanding dues on the settlement date owing to bankruptcy or other causes.
Market risk: Risk of losses arising from unfavourable changes in the level and volatility of interest rates, foreign exchange rates or investment prices.
Liquidity risk: Liquidity risk may be divided into two sub-categories:
- Market (product) liquidity risk: Risk of losses arising from difficulty in accessing a product or market at the required time, price and amount.
- Funding liquidity risk: Risk of losses arising from a timing mismatch between investing, placements and fund raising activities resulting in obligations missing the settlement date or satisfied at higher than normal rates.
Operational risk: Risk of loss resulting from the lack of skilful management or good governance within the Group and the inadequacy of proper control, which might involve internal operations, personnel, systems or external occurrences that in turn affect the income and capital funds of financial institutions. The Bank has adopted an operational risk management framework and procedures, which provide for the identification, assessment, management, monitoring and reporting of the Bank's operational risks.

The Bank's approach to management of the above risks is addressed in this note.

2.3 Credit risk

2.3.1 Introduction

Credit risk is the risk of suffering financial loss, should any of the Group's customers, clients or market counterparties fail to fulfil their contractual obligations to the Group. Credit risk arises mainly from consumer loans and advances and loan commitments arising from such lending activities, but can also arise from credit enhancement provided, such as financial guarantees and letters of credit.

The Group is also exposed to other credit risks arising from investments in debt securities and other exposures arising from its investing activities.

Credit risk constitutes the Bank's largest risk in view of its significant lending and securities portfolios, which is monitored in a structured and formal manner through several mechanisms and procedures. The credit risk management and control functions are centralised.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

2.3.2 Credit risk management

The granting of a credit facility (including loans and advances, loan commitments and guarantees) is based on the Bank's insight into the customer's financial position, which is reviewed regularly to assess whether the basis for the granting of credit has changed. Furthermore, the customer must be able to demonstrate, in all probability, the ability to repay the debt. Internal approval limits are in place starting from Bank operational managers leading up to the Credit Committee and the Board of Directors depending on the magnitude and the particular risks attached to the facility. Facilities are generally adequately secured either by property and/or guarantees and are reviewed periodically by management in terms of the exposure to the Bank and to ensure that collateral still covers the facility.

In order to minimise the credit risk undertaken, counterparty credit limits are defined with respect to investment activities, which limits consider a counterparty's creditworthiness, the value of collateral and guarantees pledged, which can reduce the overall credit risk exposure, as well as the type and the duration of the asset. In order to examine a counterparty's creditworthiness, the following are considered: country risk, quantitative and qualitative characteristics, as well as the industry sector in which the counterparty operates.

The Group has set limits of authority and has segregation of duties so as to maintain impartiality and independence during the approval process and control new and existing assets or credit facilities.

The Group manages, limits and controls concentrations of credit risk wherever they are identified − in particular, to individual counterparties and groups, and to industries and countries. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. The exposure to any one borrower including banks and brokers is further restricted by sublimits covering on and off-balance sheet exposures. Actual exposures against limits are monitored at end of day on a daily basis and on a real-time basis too.

2.3.3 Credit risk measurement

The measurement of credit exposure for risk management purposes considers that an exposure varies with changes in market conditions, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties. The Group measures credit risk using Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). This is similar to the approach used for the purposes of measuring Expected Credit Loss (ECL) under IFRS 9. Refer to note 2.3.4 for more details.

(a) Loans and advances to customers

The Group uses internal credit risk gradings (note 2.3.8) to reflect its assessment of the Probability of Default of individual counterparties. Internal credit risk gradings are based on payment behaviour, loan specific information and expert judgement.

Information considered by the Group when determining the internal credit risk grades include the payment behaviour of the borrower and other information about borrowers which impact their creditworthiness, including level of income and/or financial performance.

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2 Financial risk management (continued)

Corporate

The Group determines its internal rating grades at a borrower level. The Group incorporates any updated or new information/credit assessments on an ongoing basis. In addition, the Group also updates information about the creditworthiness of the borrower from sources such as financial statements.

The creditworthiness of the borrower is considered in every periodic review - normally on a yearly basis; or more frequently on an exceptions basis. This determines the updated internal credit risk gradings.

(b) Other financial assets

Other financial assets include Balances with Central Bank of Malta, investments and loans and advances to banks. The Group uses external risk grades to reflect its assessment of the Probability of Default of individual counterparties. These published grades are continuously monitored and updated. The PDs associated with each grade are determined based on realised default rates over the prior 12 months, as published by rating agencies.

In determining the Probability of Default of individual counterparties, the Group distinguishes between exposures considered 'investment-grade' defined by recognized external rating agencies as a rating between AAA to BBB- (Standard & Poor's, Fitch) and Aaa to Baa3 (Moody's), and 'non-investment grade' exposures.

2.3.4 Expected Credit Loss measurement

IFRS 9 outlines a 'three-stage' model for impairment based on changes in credit quality since initial recognition as summarised below:

a financial instrument that is not credit-impaired on initial recognition is classified in 'Stage 1' and has its credit risk continuously monitored by the Group.
if a significant increase in credit risk (SICR) since initial recognition is identified, the financial instrument is moved to 'Stage 2' but is not yet deemed to be credit-impaired. Please refer to note 2.3.4.1 for a description of how the Bank determines when a significant increase in credit risk has occurred.
if the financial instrument is credit-impaired, the financial instrument is then moved to 'Stage 3'. Please refer to note 2.3.4.2 for a description of how the Group defines credit-impaired and default.
financial instruments in 'Stage 1' have their ECL measured at an amount equal to the portion of lifetime Expected Credit Losses that result from default events possible within the next 12 months. Instruments in 'Stages 2' or '3' have their ECL measured based on Expected Credit Losses on a lifetime basis. Please refer to note 2.3.4.3 for a description of inputs, assumptions and estimation techniques used in measuring the ECL.
a pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward looking information. Note 2.3.4.4 includes an explanation of how the Group has incorporated this in its ECL models.
purchased or originated credit-impaired financial assets are those financial assets that are credit-impaired on initial recognition. Their ECL is always measured on a lifetime basis ('Stage 3').

Further explanation is also provided in respect of how the Group determines appropriate groupings of loans and advances to customers for ECL measurement (refer to note 2.3.4.5).

The Expected Credit Loss requirements apply to financial assets measured at amortised cost and FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, an impairment allowance (or provision in the case of commitments and guarantees) is required for ECL resulting from default events that are possible within the next 12 months ('12-month ECL'). In the event of a significant increase in credit risk, an allowance

For the Year Ended 31 December 2018

2 Financial risk management (continued)

(or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL'). Financial assets where 12-month ECL is recognised are considered 'Stage 1'. Financial assets which are considered to have experienced a significant increase in credit risk would be classified as 'Stage 2' and financial assets for which there is objective evidence of impairment, thus considered to be in default or otherwise credit-impaired, would be classified as 'Stage 3'.

The Group recognises loss allowances at an amount equal to 12-month ECL for debt investment securities that are determined to have low credit risk at the reporting date. The Group considers a debt security to have low credit risk when it is considered 'investment-grade', defined by recognised external rating agencies as a rating between AAA to BBB- (Standard & Poor's and Fitch) and Aaa to Baa3 (Moody's).

The following diagram summarises the impairment requirements under IFRS 9 (other than purchased or originated credit-impaired financial assets):

Stage 1	Stage 2	Stage 3
(Initial recognition)	(Significant increase in credit risk since initial recognition)	(Credit-impaired financial assets)
12-month Expected Credit Losses	Lifetime Expected Credit Losses	Lifetime Expected Credit Losses

			Change in credit quality since initial recognition

2.3.4.1 Significant increase in credit risk (SICR)

To determine whether the credit risk (i.e. risk of default) on a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information. Such analysis is based on the Group's historical experience, credit assessment and forward-looking information.

The Group primarily identifies whether a SICR has occurred for an exposure within the loans and advances to customers, through the Group's internal risk gradings. The Group allocates each exposure to an internal rating grade based on a variety of data that is determined to be predictive of the risk of default and applying experienced credit judgement. These factors vary depending on the nature of the exposure and the type of borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different internal rating grade.

The Group identifies SICR and classifies non-defaulted exposures into 'Stage 2', which fulfil at least one of the following conditions:

the exposure is considered forborne;
the credit quality of any other exposure(s) of the same customer is/are not considered 'regular' (except where otherwise stated in the Group's Credit Policy e.g. cash covered facilities); and
the borrower's internal rating grade is not considered 'performing', as defined in note 2.3.8.

2 Financial risk management (continued)

The monitoring typically involves use of the following data:

Corporate exposures	Retail exposures	All exposures
• Information obtained during periodic review of customer files – e.g. audited financial statements, management accounts, budgets and projections. Examples of areas of particular focus are: gross profit margins, financial leverage ratios, debt service coverage, compliance with contractual conditions, quality of management and senior management changes • Data from credit reference agencies, press articles • Actual and expected significant changes in the political, regulatory and technological environment of the borrower or in its business activities	• Internally collected data on customer behaviour – e.g. utilisation of credit card facilities • Affordability metrics • External data from credit reference agencies including industry standard credit scores	• Payment record – this includes overdue status as well as a range of variables about payment ratios • Utilisation of the granted limit • Requests for and granting of forbearance • Existing and forecast changes in business, financial and economic conditions

The assessment of SICR incorporates forward-looking information (refer to note 2.3.4.4 for further information) and is performed at the counterparty level on a periodic basis. The criteria used to identify SICR are monitored and reviewed periodically for appropriateness by the independent Risk Management Function.

As a backstop, and as required by IFRS 9, the Group presumptively considers that a SICR occurs when an asset is more than 30 days past due. The Group determines days past due by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received.

In the case of other financial assets (including loans and advances to banks and investments in debt securities), the Group applies the low credit risk simplification to all its exposures considered 'investment-grade', thus they are not subject to the SICR assessment. Moving from 'investment-grade' to 'non-investment grade' does not automatically mean that there has been a SICR.

2.3.4.2 Definition of default and credit-impaired assets

The Group's assessment to determine the extent of increase in credit risk of a financial instrument since initial recognition is performed by considering the change in the risk of default occurring over the remaining life of the financial instrument. As a result, the definition of default is important.

The Group applies the definition of default in a consistent manner with internal credit risk management practices for the relevant instruments and the definition considers qualitative and quantitative factors where appropriate.

The Group defines a financial instrument as in default, which is fully aligned with the definition of credit-impaired, when it meets one or more of the criteria below.

The Group determines that a financial instrument is credit-impaired (in default and in 'Stage 3' for IFRS 9 purposes) by considering relevant objective evidence, primarily whether:

contractual payments of either principal or interest are past due for more than 90 days for any material credit obligations to the Group;

For the Year Ended 31 December 2018

2 Financial risk management (continued)

there are other indications that the borrower is unlikely to pay such as that a concession has been granted to the borrower for economic or legal reasons of an enduring nature relating to the borrower's financial condition, unlikeliness to pay criteria, which indicates the borrower is in significant financial difficulty; and
the loan is otherwise considered to be in default. If unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due.

If unlikeliness to pay is not identified at an earlier stage, it is seemed to occur when an exposures is 90 days past due.

Therefore, the definitions of credit-impaired and default are aligned so that 'Stage 3' represents all loans which are considered defaulted or credit-impaired.

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

qualitative such as non-adherence to terms and conditions of sanction and/or other breaches of covenant;
quantitative such as overdue status and non-payment of another obligation of the same obligor to the Group; and
based on data developed internally and obtained from external sources.

The default definition has been applied consistently to model the Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD) throughout the Bank's expected loss calculations.

Except for forborne exposures, an instrument is considered to no longer be in default (i.e. to have been cured) when it no longer meets any of the default criteria for a consecutive period of three months. This period has been determined based on an analysis which considers the likelihood of a financial instrument returning to default status after cure using different possible cure definitions.

In the case of forborne exposures, the cure period comprises 12 consecutive monthly repayments made in a timely manner with a minimal grace period of one day (i.e. one or more repayments may be made no more than one day late).

The Group considers other financial assets to be in default when a payment due including a coupon payment is not effected.

2.3.4.3 Measuring ECL – Explanation of inputs, assumptions and estimation techniques

The Expected Credit Loss (ECL) is measured on either a 12-month (12M) or on a lifetime basis depending on whether a significant increase in credit risk has occurred since initial recognition or whether an asset is considered to be credit-impaired. Expected Credit Losses are the discounted product of the Probability of Default (PD), Exposure at Default (EAD), and Loss Given Default (LGD).

The ECL is determined by projecting the PD, EAD and LGD for each future month and for each individual exposure. These three components are multiplied together and adjusted for the likelihood of survival (i.e. the exposure has not prepaid or defaulted in an earlier month). This effectively calculates an ECL for each future month, which is then discounted back to the reporting date and summed. The discount rate used in the ECL calculation is the originated effective interest rate or an approximation thereof.

The 12-month ECL is calculated by multiplying the 12-month PD, LGD, and EAD. Lifetime ECL is calculated on a similar basis for the residual life of the exposure.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The PD, EAD and LGD parameters are derived from internally developed statistical models and other historical data, adjusted to reflect forward-looking information as described below.

The PD represents the likelihood of a borrower defaulting on its financial obligation (as per 'definition of default and credit-impaired' above), either over the next 12 months (12M PD), or over the remaining lifetime (Lifetime PD) of the obligation. Accordingly, the 12-month and lifetime PDs represent the Probability of Default occurring over the next 12 months and the remaining maturity of the instrument, respectively.

PD estimates are estimates at a certain date, which, for the loans and advances to customers, are calculated based on statistical rating models and assessed using rating tools tailored to the various categories of counterparties and exposures. These statistical models are based on internally-compiled data comprising both quantitative and qualitative factors. The PD calculation is based on a transition matrix approach. The main assumptions underlying such approach is that the PD does not depend on the particular periods after origination ('months on book') and that the future PD depends only on current characteristics of the exposure or borrower. Default is considered to be an absorbing state, whereby if an exposure is defaulted, it remains in this state during all next years. Market data is used for the PD of loans and advances to banks and investment securities. If a counterparty or exposure migrates between internal rating grades or external credit ratings, then this will lead to a change in the associated PD.

The Lifetime PD is developed by utilising statistical methodologies to analyse historical observed data to estimate the probability of a borrower's transition from one internal rating class to another (or stays in the same class) within a given horizon. The conditional PD is adjusted to consider forward-looking information through macroeconomic modelling.

EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months (12M EAD) or over the remaining lifetime (Lifetime EAD). For example, for a revolving commitment, the Group includes the current drawn balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of default, should it occur.

EAD represents the expected exposure in the event of a default (including any expected drawdowns of committed facilities). The Group derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract. The EAD of a financial asset is the gross carrying amount at default.

The 12-month and lifetime EADs are determined based on the expected payment profile, which varies by product type:

for amortising products and bullet repayment loans, this is based on the contractual repayments owed by the borrower over a 12-month or lifetime basis;
for revolving products, the Exposure at Default is predicted by taking current drawn balance and adding a 'credit conversion factor' which allows for the expected drawdown of the remaining limit by the time of default. These assumptions vary by product type and current limit utilisation band, based on analysis of the Group's recent default data.

The Loss Given Default (LGD) represents the Bank's expectation of the extent of loss on a defaulted exposure. Hence, the LGD represents Expected Credit Losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral values at the time it is expected to be realised and the time value of money. The 12-month and lifetime LGD are determined based on the factors which impact the recoveries made post default.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

For secured products, this is primarily based on collateral type and projected collateral values, historical discounts to market/book values due to forced sales, time to repossession and recovery costs observed. The LGD for exposures secured by real estate will be derived from the adjusted loan-to-value ratio of the individual facilities, and takes into account the expected recovery by applying a costs to sell and a market value haircut to the property haircut, and by discounting (using the effective interest rate) the updated market value of the property after haircuts, over a period of time equivalent to the perceived time to sell. The LGD for other exposures is based on the Group's perceived risk on the collateral. For unsecured products, LGD's are typically set at product level due to the limited differentiation recoveries achieved across different borrowers. These LGDs are influenced by collective strategies.

The ECL is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which the Group is exposed to credit risk. With respect to non-revolving credit facilities, the contractual life of the facility is considered. In the case of revolving credit facilities, provided that such facilities do not have a fixed term or repayment structure, the Group defines the lifetime of such exposures as 12 months, in case the next substantive credit review is within the next 12 months. For the credit cards portfolio, the Group also applied a lifetime of 12 months.

Forward-looking economic information is also included in determining the 12-month and lifetime PD and LGD. Refer to note 2.3.4.4 for an explanation of forward-looking information and its inclusion in ECL calculations.

There have been no significant changes in estimation techniques or significant assumptions made during the reporting period.

2.3.4.4 Forward-looking information incorporated in the ECL model

The calculation of ECL incorporates forward-looking information. The Group performs a historical analysis to identify the key economic variables affecting credit risk and Expected Credit Losses for each portfolio. These economic variables and their associated impact on the PD, EAD and LGD may vary by portfolio.

In this respect, the Group has identified key drivers of credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has analysed relationships between macro-economic variables, credit risk and credit losses. The key driver is predominantly Gross Domestic Product (GDP) at constant prices.

The impact of these economic variables on the PD, EAD and LGD has been determined by performing statistical regression analysis to understand the impact changes in these variables have had historically on default rates and on the components of LGD and EAD.

Three possible scenarios are considered to capture non-linearity across credit portfolios. The 'base line' scenario represents the most-likely outcome. It is based on authoritative sources forecasting these economic variables referred to above and providing the best estimate view of the economy. Apart from the 'base line' scenario, the Group considers two other macro-economic scenarios – Upside and Downside scenarios – which respectively represent a more optimistic and a more pessimistic outcome. Such scenarios reflect the current top and emergent risks and opportunities. The more optimistic and more pessimistic scenarios are economically plausible and will not necessarily be as severe as scenarios used in stress testing.

Each scenario is weighted by a probability of occurrence, determined by a combination of macroeconomic research and expert credit judgement, taking account the range of possible outcomes each chosen scenario represents. The Group measures ECL as either a probability weighted 12-month ECL ('Stage 1'), or a probability weighted lifetime ECL ('Stages 2' and '3'). These probability-weighted ECLs are determined by running each scenario through the relevant ECL model and multiplying it by the appropriate scenario weighting (as opposed to weighting the inputs).

For the Year Ended 31 December 2018

2 Financial risk management (continued)

As with any macro-economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of uncertainty and therefore, the actual outcomes may be significantly different to those projected. The Group considers these forecasts to represent its best estimate of the possible outcomes.

The most significant period-end assumptions used for the ECL estimate as at 31 December 2018 are set out below. The 'Base', 'Upside' and 'Downside' scenarios were used for all portfolios.

the 'Base' Scenario captures business-as-usual macroeconomic expectations, whereby the current rhythm of economic activity is maintained;
the 'Downside' Scenario is based on a subdued level of economic activity hypothesized to correspond to an economic recession;
the 'Upside' Scenario is based on the assumption that it would be possible to marginally improve further over the already benign economic conditions.

	As of 31 December 2018
	2019	2020	2021	2022	2023
Gross Domestic Product, constant prices (YoY)*
'Base'	6.97%	6.39%	5.82%	5.54%	5.47%
Range of forecasts for alternative scenarios	[2.8 – 11.1]%	[2.3 – 10.4]%	[1.8 – 9.9]%	[1.6 – 9.5]%	[1.6 – 9.4]%

*YoY = year on year % change

	As of 1 January 2018
	2018	2019	2020	2021	2022
Gross Domestic Product, constant prices (YoY)*
'Base'	3.49%	3.21%	3.09%	3.03%	3.04%
Range of forecasts for alternative scenarios	[1.4 – 5.6]%	[1.2 – 5.3]%	[1.0 – 5.2]%	[0.9 – 5.2]%	[0.9 – 5.2]%

*YoY = year on year % change

The weightings assigned to each economic scenario were 80% for the 'Base' scenario, 10% for the 'Downside' scenario and 10% for the 'Upside' scenario. The number of scenarios used is based on the analysis of each major product type to ensure that non-linearities are captured. The number of scenarios and their attributes are reassessed at each reporting date. The economic scenarios were simulated over a full economic cycle.

Such weightings take into account the current strong performance of the Maltese economy over the foreseeable future and that at this relatively strong level of performance, further ameliorations would be affected by the law of diminishing returns. The Board considers that the probability weightings assigned to the respective scenarios reflect an unbiased evaluation of range of possible outcomes.

Other forward-looking considerations not otherwise incorporated within the above scenarios, such as the impact of any regulatory, legislative or political changes, have also been considered, but are not deemed to have a material impact and therefore no adjustment has been made to the ECL for such factors. This is reviewed and monitored for appropriateness on an ongoing basis.

The most significant assumption affecting the ECL allowance is the GDP, given the significant impact it has on the performance of corporate entities.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

2.3.4.5 Categorisation of loans and advances to customers for ECL measurement

As part of the ECL model, the Group classifies its exposures to loans and advances to customers into homogeneous groups with similar credit risk characteristics that include instrument type and credit risk gradings. In this respect, the Group considers the following categories for ECL measurement:

retail portfolio, which includes loans and advances to individual customers such as mortgages, credit cards and other consumer credit;
construction and real estate portfolio, which includes loans and advances to customers for the purpose of financing construction of real estate projects for the purpose of re-sale or rental; and
corporates portfolio, which includes loans and advances to business entities, other than construction and real estate related borrowers.

2.3.5 Maximum exposure to credit risk

An 'exposure' is defined as the amount at risk arising from the Group's assets and off-balance sheet items. The Group's maximum credit risk with respect to on- and off-balance sheet items can be classified into the following categories:

Financial assets recognised on-balance sheet comprising principally balances with Central Bank of Malta, financial investments and loans and advances to banks and customers. The maximum exposure to credit risk of these financial assets equals their gross carrying amounts.
Documentary credits and guarantee obligations incurred on behalf of third parties. The latter carry the same credit risk as loans, whilst documentary credits are collateralised by the underlying shipments of goods to which they relate, and therefore carry less risk than a loan to a customer. The maximum exposure to credit risk is the full amount that the Group would have to pay if the guarantees are called upon or if documentary credits are exercised.
Loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities. The maximum exposure to credit risk is the full amount of the committed facilities. However, the likely amount of loss is less than the total unused commitments as most commitments to extend credit are contingent upon customers maintaining specific credit standards. These exposures are monitored in the same manner in respect of loans and advances.

2 Financial risk management (continued)

The Group's credit risk exposures relating to on-balance sheet assets and off-balance sheet instruments, reflecting the maximum exposure to credit risk before collateral held or other credit enhancements include the following:

	Group				Bank
	2018		2017		2018		2017
	Gross exposure € 000	ECL allowance € 000	Gross exposure € 000	ECL allowance € 000	Gross exposure € 000	ECL allowance € 000	Gross exposure € 000	ECL allowance € 000
Credit risk exposures relating to on-balance sheet assets:
Subject to IFRS 9 impairment allowance
Financial assets measured at amortised cost:
Balances with Central Bank of Malta	30,155	-	130,303	-	30,155	-	130,303	-
Cheques in course of collection	1,422	-	1,755	-	1,422	-	1,755	-
Loans and advances to banks	140,581	-	97,048	-	125,819	-	90,258	-
Financial investments measured at FVOCI (2017: available-for-sale)	193,704	(163)	155,985	-	189,879	(163)	152,372	-
Loans and advances to customers	534,537	(23,413)	451,459	(22,848)	534,537	(23,413)		451,459 (22,848)
Trade and other receivables	5,010	-	8,826	-	1,812	-	1,526	-
Accrued income and other assets	4,218	-	4,034	-	4,173	-	3,989	-
Credit risk exposure	909,627	(23,576)	849,410	(22,848)	887,797	(23,576)		831,662 (22,848)
Credit risk exposures relating to off-balance sheet instruments:
Contingent liabilities	14,148	(2)	9,078	-	14,167	(2)	9,093	-
Undrawn commitments to lend	202,384	-	247,737	-	202,384	-	249,737	-
Credit risk exposure	216,532	(2)	256,815	-	216,551	(2)	258,830	-

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Accrued income substantially arises from loans and advances to customers. Expected Credit Losses in respect of accrued income have been allocated to loans and advances to customers.

2.3.6 Credit concentration risk

Within the Bank, concentration risk of losses results from inadequate diversification of the credit exposures. This risk is managed by actively measuring, reporting and monitoring on a regular and ongoing basis risk concentration levels against reasonable thresholds for industry sectors, counterparties, products, and collateral types.

Credit concentration risk by industry sector

The Bank's financial investments measured at FVOCI (gross of Expected Credit Losses) are composed of local government debt securities, treasury bills and other debt and equity instruments as shown in the following table:

	Group			Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Government	169,671	135,825	167,491	133,586
Corporate
Tourism	818	806	483	479
Trade	239	236	-	-
Property and construction	8,025	4,406	7,519	3,902
Financial institutions	8,852	8,905	8,284	8,597
Other sectors	6,099	5,807	6,102	5,808
Gross investments in debt securities	193,704	155,985	189,879	152,372

The industry sector analysis of the Bank's loans and advances to customers (gross of Expected Credit Losses) is described in the following table:

	Group			Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Manufacturing	17,417	18,414	17,417	18,414
Tourism	17,398	12,547	17,398	12,547
Trade	47,461	47,873	47,461	47,873
Property and construction	251,315	223,219	251,315	223,219
Personal, professional and home loans	87,359	53,607	87,359	53,607
Financial institutions	92,508	77,578	92,508	77,578
Other sectors	21,079	18,221	21,079	18,221
Gross advances to customers	534,537	451,459	534,537	451,459

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Credit concentration risk for counterparties

The majority of the Bank's loans and advances to customers comprise exposures to corporates.

As at 31 December 2018, no loans and advances to customers were deemed to be prohibited large exposures, prior to any eligible exemptions, in accordance with the requirements of Part Four: Large Exposures, of the CRR. A limited number of customers account for a certain percentage of the Bank's loans and advances. Whilst no individual customer or group of dependent customers is considered by management as a significant concentration of credit risk in the context of the CRR, these exposures are monitored and reported more frequently and rigorously.

Credit concentration risk by geographical region

The Group also monitors credit concentration risk by geographical region. The majority of the Group's exposures are in Malta in view of the Group's lending operations being conducted with Maltese corporate entities. Moreover, the Group investments in debt securities are all issued by local sovereigns and corporate entities in Malta.

The Group's balances with correspondent banks in foreign jurisdictions are split by geographical region, as shown in the following table:

	Group			Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Loans and advances to banks
Germany	30,177	19,310	30,177	19,310
United Kingdom	28,844	14,981	28,844	14,981
France	15,978	15,978	15,978	15,978
Norway	15,407	122	15,407	122
Spain	15,319	9,991	15,319	9,991
Belgium	8,508	15,942	8,508	15,942
Denmark	5,567	-	5,567	-
Malta	14,766	11,793	4	5,003
Other	6,015	8,931	6,015	8,931
Gross loans and advances to banks	140,581	97,048	125,819	90,258

2.3.7 Information on credit quality of balances with banks, investments and treasury bills

The Group holds debt instruments that are issued by local government, local banks and other local corporate entities. All such counterparties are listed on the Malta Stock Exchange, which is currently the only locally-based Recognised Investment Exchange (RIE) in Malta. The Bank acquires debt securities and similar instruments issued by counterparties having strong financial background. These issuers are approved and regularly reviewed considering the process previously highlighted, focusing on market developments. The Group's investments include a significant amount of treasury bills and other debt securities issued by the Government of Malta.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Within its daily operations the Bank transacts with banks and other financial institutions. The Bank primarily places short-term funds with pre-approved banks subject to limits in place and subject to the respective institution's credit rating being within controlled parameters. By conducting these transactions the Bank is running the risk of losing funds due to the possible delays in the repayment to the Bank of the existing and future obligations of the counterparty banks. Actual exposures are monitored against the limits on a daily basis and in a real-time manner. The credit status of the pre-authorised banks is monitored on an ongoing basis. At 31 December 2018, loans and advances to banks consisted primarily of term placements maturing within one month.

The Bank runs the risk of loss of funds due to the possible political, economic and other events in a particular country where funds have been placed or invested with several counterparties domiciled in the same country or region. Countries are assessed according to their size, economic data and prospects together with credit ratings issued by international rating agencies. Existing country credit risk exposures, based on groupings of individual counterparties, are monitored and reviewed periodically. The Bank's assets are predominantly in Malta. The Bank's exposures to other countries are mainly limited to bank balances and money market placements with a total carrying amount of €125,819,000 (2017: €90,258,000) at the end of the reporting period.

At the end of the reporting period, none of these financial assets mentioned were past due or impaired.

The following tables set out information about the credit quality of financial assets of the Bank measured at amortised cost, financial investments at FVOCI (2018) and available-for-sale financial investments (2017). The credit quality of the financial assets is determined by credit ratings applicable to issuers or counterparties based on Standard & Poor's ratings:

	2018				2017
	Stage 1 12-month ECL	Stage 2 Lifetime ECL	Stage 3 Lifetime ECL	Total	Total
	€ 000	€ 000	€ 000	€ 000	€ 000
Balances with Central Bank of Malta at amortised cost
Gross carrying amount	30,155	-	-	30,155	130,303
Loss allowance	-	-	-	-	-
Carrying amount – net of loss allowance	30,155	-	-	30,155	130,303

The credit rating of the Government of Malta as at 31 December 2018 was A3, issued by Moody's on 21 August 2018. As at 31 December 2018, there were no loss allowances in respect of balances with the Central Bank of Malta.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

		2017
	Stage 1 12-month ECL	Stage 2 Lifetime ECL	Stage 3 Lifetime ECL	Total	Total
	€ 000	€ 000	€ 000	€ 000	€ 000
Financial investments at FVOCI
AAA to AA-	-	-	-	-	-
A+ to A-	167,491	-	-	167,491	113,586
BBB+ to BBB-	6,676	-	-	6,676	7,038
Unrated	15,712	-	-	15,712	11,748
Carrying amount – fair value	189,879	-	-	189,879	152,372
Loss allowance	(163)	-	-	(163)	-
Carrying amount – net of loss allowance	189,716	-	-	189,716	152,372
Loans and advances to banks at amortised cost
AAA to AA-	25,694	-	-	25,694	10,005
A+ to A-	82,492	-	-	82,492	49,663
BBB+ to BBB-	17,624	-	-	17,624	25,580
BB+ to BB-	5	-	-	5	7
Unrated	4	-	-	4	5,003
Carrying amount	125,819	-	-	125,819	90,258
Loss allowance	-	-	-	-	-
Carrying amount – net of loss allowance	125,819	-	-	125,819	90,258

At 31 December 2018, there were no purchased credit-impaired assets.

After the end of the reporting period there were no significant changes in credit ratings reflected in the tables above which have a material impact on the credit quality of the financial assets.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

2.3.8 Information on credit quality of loans and advances to customers

The Bank manages the credit quality of its loans and advances to customers by using internal risk grades, which provide a progressively increasing risk profile ranging from 'P1' (best quality, less risky) to 'NP'. These risk grades are an essential tool for the Bank to identify both non-performing exposures and better-performing customers. The internal risk grades used by the Bank are as follows:

Performing: Internal grade 'P1'
Under performing: Internal grades 'P2' and 'P3'; and
Non-performing: Internal grade 'NP'.

P1

The Bank's loans and advances to customers which are categorised as 'P1' are principally debts in respect of which the payment of interest and/or capital is not overdue by 30 days and no recent history of customer default exists. Management does not expect any losses from non-performance by these customers.

P2

Loans and advances which attract a 'P2' grading are those which are receiving the close attention of the Bank's management and are being reviewed periodically in order to determine whether such advances should be reclassified to either the 'P1' or the 'P3' classification. Credit facilities that attract this category include those where the payment of interest and/or capital becomes overdue by 30 days and over but not exceeding 60 days.

P3

Loans and advances which attract a 'P3' grading are those having the weaknesses inherent in those loans and advances classified as 'P2' with the added characteristics that repayment is inadequately protected by the current sound worth and paying capacity of the borrower. Loans and advances so graded have a well-defined weakness or weaknesses that could jeopardise the repayment of the debt. They are characterised by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Credit facilities that attract this category include those where the payment of interest and/or capital becomes overdue by 60 days and over but not exceeding 90 days.

NP

Loans and advances which attract a 'NP' grading are those facilities where the Bank deems the recoverability of principal to be remote as a result of worsening conditions of loans and advances classified as 'P3'. Credit facilities that attract this category include those where the payment of interest and/or capital becomes overdue by 90 days and over. These loans and advances are generally past due by more than 90 days and comprise those exposures which are deemed by the Bank as credit-impaired (see definition in note 2.3.4.2).

The following table set out information about the credit quality of financial assets measured at amortised cost. Explanation of the terms: 12-month ECL, lifetime ECL and credit-impaired are included in note 2.3.4.3.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

	2018				2017
	Stage 1 12-month ECL	Stage 2 Lifetime ECL	Stage 3 Lifetime ECL	Total	Total
	€ 000	€ 000	€ 000	€ 000	€ 000
Loans and advances to customers at amortised cost
P1	422,800	-	-	422,800	359,068
P2	-	49,621	-	49,621	16,698
P3	-	2,343	-	2,343	2,620
NP	-	-	59,773	59,773	73,073
Gross carrying amount	422,800	51,964	59,773	534,537	451,459
Loss allowance	(2,827)	(1,739)	(18,847)	(23,413)	(22,848)
Carrying amount	419,973	50,225	40,926	511,124	428,611

Undrawn commitments to lend as at 31 December 2018 amounted to €202,384,000 and predominantly comprise of sanctioned but not yet drawn facilities which are classified as 'Stage 1' (12-month ECL) upon drawdown by customers. Undrawn facilities in respect of existing 'Stage 2' and 'Stage 3' (Lifetime ECL) facilities as at 31 December 2018 have not been considered significant. ECL allowances on undrawn commitments to lend are incorporated within the ECL allowances on loans and advances to customers so as not to distort the ECL-related disclosures.

Contingent liabilities and financial guarantee contracts as at 31 December 2018 amounting to €14,148,000 are all classified as 'Stage 1' (12-month ECL) by the Group. ECL allowances on contingent liabilities and financial guarantee contracts as at 31 December 2018 amounted to €2,000.

At 31 December 2018, there are no purchased credit-impaired assets.

The following table analyses the impaired loans and advances, gross of impairment allowances, by industry sector:

	2018 € 000	2017 € 000
Manufacturing	5,364	4,268
Tourism	3,564	2,257
Trade	3,969	895
Property and construction	35,997	28,324
Personal, professional and home loans	9,836	3,880
Financial institutions	154	-
Other sectors	889	588
Gross impaired advances to customers	59,773	40,212

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The following table provides a detailed analysis of the credit quality of the Bank's lending portfolio as at 31 December 2018:

	Non-forborne exposures	Forborne exposures	Total
	2018	2018	2018
	€ 000	€ 000	€ 000
Performing - Stage 1
Loans which are not past due	405,677	-	405,677
Loans which are past due by less than 30 days	17,123	-	17,123
	422,800	-	422,800
Performing - Stage 2
Loans which are not past due
P2	29,886	8,542	38,428
P3	1,742	-	1,742
Loans which are past due by less than 90 days
Past due between 1 and 30 days	11,158	-	11,158
Past due between 31 and 89 days	636	-	636
	43,422	8,542	51,964
Non-performing - Stage 3
Past due loans by 90 days or more and credit-impaired loans:	33,465	26,308	59,773
Gross loans and advances	499,687	34,850	534,537
12-month ECL	(2,827)	-	(2,827)
Lifetime ECL	(15,341)	(5,245)	(20,586)
Net loans and advances	481,519	29,605	511,124

Interest income recognised during the financial year ended 31 December 2018 in respect of forborne exposures amounted to €2,456,000.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The following table provides a detailed analysis of the credit quality of the Bank's forborne and non-forborne lending portfolio as at 31 December 2017:

	Non-forborne exposures 2017	Forborne exposures 2017	Total 2017
Performing	€ 000	€ 000	€ 000
Loans which are not past due
P1	347,864	8,241	356,105
P2	15,365	-	15,365
P3	1,391	-	1,391
	364,620	8,241	372,861
Past due loans by less than 90 days
Past due between 1 and 30 days	2,209	754	2,963
Past due between 31 and 60 days	1,333	-	1,333
Past due between 61 and 90 days	1,229	-	1,229
	4,771	754	5,525
Non-performing
Past due loans by 90 days or more
Impaired, gross of specific impairment allowances	27,950	12,262	40,212
Forborne (excluding impaired exposures)	-	21,707	21,707
Non-forborne past due by 90 days or more but not impaired	11,154	-	11,154
	39,104	33,969	73,073
Gross loans and advances	408,495	42,964	451,459
Specific impairment allowances applied to specifically impaired
exposures reflected above	(13,652)	(4,382)	(18,034)
Collective impairment allowances	(3,635)	(1,179)	(4,814)
Net loans and advances	391,208	37,403	428,611

Past due but not impaired

Until the period ended 31 December 2017, past due but not impaired loans included loans and advances where contractual interest or principal payments were past due, but the Group believed that impairment is not appropriate based on the level of collateral available and/or the stage of collection of amounts owed to the Group. Related credit losses, which may arise, if any, were partly covered through collective impairment allowances.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

2.3.9 Modification of financial assets

The contractual terms of a loan may be revised for a number of reasons, including changes in market conditions, customer retention and other factors that are not related to the credit quality of a customer. Forbearance measures comprise concessions made on the contractual terms of a loan in response to a customer's financial difficulties. The Group categorises loans on which concessions have been granted under conditions of financial difficulties as 'forborne loans' when their contractual payment terms have been revised, because of significant concerns about the customer's ability to meet contractual payments when due.

When considering whether there is significant concern regarding a customer's ability to meet contractual loan repayments when due, the Group assesses the customer's delinquency status, account behaviour, repayment history, current financial situation and continued ability to repay.

If the customer is not meeting contractual repayments or it is evident that the client will be unable to do so without the renegotiation, there will be a significant concern regarding the ability to meet contractual payments. Indicators of significant concerns regarding a borrower's ability to pay include:

the customer is currently in default on any of its debt;
the customer has declared or is in the process of declaring bankruptcy or entering into a similar process;
there is significant doubt as to whether the customer will continue to be a going concern; and
the Group forecasts that the customer's entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through maturity.

A range of forbearance measures are employed by the Group in order to improve the management of customer relationships, maximise collection opportunities and, if possible, avoid default or call-in of facilities. They include extended payment terms, a reduction in principal repayments, the deferral of call-in of facilities and other forms of loan modifications. The Group's policies and procedures in this area allow the Group to provide a customer with terms and conditions that are more favourable than those provided initially. Loan forbearance is only granted in situations where the customer has shown a willingness to repay the loan and is expected to be able to meet the revised obligations. The Group's credit risk management policies set out restrictions on the number and frequency of forbearance measures and the minimum period an account must have been opened before any forbearance measure can be considered.

For the purposes of determining whether changes to a customer's agreement should be treated as forbearance the following types of modification could be regarded as concessionary in cases where the customer is in financial difficulty:

reduction of the stated interest rate for the remaining original life of the debt;
extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk;
reduction of the face amount or maturity amount of the debt; and
reduction of accrued interest.

Term extension is the most common type of modification granted by the Group. Other types of concession, namely transfer to an interest-only arrangement or interest rate changes, occur less often.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

In assessing whether forbearance is a sustainable strategy, the customer's entire exposures are reviewed and the customer's ability to meet the terms in relation to the revised obligations and other unchanged credit facilities is considered. In all cases, forbearance is only granted when the customer is expected to be able to meet the revised terms. When considering acceptable modified terms the Group considers the ability of the customer to be able to service the revised interest payments as a necessity. When principal payment modifications are utilised, the Group requires the customer to be able to comply with the revised terms as a necessary pre-condition for the restructuring to proceed.

Generally, forbearance is a qualitative indicator of a significant increase in credit risk.

The risk of default of modified assets is assessed at the reporting date and compared with the risk under the original terms at initial recognition, when the modification is not substantial it does not result in derecognition of the original asset (refer to notes 1.7.5).

The Group monitors the subsequent performance of modified assets and may determine that the credit risk has significantly improved after restructuring.

Modified assets are moved from 'Stage 3' (Lifetime ECL) to 'Stage 1' (12-month ECL) only if they have performed in accordance with the new terms for 36 consecutive months or more.
Modified assets are moved from 'Stage 2' (Lifetime ECL) to 'Stage 1' (12-month ECL) only if they have performed in accordance with the new terms for 24 consecutive months or more.

The gross carrying amount of such assets held as at 31 December 2018 amount to €4,357,000.

The Group continues to monitor if there is a subsequent significant increase in credit risk in relation to modified assets that moved from 'Stage 3' (Lifetime ECL) or 'Stage 2' (Lifetime ECL) to 'Stage 1'.

There were no material changes to the Bank's policies and procedures regarding forbearance or forborne loans in 2018.

The movement in the carrying amount of forborne loans and advances, before impairment allowances, is analysed below:

	Forborne	Forborne
	exposures	exposures
	2018	2017
	€ 000	€ 000
At 1 January	42,964	41,435
Loans to which forbearance measures have been extended during the year	2,375	7,361
Repayments	(6,132)	(2,365)
Retired from forborne	(4,357)	(3,467)
At 31 December	34,850	42,964

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Forborne loans, gross of Expected Credit Losses, are analysed by industry sector as follows:

	34,850	42,964
Other sectors	-	423
Financial institutions	-	6,433
Personal, professional and home loans	11,395	7,017
Property and construction	18,575	22,796
Trade	4,442	5,808
Tourism	106	110
Manufacturing	332	377
	€ 000	€ 000
	2018	2017

As at 31 December 2018 and 2017, forborne loans mainly comprise exposures to customers based in Malta.

2.3.10 Loss allowances

2.3.10.1 Loss allowances under IAS 39 (applicable until 31 December 2017)

Until the 31 December 2017, the Group estimated an impairment allowance for any possible incurred losses within its lending portfolio. The Group performed an assessment for the calculation of specific provisions when a review of credit facilities reveals that the creditworthiness of a borrower had undergone a significant deterioration and that, as a result, recovery of a credit facility was in serious doubt. The Group made an assessment for specific impairment for those credit facilities being overdue by 90 days, amongst other qualitative factors, and provided if there was a shortfall. The shortfall or surplus was calculated as the difference between the individual loans' carrying amounts and the present value of future cashflows, discounted at the loans' original effective interest rate.

Impaired loans and advances which the Group has determined as probable that it will be unable to collect all principal and interest due according to the contractual terms of the loans and advances agreement(s).

The calculation of the present value of estimated future cashflows considered the estimated time period to liquidation of the collateral, the costs involved in obtaining and selling the collateral, as well as an appropriate haircut on the market value of the collateral.

The Group assumed that all its exposures were individually significant. The Group reviewed all credit exposures on a case by case basis and also on a collective basis, if the exposure was not deemed individually impaired, in order to consider the likelihood that the Group might have been exposed to losses on loans and advances and with a view to taking early recovery action. Accordingly, allowances were assessed collectively for individually significant loans and advances where there was no objective evidence of individual impairment as yet.

Financial guarantees and letters of credit were assessed and provisions were made in a similar manner as for loans.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The following tables represent a reconciliation of changes in the specific and collective impairment allowances of the Group.

	Non-forborne exposures	Forborne exposures	Total
	€ 000	€ 000	€ 000
Specific impairment allowance
At 1 January 2017	15,085	3,730	18,815
Additions	8,044	1,080	9,124
Reversals	(9,477)	(428)	(9,905)
At 31 December 2017	13,652	4,382	18,034
Collective impairment allowance
At 1 January 2017	4,093	649	4,742
Additions	2,063	1,119	3,182
Reversals	(2,521)	(589)	(3,110)
At 31 December 2017	3,635	1,179	4,814

Write-offs during the period ended 31 December 2017 were €3,375,000.

2.3.10.2 Loss allowances under IFRS 9 (applicable as from 1 January 2018)

Reconciliation of 12-month and Lifetime ECL provision

The loss allowance recognised in the period is impacted by a variety of factors, as described below:

transfers between 'Stage 1' and 'Stages 2' or '3' due to financial instruments experiencing significant increases (or decreases) of credit risk or becoming credit-impaired in the period, and the consequent 'step up' (or 'step down') between 12-month and Lifetime ECL;
additional allowances for new financial instruments recognised during the period, as well as releases for financial instruments derecognised in the period;
impact on the measurement of ECL due to changes in PDs, EADs and LGDs in the period, arising from regular refreshing of inputs to models;
impacts on the measurement of ECL due to changes made to models and assumptions;
discount unwind within ECL due to the passage of time, as ECL is measured on a present value basis;
foreign exchange retranslations for assets denominated in foreign currencies and other movements; and
financial assets derecognised during the period and write-offs of allowances related to assets that were written off during the period.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The following tables explain the changes in the loss allowance between the beginning and the end of the annual period:

	2018
	Stage 1 12-month ECL	Stage 2 Lifetime ECL	Stage 3 Lifetime ECL	Total
	€ 000	€ 000	€ 000	€ 000
Balances with Central Bank of Malta at amortised cost
Loss allowance as at 1 January 2018	-	-	-	-
Total net profit and loss charge during the year	-	-	-	-
Loss allowance as at 31 December 2018	-	-	-	-
Financial investments measured at FVOCI
Loss allowance as at 1 January 2018	56	-	-	56
Changes to risk parameters (model inputs: PDs/LGDs/EADs)	107	-	-	107
Total net profit and loss charge during the year	107	-	-	107
Loss allowance as at 31 December 2018	163	-	-	163
Loans and advances to banks at amortised cost Loss allowance as at 1 January 2018	-	-	-	-
Total net profit and loss charge during the year	-	-	-	-
Loss allowance as at 31 December 2018	-	-	-	-

For the Year Ended 31 December 2018

2 Financial risk management (continued)

	2018
	Stage 1 12-month ECL	Stage 2 Lifetime ECL	Stage 3 Lifetime ECL	Total
Loans and advances to customers at amortised cost	€ 000	€ 000	€ 000	€ 000
Loss allowance as at 1 January 2018	513	10,255	11,943	22,711
Transfers of financial instruments
Transfer from Stage 1 to Stage 2	(51)	155	-	104
Transfer from Stage 2 to Stage 1	1,256	(3,488)	-	(2,232)
Transfer from Stage 2 to Stage 3	-	(6,625)	6,625	-
Transfer from Stage 3 to Stage 2	-	81	(81)	-
Total remeasurement of loss allowance arising
from transfers in stages	1,205	(9,877)	6,544	(2,128)
New financial assets originated or purchased	591	1,023	113	1,727
Changes to risk parameters (model inputs
PDs/LGDs/EADs)	613	365	248	1,226
Financial assets derecognised during the year	(95)	(27)	(557)	(679)
Write-offs	-	-	3	3
Total net profit and loss charge during the year	2,314	(8,516)	6,351	149
Other movements
Write-offs	-	-	(714)	(714)
Unwind of discount	-	-	1,267	1,267
Loss allowance as at 31 December 2018	2,827	1,739	18,847	23,413

ECL allowances on undrawn commitments to lend are incorporated within ECL allowances on loans and advances to customers so as not to distort the ECL-related disclosures.

The unwind of discount on 'Stage 3' financial assets is reported within 'interest income' so that interest income is recognised on the amortised cost (after deducting the ECL allowance).

Remeasurement of loss allowances arising on contingent liabilities and financial guarantee contracts was not considered significant. Similarly, remeasurement of loss allowance arising from foreign-exchange and other movements was not considered significant.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Changes in the gross carrying amount that contributed to changes in loss allowance

The significant change in the gross carrying amount of financial assets that contributed to changes in loss allowances was mainly due to growth in the loan book, which was aligned with the Group's growth objectives.

The following table explains changes in the gross carrying amount of the financial assets to help explain their significance to the changes in the loss allowance for the same portfolios as discussed above:

	2018
	Stage 1 12-month ECL	Stage 2 Lifetime ECL	Stage 3 Lifetime ECL	Total
Balances with Central Bank of Malta	€ 000	€ 000	€ 000	€ 000
Gross carrying amount as at 1 January 2018	130,303	-	-	130,303
Financial assets derecognised during the year	(100,148)	-	-	(100,148)
Gross carrying amount as at 31 December 2018	30,155	-	-	30,155
Financial investments measured at FVOCI
Gross carrying amount as at 1 January 2018	75,895	-	-	75,895
New financial assets originated or purchased	27,849	-	-	27,849
Financial assets derecognised during the year	(4,445)	-	-	(4,445)
Other movements	771	-	-	771
Gross carrying amount as at 31 December 2018	100,070	-	-	100,070
Loans and advances to banks at amortised cost
Gross carrying amount as at 1 January 2018	97,048	-	-	97,048
New financial assets originated or purchased	43,533	-	-	43,533
Gross carrying amount as at 31 December 2018	140,581	-	-	140,581

For the Year Ended 31 December 2018

2 Financial risk management (continued)

	2018
	Stage 1 12-month	Stage 2 Lifetime	Stage 3 Lifetime
	ECL	ECL	ECL	Total
Loans and advances to customers at amortised cost	€ 000	€ 000	€ 000	€ 000
Gross carrying amount as at 1 January 2018	344,942	41,528	64,989	451,459
Transfers of financial instruments
Transfer from Stage 1 to Stage 2	(23,467)	23,467	-	-
Transfer from Stage 1 to Stage 3	(335)	-	335	-
Transfer from Stage 2 to Stage 1	18,220	(18,220)	-	-
Transfer from Stage 2 to Stage 3	-	(10,026)	10,026	-
Transfer from Stage 3 to Stage 1	680	-	(680)	-
Transfer from Stage 3 to Stage 2	-	7,222	(7,222)	-
Total changes in gross carrying amounts arising from
transfers in stages	(4,902)	2,443	2,459	-
New financial assets originated or purchased	110,261	14,066	307	124,634
Changes in gross carrying amount due to facilities
present as at 1 January 2018	4,825	(1,945)	(2,185)	695
Financial assets derecognised during the year	(32,326)	(4,128)	(5,083)	(41,537)
Write-offs	-	-	(714)	(714)
Total net change during the period	77,858	10,436	(5,216)	83,078
Gross carrying amount as at 31 December 2018	422,800	51,964	59,773	534,537

Undrawn commitments to lend as at 31 December 2018 amounted to €202,384,000 (2017: €247,737,000) and predominantly comprise of sanctioned but not yet drawn facilities which are classified as 'Stage 1' (12-month ECL) upon drawdown by customers. Changes in gross carrying amount of undrawn commitments to lend mainly relate to existing facilities drawn down by customers and new facilities sanctioned during 2018.

Contingent liabilities and financial guarantee contracts as at 31 December 2018 amounting to €14,148,000 (2017: €9,078,000) are all classified as 'Stage 1' (12-month ECL) by the Group. Changes in gross carrying amount of contingent liabilities and financial guarantee contracts mainly related to the expiry or enforcement of existing financial guarantees and the issuance of new financial guarantees during 2018.

Changes in gross carrying amount arising from a foreign-exchange and other movements was not significant.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

2.3.11 Write-off policy

The Group writes off loans and advances to customers when it determines that these are uncollectible and it has exhausted all practical recovery efforts and has concluded there is no reasonable expectation of recovery. This is generally the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-offs.

The Group may write-off financial assets that are still subject to enforcement activity. The Group still seeks to recover amounts it is legally owed in full, but which have been partially written off due to no reasonable expectation of full recovery.

2.3.12 Collateral

The Group employs a range of policies and practices to mitigate credit risk. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. The Group's Board establishes a policy regarding the acceptability of types of collateral and valuation parameters.

Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured.

The main types of collateral obtained are as follows:

for corporate lending, charges over real estate properties, cash or securities;
for retail lending (including home loans and consumer credit), mortgages over residential properties, cash or securities; and
for exposures arising from reverse repurchase transactions, a pledge on liquid sovereign debt securities.

Collateral held as security for financial assets other than loans and advances depends on the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured.

Management assesses the market value of collateral as part of the loan origination process. This assessment is reviewed periodically through ongoing credit file reviews. The Group requests additional collateral in accordance with the underlying agreement when necessary.

The Group's policies regarding obtaining collateral have not significantly changed during the reporting period and there has been no significant change in the overall quality of the collateral held by the Group since the prior period.

A portion of the Group's financial assets has sufficiently low 'loan-to-value' (LTV) ratios, which result in no loss allowance being recognised in accordance with the Group's Expected Credit Loss model. The carrying amount of such financial assets is €305,261,000.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The Group closely monitors collateral held for financial assets considered to be credit-impaired, as it becomes more likely that the Group will take possession of collateral to mitigate potential credit losses. Financial assets that are credit-impaired and related collateral held in order to mitigate potential losses are shown below:

			Fair value
Gross	Impairment	Carrying	of collateral
exposure	allowance	amount	held
€ 000	€ 000	€ 000	€ 000
18,971	3,909	15,062	31,400
37,189	12,824	24,365	66,253
33	-	33	41
56,193	16,733	39,460	97,694

Financial assets that are credit-impaired and no collateral is held are shown below:

Credit-impaired assets	Gross exposure € 000	Impairment allowance € 000	Carrying amount € 000
- Overdrafts	475	475	-
- Term loans	3,095	2,104	991
- Credit cards	10	10	-
Total credit-impaired assets	3,580	2,589	991

It is the Bank's policy to dispose of properties acquired through judicial action in an orderly fashion. The proceeds are used to reduce or repay the outstanding claim. In general, the Bank does not occupy properties acquired through judicial action for business use.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The following tables show the distribution of LTV ratios for the Group's credit-impaired loans and advances to customers.

	Non-forborne exposures	Forborne exposures	Total
	2018 € 000	2018 € 000	2018 € 000
Performing - Stage 1
Not collateralised	68,144	-	68,144
Fully collateralised
Less than 50% LTV	199,448	-	199,448
51% to 75% LTV	103,260	-	103,260
76% to 90% LTV	22,538	-	22,538
91% to 100% LTV	13,545	-	13,545
	338,791	-	338,791
Partially collateralised
Greater than 100% LTV	15,865	-	15,865
Total performing – Stage 1	422,800	-	422,800
Performing – Stage 2
Not collateralised	5,413	4	5,417
Fully collateralised
Less than 50% LTV	23,391	7,716	31,107
51% to 75% LTV	68	650	718
76% to 90% LTV	291	-	291
91% to 100% LTV	13,628	121	13,749
Partially collateralised	37,378	8,487	45,865
Greater than 100% LTV	631	51	682
Total performing – Stage 2	43,422	8,542	51,964
Non-Performing – Stage 3
Not collateralised	3,099	481	3,580
Fully collateralised
Less than 50% LTV	4,068	8,894	12,962
51% to 75% LTV	6,393	6,106	12,499
76% to 90% LTV	710	3,587	4,297
91% to 100% LTV	-	127	127
	11,171	18,714	29,885
Partially collateralised
Greater than 100% LTV	19,195	7,113	26,308
Total non-performing – Stage 3	33,465	26,308	59,773
At 31 December	499,687	34,850	534,537

For the Year Ended 31 December 2018

2 Financial risk management (continued)

	Non-forborne exposures 2017 € 000	Forborne exposures 2017 € 000	Total 2017 € 000
Performing
Not collateralised	73,615	42	73,657
Fully collateralised
Less than 50% LTV	190,449	3,839	194,288
51% to 75% LTV	68,830	4,286	73,116
76% to 90% LTV	13,045	708	13,753
91% to 100% LTV	12,468	120	12,588
	284,792	8,953	293,745
Partially collateralised Greater than 100% LTV	10,984	-	10,984
Total performing	369,391	8,995	378,386
Non-Performing
Not collateralised	897	209	1,106
Fully collateralised
Less than 50% LTV	7,549	16,520	24,069
51% to 75% LTV	9,356	8,082	17,438
76% to 90% LTV	1,045	2,317	3,362
91% to 100% LTV	618	-	618
	18,568	26,919	45,487
Partially collateralised
Greater than 100% LTV	19,639	6,841	26,480
Total non-performing	39,104	33,969	73,073
At 31 December	408,495	42,964	451,459

2 Financial risk management (continued)

2.3.13 Trade and other receivables

The Bank's subsidiary assesses the credit quality of its customers taking into account financial position, past experience and other factors. It has policies in place to ensure that sales of products and services are effected to customers with an appropriate credit history in the case of credit sales. The subsidiary monitors the performance of these financial assets on a regular basis to identify incurred collection losses which are inherent in the subsidiary's receivables taking into account historical experience in collection of accounts receivable.

Standard credit terms are in place for individual clients, however, wherever possible, new corporate customers are analysed individually for creditworthiness before the subsidiary's standard payment and service delivery terms and conditions are offered. The entity's review includes external creditworthiness databases when available. The subsidiary establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. This allowance represents Expected Credit Losses against individual exposures. The movement in provisions for impairment in respect of trade receivables is disclosed in note 15. Other overdue trade receivables amounted to €376,000 (2017: €773,000), principally overdue by nine months, but were not impaired.

The subsidiary's receivables, which are not impaired financial assets, are principally in respect of transactions with customers for whom there is no recent history of default. Management does not expect any material losses from nonperformance by these customers.

2.3.14 Contingencies and commitments

Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions – are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments as most commitments to extend credit are contingent upon customers maintaining specific credit standards. These exposures are monitored in the same manner outlined above in respect of loans and advances.

2.4 Market risk

The Group takes on exposure to market risk, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, credit spreads, foreign exchange rates and equity prices.

2 Financial risk management (continued)

Accordingly, market risk for the Group consists of three elements:

interest rate risk, which is the risk of losses because of changes in interest rates;
exchange rate risk, which is the risk of losses on the Group's positions in foreign currency because of changes in exchange rates; and
equity price risk, which is the risk of losses because of changes in investment prices.

2.4.1 Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Group, through its banking operations, takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but losses may occur in the event that unexpected movements arise.

The Bank's operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets and interest-bearing liabilities mature or reprice within different time periods or on different terms. The Bank accepts deposits from customers at both fixed and floating rates and for varying terms. This poses a risk to the Bank, which risk is managed by monitoring on a continuous basis the level of mismatch of interest rate repricing taking cognisance of the terms of the Bank's principal assets, loans and advances to customers, that are repriceable at the Bank's discretion. The Bank also invests in highly liquid quality assets and other short-term instruments for the purposes of mitigating exposures to fluctuations in interest rates. The Bank is accordingly in a position to manage the interest rate terms of its financial assets and simultaneously to effect changes to interest terms of liabilities reflecting the Bank's strategy together with market developments. The Group seeks to manage its net interest spread, considering the cost of capital, by investing funds in a portfolio of assets with a longer term than the liabilities funding them (therefore normally giving rise to a negative maturity gap position) but with shorter repricing periods or terms. The Bank manages the shorter term nature of the liabilities funding the assets for the purposes of ensuring a steady base of deposits with differing terms over the medium to longer term. The Bank's Assets & Liabilities Committee is primarily responsible for oversight over the Bank's interest rate risk management process and monitors actively the interest rate risk measures utilised by the Bank.

Credit facilities and commitments to lend funds to customers are granted at prevailing market interest rates at drawdown date.

2 Financial risk management (continued)

The following tables summarise the Group's exposures to interest rate risks. These analyse the Group's financial instruments, which were interest-bearing at their carrying amounts, categorised by the earlier of contractual repricing or maturity dates.

Group

	Carrying amount	Effective interest rate	Less than 3 months	Between 3 months and 1 year	Between 1 year and 5 years	More than 5 years	Non interest bearing
At 31 December 2018	€ 000	%	€ 000	€ 000	€ 000	€ 000	€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	128,726	0.09	87,206	36,583	-	-	4,937
Debt and other fixed income instruments measured at FVOCI (2017: available for-sale)	87,481	3.05	102	8,181	20,016	59,182	-
Loans and advances to banks	140,581	0.97	129,581	11,000	-	-	-
Loans and advances to customers	511,124	4.38	409,138	16,632	40,941	35,797	8,616
Total financial assets	867,912		626,027	72,396	60,957	94,979	13,553
Financial liabilities
Amounts owed to banks	854	0.10	503	-	-	-	351
Amounts owed to customers	788,044	0.73	476,269	68,325	88,406	61,590	93,454
Total financial liabilities	788,898		476,772	68,325	88,406	61,590	93,805
Interest repricing gap			149,255	4,071	(27,449)	33,389	(80,252)
Cumulative gap			149,255	153,326	125,877	159,266

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Group

	Carrying amount	Effective interest rate	Less than 3 months	Between 3 months and 1 year	Between 1 year and 5 years	More than 5 years	Non interest bearing
At 31 December 2017	€ 000	%	€ 000	€ 000	€ 000	€ 000	€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	215,133	0.08	190,360	20,033	-	-	4,740
Debt and other fixed income instruments classified as available-for-sale investments	66,512	2.81	-	4,126	28,352	34,034	-
Loans and advances to banks	97,048	0.03	87,048	10,000	-	-	-
Loans and advances to customers	428,611	4.71	321,953	11,213	59,534	33,907	2,004
Total financial assets	807,304		599,361	45,372	87,886	67,941	6,744
Financial liabilities
Amounts owed to banks	5,362	0.10	5,268	-	-	-	94
Amounts owed to customers	733,151	0.88	431,716	96,598	72,440	53,073	79,324
Total financial liabilities	738,513		436,984	96,598	72,440	53,073	79,418
Interest repricing gap			162,377	(51,226)	15,446	14,868	(72,674)
Cumulative gap			162,377	111,151	126,597	141,465

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Bank

	Carrying	Effective interest	Less than	Between 3 months	Between 1 year	More than	Non interest
At 31 December 2018	amount € 000	rate %	3 months € 000	and 1 year € 000	and 5 years € 000	5 years € 000	bearing € 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	128,143	0.09	87,206	36,583	-	-	4,354
Debt and other fixed income instruments measured at FVOCI (2017: available for-sale)	83,656	2.97	-	7,967	18,921	56,768	-
Loans and advances to banks	125,819	1.07	117,819	8,000	-	-	-
Loans and advances to customers	511,124	4.38	409,138	16,632	40,941	35,797	8,616
Total financial assets	848,742		614,163	69,182	59,862	92,565	12,970
Financial liabilities
Amounts owed to banks	854	0.10	503	-	-	-	351
Amounts owed to customers	790,073	0.73	477,025	68,539	88,406	61,590	94,513
Total financial liabilities	790,927		477,528	68,539	88,406	61,590	94,864
Interest repricing gap			136,635	643	(28,544)	30,975	(81,894)
Cumulative gap			136,635	137,278	108,734	139,709

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Bank

	Carrying amount	Effective interest rate	Less than 3 months	Between 3 months and 1 year	Between 1 year and 5 years	More than 5 years	Non interest bearing
At 31 December 2017	€ 000	%	€ 000	€ 000	€ 000	€ 000	€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	214,500	0.08	190,360	20,033	-	-	4,107
Debt and other fixed income instruments classified as available-for-sale investments	62,899	2.73	-	4,126	27,083	31,690	-
Loans and advances to banks	90,258	0.02	82,258	8,000	-	-	-
Loans and advances to customers	428,611	4.71	321,953	11,213	59,534	33,907	2,004
Total financial assets	796,268		594,571	43,372	86,617	65,597	6,111
Financial liabilities
Amounts owed to banks	5,362	0.10	5,268	-	-	-	94
Amounts owed to customers	736,695	0.88	433,542	96,612	72,440	53,073	81,028
Total financial liabilities	742,057		438,810	96,612	72,440	53,073	81,122
Interest repricing gap			155,761	(53,240)	14,177	12,524	(75,011)
Cumulative gap			155,761	102,521	116,698	129,222

For the Year Ended 31 December 2018

2 Financial risk management (continued)

2.4.2 Interest rate profile

At the end of the reporting periods the interest rate profile of the Group's interest-bearing financial instruments was:

Group		Fixed rate	Variable rate
	2018 € 000	2017 € 000	2018 € 000	2017 € 000
Interest-earning assets
Balances with Central Bank of Malta and treasury bills	115,089	202,222	8,700	8,172
Debt and other fixed income instruments measured at FVOCI (2017: available-for-sale)	86,475	64,512	1,006	2,000
Loans and advances to banks	79,789	24,167	60,792	72,881
Loans and advances to customers	95,259	106,290	407,249	320,317
	376,612	397,191	477,747	403,370
Interest-bearing liabilities
Amounts owed to banks	23	222	480	5,046
Amounts owed to customers	264,553	269,135	430,037	384,692
	264,576	269,357	430,517	389,738

At the end of the reporting periods the interest rate profile of the Bank's interest-bearing financial instruments was:

Bank	Fixed rate		Variable rate
	2018 € 000	2017 € 000	2018 € 000	2017 € 000
Interest-earning assets
Balances with Central Bank of Malta and treasury bills	115,089	202,222	8,700	8,172
Debt and other fixed income instruments measured at FVOCI (2017: available-for-sale)	82,650	60,899	1,006	2,000
Loans and advances to banks	76,789	22,167	49,030	68,091
Loans and advances to customers	95,259	106,290	407,249	320,317
	369,787	391,578	465,985	398,580
Interest-bearing liabilities
Amounts owed to banks	23	222	480	5,046
Amounts owed to customers	265,268	269,150	430,292	386,517
	265,291	269,372	430,772	391,563

2 Financial risk management (continued)

2.4.3 Fair value sensitivity analysis for fixed rate instruments

The Group's instruments exposing the Bank to fair value interest rate risk consist of quoted debt securities measured at FVOCI (2017: available-for-sale) (also refer to note 6) since these are fair valued with fair value changes recognised in other comprehensive income. Considering the nature and carrying amount of the investments, with the majority of investments comprising securities issued by the Government of Malta, a sensitivity analysis disclosing how equity would have been affected by changes in interest rates that were reasonably possible at the end of the reporting period is not deemed necessary.

2.4.4 Cash flow sensitivity analysis for variable rate instruments

At the end of the reporting periods, if interest rates had increased/decreased by 100 basis points (assuming a parallel shift of 100 basis points in yields) with all other variables held constant, the pre-tax result for the year would change by the following amounts determined by applying the shift to the net variable interest exposure of the Group/Bank at the end of the reporting periods:

Group	2018 € 000	2017 € 000
(+) 100bp	472	136
(- ) 100bp	(472)	(136)
Bank	2018 € 000	2017 € 000
(+) 100bp	352	70
(- ) 100bp	(352)	(70)

2.4.5 Currency risk

The Group takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows particularly within the Bank's operations. Foreign exchange risk to the Bank is the risk that earnings and values fluctuate as a result of changes in foreign exchange rates. The Bank's foreign exchange risk arises when financial assets or liabilities are denominated in currencies which are different from the Bank's functional currency.

The Bank essentially manages this risk by ensuring that foreign currency liabilities are utilised to fund assets denominated in the same foreign currency thereby matching asset and liability positions as much as is practicable. This mechanism is reflected in the figures reported in the tables below which present this matching process.

The Bank maintains its exposure to foreign currencies within prescribed limits set by the Bank's ALCO. ALCO sets limits on the level of exposure by currency and in aggregate for both overnight and intra-day positions which are monitored on a real-time basis.

2 Financial risk management (continued)

The Bank enters into forward foreign exchange contracts with customers in the normal course of its business. Generally, it is the Bank's policy to cover the exposure arising from forward contracts. As a result, the Group is not exposed to any significant exchange risk in respect of outstanding derivative financial instruments at the end of the reporting periods. The Bank also retains a deposit margin covering a portion of the notional amount of the respective contract from the customer thereby reducing the extent of credit risk should the derivative client default. The Bank did not have any derivative financial instruments as at 31 December 2018 and 2017.

The following tables summarise the Group's exposures to foreign currency risk. Included in the tables are the entity's financial instruments which are subject to foreign exchange risk at carrying amounts, categorised by currency.

Group

Other	USD	GBP	EUR	Total
€ 000	€ 000	€ 000	€ 000	€ 000	At 31 December 2018
					Financial assets
15	13,475	8,728	106,508	128,726	Balances with Central Bank of Malta, treasury bills and cash
-	- 395		99,675	100,070	Investments measured at FVOCI
7,386	53,449	26,364	53,382	140,581
- -		2,026	509,098	511,124
784	1,660	362	7,844	10,650	Other assets
8,185	68,979	37,480	776,507	891,151	Total financial assets
					Financial liabilities
- -	-		854	854	Amounts owed to banks
7,429	64,840	36,644	679,131	788,044	Amounts owed to customers
614	3,223	735	32,365	36,937	Other liabilities
8,043	68,063	37,379	712,350	825,835	Total financial liabilities
142	916	101	64,157		Net currency exposure in financial assets/liabilities
-	874	144	215,512	216,530	Commitments and contingent liabilities
					Loans and advances to banks Loans and advances to customers

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Group

At 31 December 2017	Total € 000	EUR € 000	GBP € 000	USD € 000	Other € 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	215,133	151,633	21,589	41,842	69
Investments classified as available-for-sale	75,895	75,520	-	375	-
Loans and advances to banks	97,048	69,316	13,288	9,024	5,420
Loans and advances to customers	428,611	423,712	2,712	1,489	698
Other assets	14,615	12,654	272	1,167	522
Total financial assets	831,302	732,835	37,861	53,897	6,709
Financial liabilities
Amounts owed to banks	5,362	5,162	-	-	200
Amounts owed to customers	733,151	637,506	37,525	52,164	5,956
Other liabilities	34,269	32,847	360	737	325
Total financial liabilities	772,782	675,515	37,885	52,901	6,481
Net currency exposure in financial assets/liabilities		57,320	(24)	996	228
Commitments and contingent liabilities	256,815	255,678	958	179	-

Under the scenario that the euro appreciates by 20% against all currencies the effect would be a decrease of €231,000 (2017: €240,000) in the carrying amount of financial instruments with the adverse impact recognised in profit or loss. Should the euro depreciate against all currencies by 20%, the effect would be a gain of €231,000 (2017: €240,000) in the carrying amount of financial instruments and the favourable impact would be recognised in profit or loss.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The following tables summarise the Bank's exposures to foreign currency risk. Included in the tables are the entity's financial instruments which are subject to foreign exchange risk at carrying amounts, categorised by currency.

Bank
	Total	EUR	GBP	USD	Other
At 31 December 2018	€ 000	€ 000	€ 000	€ 000	€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	128,143	105,929	8,724	13,475	15
Investments measured at FVOCI	96,245	95,850	-	395	-
Loans and advances to banks	125,819	38,650	26,363	53,420	7,386
Loans and advances to customers	511,124	509,098	2,026	-	-
Other assets	7,407	7,319	43	18	27
Total financial assets	868,738	756,846	37,156	67,308	7,428
Financial liabilities
Amounts owed to banks	854	854	-	-	-
Amounts owed to customers	790,073	681,076	36,667	64,900	7,430
Other liabilities	18,805	16,382	483	1,924	16
Total financial liabilities	809,732	698,312	37,150	66,824	7,446
Net currency exposure in financial assets/liabilities		58,534	6	484	(18)
Commitments and contingent liabilities	216,551	215,533	144	874	-

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Bank

At 31 December 2017	Total € 000	EUR € 000	GBP € 000	USD € 000	Other € 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	214,500	151,000	21,589	41,842	69
Investments classified as available-for-sale	72,282	71,906	-	376	-
Loans and advances to banks	90,258	62,587	13,287	8,964	5,420
Loans and advances to customers	428,611	423,712	2,712	1,489	698
Other assets	7,271	7,233	17	21	-
Total financial assets	812,922	716,438	37,605	52,692	6,187
Financial liabilities
Amounts owed to banks	5,362	5,162	-	-	200
Amounts owed to customers	736,695	641,039	37,525	52,175	5,956
Other liabilities	19,496	19,270	82	95	49
Total financial liabilities	761,553	665,471	37,607	52,270	6,205
Net currency exposure in financial assets/liabilities		50,967	(2)	422	(18)
Commitments and contingent liabilities	256,830	255,693	958	179	-

Under the scenario that the euro appreciates by 20% against all currencies the effect would be a decrease of €95,000 (2017: €80,000) in the carrying amount of financial instruments with the adverse impact recognised in profit or loss. Should the euro depreciate against all currencies by 20%, the effect would be a gain of €95,000 (2017: €80,000) in the carrying amount of financial instruments and the favourable impact would be recognised in profit or loss.

2.4.6 Equity price risk

The exposure of the Group to this risk is not significant in view of the extent of the Group's holdings of equity investments measured at FVOCI (refer to note 6) which are not deemed material in the context of the Group's statement of financial position. These investments are principally locally quoted equity instruments issued by local well-known corporates. Frequent management reviews are carried out to ensure continued high quality of the portfolio.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

2.5 Liquidity risk

Liquidity risk is defined as the risk of losses due to:

the Group's funding costs increasing disproportionately;
lack of funding preventing the Group from establishing new business; and
lack of funding which will ultimately prevent the Group from meeting its obligations.

In relation to the Bank's operations, liquidity risk is the risk that the Bank is unable to meet its obligations when they fall due as a result of customer deposits being withdrawn, cash requirements from contractual commitments, or other cash outflows. The Group is exposed to daily calls on its available cash resources from overnight deposits, current and call deposits, maturing term deposits, loan draw-downs and guarantees together with other related off-balance sheet instruments. Such outflows would deplete available cash resources for client lending and investments. In extreme circumstances, lack of liquidity could result in sales of assets, or potentially an inability to fulfil lending commitments. The risk that the Group will be unable to do so is inherent in all banking operations and can be affected by a range of institution-specific and market-wide events including, but not limited to, credit events, systemic shocks and natural disasters.

The objective of the Group's liquidity and funding management is to ensure that all foreseeable funding commitments and deposit withdrawals can be met when due. It is the Bank's objective to maintain a diversified and stable funding base with the objective of enabling it to respond quickly and smoothly to unforeseen liquidity requirements.

The Group manages this risk by ensuring that its assets and liabilities are matched in terms of maturities as much as is practicable. However, the Bank ought to manage its net interest spread by investing funds in a portfolio of assets with a longer term than the liabilities funding them (therefore giving rise to a negative maturity gap position). To mitigate exposures arising in this respect, the Bank holds significant liquid assets in the form of Malta Government treasury bills, money market placements and other short-term instruments for managing liquidity risk to support payment obligations and contingent funding in a stressed market environment.

The Bank's advances-to-deposit ratio of 64.7% (2017: 58.2%) at the end of the reporting period reflects management's prudent stance in the context of liquidity management.

Liquidity Coverage Ratio

The Liquidity Coverage Ratio (LCR) is designed to promote the short-term resilience of a bank's liquidity profile. This ratio became a minimum regulatory standard from 1 October 2015, under the European Commission Delegated Regulation 2015/61.

The LCR aims to ensure that a bank has adequate unencumbered high-quality liquid assets (HQLA) to meet its liquidity requirements within a 30-calendar-day liquidity stress scenario. Generally, HQLA consists of cash or assets that can be converted into cash at little or no loss of value in markets.

The Bank's LCR as at 31 December 2018 was 385.6% (2017: 302.1%).

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Net Stable Funding Ratio

The Net Stable Funding Ratio (NSFR) is a metric showing how a bank is able to maintain sufficient stable funding relative to required stable funding, and reflects a bank's long-term funding profile (typically, with a term of more than one year).

The Bank calculates its NSFR ratio in line with the Basel Committee on Banking Supervision (publication 295), given that the European calibration is still subject to implementation by the European Commission.

The Bank's NSFR as at 31 December 2018 was 133.1% (2017: 144.2%).

The Bank's ALCO focuses on the Bank's management process with respect to market and funding liquidity risks.

The Group's liquidity management process, focusing on the liquidity of the Bank and that of its principal subsidiary, includes:

management of day-to-day funding, by monitoring future cash flows to ensure that requirements can be met. This includes replenishment of funds as they mature or are borrowed by customers. The starting point for those projections is an analysis of the contractual maturity of the financial liabilities and the expected collection date of the financial assets;
maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen interruption to cash flow;
monitoring the liquidity ratios of the Bank against internal and regulatory requirements; and
managing the concentration and profile of debt maturities.

The Bank also monitors the level and type of undrawn lending commitments and the impact of contingent liabilities such as guarantees as part of the liquidity management process previously referred to.

As at 31 December 2018, the Bank had outstanding guarantees on behalf of third parties amounting to €11,206,000 (2017: €5,649,000), which are cancellable upon the request of the third parties. The Group's liquidity exposures arising from these commitments and contingencies are expected to expire principally within a period of twelve months from the end of the reporting period.

The following tables analyse the Group's principal financial assets and liabilities into relevant maturity groupings based on the remaining period at the end of the reporting period to the contractual maturity date.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Group

	Less than 3 months	Between 3 months and 1 year	Between 1 year and 5 years	More than 5 years	No maturity date	Total
At 31 December 2018	€ 000	€ 000	€ 000	€ 000	€ 000	€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	87,206	36,583	-	-	4,937	128,726
Investments measured at FVOCI	102	8,181	20,016	59,182	12,589	100,070
Loans and advances to banks	129,581	11,000	-	-	-	140,581
Loans and advances to customers	107,966	55,362	127,765	220,031	-	511,124
Other assets	10,210	440	-	-	-	10,650
Total financial assets	335,065	111,566	147,781	279,213	17,526	891,151
Financial liabilities
Amounts owed to banks	854	-	-	-	-	854
Amounts owed to customers	569,725	68,325	88,406	61,588	-	788,044
Other liabilities	31,857	358	565	2,234	1,923	36,937
Total financial liabilities	602,436	68,683	88,971	63,822	1,923	825,835
Maturity gap	(267,371)	42,883	58,810	215,391
Cumulative gap	(267,371)	(224,488)	(165,678)	49,713
Group
At 31 December 2017
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	190,360	20,033	-	-	4,740	215,133
Available-for-sale investments	-	4,126	28,552	34,034	9,183	75,895
Loans and advances to banks	87,048	10,000	-	-	-	97,048
Loans and advances to
customers Other assets	89,835 14,234	28,044 381	144,539 -	166,193 -	- -	428,611 14,615
Total financial assets	381,477	62,584	173,091	200,227	13,923	831,302
Financial liabilities
Amounts owed to banks	5,362	-	-	-	-	5,362
Amounts owed to customers	511,040	96,598	72,440	53,073	-	733,151
Other liabilities	29,539	550	655	1,773	1,752	34,269
Total financial liabilities	545,941	97,148	73,095	54,846	1,752	772,782
Maturity gap	(164,464)	(34,564)	99,996	145,381
Cumulative gap	(164,464)	(199,028)	(99,032)	46,349

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Bank

	Less than 3 months	Between 3 months and 1 year	Between 1 year and 5 years	More than 5 years	No maturity date	Total
At 31 December 2018	€ 000	€ 000	€ 000	€ 000	€ 000	€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	87,206	36,583	-	-	4,354	128,143
Investments measured at FVOCI	-	7,967	18,921	56,768	12,589	96,245
Loans and advances to banks	117,819	8,000	-	-	-	125,819
Loans and advances to customers	107,966	55,362	127,765	220,031	-	511,124
Other assets	6,967	440	-	-	-	7,407
Total financial assets	319,958	108,352	146,686	276,799	16,943	868,738
Financial liabilities
Amounts owed to banks	854	-	-	-	-	854
Amounts owed to customers Other liabilities	571,538 13,726	68,539 358	88,406 565	61,590 2,233	- 1,923	790,073 18,805
Total financial liabilities	586,118	68,897	88,971	63,823	1,923	809,732
Maturity gap	(266,160)	39,455	57,715	212,976
Cumulative gap	(266,160)	(226,705)	(168,990)	43,986

Bank
At 31 December 2017
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	190,360	20,033	-	-	4,107	214,500
Available-for-sale investments	-	4,126	27,283	31,690	9,183	72,282
Loans and advances to banks	82,258	8,000	-	-	-	90,258
Loans and advances to customers	89,835	28,044	144,539	166,193	-	428,611
Other assets	6,889	382	-	-	-	7,271
Total financial assets	369,342	60,585	171,822	197,883	13,290	812,922
Financial liabilities
Amounts owed to banks	5,362	-	-	-	-	5,362
Amounts owed to customers	514,570	96,612	72,440	53,073	-	736,695
Other liabilities	14,765	550	655	1,773	1,753	19,496
Total financial liabilities	534,697	97,162	73,095	54,846	1,753	761,553
Maturity gap	(165,355)	(36,577)	98,727	143,037
Cumulative gap	(165,355)	(201,932)	(103,205)	39,832

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The tables below analyse the Group's principal non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the end of the reporting period to the contractual maturity date. The amounts disclosed in the tables are the contractual undiscounted cash flows.

Group

At 31 December 2018	Less than 3 months € 000	Between 3 months and 1 year € 000	Between 1 year and 5 years € 000	More than 5 years € 000	Total € 000
Financial liabilities
Amounts owed to banks	854	-	-	-	854
Amounts owed to customers	570,136	69,315	93,300	71,864	804,615
Total financial liabilities	570,990	69,315	93,300	71,864	805,469

At 31 December 2017
Financial liabilities
Amounts owed to banks	5,362	-	-	-	5,362
Amounts owed to customers	511,454	98,329	77,359	62,036	749,178
Total financial liabilities	516,816	98,329	77,359	62,036	754,540

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The tables below analyse the Bank's principal non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the end of the reporting period to the contractual maturity date. The amounts disclosed in the tables are the contractual undiscounted cash flows.

Bank

At 31 December 2018	Less than 3 months € 000	Between 3 months and 1 year € 000	Between 1 year and 5 years € 000	More than 5 years € 000	Total € 000
Financial liabilities
Amounts owed to banks	854	-	-	-	854
Amounts owed to customers	571,950	69,530	93,300	71,864	806,644
Total financial liabilities	572,804	69,530	93,300	71,864	807,498
At 31 December 2017
Financial liabilities
Amounts owed to banks	5,362	-	-	-	5,362
Amounts owed to customers	514,984	98,344	77,359	62,036	752,723
Total financial liabilities	520,346	98,344	77,359	62,036	758,085

For the Year Ended 31 December 2018

2 Financial risk management (continued)

2.6 Operational risk

Operational risk is the risk of losses due to:

deficient or erroneous internal procedures;
human or system errors;
external events, including legal events;
internal and external fraud;
employment practices and workplace safety;
clients, products and business practices;
damage to physical assets;
business disruption and system failures; and
execution, delivery and process management.

Operational risk is thus often associated with specific and one-off events, such as failure to observe business or working procedures, defects or breakdowns of the technical infrastructure, criminal acts, fire and storm damage or litigation. Operational risks are, thus, non-financial risks. Operational risk management relies on a framework of policies implemented by the different operational functions and which implementation is overseen by the Risk Management Function.

A financial measurement of this risk is arrived at by the Group for the purpose of allocating risk capital using the Basic Indicator Approach under the European Union Directive on Capital Requirements (CRD) rules. The capital requirement for operational risk under this method was calculated at €3,337,000 (2017: €3,021,000).

2.7 Capital risk management

The Group's objectives when managing capital, which is a broader concept than the 'equity' on the consolidated statement of financial position, are:

to comply with the capital requirements set by the MFSA with respect to the Bank's operations;
to safeguard the Group's ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and
to maintain a strong capital base to support the development of its business.

Accordingly, the purpose of the Group's capital management is essentially that of ensuring efficient use of capital taking cognisance of the Group's risk appetite and profile as well as its objectives for business development. The Group is subject to externally imposed capital requirements only in respect of the Bank's activities as a credit institution. The Bank is a licensed financial services provider and must therefore comply with the capital requirements under the relevant laws and regulations.

The Bank's Executive Team and ALCO are predominately responsible for the Bank's capital risk management process. Capital adequacy and the use of regulatory capital are monitored regularly by the Bank's management, employing techniques based on the guidelines developed by the Basel Committee and the European Union Directives, as implemented by the MFSA for supervisory purposes. The Bank's capital management is based on the regulatory requirements established by local laws and regulations which are modelled on the requisites of the CRD rules. The CRD consists of three pillars: Pillar I contains a set of rules for a mathematical calculation of the capital requirement; Pillar II describes the supervisory review process and contains requirements for the internal calculation of the capital requirement while Pillar III deals with market discipline and sets forth disclosure requirements for risk and capital management.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

The sum of the capital requirement calculated under Pillar I and the additional requirement identified under Pillar II represents the total capital actually required under the CRD.

The following is an analysis of the Bank's Capital Base in accordance with the CRD's requirements:

	2018	2017
	€ 000	€ 000
Common Equity Tier 1 (CET1) capital
Share capital	11,044	11,044
Share premium	18,530	18,530
Revaluation and other reserves	15,490	12,624
Retained earnings	59,097	51,887
	104,161	94,085
Adjustments:
Final dividend	(1,436)	(1,149)
Depositor Compensation Scheme	(3,502)	(3,630)
Intangible assets	(375)	(480)
Minimum loss coverage for non-performing exposures	(171)	-
Transfer of unrealised gains to Tier 2 capital	-	(1,375)
Total CET1 capital	98,677	87,451
Tier 2 capital
Property revaluation reserve	-	468
Investment revaluation reserve	-	907
Total Tier 2 capital	-	1,375
Total own funds	98,677	88,826

Minimum capital requirements are computed for credit, market and operational risks. The MFSA requires a bank to maintain a ratio of total regulatory capital to risk-weighted assets and instruments (the Capital requirements ratio) at or above the prescribed minimum of 8%. The Capital requirements ratio expresses Own funds as a proportion of risk-weighted assets and off-balance sheet instruments in relation to Credit Risk together with notional risk-weighted assets in respect of Operational Risk and Market Risk.

The risk-weighted assets are measured by means of a hierarchy of risk weights classified according to the nature of – and reflecting an estimate of credit, market and other risks associated with – each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off-balance sheet instruments, with some adjustments to reflect the more contingent nature of the potential losses. Risk-weighted assets are measured using the 'Standardised Approach' for credit risk with risk-weights being assigned to assets and off-balance sheet instruments according to their asset class and credit risk mitigation. For the determination of credit assessments, independent rating agencies are nominated as required.

Total risk-weighted assets are determined by multiplying the capital requirements for market risk and operational risk by 12.5 (i.e. the reciprocal of the minimum capital ratio of 8%) and adding the resulting figures to the sum of risk-weighted assets for credit risk.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

2.8 Fair values of financial assets and liabilities

2.8.1 Financial instruments measured at fair value

The Group's financial instruments which are carried at fair value include the Group's financial assets designated at FVOCI (note 6). The Group is required to disclose fair value measurements by level of the following fair value measurement hierarchy for financial instruments that are measured in the statement of financial position at fair value:

quoted prices (unadjusted) in active markets for identical assets (Level 1).
inputs other than quoted prices included within Level 1 that are observable for the asset either directly i.e. as prices, or indirectly i.e. derived from prices (Level 2).
inputs for the asset that are not based on observable market data i.e. unobservable inputs (Level 3).

The IFRS 7 hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Bank's market assumptions.

The Bank considers only relevant and observable market prices in its valuations. Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations.

The fair value of the Bank's financial assets designated at FVOCI, which are principally traded in active markets, is mainly based on quoted market prices.

As at 31 December 2018 and 2017, the principal financial instruments that are measured at fair value, consisted of the investments designated at FVOCI (2017: available-for-sale), that were valued using principally Level 1 inputs. No transfers of financial instruments between different levels of the fair value hierarchy have occurred during the financial years ended 31 December 2018 and 2017.

2.8.2 Financial instruments not measured at fair value

Loans and advances to banks and customers

These categories of assets are presented net of impairment allowances to reflect the estimated recoverable amounts. As at 31 December 2018, the Group's aggregate carrying amount in this respect was €651,705,000 (2017: €525,659,000). The loans and advances to customers, which are principally subject to floating interest rates, are measured at the amount of €511,124,000 (2017: €428,611,000). This carrying value approximates to fair value in view of the fact that these loans and advances are repriceable at the Group's discretion. The loans and advances to banks, comprising term placements maturing within one month from the end of the reporting period, are carried at the amount of €68,789,000 (2017: €14,167,000). Rates on advances reflect current market rates, and the Directors consider the carrying amounts to be a reasonable estimate of their fair value principally in view of the relatively short periods to repricing or maturity from the end of the reporting periods. The current market interest rates utilised for fair value estimation, which reflect essentially the respective instruments' contractual interest rates, are deemed observable and accordingly these fair value estimates have been categorised as Level 2.

For the Year Ended 31 December 2018

2 Financial risk management (continued)

Trade and other receivables

This category principally represents short-term trade receivables arising from postal operations in respect of which the carrying amount is a reasonable approximation of its fair value.

Amounts owed to banks and customers

These categories of financial liabilities are carried at amortised cost and amount to €788,899,000 as at 31 December 2018 (2017: €738,513,000). 11.9% (2017: 10.8%) of this liability is non-interest bearing, 60.4% (2017: 59.2%) of the liability has a contractual repricing term of three months or less, 8.7% (2017: 13.1%) reprices between three months and one year, 11.2% (2017: 9.8%) reprices between one year and five years while 7.8% (2017: 7.2%) is repriceable after more than five years. Accordingly, in view of their profile, the fair value of these financial liabilities is not deemed to be significantly different from their carrying amounts. This applies to variable rate deposits in view of the short periods to repricing, but also applies to liabilities subject to fixed interest rates, based on discounting future contractual cash flows at current market interest rates, taking into account the short periods to maturity. The current market interest rates utilised for discounting purposes, which were almost equivalent to the respective instruments' contractual interest rates, are deemed observable and accordingly these fair value estimates have been categorised as Level 2.

Other financial instruments

The fair values of certain other financial assets, including balances with the Central Bank of Malta and accrued income, are considered to approximate their respective carrying values due to their short-term nature.

3 Accounting estimates and judgements

3.1 Critical accounting estimates and judgements in applying the Group's accounting policies

Estimates and judgements are continually evaluated and based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. These estimates and assumptions present a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. The Group's management also makes judgements, apart from those involving estimations, in the process of applying the entity's accounting policies that may have a significant effect on the amounts recognised in the financial statements.

3.2 Measurement of the Expected Credit Losses (applicable as from 1 January 2018)

The measurement of the Expected Credit Loss allowance for financial assets measured at amortised cost and FVOCI is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour. Explanation of the inputs, assumptions and estimation techniques used in measuring ECL is further detailed in note 2.

3 Accounting estimates and judgements (continued)

A number of significant judgements are required in measurement of Expected Credit Loss, such as:

determining criteria for significant increase in credit risk;
choosing appropriate models and assumptions for the measurement of ECL; and
establishing the number and relative weightings of forward-looking scenarios and associated ECL.

Detailed information about the judgements and estimates made by the Bank in the above areas is set out in note 2.

3.2.1 Measurement of the impairment losses (applicable until 31 December 2017)

The Bank reviewed its loan portfolio to assess impairment on an ongoing basis as relevant generic data was observed concerning risks associated with groups of loans with similar risk characteristics. In determining whether an impairment loss should be recorded in the income statement, the Bank made judgements as to whether there was any observable data indicating an impairment trigger followed by a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease could be identified with that portfolio. This evidence includes observable data indicating that there had been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlated with defaults on assets in the group. Management used estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows were reviewed regularly to reduce any differences between loss estimates and actual loss experience.

3.3 Assessment of estimates and judgements

In the opinion of the Directors, the accounting estimates and judgements made in the course of preparing these consolidated financial statements, which have been highlighted above, are not difficult, subjective or complex to a degree which would warrant their description as critical in terms of the requirements of IAS 1.

However, the Directors would like to draw attention to these accounting judgements, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. In this respect these primarily comprise assumptions and estimates relating to the calculation of impairment allowances in respect of loans and advances to customers (see notes 2.3, 8 and 31).

For the Year Ended 31 December 2018

4 Segmental information

The Group has two reporting segments, as described below, which are the Group's strategic business units and cashgenerating units. The strategic business units offer different services and are managed separately because they require different technology and marketing strategies. For each of the strategic business units, the Board of Directors reviews internal management reports. The following summary describes the operations in each of the Group's reportable segments:

banking services comprise the Group's banking services and other activities carried out as a licensed credit institution, an authorised currency dealer and financial intermediary. Stockbroking activities may also be carried out since the Bank is a member of the Malta Stock Exchange; and
postal services comprise the Group's postal services activities, being the sole licensed Universal Service Provider of postal services in Malta.

The Group's internal reporting to the Board of Directors and senior executives is analysed according to the below segments. Information about reportable segments:

	Banking services		Postal services		Total
	2018	2017	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000	€ 000	€ 000
Interest receivable	23,024	21,281	164	145	23,188	21,426
Interest expense	(5,677)	(5,992)	-	-	(5,677)	(5,992)
Postal sales and other revenue	272	12	38,982	37,359	39,254	37,371
Net fee and commission income	3,549	3,054	1,167	1,079	4,716	4,133
Other	1,285	1,026	19	(81)	1,304	945
Segment operating income	22,453	19,381	40,332	38,502	62,785	57,883
Depreciation and amortisation	(624)	(622)	(964)	(789)	(1,588)	(1,411)
Credit impairment (losses)/reversals	(258)	(2,831)	24	(4)	(234)	(2,835)
Employee compensation and benefits	(6,108)	(6,115)	(14,657)	(13,830)	(20,765)	(19,945)
Other costs	(4,438)	(3,893)	(22,099)	(20,825)	(26,537)	(24,718)
Operating profit	11,025	5,920	2,636	3,054	13,661	8,974
Share of profit/(loss) of investment accounted for using the equity
method, net of tax	109	(106)	-	-	109	(106)
Profit before taxation	11,134	5,814	2,636	3,054	13,770	8,868
Income tax expense	(3,923)	(2,124)	(908)	(1,041)	(4,831)	(3,165)
Profit for the year	7,211	3,690	1,728	2,013	8,939	5,703
Segment total assets	902,139	841,234	47,390	41,512	950,069	882,746
Capital expenditure during the year	1,575	1,398	1,309	1,534	2,884	2,932
Segment total liabilities	812,720	762,000	21,514	17,872	834,234	779,872

4 Segmental information (continued)

There are no material inter-segment transactions.

The Group mainly provides banking and postal services within the local market and economic sectors. From a customers' perspective, MaltaPost p.l.c. generated 36.9% (2017: 38.9%) of its revenue for 2018 internationally.

The Group's reliance on any single customer is not considered significant for disclosure purposes.

5 Balances with Central Bank of Malta, treasury bills and cash

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Balances with Central Bank of Malta	30,155	130,303	30,155	130,303
Malta Government treasury bills	93,634	80,090	93,634	80,090
Cash in hand	4,937	4,740	4,354	4,107
	128,726	215,133	128,143	214,500

The balances with the Central Bank of Malta include a reserve deposit amounting to €5,892,000 (2017: €5,363,000) held in terms of Regulation (EC) No. 1745/2003 of the European Central Bank. The average reserve deposit balance held for the relevant maintenance period amounted to €5,892,000 (2017: €5,562,000).

At 31 December 2018, the Bank had pledged a deposit with the Central Bank of Malta amounting to €2,809,000 (2017: €2,809,000) in favour of the Depositor Compensation Scheme to comply with local regulatory requirements.

6 Investments

Financial investments measured at FVOCI (2017: available-for-sale) include the following:

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000

Debt and other fixed income instruments
(available-for-sale as at 31 December 2017)	87,419	66,512	83,594	62,899
Equity instruments
(available-for-sale as at 31 December 2017)	12,651	9,383	12,651	9,383
	100,070	75,895	96,245	72,282

For the Year Ended 31 December 2018

6 Investments (continued)

Debt and other fixed income instruments measured at FVOCI (2017: available-for-sale) which are listed on the Malta Stock Exchange comprise:

		Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Issued by public bodies:
- local government	76,037	55,735	73,857	53,496
Issued by public issuers:
- local banks	6,162	5,926	5,594	5,618
- local corporates	5,220	4,851	4,143	3,785
	87,419	66,512	83,594	62,899

At 31 December 2018, the impairment allowance measured in accordance with IFRS 9 expected loss model was €163,000.

At 31 December 2018, the Bank held Malta Government Stocks investments measured at FVOCI (2017: availablefor-sale) pledged with the Central Bank of Malta amounting to €8,855,000 (2017: €8,852,000) in terms of Directive No.8 (Chapter 204 of the Central Bank of Malta Act) as security for a facility that was not utilised during the reporting period.

Equity instruments measured at FVOCI (2017: available-for-sale) include equities listed on the Malta Stock Exchange, except for investments with a carrying amount of €440,600 (2017: €560,500) which are measured at cost in view of the absence of a reliable fair valuation of these investments.

The movement in financial investments measured at FVOCI (2017: available-for-sale) is summarised as follows:

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
At 1 January	75,895	80,515	72,282	76,358
Exchange differences	18	(52)	18	(52)
Amortisation	(472)	(516)	(469)	(513)
Acquisitions	27,849	905	27,350	879
Redemptions/disposals	(4,445)	(3,366)	(4,196)	(2,930)
Fair value movement	1,225	(1,591)	1,260	(1,460)
At 31 December	100,070	75,895	96,245	72,282

For the Year Ended 31 December 2018

6 Investments (continued)

Equity instruments referred to in the table above include the investment as a result of the acquisition of Visa Europe Limited by Visa Inc., emanating from the Bank receiving preferred stock of Visa Inc. in exchange for its membership in Visa Europe Limited. These investments have been designated at FVOCI upon adoption of IFRS 9 as they are held for purposes other than to generate investment returns. The carrying amount of this investment as of 31 December 2018 is €1,479,000 (2017: €1,479,000).

The preference shares are convertible into ordinary shares of Visa Inc.; they have no maturity and represent a residual interest in the issuer's net assets. The holder of the preference shares is exposed to litigation risk borne by their issuer, and hence the value of these shares depends on the level and outcome of any future litigation, which is for obvious reasons impossible to accurately forecast.

The purpose of the preferred stock is to provide Visa Inc. with protection against all litigation risk associated with interchange fees linked to the activity of Visa Europe Limited.

The level of exposure of Visa Inc. and Visa Europe Limited is uncertain due to legal proceedings remaining in an embryonic stage. The conversion rate will be periodically adjusted to reflect any change in the litigation risk, in order to reimburse Visa Inc. for the costs of any successful claims; so that over time, the litigation risk and accordingly the outstanding preferred stock should decrease.

Due to the lack of any more recent developments, it is not possible to create an actuarial model to assess the future litigation costs, and the estimation arrived at for the purposes of these financial statements therefore remains the best available forecast.

The disclosure requirements in paragraph 93 of IFRS 13 in respect of Level 3 fair value measurements were not deemed necessary by the Directors taking cognisance of the insignificance of the carrying amount of the interest as at 31 December 2017 and 2018.

7 Loans and advances to banks

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Repayable on call and at short notice	129,581	82,048	117,819	77,258
Term loans and advances	11,000	15,000	8,000	13,000
	140,581	97,048	125,819	90,258

For the Year Ended 31 December 2018

8 Loans and advances to customers

	Group		Bank
	2018 € 000	2017 € 000	2018 € 000	2017 € 000
Repayable on call and at short notice	99,577	76,986	99,577	76,986
Term loans and advances	434,960	374,473	434,960	374,473
Gross loans and advances to customers	534,537	451,459	534,537	451,459
Impairment allowances	(23,413)	(22,848)	(23,413)	(22,848)
Net loans and advances to customers	511,124	428,611	511,124	428,611
Impairment allowances
Stage 1 (starting from 1 January 2018)	2,827	-	2,827	-
Stage 2 (starting from 1 January 2018)	1,739	-	1,739	-
Stage 3 (starting from 1 January 2018)	18,847	-	18,847	-
Specific (applicable until 31 December 2017)	-	18,034	-	18,034
Collective (applicable until 31 December 2017)	-	4,814	-	4,814
	23,413	22,848	23,413	22,848

Assets acquired in settlement of debt amounting to €778,000 (2017: €822,000) are presented as assets classified as held for sale.

For the Year Ended 31 December 2018

9 Investment in subsidiaries

Name of company	Country of incorporation	Nature of business E	quity interest		Carrying amount
			2018	2017	2018	2017
			%	%	€ 000	€ 000
Redbox Limited	Malta	Holding Company	100	100	15,732	15,732

At 31 December 2018, Redbox Limited held 71.5% (2017: 71.5%) of the equity share capital and voting rights of MaltaPost p.l.c., a listed company incorporated and operating in Malta, comprising the Group's postal services reportable segment (see note 4). The remaining 28.5% (2017: 28.5%) is held by the general public.

The profit or loss allocated to non-controlling interests of MaltaPost p.l.c. during the financial year under review, accumulated non-controlling interests of the subsidiary at the end of the reporting period and dividends paid to noncontrolling interests are presented within the Group's statement of changes in equity. Financial information about the assets, liabilities, revenues, profit or loss, total comprehensive income and cash flows of the subsidiary are disclosed within the annual report and financial statements of MaltaPost p.l.c., which are publicly available in view of the company's listed status. Financial information about the subsidiary is also disclosed within note 4 to these financial statements dealing with segmental information.

The end of the reporting period of the audited financial statements of MaltaPost p.l.c. that have been utilised in the preparation of these consolidated financial statements is 30 September 2018, since the financial statements prepared as of this date constitute the most recent audited financial statements of MaltaPost p.l.c.

Tanseana Limited is a fully owned subsidiary of MaltaPost p.l.c.

10 Investment in associate

Name of company	Country of incorporation	Nature of business E	quity interest		Carrying amount
			2018	2017	2018	2017
			%	%	€ 000	€ 000
Gozo Hotels Company Limited	Malta	Accommodation	33.3	33.3	1,684	1,575

With effect from 31 December 2015 the exposure with Gozo Hotels Company Limited with a carrying amount of €1,645,000 has been recognised as an investment in associate on the basis that the Bank controls 33.3% of the shares (and holds an equivalent amount of voting rights). The Group is deemed to have significant influence over the investee in accordance with the requirements of IAS 28 'Investments in Associates'.

Gozo Hotels Company Limited is an unlisted company incorporated and operating in Malta. Its principal activity is the operation of the Hotel Calypso in Marsalforn, Gozo, and its registered address is 'Calypso', Ghar Qawqla Street, Zebbug, Gozo.

10 Investment in associate (continued)

The investment in associate is measured using the equity method of accounting. The increase in the carrying amount of the investment in Gozo Hotels Company Limited is attributable to the share of the investee's profit for the year, on the basis of the most recent financial information available to the Board.

The Group's associate is not deemed material to Lombard Bank Malta p.l.c. as a reporting entity in terms of the requirements of IFRS 12 'Disclosure of interest in other entities' and the disclosure of summarised financial information of the associate and other information is accordingly not deemed necessary.

11 Intangible assets

	Group			Bank
	Goodwill € 000	Computer software € 000	Total € 000	Computer software € 000
At 1 January 2017
Cost	857	4,806	5,663	2,764
Accumulated amortisation	-	(3,854)	(3,854)	(2,210)
Net book amount	857	952	1,809	554
Year ended 31 December 2017
At 1 January 2017	857	952	1,809	554
Acquisitions	-	254	254	184
Amortisation for the year	-	(415)	(415)	(258)
At 31 December 2017	857	791	1,648	480
At 31 December 2017
Cost	857	5,063	5,920	2,948
Accumulated amortisation	-	(4,272)	(4,272)	(2,468)
Net book amount	857	791	1,648	480
Year ended 31 December 2018
At 1 January 2018	857	791	1,648	480
Acquisitions	-	506	506	167
Amortisation for the year	-	(453)	(453)	(272)
At 31 December 2018	857	844	1,701	375
At 31 December 2018
Cost	857	5,569	6,426	3,115
Accumulated amortisation	-	(4,725)	(4,725)	(2,740)
Net book amount	857	844	1,701	375

For the Year Ended 31 December 2018

11 Intangible assets (continued)

11.1 Impairment test for the cash-generating unit to which goodwill has been allocated

The recognised goodwill represents payments made by the Group in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recognised. At 31 December 2018 and 2017 the recognised goodwill amounted to €857,000 and related to the acquisition of MaltaPost p.l.c.

In applying the requirements of IAS 36, 'Impairment of assets', in relation to goodwill arising in business combinations, the Directors carried out an impairment test at the end of the reporting period to obtain comfort that the recoverable amount of the cash-generating unit to which goodwill has been allocated is at least equal to its carrying amount.

The recoverable amount of the cash-generating unit is based on fair value less costs to sell.

This calculation takes into account the market capitalisation of MaltaPost p.l.c. based on the quoted price of its equity on the Malta Stock Exchange at a price per share of €1.58 as at 31 December 2018 (2017: €2.12). On this basis, the recoverable amount of the cash-generating unit is higher than its carrying amount.

For the Year Ended 31 December 2018

12 Property, plant and equipment

Group	Land and buildings € 000	Computer equipment € 000	Other € 000	Total € 000
At 1 January 2017
Cost or valuation	31,566	3,996	7,506	43,068
Accumulated depreciation	(3,705)	(3,384)	(5,781)	(12,870)
Net book amount	27,861	612	1,725	30,198
Year ended 31 December 2017
At 1 January 2017	27,861	612	1,725	30,198
Acquisitions	1,665	319	694	2,678
Disposals	-	(35)	(142)	(177)
Depreciation charge for the year	(353)	(231)	(412)	(996)
Depreciation released on disposals	-	23	27	50
Other movements	(1,515)	-	1,515	-
At 31 December 2017	27,658	688	3,407	31,753
At 31 December 2017
Cost or valuation	29,153	4,280	12,133	45,566
Accumulated depreciation	(1,495)	(3,592)	(8,726)	(13,813)
Net book amount	27,658	688	3,407	31,753
Year ended 31 December 2018
At 1 January 2018	27,658	688	3,407	31,753
Acquisitions	1,530	237	612	2,379
Disposals	-	(43)	(48)	(91)
Revaluation	5,119	-	-	5,119
Depreciation charge for the year	(262)	(293)	(580)	(1,135)
Depreciation released on disposals	445	37	736	1,218
Other movements	(32)	5	(662)	(689)
At 31 December 2018	34,458	631	3,465	38,554
At 31 December 2018
Cost or valuation	35,845	4,468	11,987	52,300
Accumulated depreciation	(1,387)	(3,837)	(8,522)	(13,746)
Net book amount	34,458	631	3,465	38,554

For the Year Ended 31 December 2018

12 Property, plant and equipment (continued)

Bank	Land and buildings € 000	Computer equipment € 000	Other € 000	Total € 000
At 1 January 2017
Cost or valuation	16,945	1,956	2,598	21,499
Accumulated depreciation	(803)	(1,704)	(2,166)	(4,673)
Net book amount	16,142	252	432	16,826
Year ended 31 December 2017
At 1 January 2017	16,142	252	432	16,826
Acquisitions	1,044	118	53	1,215
Disposals	-	(24)	(26)	(50)
Depreciation charge for the year	(119)	(110)	(136)	(365)
Depreciation released on disposals	-	24	26	50
At 31 December 2017	17,067	260	349	17,676
At 31 December 2017
Cost or valuation	17,990	2,050	2,625	22,665
Accumulated depreciation	(923)	(1,790)	(2,276)	(4,989)
Net book amount	17,067	260	349	17,676
Year ended 31 December 2018
At 1 January 2018	17,067	260	349	17,676
Acquisitions	1,219	126	63	1,408
Revaluations	2,498	-	-	2,498
Disposals	-	(37)	(48)	(85)
Depreciation charge for the year	(123)	(122)	(108)	(353)
Release on disposal	220	37	48	305
At 31 December 2018	20,881	264	304	21,449
At 31 December 2018
Cost or valuation	21,706	2,142	2,640	26,488
Accumulated depreciation	(825)	(1,878)	(2,336)	(5,039)
Net book amount	20,881	264	304	21,449

For the Year Ended 31 December 2018

12 Property, plant and equipment (continued)

12.1 Fair valuation of land and buildings

The Bank's land and buildings were revalued on 1 August 2018 by management, while the subsidiary's land and buildings were revalued on 30 September 2018, by an independent firm of property valuers having appropriate recognised professional qualifications and experience in the location and category of the property being valued. The Directors have reviewed the carrying amounts of the Group's properties, on the basis of the valuations carried out by the independent property valuers.

Valuations were made on the basis of open market value taking cognisance of the specific location of the properties, the size of the sites, the availability of similar properties in the area, and whenever possible, having regard to recent market transactions for similar properties in the same location. At 31 December 2018, the carrying values of the properties, classified within property, plant and equipment, have been adjusted to the valuations and the net resultant adjustment comprised an increase of €5,564,000 in the carrying values for the Group and an increase of €2,717,000 in the carrying values for the Bank, to reflect the property's estimated open market value on an individual asset level. This increase was recognised in other comprehensive income in the property revaluation reserve.

The revaluation surplus net of applicable deferred income taxes is accordingly shown in 'other reserves' in shareholders' equity (note 18).

The Group is required to analyse non-financial assets carried at fair value by level of the fair value hierarchy within which the recurring fair value measurements are categorised in their entirety (Level 1, 2 or 3). The different levels of the fair value hierarchy have been defined as fair value measurements using:

Quoted prices (unadjusted) in active markets for identical assets (Level 1);
Inputs other than quoted prices included within Level 1 that are observable for the asset, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2);
Inputs for the asset that are not based on observable market data (i.e. unobservable inputs) (Level 3).

The Bank's land and buildings comprise various offices and operational premises, including the Bank's head office. The subsidiary's land and buildings, within property, plant and equipment, comprises the head office, mail delivery hubs and retail outlets. All the Group's recurring property fair value measurements use significant unobservable inputs and are accordingly categorised within Level 3 of the fair valuation hierarchy.

The Group's policy is to recognise transfers into and out of fair value hierarchy levels as of the beginning of the reporting period. There were no transfers between different levels of the fair value hierarchy during the years ended 31 December 2018 and 2017.

A reconciliation from the opening balance to the closing balance of land and buildings for recurring fair value measurements categorised within Level 3 of the value hierarchy, is reflected in the table above. The principal movements reflect changes in fair value, additions and depreciation charge for the years ended 31 December 2018 and 2017.

For all Group properties, their current use equates to the highest and best use.

For the Year Ended 31 December 2018

12 Property, plant and equipment (continued)

12.2 Valuation processes

The valuations of the properties are performed on a periodic basis taking into consideration the valuation reports prepared by independent and qualified valuers. These reports are based on both:

information provided by the Bank such as current terms and conditions of lease agreements. This information is derived from the Bank's systems and is subject to the Bank's overall control environment; and
assumptions and valuation models used by the valuers the assumptions are typically market related, such as rental yields, discount rates and sales prices. These are based on professional judgement and market observation.

The information provided to the valuers – and the assumptions and the valuation models used by the valuers – are reviewed by management.

When management considers that the valuation report is appropriate, the valuation report is recommended to the Audit & Risk Committee. The Audit & Risk Committee considers the valuation report as part of its overall responsibilities.

12.3 Valuation techniques

The Level 3 fair valuation of the Bank's property was determined using discounted cash flow (DCF) projections based on significant unobservable inputs. These inputs include estimated rental values per square metre, estimated growth rate in rental values and the discount rate applied.

The external valuations of the subsidiary's Level 3 property have been performed using an adjusted sales comparison approach for the land component and the replacement cost approach for the buildings component.

In view of a limited number of similar sales in the local market, the valuations have predominately been performed using unobservable inputs. The significant input to the adjusted sales comparison approach is generally a sales price per square metre related to transactions in comparable properties located in proximity to the subsidiary's property, with significant adjustments for differences in size, age, exact location and condition of the property. The significant input to the replacement cost approach is the estimated development costs per square metre.

12.4 Information about fair value measurements using significant unobservable inputs (Level 3)

			Range of significant unobservable inputs
Description by class based on highest and best use	Fair value €	Valuation technique	Rental value €/sqm	Growth rate %	Discount rate %
Current use as Bank's offices and operational premises	19.1 million	Discounted cash flows	130 - 400	2	5

For the Year Ended 31 December 2018

12 Property, plant and equipment (continued)

Description by class based on highest and best use	Fair value €	Valuation technique	Significant unobservable input	Range of unobservable inputs
				(weighted average) €
Current use as subsidiary's office premises, retail outlets and mail delivery hubs	12.8 million	Adjusted sales comparison approach	Sales price per square metre	800 – 19,000 (885)
		Replacement cost approach	Development costs per square metre	250 – 600 (300)

The higher the rental value or the growth rate, the higher the resultant fair value. Conversely, the lower the discount rate, the higher the resultant fair value.

The higher the sales price per square metre or the development costs per square metre, the higher the resultant fair valuation.

12.5 Historical cost of land and buildings

If the land and buildings were stated on the historical cost basis, the carrying amounts would be as follows:

		Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Cost	23,622	25,247	13,473	15,286
Accumulated depreciation	(2,116)	(2,621)	(1,755)	(1,680)
Net book amount at 31 December	21,506	22,626	11,718	13,606

For the Year Ended 31 December 2018

13 Deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

Group

	Assets	Liabilities	Net	Assets	Liabilities	Net
	2018	2018	2018	2017	2017	2017
	€ 000	€ 000	€ 000	€ 000	€ 000	€ 000
Differences between depreciation and
capital allowances	223	(85)	138	207	(76)	131
Provisions for liabilities and
charges	719	-	719	740	-	740
Impairment allowances	8,279	-	8,279	8,033	-	8,033
Revaluation of property	-	(2,661)	(2,661)	-	(1,798)	(1,798)
Fair value movements on
investments	-	(2,518)	(2,518)	-	(2,040)	(2,040)
	9,221	(5,264)	3,957	8,980	(3,914)	5,066

Bank

	Assets 2018 € 000	Liabilities 2018 € 000	Net 2018 € 000	Assets 2017 € 000	Liabilities 2017 € 000	Net 2017 € 000

Differences between depreciation and	-	(85)	(85)
capital allowances Provisions for liabilities and				-	(75)	(75)
charges	387	-	387	372	-	372
Impairment allowances	8,252	-	8,252	7,997	-	7,997
Revaluation of property	-	(1,633)	(1,633)	-	(1,021)	(1,021)
Fair value movements on
investments	-	(2,518)	(2,518)	-	(2,040)	(2,040)
	8,639	(4,236)	4,403	8,369	(3,136)	5,233

For the Year Ended 31 December 2018

13 Deferred tax assets and liabilities (continued)

Movement in temporary differences relate to:

Group

	At 1 January 2017 € 000	Recognised in profit or loss € 000	Recognised in other comprehensive income € 000	At 31 December 2017 € 000	Impact of adopting IFRS 9 recognised in retained earnings € 000	Recognised in profit or loss € 000	Recognised in other comprehensive income € 000	At 31 December 2018 € 000
Differences between
depreciation and capital allowances	210	(79)	-	131	-	7	-	138
Provisions for liabilities
and charges	412	(17)	304	699	-	16	4	719
Impairment
allowances	8,280	(247)	-	8,033	(28)	274	-	8,279
Revaluation of property	(1,798)	-	-	(1,798)	-	-	(863)	(2,661)
Fair value movements
on investments	(2,580)	-	540	(2,040)	(20)	-	(458)	(2,518)
Other temporary
differences	-	41	-	41	-	(41)	-	-
	4,524	(302)	844	5,066	(48)	256	(1,317)	3,957

Bank	At 1 January 2017 € 000	Recognised in profit or loss € 000	Recognised in other comprehensive income € 000	At 31 December 2017 € 000	Impact of adopting IFRS 9 recognised in retained earnings € 000	Recognised in profit or loss € 000	Recognised in other comprehensive income € 000	At 31 December 2018 € 000
Differences between depreciation and capital allowances	(71)	(4)	-	(75)	-	(10)	-	(85)
Provisions for liabilities and charges	390	(18)	-	372	-	15	-	387
Impairment allowances	8,245	(248)	-	7,997	(28)	283	-	8,252
Revaluation of property	(1,021)	-	-	(1,021)	-	-	(612)	(1,633)
Fair value movements on investments	(2,580)	-	540	(2,040)	(20)	-	(458)	(2,518)
	4,963	(270)	540	5,233	(48)	288	(1,070)	4,403

The recognised deferred tax assets and liabilities are expected to be recovered or settled principally after more than twelve months from the end of the reporting period. The deferred tax liabilities reflected in other comprehensive income relate principally to the revaluation of property, plant and equipment and the fair valuation of investments measured at FVOCI (2017: available-for-sale).

For the Year Ended 31 December 2018

14 Inventories

	Group		Bank
	2018 € 000	2017 € 000	2018 € 000	2017 € 000
Postal supplies and materials	234	254	-	-
Merchandise	372	503	-	-
Stocks for resale	734	383	734	383
Other stock items	20	24	20	24
	1,360	1,164	754	407

15 Trade and other receivables

	Group		Bank
	2018 € 000	2017 € 000	2018 € 000	2017 € 000
Trade receivables - net of expected impairment allowances	3,504	7,496	-	-
Others	1,506	1,330	1,812	1,526
	5,010	8,826	1,812	1,526

The expected impairment allowances in respect of trade receivables are analysed as follows:

	Group		Bank
	2018 € 000	2017 € 000	2018 € 000	2017 € 000
Loss allowance as at 1 January	103	99	-	-
Net profit and loss charge during the year	(24)	4	-	-
Loss allowance as at 31 December	79	103	-	-

16 Accrued income and other assets

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Accrued income	2,085	1,911	2,040	1,866
Prepayments	4,755	3,945	445	229
Other assets	2,133	2,123	2,133	2,123
	8,973	7,979	4,618	4,218

For the Year Ended 31 December 2018

17 Share capital

Bank	2018		2017
	No. of shares 000s	€ 000	No. of shares 000s	€ 000
Authorised
Ordinary shares of 25 cent each	80,000	20,000	80,000	20,000

Issued
Ordinary shares of 25 cent each	44,178	11,044	44,178	11,044

18 Reserves

These reserves are non-distributable.

18.1 Share premium

The share premium arises on premium attributable to the scrip issue of 406,341 ordinary shares, amounting to €1.93 per share, approved by the shareholders during the Annual General Meeting held on 6 April 2016. Utilisation of the share premium account is governed by the requirements of Article 114 within the Companies' Act, Chapter 386 of the Laws of Malta.

18.2 Revaluation and other reserves

The Group and the Bank had the following reserves as at end of the reporting period:

	Group		Bank
	2018 € 000	2017 € 000	2018 € 000	2017 € 000
Property revaluation reserve	6,384	2,420	4,445	2,338
Investment revaluation reserve	4,975	4,113	4,640	3,753
Reserve for General Banking Risks	2,903	2,903	2,903	2,903
Other reserve	3,094	3,226	3,502	3,630
	17,356	12,662	15,490	12,624

The property revaluation reserve relates to the fair valuation of the land and buildings component of property, plant and equipment, and the balance represents the cumulative net increase in fair value of such property, net of related deferred tax.

For the Year Ended 31 December 2018

18 Reserves (continued)

The investment revaluation reserve represents the cumulative net change in fair values of financial assets measured at FVOCI (2017: available-for-sale) held by the Group and by the Bank, net of related deferred tax impacts.

The other reserve represents amounts set aside by the Bank from its retained earnings in relation to the Depositor Compensation Scheme reflecting the carrying amount of assets pledged in favour of the Scheme to comply with local regulatory requirements.

19 Amounts owed to banks

	Group		Bank
	2018 € 000	2017 € 000	2018 € 000	2017 € 000
Term deposits with agreed maturity dates or periods of notice	23	222	23	222
Repayable on demand	831	5,140	831	5,140
	854	5,362	854	5,362

20 Amounts owed to customers

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Term deposits with agreed maturity dates	264,553	269,135	265,268	269,149
Repayable on demand	523,491	464,016	524,805	467,546
	788,044	733,151	790,073	736,695

For the Year Ended 31 December 2018

21 Provisions for liabilities and other charges

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Obligation to Government	1,963	2,047	-	-
Legal	1,170	1,130	1,105	1,064
Other expected credit losses on off-balance sheet items	2	-	2	-
	3,135	3,177	1,107	1,064

These provisions are predominantly non-current in nature.

Group	2018			2017
	Obligation to Government € 000	€ 000	Expected Credit Loss Legal allowance € 000	Total € 000	Obligation to Government € 000	Legal € 000	Total € 000
At 1 January	2,047	1,129	-	3,176	1,646	1,177	2,823
Exchange differences recognised in profit or loss	-	22	-	22	-	(63)	(63)
Charge - recognised in other comprehensive income	11	-	-	11	528	-	528
Charge - recognised
in profit or loss	41	19	-	60	-	23	23
Crystallised obligations	(136)	-	-	(136)	(127)	(7)	(134)
ECL provision on off-
balance sheet items	-	-	2	2	-	-	-
At 31 December	1,963	1,170	2	3,135	2,047	1,130	3,177

The obligation to Government arises in terms of Article 8A of the Pensions Ordinance (Chapter 93 of the Laws of Malta), covering former Government employees who opted to become full-time employees of MaltaPost p.l.c., and who continued to be entitled to pension benefits which go beyond the National Insurance Scheme. The pension benefits scheme is a final salary defined benefit plan and is unfunded.

For the Year Ended 31 December 2018

21 Provisions for liabilities and other charges (continued)

Obligation to Government recognised in the statement of financial position is arrived at as follows:

	2018	2017
	€ 000	€ 000
Present value of unfunded obligations	3,783	3,731
Crystallised obligations	(1,121)	(985)
Fair value of obligations to be reimbursed by Government	(699)	(699)
	1,963	2,047
The movement for the year is made up of:
	2018 € 000	2017 € 000

Charge to profit or loss	(42)	-
Charge to other comprehensive income Crystallised obligations	(11) 136	(528) 127

The amount recognised in other comprehensive income is as follows:

	2018	2017
	€ 000	€ 000
Net actuarial losses
- attributable to financial assumptions	(11)	(591)
- attributable to demographic assumptions	-	63
	(11)	(528)

In computing the provision, the Group used a weighted average discount rate of 1.63% (2017: 1.75%). Assumptions regarding future mortality experience are based on published mortality tables in Malta, which translate into an average life expectancy of 83 (2017: 83) depending on age and gender of the beneficiaries.

These factors are deemed to be the key assumptions used in the computation of the liability. The sensitivity of the obligation to changes in the key assumptions is considered immaterial for disclosure purposes.

For the Year Ended 31 December 2018

21 Provisions for liabilities and other charges (continued)

Bank

	2018 Expected Credit		2017
	Legal € 000	Loss allowance € 000	Legal € 000
At 1 January	1,064	-	1,114
Exchange differences recognised in profit or loss	23	-	(63)
Charge - recognised in profit or loss	20	-	22
Crystallised obligations	-	-	(9)
Expected Credit Losses on off-balance sheet items	-	2	-
At 31 December	1,107	2	1,064

In addition, the Bank is also a defendant in legal actions by other customers as a result of which the Directors are of the opinion that no liability will be incurred.

22 Other liabilities

		Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Trade payables	3,672	6,815	-	-
Bills payable	2,745	3,209	2,745	3,209
Other payables	20,721	13,193	11,325	11,867
	27,138	23,217	14,070	15,076

23 Accruals and deferred income

		Group		Bank
	2018 € 000	2017 € 000	2018 € 000	2017 € 000
Accrued interest	3,497	3,330	3,498	3,330
Other	6,302	7,492	1,237	1,090
	9,799	10,822	4,735	4,420

For the Year Ended 31 December 2018

24 Commitments and contingent liabilities

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Contingent liabilities
Guarantee obligations incurred on behalf of third parties	11,197	5,635	11,206	5,650
Documentary credits	2,951	3,443	2,961	3,443
	14,148	9,078	14,167	9,093

Commitments
Credit facilities and other commitments to lend	202,384	247,737	202,384	247,737

Credit facilities and commitments to lend funds to customers are granted at prevailing market interest rates at drawdown date.

At 31 December 2018, the Group was party to non-cancellable operating lease agreements of properties, in respect of which the future minimum lease payments extended over a number of years. The leases run for an initial period of up to one hundred and fifty years. Specific lease arrangements include an option to renew the lease after the original term but the amounts presented in the table below do not reflect lease charges applicable to the renewal period.

Total future minimum lease net payments under non-cancellable property operating leases:

	2018 € 000	2017 € 000
Current
Within 1 year	86	125
Non-current
Between 1 and 2 years	77	215
Between 2 and 5 years	132	45
	295	385

The Group is also committed to pay a licence fee of 0.75% (2017: 0.75%) of its total gross revenue from postal services within the scope of the universal services.

For the Year Ended 31 December 2018

25 Net interest income

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Interest income
On loans and advances to banks	978	399	938	371
On loans and advances to customers	20,574	19,544	20,574	19,544
On balances with Central Bank of Malta	250	(145)	250	(145)
On Malta Government treasury bills	(332)	(308)	(332)	(308)
	21,470	19,490	21,430	19,462

On debt and other fixed income instruments	2,190	2,452	2,063	2,336
Net amortisation of premiums and discounts	(472)	(516)	(469)	(513)
	1,718	1,936	1,594	1,823
Total interest income	23,188	21,426	23,024	21,285

Interest expense
On amounts owed to banks	(1)	(3)	(1)	(3)
On amounts owed to customers	(5,676)	(5,989)	(5,676)	(5,994)
Total interest expense	(5,677)	(5,992)	(5,677)	(5,997)

Net interest income	17,511	15,434	17,347	15,288

26 Net fee and commission income

		Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Fee and commission income
Retail banking customer fees	2,829	2,542	2,829	2,542
Brokerage	56	14	56	14
Other	2,166	1,875	1,004	801
Total fee and commission income	5,051	4,431	3,889	3,357
Fee and commission expense
Interbank transaction fees	(328)	(294)	(328)	(294)
Other	(7)	(4)	(8)	(5)
Total fee and commission expense	(335)	(298)	(336)	(299)
Net fee and commission income	4,716	4,133	3,553	3,058

For the Year Ended 31 December 2018

27 Postal sales and other revenues

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Stamps, parcel post and postal stationery
including income from foreign inbound mail	35,799	33,942	-	-
Collectibles and philatelic sales	792	583	425	172
Other	2,663	2,846	-	-
	39,254	37,371	425	172

28 Dividend income

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Subsidiary company	-	-	1,601	1,554
Equity shares measured at FVOCI (2017: available-for-sale)	369	326	369	326
	369	326	1,970	1,880

29 Net trading income

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Gains on foreign exchange activities	880	619	862	699

30 Employee compensation and benefits

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Staff costs
Wages, salaries and allowances	19,408	18,716	6,042	5,960
Social security costs	1,357	1,229	326	309
	20,765	19,945	6,368	6,269

		Group		Bank
	2018	2017	2018	2017
Average number of employees Managerial Others	100 784	99 710	57 110	56 110
					884	809	167	166

For the Year Ended 31 December 2018

31 Credit impairment losses

Credit impairment losses during 2018 were as follows:

	Group
	Write downs € 000	Reversals of write-downs € 000	Total € 000	Write downs € 000	Reversals of write-downs € 000	Total € 000
Trade receivables
Stage 3	(9)	33	24	-	-	-
Total trade receivables	(9)	33	24	-	-	-
Loans and advances to customers
Stage 1	(2,314)	-	(2,314)	(2,314)	-	(2,314)
Stage 2	-	8,516	8,516	-	8,516	8,516
Stage 3	(6,348)	-	(6,348)	(6,348)	-	(6,348)
Bad debts written off	(3)	-	(3)	(3)	-	(3)
Total loans and advances to customers	(8,665)	8,516	(149)	(8,665)	8,516	(149)
Financial investments measured at FVOCI
Stage 1	(107)	-	(107)	(107)	-	(107)
Total financial investments measured at FVOCI	(107)	-	(107)	(107)	-	(107)
Off-balance sheet items
Stage 1	(2)	-	(2)	(2)	-	(2)
Total off-balance sheet items	(2)	-	(2)	(2)	-	(2)
Credit impairment losses	(8,783)	8,549	(234)	(8,774)	8,516	(258)

Credit impairment losses during 2017 were as follows:

	Group				Bank
	Write downs € 000	Reversals of write-downs € 000	Total € 000	Write downs € 000	Reversals of write-downs € 000	Total € 000
Loans and advances to customers
- specific allowances	(9,088)	9,704	616	(9,088)	9,704	616
- collective allowances	(72)	-	(72)	(72)	-	(72)
- bad debts written off	(3,375)	-	(3,375)	(3,375)	-	(3,375)
Trade receivables	(4)	-	(4)	-	-	-
Credit impairment losses	(12,539)	9,704	(2,835)	(12,535)	9,704	(2,831)

For the Year Ended 31 December 2018

32 Profit before taxation

Profit before taxation is stated after charging and crediting the following:

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
After charging Directors' emoluments - fees	69	63	49	49
					- other emoluments	355	335	355	335
					After crediting
Net income from investment services	347	147	347	147

Other operating costs are analysed as follows:

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Foreign outbound mail	15,328	15,265	-	-
Utilities and insurance	1,087	1,164	687	775
IT support and telecommunication costs	409	388	208	188
Repairs and maintenance	1,771	1,517	420	447
Operating lease rental charges	1,424	803	574	475
Other administrative expenses	6,458	5,558	2,745	2,167
Total other operating costs	26,477	24,695	4,634	4,052

From time to time the Board of Directors of the Bank approves the allocation of a financial contribution towards Retirement Gratuities that it may decide to grant and /or a Staff Pension fund that may be formally established in the future. Gratuities that it may make, on an ex gratia basis, to its employees, including its Chief Executive Officer, are made upon retirement. Amounts contributed for this purpose in 2018 amounted to €100,000 (2017: € 100,000). Once contributed, these amounts are held in a separate bank account which is not controlled by the Bank and is therefore not included in the Bank's financial statements. The Board of Directors has resolved that a retirement gratuity be eventually paid on an ex gratia basis, to the Chief Executive Officer on his retirement. Amounts intended as a contribution to an eventual pension fund will be regulated by rules yet to be determined in light of relevant legislation.

Other administrative expenses mainly comprise professional expenses, subcontracted services and other services or expense items which are incurred in the course of the operations of the Group and the Bank.

For the Year Ended 31 December 2018

32 Profit before taxation (continued)

Fees charged by the auditors for services rendered during the financial year related to the following:

	Audit	Other assurance/ advisory services	Tax advisory services
Auditors of the parent	€ 000	€ 000	€ 000
2018	56	50	4
2017	56	40	4
Auditors of subsidiary companies 2018	27	120	1
2017	27	68	1
Income tax expense
Recognised in profit or loss:

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Current taxation
Current tax expense	5,087	2,862	4,736	2,362

Deferred taxation
Deferred tax (income)/expense (note 13)	(256)	303	(288)	270
	4,831	3,165	4,448	2,632

For the Year Ended 31 December 2018

33 Income tax expense (continued)

The tax on the profit before income tax differs from the theoretical amount that would arise using the tax rate applicable as follows:

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Profit before income tax	13,770	8,868	12,629	7,478

Tax on profit at 35%	4,820	3,103	4,420	2,617
Tax effect of:
Non-taxable income	-	(17)	(36)	(53)
Expenses non-deductible for tax purposes	51	40	41	38
Income taxed at different tax rates	(43)	(22)	(11)	-
Depreciation expense not deductible
by way of capital allowances	73	58	49	48
Other differences	(70)	3	(15)	(18)
	4,831	3,165	4,448	2,632

For the Year Ended 31 December 2018

33 Income tax expense (continued)

The tax impacts, which are entirely attributable to deferred taxation, relating to components of other comprehensive income and accordingly presented directly in equity are as follows:

Group		2018			2017
	Before tax	Tax (charge) /credit	Net of tax	Before tax	Tax credit	Net of tax
	€ 000	€ 000	€ 000	€ 000	€ 000	€ 000
Fair valuation of financial assets measured at FVOCI (2017: available-for-sale):
- Net changes in fair value - Net changes on financial assets	1,332	(479)	853	(1,591)	511	(1,080)
reclassified to profit or loss - Remeasurements of defined benefit	(59)	21	(38)	(81)	29	(52)
obligations	(11)	4	(7)	(528)	304	(224)
- Fair valuation of land and buildings	5,564	(863)	4,701	-	-	-
	6,826	(1,317)	5,509	(2,200)	844	(1,356)
Bank
Fair valuation of financial assets measured at FVOCI (2017: available-for-sale):
- Net changes in fair value - Reclassification adjustments	1,367	(479)	888	(1,460)	511	(949)
to profit or loss	(59)	21	(38)	(81)	29	(52)
- Fair valuation of land and buildings	2,717	(612)	2,105	-	-	-
	4,025	(1,070)	2,955	(1,541)	540	(1,001)

34 Earnings per share

Earnings per share is based on the net profit for the year divided by the weighted average number of ordinary shares in issue during the year.

		Group
	2018	2017
Net profit attributable to equity
holders of the Bank (€ 000)	8,447	5,129
Number of ordinary shares in issue	44,177,914	44,177,914
Earnings per share (€ cent)	19c1	11c6

The Bank has no instruments or arrangements which give rise to dilutive potential ordinary shares, and accordingly diluted earnings per share is equivalent to basic earnings per share.

For the Year Ended 31 December 2018

35 Dividends

	2018	2017
Dividends declared and paid by the Bank (€ 000)	1,149	1,149
€ cent per share – gross	4c0	4c0

Subsequent to the end of the reporting period, a gross dividend of 5 cent per nominal 25 cent share (net dividend of 3.25 cent for a total amount of €1,436,000) for the twelve months ended 31 December 2018 is being proposed for approval by the shareholders to be distributed. A resolution to this effect will be proposed to the Annual General Meeting.

36 Cash and cash equivalents

Cash and cash equivalents comprise balances with less than three months' maturity from the date of acquisition, including cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.

	Group		Bank
	2018	2017	2018	2017
	€ 000	€ 000	€ 000	€ 000
Malta Government treasury bills (note 5)	93,634	60,056	93,634	60,056
Loans and advances to banks (notes 5 and 7)	114,476	209,180	102,714	204,390
Cash (note 5)	4,937	4,740	4,354	4,107
Amounts owed to banks (note 19)	(854)	(5,340)	(854)	(5,340)
Cash and cash equivalents	212,193	268,636	199,848	263,213

37 Related parties

37.1 Identity of related parties

The Bank has a related party relationship with its subsidiaries, its major shareholder, Cyprus Popular Bank Public Co. Ltd. (up till 10 August 2018) and the National Development and Social Fund (as from 10 August 2018), the Bank's Directors (key management personnel) and other related parties, primarily entities controlled by key management personnel.

The Government of Malta is also considered to be a related party, through its control over the National Development and Social Fund. The Group's exposure with the Government of Malta arises through its investment in Government debt securities and treasury bills which are disclosed in note 2 and other obligations disclosed in note 21.

For the Year Ended 31 December 2018

37 Related parties (continued)

37.2 Transaction arrangements and agreements involving key management personnel

	Loans and advances 2018 € 000	Commitments 2018 € 000	Loans and advances 2017 € 000	Commitments 2017 € 000
At 1 January	1,092	(5,214)	1,393	-
Additions	1,079	(792)	1,049	(5,214)
Repayments	(560)	451	(1,350)	-
At 31 December	1,611	(5,555)	1,092	(5,214)

The above banking facilities are part of long-term commercial relationships and were made in the ordinary course of business on substantially the same terms, including rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features.

37.3 Compensation to key management personnel

Details of Directors' fees and emoluments are stated in note 32.

37.4 Transactions with other related parties

37.4.1 Subsidiaries

Information relating to transactions undertaken by the Bank with its subsidiary companies during the year:

	2018	2017
	€ 000	€ 000
Income statement
Fee and commission income	4	4
Postal sales and other expenses	38	31
Other operating income	321	178
Interest payable	-	5
Administrative expenses	116	127

Statement of financial position
Loans and advances to customers	95	-
Trade and other receivables	306	197
Inventories	-	1
Amounts owed to customers	1,894	3,544
Accruals and deferred income	19	15
Contingent liabilities	9	14

For the Year Ended 31 December 2018

37 Related parties (continued)

During the year, the Bank made payments in settlement of transactions carried out by subsidiaries amounting to €7,000 (2017: €14,800).

During the year, the Bank received gross dividend of €1,602,000 (2017: €1,544,000).

37.4.2 Associates

Information relating to transactions undertaken by the Bank with its associates during the year:

	2018	2017
Income statement	€ 000	€ 000
Interest receivable and similar income	24	23
Administrative expenses	-	5
Net impairment reversals	-	239

Statement of financial position
Loans and advances to customers	1,900	1,900
Investment in associate	1,645	1,645
Prepayments and accrued income	453	10
Accruals and deferred income	4	4

38 Investor Compensation Scheme

In accordance with the requirements of the Investor Compensation Scheme Regulations, 2003 issued under the Investment Services Act, 1994 (Chapter 370 of the Laws of Malta) licence holders are required to transfer a variable contribution to an Investor Compensation Scheme Reserve and place the equivalent amount with a bank, pledged in favour of the Scheme. Alternatively licence holders can elect to pay the amount of variable contribution directly to the Scheme. Lombard Bank Malta p.l.c. has elected to pay the amount of the variable contribution directly to the Scheme.

39 Statutory information

Lombard Bank Malta p.l.c. is a limited liability company domiciled and incorporated in Malta.

For the Year Ended 31 December 2018

1 Risk management

1.1 Overview of risk disclosures

The Additional Regulatory Disclosures seek to increase public disclosure with respect to a Bank's capital structure and adequacy as well as its risk management policies and practices. These disclosures have been prepared by the Bank in accordance with the Pillar III quantitative and qualitative disclosure requirements as governed by Banking Rule BR/07: Publication of Annual Report and Audited Financial Statements of Credit Institutions authorised under the Banking Act, 1994, issued by the Malta Financial Services Authority. These disclosures are published by the Bank on an annual basis as part of the Annual Report. The rule follows the disclosure requirements of Directive 2013/36/ EU (Capital Requirements Directive) and EU Regulation No. 575/2013 (Capital Requirements Regulation) of the European Parliament and of the Council of 26 June 2013.

Consistent with the requirements of banking regulations, these disclosures are not subject to an external audit, except to the extent that any disclosures are equivalent to those made in the Financial Statements which have been prepared in accordance with the requirements of International Financial Reporting Standards ('IFRS') as adopted by the EU. The Bank is satisfied that internal verification procedures ensure that these Additional Regulatory Disclosures are presented fairly.

1.2 Risk Management Framework

The Board of Directors has overall responsibility for the establishment and oversight of the Bank's risk management framework. The Bank has the Assets & Liabilities Committee (ALCO) and the Credit Committee that are responsible for developing the Bank's risk management policies in their specific areas. The Bank also has an independent Risk Management function. The aim of risk management is to create value for stakeholders by supporting the Bank in achieving its goals and objectives, and ultimately ensuring that the risks are commensurate with the rewards.

To enhance its risk oversight efforts, the Board of Directors established a Risk committee with a mandate to monitor the Bank's compliance with its risk management policies and procedures, and to review the adequacy of the Bank's risk management framework, including its risk appetite and strategy. This Committee was combined with the previous Audit Committee, and is today the Audit & Risk Committee.

The Bank considers risk management a core competency that helps produce consistently high returns for its various stakeholders. The Bank's business involves taking on risks in a targeted manner and managing them professionally. The Bank aims to manage all major types of risk by applying methods that meet best practice. The Bank considers it important to have a clear distribution of responsibilities within risk management. One of the main tasks of the Bank's executive management is to set the framework for this area. The core functions of the Bank's risk management are to identify all key risks for the Bank, measure these risks, manage the risk positions and determine capital allocations. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and best market practice.

An understanding of risk-taking and transparency in risk-taking are key elements in the Bank's business strategy and thus in its ambition to be a strong financial institution. The Bank's internal risk management processes support this objective.

For the Year Ended 31 December 2018

1 Risk management (continued)

Risk management within the Bank is mainly carried out on a unified basis, using an integrated and global framework. This framework is based on local and international guidelines, such as the Basel III Accord and corresponding Directives and Regulations of the European Union, including technical standards, as well as on contemporary international banking practices guided by the Basel Committee on Banking Supervision.

The Bank has adopted the Standardised Approach and the Basic Method with respect to the calculation of capital requirements and management of credit and foreign exchange risk respectively, as well as the Basic Indicator Approach with respect to operational risk.

The Bank's risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations.

The Board deems the risk management framework adopted by the Bank to be adequate and gives assurance to the Bank's stakeholders that the risk management systems are appropriate in relation to the Bank's risk profile and strategy.

The Bank's different operational functions, on an entity-wide basis, are primarily responsible for risk management procedures and activities in their respective areas. All the operational functions have a primary role in risk management at Bank-wide level. The Risk Management Function provides oversight, independently from operations. The Bank's risk management is implemented and handled properly by the operational functions. The Bank's Internal Audit Function, through verification, ensures that effective risk management procedures and activities are adequately designed and operating as prescribed.

1.3 Board and Senior Management Committees

The Bank's Board of Directors is responsible for ensuring that adequate processes and procedures exist to ensure effective internal control systems for the Bank. These internal control systems ensure that decision-making capability and the accuracy of the reporting and financial results are maintained at a high level at all times. The Board assumes responsibility for:

setting business objectives, goals and the general strategic direction for Management with a view to maximise value;
selecting and appointing the Chief Executive Officer who is entrusted with the day-to-day operations of the Bank;
management of the Bank's operations, as well as appointment of members of Management;
ensuring that significant business risks are identified and appropriately managed; and
setting the highest business standards and code for ethical behaviour, and monitoring performance in this respect.

For the Year Ended 31 December 2018

1 Risk management (continued)

In deciding how best to discharge its responsibilities, the Board upholds a policy of clear demarcation between its role and responsibilities and those of Management. It has defined the level of authority that it retains over strategy formulation and policy determination, and delegated authority and vested accountability for the Bank's day-to-day business in the Assets & Liabilities Committee and Credit Committee and, for the Bank's day-to-day operations, in an Executive Team comprising the Chief Executive Officer and Chief Officers. The Audit & Risk Committee reviews the processes and procedures to ensure the effectiveness of the Bank's system of internal control, as well as the implementation of the Board's risk strategy by Management. The Audit & Risk Committee is supported by the Internal Audit and the Bank's Risk Management Function. Internal Audit is one of the principal internal control mechanisms within the Bank.

The ALCO monitors the Bank's financial performance, considers investment policy and overseas counterparty limits. Membership of this Committee is made up of a number of Chief Officers and Senior Managers including managers from Finance and Treasury Departments. The Chief Executive Officer is Chairman of ALCO and retains primary responsibility for asset and liability management. The ALCO oversees risk management practices in relation to asset and liability management.

The Credit Committee considers the development of general lending principles and oversees risk management practices in lending operations. The Credit Committee is chaired by the Chief Executive Officer and is composed of other Chief Officers as well as other Senior Officers.

The Audit & Risk Committee assists the Board in fulfilling its supervisory and monitoring responsibility by reviewing the financial statements and disclosures, the system of internal control established by management as well as the external and internal audit processes. The Audit & Risk Committee is also responsible for monitoring compliance with the Bank's risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank. The Audit & Risk Committee is assisted by the Internal Audit Function and the Bank's independent Risk Management Function.

The Bank's independent Internal Audit Department reviews the adequacy and proper operation of internal controls in individual areas of operation and reports its findings to the Audit & Risk Committee. The Internal Audit Function carries out both regular and ad-hoc reviews of risk management controls and procedures, in both cases reporting its findings.

The Bank's independent Risk Management Function was composed of senior officers during the year under review, with reporting lines to the Audit & Risk Committee. This Function focuses on overseeing the manner in which the different operational functions and activities of the Bank implement and monitor risk policies and limits in their respective areas. The overall objective is ensuring that the Bank's intended risk management framework has been structured effectively and is proving to be effective at operational level in mitigating exposures to the Bank. Frequent reviews are carried out by this Function and regular reporting to the Audit & Risk Committee is in place.

The Bank has an appropriate organisational structure for planning, executing, controlling and monitoring business operations in order to achieve the Bank's objectives.

Authority to operate the Bank and its subsidiaries is delegated to the Chief Executive Officer within the limits set by the Board. The Board is ultimately responsible for the Bank's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide only reasonable, and not absolute, assurance against material misstatement or loss.

The Bank is committed to the highest standards of business conduct and seeks to maintain these standards across all of its operations. Bank policies and procedures are in place for the reporting and resolution of fraudulent activities.

For the Year Ended 31 December 2018

1 Risk management (continued)

1.4 Key risk components

To ensure coherence between the Bank's strategic considerations regarding risk-taking and day-to-day decisions, from time to time, the Bank establishes its risk appetite as a strategic tool. Risk appetite is the maximum risk that the Bank is willing to assume to meet business targets. The Bank's risk appetite is set in a process based on a thorough analysis of its current risk profile. The Bank identifies a number of key risk components and for each determines a target that represents the Bank's views on the component in question.

In terms of the Capital Requirements Regulation (CRR), an 'exposure' is the amount at risk arising from the reporting credit institution's assets and off-balance sheet instruments. Consistent with this, an exposure would include the amount at risk arising from the Bank's:

claims on a customer including actual and potential claims which would arise from the drawing down in full of undrawn advised facilities, which the Bank has committed itself to provide;
contingent liabilities arising in the normal course of business, and those contingent liabilities which would arise from the drawing down in full of undrawn advised facilities which the Bank has committed itself to provide; and
other on and off-balance sheet financial assets and commitments.

The Bank is exposed to a number of risks, which it manages at different organisational levels.

The main categories of risk are:

Credit risk: Credit risk stems from the possible non-prompt repayment or non-payment of existing and contingent obligations by the Bank's counterparties, resulting in the loss of equity and profit. It comprises the risk that deterioration in the financial condition of a borrower will cause the asset value to decrease or be extinguished. Country risk and Settlement risk are included in this category. Country risk refers to the risk of losses arising from economic or political changes that affect the country from which the asset originates. Settlement risk refers to the risk of losses through failure of the counterparty to settle outstanding dues on the settlement date owing to bankruptcy or other causes.
Market risk: Risk of losses arising from unfavourable changes in the level and volatility of interest rates, foreign exchange rates or investment prices.
Liquidity risk: Liquidity risk may be divided into two sub-categories:
- Market (product) liquidity risk: Risk of losses arising from difficulty in accessing a product or market at the required time, price and volume.
- Funding liquidity risk: Risk of losses arising from a timing mismatch between investing, placements and fund raising activities resulting in obligations missing the settlement date or satisfied at higher than normal rates.
Operational risk: Risk of loss resulting from the lack of skilful management or good governance within the Bank and the inadequacy of internal control, which might involve internal operations, staff, systems or external occurrences that in turn affect the income and capital funds of financial institutions. The Bank has adopted an operational risk management framework and procedures, which provide for the identification, assessment, management, monitoring and reporting of the Bank's operational risks.

For the Year Ended 31 December 2018

1 Risk management (continued)

1.5 Risk statement by the Board of Directors

The Bank's business model throughout the years has been that of retaining a stable deposit base and granting credit principally to the commercial real estate sector, particularly because the Board strongly believes that despite the increased capital requirements introduced by the CRR, an active commercial real estate market is a fundamental source of employment and economic growth in Malta. Nonetheless, the Bank is conscious of the risks involved in commercial real estate lending, and thus ensures it prices loans by reference to underlying risks. In this respect, the Bank's return on assets, expressed as a percentage of profit after tax to average total assets, for the reporting period ended 31 December 2018 amounts to 0.9%.

The Bank manages its credit risk in this respect by selecting its customers and the projects it finances with prudence and caution, and by actively monitoring the value of collateral in relation to its exposure amounts such that in the event of default, the Bank would have sufficient collateral to secure recoverability.

In this respect, the loan loss coverage ratio, calculated as total provisions for impairment to total non-performing exposures, which as at 31 December 2018, amounted to 39.2% differs from that experienced within the sector, which generally tends to fluctuate between 50% to 55%. This clearly illustrates the robustness of the Bank's risk management practices particularly in respect of credit risk.

2 Credit risk

2.1 Introduction to Credit risk

Credit risk is the risk of suffering financial loss, should any of the Bank's customers, clients or market counterparties fail to fulfil their contractual obligations to the Bank. Credit risk arises mainly from commercial and consumer loans and advances and loan commitments arising from such lending activities, but can also arise from credit enhancement provided, such as financial guarantees, letters of credit, endorsements and acceptances.

Credit risk constitutes the Bank's largest risk in view of its significant lending and securities portfolios, which are monitored in several ways. The Bank is fully aware of such risk and places great importance on its effective management.

The Bank allocates considerable resources in ensuring the ongoing compliance with approved credit limits and to monitor its credit portfolio. In particular, the Bank has a fixed reporting cycle to ensure that the relevant management bodies, including the Board of Directors and the Executive Team, are kept informed on an ongoing basis of developments in the credit portfolio, non-performing loans and other relevant information.

For the Year Ended 31 December 2018

2 Credit risk (continued)

2.2 Credit risk management

The Board of Directors has delegated the responsibility for the monitoring of management of credit risk to the Credit Committee. The granting of a credit facility is based on the Bank's insight into the customer's financial position, which is reviewed regularly to assess whether the basis for the granting of credit has changed. Furthermore, the customer must be able to demonstrate a reasonable ability to repay the debt. Approval limits are graded starting from managers and leading up to the Credit Committee and the Board of Directors depending on the size and the particular risk attached to the loan. Facilities are generally adequately secured either by property and/or guarantees and are reviewed periodically by Management both in terms of the exposure to the Bank and to ensure that security is still valid.

The Bank's Credit Department is responsible for undertaking and managing credit risk in relation to the entity's lending activities; covering all the stages in the lending cycle comprising credit proposal, loan approval, effecting advances, credit and collateral monitoring, processing repayments and credit recovery procedures. The Bank manages, limits and controls concentrations of credit risk arising from loans and advances wherever they are identified − in particular, to individual customers and groups, and to industry sectors. Such risks are monitored on a revolving basis and subject to frequent review, as considered necessary. The exposure to any one borrower is further restricted by sub-limits covering on- and off-balance sheet exposures. Actual exposures against limits are monitored at end of day on a daily basis and on a real-time basis too. As highlighted previously, the Bank's reporting framework with respect to lending credit risk is comprehensive with regular reporting by the Credit Department to the Board, Credit Committee and Executive Team on adherence to limits, activity levels, performance measures and specific credit risk events.

In order to minimise the credit risk undertaken, counterparty credit limits may be defined, which consider a counterparty's creditworthiness, the value of collateral and guarantees which can reduce the overall credit risk exposure, as well as the type and the duration of the credit facility. In order to examine a counterparty's creditworthiness, the following are considered: country risk, quantitative and qualitative characteristics, as well as the industry sector in which the counterparty operates. The Bank has set limits of authority and has segregated duties so as to maintain impartiality and independence during the approval process and control for new and existing credit facilities.

The Bank's maximum exposure amount to credit risk before taking account of any collateral held or other credit enhancements can be classified in the following categories:

Financial assets recognised on-balance sheet comprising principally balances with Central Bank of Malta, Malta Government treasury bills, cheques in course of collection, financial assets designated at FVOCI as well as loans and advances to banks and customers. The maximum exposure of these financial assets to credit risk equals their carrying amount.
Guarantee obligations incurred on behalf of third parties. The maximum exposure to credit risk is the full amount that the Bank would have to pay if the guarantees are called upon.
Loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities. The maximum exposure to credit risk is the full amount of the committed facilities.

For the Year Ended 31 December 2018

2 Credit risk (continued)

The Bank's credit risk exposure amounts reflect the maximum exposure to credit risk before collateral held or other credit enhancements in accordance with the regulatory information submitted to the MFSA and are as follows:

	2018	2018 Year end
	Average value	Exposure value
	€ 000	€ 000
Central governments or central banks	228,128	198,327
Institutions	105,761	132,904
Corporates	81,903	67,144
Retail	19,588	18,123
Secured by mortgages on immovable property	306,934	357,077
Exposures in default	19,761	18,417
Items associated with particularly high risk	76,909	74,721
Equity	23,175	23,104
Other items	36,340	39,591
	898,499	929,408

The exposures set out in the table above are based on the sum of on-balance sheet exposures and off-balance sheet exposures adjusted for the credit conversion factors stipulated in Article 166(10) of the CRR.

The following is an analysis of the Bank's exposure to credit risk split by on-balance sheet assets and off-balance sheet instruments:

	2018
	€ 000
On-balance sheet assets	915,000
Deduction for intangible assets	(375)
Minimum loss coverage for non-performing exposures	(171)
Off-balance sheet instruments	14,954
	929,408

2.3 Concentration risk

Concentration risk arises as a result of the concentration of exposures within the same category, whether the category relates to geographical location, industry sector or counterparty type.

For the Year Ended 31 December 2018

2 Credit risk (continued)

Credit risk attributable to concentration of investments is not considered by the Directors to be significant in view of the credit standing of the issuers.

The following tables analyse the concentration of credit risk by geographical region, industry sector and residual maturity at the end of the reporting period.

2.3.1 Credit risk exposures analysed by geographical region

The Bank monitors concentration of credit risk by geographical region. The following table summarises the country of risk by exposure class:

At 31 December 2018	Total € 000	Malta € 000	Eurozone € 000	Other European countries € 000	Other € 000
Central governments or central banks	198,327	198,327	-	-	-
Institutions	132,904	7,089	72,078	49,818	3,919
Corporates	67,144	67,144	-	-	-
Retail	18,123	18,123	-	-	-
Secured by mortgages on immovable property	357,077	357,077	-	-	-
Exposures in default	18,417	18,417	-	-	-
Items associated with particularly high risk	74,721	74,721	-	-	-
Equity	23,104	22,709	-	-	395
Other items	39,591	39,591	-	-	-
	929,408	803,198	72,078	49,818	4,314

For the Year Ended 31 December 2018

2 Credit risk (continued)

2.3.2 Credit risk exposures analysed by industry sector

The following are the exposure amounts split by exposure class according to the respective industry concentration:

At 31 December 2018	€ 000	Total Manufacturing € 000	Tourism € 000	€ 000	Property and Trade construction € 000	Personal, professional and home loans € 000	Financial institutions € 000	Other sectors € 000
Central governments or central banks	198,327	-	-	-	-	-	198,327	-
Institutions	132,904	-	-	-	-	-	132,904	-
Corporates	67,144	5,753	520	19,625	5,528	518	31,452	3,748
of which: SME	11,283	-	-	8,506	639	10	2,127	1
Retail	18,123	3,577	5	570	5,987	5,953	1,754	277
of which: SME	9,560	3,462	1	388	3,817	55	1,747	90
Secured by mortgages on immovable property	357,077	3,434	13,865	28,480	156,925	77,822	56,937	19,614
of which: SME	94,837	295	3,031	16,467	47,736	2,386	14,600	10,322
Exposures in default	18,417	3,537	1,699	643	10,412	1,310	154	662
of which: SME	13,956	3,472	1,163	191	8,874	-	154	102
Items associated with particularly high risk	74,721	258	-	-	68,184	5,944	335	-
of which: SME	34,033	258	-	-	33,775	-	-	-
Equity	23,104	235	-	-	-	-	2,690	20,179
Other items	39,591	-	-	-	21,660	-	10,643	7,288
	929,408	16,794	16,089	49,318	268,696	91,547	435,196	51,768

For the Year Ended 31 December 2018

2 Credit risk (continued)

2.3.3 Credit risk exposures analysed by residual maturity

The residual maturity breakdown by exposure class at the end of the reporting period was as follows:

	Total	Less than 1 year	Over 1 but less than 5 years	Over 5 years
At 31 December 2018	€ 000	€ 000	€ 000	€ 000
Central governments or central banks	198,327	131,838	17,817	48,672
Institutions	132,904	127,909	-	4,995
Corporates	67,144	27,122	16,021	24,001
Retail	18,123	9,071	3,860	5,192
Secured by mortgages on immovable property	357,077	102,286	65,940	188,851
Exposures in default	18,417	13,899	4,412	106
Items associated with particularly high risk	74,721	31,249	38,507	4,965
Equity	23,104	23,041	63	-
Other items	39,591	39,591	-	-
	929,408	506,006	146,620	276,782

2.3.4 Counterparty banks' risk

The Bank runs the risk of loss of funds due to the possible delay in the repayment of existing and future obligations by counterparty banks.

Within its daily operations, the Bank transacts with banks and other financial institutions. By conducting these transactions, the Bank is running the risk of losing funds due to the possible delays in the repayment to the Bank of the existing and future obligations of the counterparty banks. The Bank primarily places short-term funds with pre-approved banks subject to the limits in place and subject to the respective institutions' credit rating being within controlled parameters. The positions are checked against the limits in real time and at end of day on a daily basis.

2.3.5 Country risk

The Bank runs the risk of loss of funds due to the possible political, economic and other events in a particular country where funds have been placed or invested with several counterparties. Countries are assessed according to their size, economic data and prospects and their credit ratings from international rating agencies. Existing country credit risk exposures are monitored and reviewed periodically. The Bank's exposures are predominantly in Malta as reflected within the table in section 2.3.1 which discloses country risk by exposure class. Other country risks are mainly bank balances and money market placements with a total carrying amount of €125,819,000.

For the Year Ended 31 December 2018

2 Credit risk (continued)

2.4 Use of External Credit Assessment Institutions

In calculating its risk-weighted exposure amounts, the Bank uses an External Credit Assessment Institution (ECAI) for Central governments, Institutions, Corporates and Items associated with particularly high risk for which a credit assessment is available. The credit quality of such exposures is determined by reference to credit ratings applicable to issuers published by Standard & Poor's Ratings. The Bank maps the external ratings to the credit quality steps prescribed in the CRR as required by CEBS publication 'Standardised Approach: Mapping of ECAIs' credit assessments to credit quality steps'.

The following are the exposure values for which an ECAI is used:

At 31 December 2018	Credit quality step	Central governments or central banks € 000	Institutions € 000	Total € 000
AAA to AA-	1	-	25,693	25,693
A+ to A-	2	198,327	82,492	280,819
BBB+ to BBB-	3	-	24,112	24,112
BB+ to BB-	4	-	-	-
B+ to B-	5	-	6	6
CCC+ and below	6	-	601	601
		198,327	132,904	331,231

2.5 Credit quality of the Bank's lending portfolio

Performing: Internal grade 'P1';
Under performing: Internal grades 'P2' and 'P3'; and
Non-performing: Internal grade 'NP'.

P1

The Bank's loans and advances to customers which are categorised as 'P1' are principally debts in respect of which the payment of interest and/or capital is not overdue by 30 days and with no recent history of customer default. Management does not expect any losses from non-performance by these customers.

Loans and advances which attract a 'P2' grading are those which are receiving the close attention of the Bank's Management and are being reviewed periodically in order to determine whether such advances should be reclassified to either 'P1' or 'P3' classification. Credit facilities that attract this category include those where the payment of interest and/or capital becomes overdue by 30 days and over but not exceeding 60 days.

For the Year Ended 31 December 2018

2 Credit risk (continued)

P3

NP

The following table provides a detailed analysis of the credit quality of the Bank's lending portfolio.

	2018
	€ 000
Gross loans and advances to customers
Performing ('Stage 1' assets)	422,800
Under-performing ('Stage 2' assets)	51,964
Non-performing ('Stage 3' assets)	59,773
	534,537

2.5.1 Credit-Impaired loans and advances to customers

Credit-impaired loans and advances are advances which are either more than 90 days past due, or for which the Bank determines as probable that it will be unable to collect all principal and interest due according to the contractual terms of the loans and advances agreement(s). The Bank's credit-impaired loans and advances mainly relate to a number of independent customers which are not meeting repayment obligations or deemed by the Bank as unlikely to pay their obligations to the Bank without recourse by the Bank to realising the collateral.

For the Year Ended 31 December 2018

2 Credit risk (continued)

2.5.2 Past due but not credit-impaired loans

Past due but not impaired loans include loans and advances where contractual interest or principal payments are past due. Credit losses that may arise are covered through the Bank's assessment of Expected Credit Loss allowances.

Loans and advances to customers are analysed into impaired, past due and other exposures as follows:

	2018
	€ 000
Gross loans and advances to customers
Credit-impaired	59,773
Past due but not credit-impaired	28,917
Neither past due nor credit-impaired	445,847
	534,537

The table below analyses the impaired and the past due but not impaired gross loans and advances to customers by industry sector.

	59,773	28,917
Other sectors	889	2
Financial institutions	154	18,743
Personal, professional and home loans	9,836	1,928
Property and construction	35,997	4,079
Trade	3,969	1,812
Tourism	3,564	2,189
Manufacturing	5,364	164
At 31 December 2018	impaired € 000	impaired € 000
	Credit	Past due but not credit

The majority of the impaired and past due but not impaired loans and advances to customers were concentrated within Malta.

For the Year Ended 31 December 2018

2 Credit risk (continued)

2.5.3 Collateral

The Bank holds collateral against exposures in the form of hypothecs over property, other registered securities over assets and guarantees. The nature and level of collateral required depends on a number of factors, including, but not limited to, the amount of the exposure, the type of facility provided, the term of the facility, the amount of the counterparty's contribution and an evaluation of the level of the credit risk or Probability of Default involved. Collateral is an important mitigant of credit risk. Nevertheless, it is the Bank's policy to establish that facilities are within the customer's capacity to repay rather than to over rely on security. In certain cases, depending on the customer's standing and the type of product, facilities may be unsecured. The Bank applies various measures to reduce the risk on individual transactions, including collateral in the form of physical assets and guarantees.

The principal collateral types used as credit risk mitigants are mortgages on residential properties and commercial real estate. For regulatory purposes, none of the Bank's collateral in the form of commercial real estate qualifies as eligible collateral, as these properties fail to meet the conditions of Article 126(2) of the CRR.

Out of the €511.1 million exposures arising from the Bank's lending, €351.4 million are secured by mortgages on immovable property, while €67.5 million are secured by mortgages on immovable property but are classified within the high risk exposures since these are associated with speculative immovable property financing. From the €351.4 million exposures secured by mortgages on immovable property, €74.0 million qualify as fully and completely secured by mortgages on residential immovable property, and accordingly attract a risk-weight of 35%.

2.5.4 Loss allowances

The Bank assesses on a forward-looking basis the Expected Credit Losses associated with its loans and advances portfolio. The Bank recognises a loss allowance for such losses at each reporting date.

Expected Credit Losses	Total € 000	Manufacturing € 000	Tourism € 000	€ 000	Property and Trade construction € 000	Personal, professional and home loans € 000	Financial institutions € 000	Other sectors € 000
At 1 January 2018	22,848	1,285	2,255	1,073	15,204	2,259	555	217
Additions	12,775	292	217	1,075	8,472	430	2,235	54
Reversals	(12,210)	(217)	(709)	(620)	(9,572)	(716)	(237)	(139)
At 31 December 2018	23,413	1,360	1,763	1,528	14,104	1,973	2,553	132

2.5.5 Write-off policy

The Bank writes off loan or advance balances (and any related allowances for impairment losses) when it determines that these are uncollectible. This decision is reached after considering information such as the occurrence of significant changes in the borrower's financial position, such that the borrower can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure.

For the Year Ended 31 December 2018

3 Market risk

The Bank takes on exposure to market risk, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, credit spreads, foreign exchange rates and equity prices.

Accordingly, market risk for the Bank consists of three elements:

Interest rate risk, which is the risk of losses because of changes in interest rates;
Exchange rate risk, which is the risk of losses on the Bank's positions in foreign currency because of changes in exchange rates; and
Equity price risk, which is the risk of losses because of changes in investment prices.

3.1 Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The Bank's operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or at different amounts. The Bank accepts deposits from customers at both fixed and floating rates and for varying maturity periods. This risk is managed through the matching of the interest resetting on repricing dates on assets and liabilities as much as it is practicable. The Bank monitors on a continuous basis the level of mismatch of interest rate repricing taking cognisance of the terms of the Bank's principal assets, comprising loans and advances to customers, that are repriceable at the Bank's discretion. Accordingly, the Bank is in a position to manage the interest rate terms of its financial assets and simultaneously modify the interest terms of its liabilities. The Bank seeks to manage its net interest spread, taking cognisance of the cost of capital, by investing funds in a portfolio of loans and advances and securities with a longer tenure than the funding liabilities (therefore normally giving rise to a negative maturity gap position) through the effective management of shorter term deposit liabilities with a view to securing steady base deposits with differing terms over the medium to longer term.

Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved limits for repricing bands which are set by ALCO. ALCO is the monitoring body for compliance with these limits and is assisted by Treasury through its day-to-day operational activities. The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Bank's financial assets and liabilities to interest rate movements.

Accordingly, the Bank's ALCO is primarily responsible for the interest rate risk management process and for monitoring actively the interest rate risk measures utilised by the Bank. Reporting of interest rate risk measures exposures vis-à-vis limits flows to the ALCO and Board on a regular systematic basis. The Bank's independent Risk Management Function provides oversight in respect of the interest rate risk management process ensuring that it is designed in an appropriate manner and is functioning properly.

The Bank's repricing gaps at 31 December 2018 are disclosed in the tables within note 2.4.1 to the financial statements. The measures applied for the monitoring of the fair value sensitivity of the fixed rate instruments and the cash flow sensitivity for variable rate instruments are disclosed within notes 2.4.3 and 2.4.4 to the financial statements.

For the Year Ended 31 December 2018

3 Market risk (continued)

3.2 Currency risk

The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. Foreign exchange risk is the risk to earnings and value caused by a change in foreign exchange rates. Foreign exchange risk arises when financial assets or liabilities are denominated in currencies which are different from the Bank's functional currency.

The Bank manages this risk principally by ensuring that its foreign currency denominated liabilities are matched with corresponding assets in the same currency.

Accordingly, foreign currency liabilities are utilised to fund assets denominated in the same foreign currency thereby matching asset and liability positions as much as is practicable. This mechanism is reflected in the figures reported in the table below which presents this matching process.

The Bank's foreign exchange risks are managed actively and monitored by the Treasury Function, which process ensures that the Bank maintains its exposure to foreign currencies within prescribed limits set by the Bank's ALCO. ALCO sets limits on the level of exposure by currency and in aggregate for both overnight and intra-day positions which are monitored on a real-time basis. Reporting of exposures vis-à-vis limits flows to the ALCO and Board on a regular systematic basis. The Bank's independent Risk Management Function is responsible for assuring that the foreign exchange risk management process is designed in an appropriate manner and is functioning effectively.

The Bank enters into forward foreign currency exchange contracts with customers in the normal course of its business. Generally, it is the Bank's policy to cover these contracts by other forward positions. As a result, the Bank is not open to any significant exchange risk in respect of derivative contracts. The Bank also takes a deposit margin of the nominal value from the customer thereby reducing its credit risk should the client default. The Bank had no open forward foreign currency contracts at the end of the reporting period.

The following table summarises the Bank's net exchange position by currency taking into account the Bank's financial assets and liabilities as well as off-balance sheet instruments exposing the Bank to foreign exchange risk.

For the Year Ended 31 December 2018

3 Market risk (continued)

At 31 December 2018	Total € 000	EUR € 000	GBP € 000	USD € 000	Other € 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash	128,143	105,929	8,724	13,475	15
Investments measured at FVOCI	96,245	95,850	-	395	-
Loans and advances to banks	125,819	38,650	26,363	53,420	7,386
Loans and advances to customers	511,124	509,098	2,026	-	-
Other assets	7,407	7,319	43	18	27
Total financial assets	868,738	756,846	37,156	67,308	7,428
Financial liabilities
Amounts owed to banks	854	854	-	-	-
Amounts owed to customers	790,073	681,076	36,667	64,900	7,430
Other liabilities	18,805	16,382	483	1,924	16
Total financial liabilities	809,732	698,312	37,150	66,824	7,446
Net currency exposure in financial assets/liabilities		58,534	6	484	(18)
Commitments and contingent liabilities	216,551	215,533	144	874	-

3.3 Equity price risk

The exposure of the Bank to this risk is not significant given the low holdings of equity instruments by the Bank, which are not deemed material in the context of the Bank's statement of financial position. Such holdings are limited to locally quoted equity instruments issued by local well-known corporate issuers. Frequent management reviews are carried out to obtain comfort on the high quality of the portfolio.

For the Year Ended 31 December 2018

4 Liquidity risk

4.1 Management of liquidity risk

Liquidity risk is defined as the risk of losses due to:

the Bank's funding costs increasing disproportionately;
lack of funding preventing the Bank from establishing new business; and
lack of funding ultimately preventing the Bank from meeting its obligations.

Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value. The Bank is exposed to daily calls on its available cash resources from overnight deposits, current and call deposits, maturing term deposits, loan drawdowns and guarantees.

The objective of the Bank's liquidity and funding management is to ensure that all foreseeable funding commitments and deposit withdrawals can be met when due. It is the Bank's objective to maintain a diversified and stable funding base with the objective of enabling the Bank to respond quickly and smoothly to unforeseen liquidity requirements.

The Bank manages this risk by ensuring that its assets and liabilities are matched in terms of maturities as much as is practicable. However, the Bank ought to manage its net interest spread by investing funds in a portfolio of assets with a longer term than the liabilities funding them. To mitigate exposures arising in this respect, the Bank holds significant liquid assets in the form of Malta Government treasury bills, money market placements and other shortterm instruments for managing liquidity risk to support payment obligations and contingent funding in a stressed market environment.

The Bank maintains internal liquidity buffers established by ALCO made up of cash and financial assets which are also eligible for collateral against borrowing from the European Central Bank. In order to ensure that maturing funds are always available to meet unexpected demand for cash, the Board sets parameters within which maturities of assets and liabilities may be mismatched in line with the stance referred to previously. Unmatched positions potentially enhance profitability, but also increase risks. The Bank's ALCO focuses on the entity's management process with respect to market and funding liquidity risks. ALCO maintains ongoing oversight of forecast and actual cash flows, by monitoring the availability of funds to meet commitments associated with financial instruments. ALCO is supported by the Bank's Executive Team and Treasury Function in this respect, at operational level. ALCO monitors the Bank's Liquidity Gap analysis on a monthly basis. The Bank's liquidity management process comprises management of day-to-day funding, by monitoring future cash flows to ensure that requirements can be met and that funds are replenished as they mature or are borrowed by customers. This implies a structured ongoing analysis of the contractual maturity of the financial liabilities and the expected collection date of the financial assets. The Bank's liquidity management focuses on maintaining a portfolio of highly marketable assets, subject to pre-established limits, that can easily be liquidated in case of any unforeseen interruption to cash flow; and monitoring the liquidity ratios of the Bank against internal and regulatory requirements. In this respect, the Bank's advances-to-deposit ratio of 64.7% at the end of the reporting period reflects management's prudent stance in the context of liquidity management. Also, the Liquidity Coverage ratio at 31 December 2018 is 385.6%, which is significantly higher than the prudential parameters set by Regulation.

For the Year Ended 31 December 2018

4 Liquidity risk (continued)

Reporting of measures of liquidity risk and liquidity ratios vis-à-vis internal limits flows to the ALCO and Board on a regular basis. The Bank's Risk Management Function provides oversight in respect of the liquidity risk management process ensuring that it is functioning effectively.

As at 31 December 2018, the Bank had outstanding guarantees on behalf of third parties amounting to €11,206,000, which are cancellable upon the request of the third parties. The Bank's liquidity exposures arising from these commitments and contingencies are expected to expire principally within a period of twelve months from the end of the reporting period.

4.2 Asset Encumbrance

The disclosure on asset encumbrance is a requirement introduced in Banking Rule 07 transposing the provisions of the EBA Guidelines on Disclosure of Encumbered and Unencumbered Assets (EBA/GL/2014/03).

The objective of this disclosure is to facilitate an understanding of available and unrestricted assets that could be used to support potential future funding and collateral needs. An asset is defined as encumbered if it has been pledged as collateral against an existing liability, and as a result is no longer available to the Bank to secure funding, satisfy collateral needs or be sold to reduce the funding requirement.

The disclosure is not designed to identify assets which would be available to meet the claims of creditors or to predict assets that would be available to creditors in the event of a resolution or bankruptcy.

In accordance with the EBA 'Guidelines on Disclosure of Encumbered and Unencumbered Assets', the amounts disclosed in the table below represent median values, being the rolling quarterly amounts over the previous 12 months.

	Carrying amount of encumbered assets	Fair value of encumbered assets	Carrying amount of unencumbered assets	Fair value of unencumbered assets
At 31 December 2018	€ 000	€ 000	€ 000	€ 000
Assets of the reporting institution	11,764	11,764	907,471	907,471
Loans on demand	-	-	84,383	84,383
Equity instruments	8,956	8,956	12,652	12,652
Debt securities	-	-	168,860	168,860
Loans and advances	-	-	582,712	582,712
Other assets	2,808	2,808	58,864	58,864

The Bank does not encumber any of the collateral received. Moreover, as at 31 December 2018, the Bank did not have any outstanding liabilities associated with encumbered assets and collateral received.

The Bank undertakes encumbrance by pledging debt securities against the provision of credit lines by the Central Bank of Malta and in favour of the Depositor Compensation Scheme.

For the Year Ended 31 December 2018

5 Operational risk

Operational risk is the risk of loss resulting from the lack of skilful management or good governance within the Bank and the inadequacy of internal control, which might involve internal operations, staff, systems or external occurrences that in turn affect the income and capital funds of financial institutions. The Bank has adopted an operational risk management framework and procedures, which provide for the identification, assessment, management, monitoring and reporting of the Bank's operational risks. Operational risk is also addressed through proper insurance cover.

Operational risk management relies on a framework of policies and procedures implemented by the different operational functions within the Bank through transaction processing and business execution. Regular reporting of operational risk events to the Board of Directors is carried out as required. The implementation of such policies and procedures by the Bank's operational functions is overseen by the Risk Management Function.

The Bank currently uses the Basic Indicator Approach to assess the operational risk capital requirements and accordingly allocates 15% of average gross income for a three year period in accordance with regulatory requirements. The operational risk capital regulatory requirement as at 31 December 2018 amounted to €3,337,000.

6 Capital risk management

The Bank is a licensed credit institution and must therefore comply with the capital requirements under the relevant capital requirements within laws and regulations. Maltese law and regulations on capital adequacy are naturally based on EU capital requirements.

The prudent and efficient management of capital remains one of the Bank's top priorities. The Bank must have sufficient capital to comply with regulatory capital requirements. The purpose of the Bank's capital management is to ensure an efficient use of capital in relation to risk appetite as well as business development. Capital management is managed primarily through the capital planning process that determines the optimal amount and mix of capital that should be held by the Bank, subject to regulatory limits.

Capital adequacy and the use of regulatory capital are monitored regularly by the Bank's management, employing techniques based on the guidelines developed by the Basel Committee, European Union Regulations and Directives, as implemented by the MFSA for supervisory purposes. The Bank's capital management is based on the regulatory requirements established within the CRR and by local regulations which are modelled on the requisites of the CRD rules.

The Bank's Executive Team and ALCO are predominately responsible for the Bank's capital risk management process. Capital adequacy ratios together with the level and quality of Own funds are reported on a regular basis to the Board and the ALCO by the Finance Function.

For the Year Ended 31 December 2018

6 Capital risk management (continued)

6.1 Own funds

Own funds represent the Bank's available capital and reserves for the purposes of capital adequacy. Capital adequacy is a measure of the financial strength of a bank, expressed as a ratio of its capital to its assets. The Bank adopts processes to ensure that the minimum regulatory requirements are met at all times, through the assessment of its capital resources and requirements given current financial projections. During the year ended 31 December 2018, the Bank complied with all of the externally imposed capital requirements to which it was subject.

In July 2013, the European Banking Authority (EBA) issued its final draft Implementing Technical Standards (ITS) on Own funds disclosures. The disclosure requirements of these technical standards have been integrated within the Bank's disclosures set out below.

The Bank's capital base comprises Common Equity Tier 1 (CET1) capital, which includes the following items:

ordinary share capital;
share premium;
retained earnings;
revaluation and other reserves; and
- other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes including deductions relating to amounts pledged in favour of the Depositor Compensation Scheme and any losses in the fair valuation of financial assets measured at FVOCI, net of deferred taxation.

(a) Share capital

The Bank's share capital as at 31 December 2018 is analysed as follows:

Authorised Ordinary shares of 25 cent each	No. of shares 000s 80,000	2018 € 000 20,000
Issued Ordinary shares of 25 cent each	44,178	11,044

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Bank. All shares rank equally with regard to the Bank's residual assets.

For the Year Ended 31 December 2018

6 Capital risk management (continued)

The following table describes the terms and conditions of the ordinary share capital issued by the Bank.

Capital Instruments	Ordinary share capital and share premium
Unique Identifier	MT0000040106
Governing law(s) of the instrument	Maltese Law
Regulatory treatment
Transitional CRR rules	Common Equity Tier 1
Post-transitional CRR rules	Common Equity Tier 1
Eligible at solo/(sub-)consolidated / solo &(sub-) consolidated	Solo
Amount recognised in regulatory capital	€11,044,479
Nominal amount of instrument	€11,044,479
Nominal amounts of each share	€0.25
Accounting classification	Share capital
Issuer call subject to prior supervisory approval	No
Position in subordination hierarchy in liquidation	Subordinated to creditors and depositors
Non-compliant transitioned features	No

(b) Share premium

The share premium represents the amounts at which ordinary shares were issued in excess of their nominal value, normally arising as a result of rights issues approved by the shareholders during the Annual General Meetings. The amount is not distributable by way of dividend to shareholders.

The retained earnings represent earnings not paid out as dividends.

Retained earnings form part of Own funds only if those profits have been verified by the Bank's independent external auditor. The Bank has demonstrated to the satisfaction of the competent authority that any foreseeable charge or dividend has been deducted from the amount of those profits.

For the Year Ended 31 December 2018

6 Capital risk management (continued)

(d) Reserve for General Banking Risks

Banking Rule BR/09 'Measures addressing credit risks arising from the assessment of the quality of asset portfolios of credit institutions authorised under the Banking Act 1994', issued by the MFSA, requires banks in Malta to hold additional reserves for general banking risks in respect of non-performing loans. This reserve is required to be funded from planned dividends. As at the reporting date, this reserve amounted to €2,903,000 (representing 100% of the total estimated amount). The amount has not changed during the year under review.

(e) Property revaluation reserve

This represents the surplus arising on the revaluation of the Bank's freehold property net of related deferred tax effects. The revaluation reserve is not available for distribution.

(f) Investment revaluation reserve

This represents the cumulative net change in fair values of assets measured at FVOCI held by the Bank, net of related deferred tax effects.

For the Year Ended 31 December 2018

6 Capital risk management (continued)

The Bank's Own funds and capital ratio calculations are set out below:

At 31 December 2018	€ 000
Common Equity Tier 1 (CET1) capital
Common Equity Tier 1 (CET1) capital: instruments and reserves
Capital instruments and the related share premium accounts	29,574
Retained earnings	57,661
Accumulated other comprehensive income (and other reserves)	9,085
Reserve for General Banking Risks	2,903
CET1 capital before regulatory adjustments	99,223
Common Equity Tier 1 (CET1) capital: regulatory adjustments
Intangible assets	(375)
Regulatory adjustments relating to minimum loss coverage for non-performing exposures	(171)
Total regulatory adjustments to CET1	(546)
CET1 capital	98,677
Total risk-weighted assets	672,948
Capital ratios
CET1 capital	14.7%
Institution specific buffer requirement	6.38%
of which: capital conservation buffer requirement	1.88%
CET1 available to meet buffers	10.2%
	€ 000
Items not deducted from own funds in accordance with Article 48 of CRR	4,404

For the Year Ended 31 December 2018

6 Capital risk management (continued)

6.2 Capital requirements

The allocation of capital between specific operations and activities is, to a large extent, driven by optimisation of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily upon the regulatory capital, though in some cases the regulatory requirements do not reflect differing risk profiles, subject to the overall level of capital to support a particular operation or activity not falling below the minimum required for regulatory purposes. The process of allocating capital to specific operations and activities is undertaken independently of those responsible for the operation.

Although maximisation of the return on risk-adjusted capital is the principal basis used in determining how capital is allocated within the Bank to particular operations or activities, it is not the sole basis used for decision-making. Account is also taken of synergies with other operations and activities, the availability of management and other resources, and the fit of the activity with the Bank's long-term strategic objectives. The Bank's policies in respect of capital management and allocation are reviewed regularly by the Board of Directors.

The Pillar I minimum capital requirements are calculated for credit, market and operational risks. During the year, the Bank continued to use the Standardised Approach for credit risk, the Basic Method for foreign exchange risk and the Basic Indicator Approach for operational risk in order to calculate the Pillar I minimum capital requirements. For credit risk, under the Standardised Approach, risk weights are determined according to the asset class, credit risk mitigation and credit ratings provided by Standard & Poor's or by using the applicable regulatory risk weights for unrated exposures. Capital charge for foreign exchange risk using the Basic Method is calculated at 8% of the higher of the sum of all the net short positions and the sum of all the net long positions in each foreign currency. The Basic Indicator Approach requires that the Bank allocates capital for operational risk by taking 15% of the average gross income of the preceding three years.

The Total Capital Ratio is calculated using the definition of regulatory capital and risk-weighted assets. As required by the CRR, the minimum level of the Capital Requirements Ratio stands at 8%. The Capital Requirements Ratio expresses Own funds as a proportion of risk-weighted assets and off-balance sheet instruments for credit risk purposes, together with notional risk-weighted assets in respect of operational risk and market risk. Total risk-weighted assets are determined by multiplying the capital requirements for market risk and operational risk by 12.5 (i.e. the reciprocal of the minimum capital ratio of 8%) and adding the resulting figures to the sum of risk-weighted assets for credit risk.

The Bank's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders' return is also recognised and the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.

The Bank will be fully implementing the CRD IV capital requirements with effect from January 2019. Although it is not yet certain whether the Bank will be required to maintain an additional countercyclical capital buffer as required by the CRR, given that the Bank's exposures are mainly contained within Malta, this buffer is expected to be marginal, since the deviation of Malta's credit-to-GDP ratio is not expected to be significant taking cognisance of its long-term trend.

Additionally, the Bank will be required to maintain a capital conservation buffer of 2.5%, made up of CET1 capital, on the risk-weighted exposures of the Bank as from 1 January 2019. This buffer will be phased in over the period from 1 January 2016 to 31 December 2018.

For the Year Ended 31 December 2018

6 Capital risk management (continued)

The Bank's capital requirements and Total Capital Ratio computation are as follows:

	Risk
	Exposure	weighted	Capital
	value	assets	required
At 31 December 2018	€ 000	€ 000	€ 000
Central governments or central banks	198,327	-	-
Institutions	132,904	30,929	2,474
Corporates	67,144	67,144	5,372
Retail	18,123	13,592	1,087
Secured by mortgage on immovable property	357,077	305,236	24,419
Exposures in default	18,417	27,626	2,210
Items associated with particularly high risk	74,721	112,081	8,966
Equity	23,104	33,800	2,704
Other items	39,591	40,704	3,256
Credit risk	929,408	631,112	50,488
Foreign exchange risk		122	10
Operational risk		41,714	3,337
Total capital required		672,948	53,835
Own funds
Common Equity Tier 1 capital			98,677
Total own funds			98,677
Total capital ratio			14.66%

6.3 Other disclosures on Own funds

The Bank has opted not to apply the transitional arrangements laid down in Regulation (EU) 2017/2395 to mitigate the impact of the introduction of IFRS 9 on Own funds. Under Regulation (EU) 2017/2395, during the transitional period ending 31 December 2023, the Bank would have had the option to add back a proportion of:

the Day 1 impact as a result of the introduction of IFRS 9, being the difference between IFRS 9 Expected Credit Losses (ECLs) on 1 January 2018 and IAS 39 provisions determined at 31 December 2017; and
on difference in the IFRS 9 ECLs determined at reporting date and the ECLs determined on 'day 1' of the introduction of IFRS 9 (being 1 January 2018 for the Bank) for 'Stage 1' (12-months ECLs) and 'Stage 2' (lifetime ECLs) assets.

The factors used to adjust the above ECLs declines across the transitional period, starting at 95% during the financial year ended 31 December 2019 to 25% in the final transitional financial year ended 31 December 2023. The above treatment is in accordance with the requirements laid down in paragraph 2 and paragraph 4 of Regulation (EU) 2017/2395.

For the Year Ended 31 December 2018

6 Capital risk management (continued)

In line with Section 2 of the EBA 'Guidelines on uniform disclosures under Article 473a of Regulation (EU) No. 575/2013 as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9 on Own funds', the Bank is required to disclose a comparison of the institutions' Own funds, Common Equity Tier 1 capital, Tier 1 capital, risk-weighted assets, Common Equity Tier 1 capital ratio, Tier 1 capital ratio, total capital ratio and leverage ratio with and without the application of transitional arrangements for IFRS 9 or analogous ECLs.

Given that the Bank has opted not to apply the transitional arrangements emanating from Regulation (EU) 2017/2395, and thus, reflect in full the impact of the adoption of IFRS 9 on own funds upon initial adoption without adding back any portion of the impact throughout the transitional period. On this basis, the Bank has opted not to disclose a table illustrating a comparison between its capital and leverage ratios with and without the application of the transitional arrangements of IFRS 9.

The Bank's capital and leverage ratios illustrating the full impact of IFRS 9 on initial adoption (without transitional arrangements) are shown in Sections 6.3 and 7 respectively. Upon initial adoption of IFRS 9, the Bank recognised a reversal in Expected Credit Losses amounting to €89,000 (net of tax), which has had minimal impact to the Bank's capital and leverage ratios. As a result, the Bank's capital and leverage ratios as at 31 December 2018 are not deemed to be over-stated.

6.4 Internal Capital Adequacy Assessment Process (ICAAP)

The Bank considers the Internal Capital Adequacy Assessment Process (ICAAP) embedded in Pillar II as a tool that ensures the proper measurement of material risks and capital and allows for better capital management and improvements in risk management. Therefore, it facilitates a better alignment between material risks and regulatory capital in order to have better capital deployment and improvements in the risk management and mitigation techniques adopted by the Bank. The ICAAP as required by the MFSA Banking Rule BR/12: The Supervisory Review Process of Credit Institutions authorised under the Banking Act, 1994, is performed on an annual basis.

Therefore, ICAAP is a process that the Bank utilises to ensure that:

there is adequate identification, measurement, aggregation and monitoring of the Bank's risks;
adequate internal capital is held by the institution in relation to its risk profile; and
the Bank uses sound risk management systems and there is the intention to develop them further.

For the Year Ended 31 December 2018

6 Capital risk management (continued)

The Board and the Bank's Executive Team take overall responsibility for the conceptual design and technical details of the ICAAP document. Apart from the responsibility for the conceptual design, the Board discussed, approved, endorsed and delivered the yearly ICAAP submission. The Bank's independent Risk Management Function is involved in the ICAAP with a view to ensuring that the process reflects and takes cognisance of the Bank's risk management activities and processes.

The ICAAP is an ongoing process which starts with defining risk strategy followed by identifying, quantifying and aggregating risks, determining risk-bearing ability, allocating capital, establishing limits and ongoing risk monitoring. The individual elements of the process are performed with varying regularity. All the activities described are examined at least once a year to ensure that they are up to date, adequate and also adjusted to current underlying conditions when necessary.

The process involves a quantitative assessment of individual types of risk and an assessment of the existing methods and systems for monitoring and managing risk (qualitative assessment). The risk assessment concept is based on a scoring procedure, thus providing a comprehensive overview of the risk situation of the Bank.

The basis for the quantitative implementation of the ICAAP is the risk-bearing capacity calculation which demonstrates that adequate capital is in place at all times to provide sufficient cover for risks that have been entered into and which also ensures such cover is available for the future. The Bank's ICAAP is based upon a 'Pillar I Plus' approach whereby the Pillar I capital requirement for credit, market and operational requirements are supplemented by the capital allocation for other material risks not fully addressed within Pillar I. The risks considered for ICAAP include concentration, liquidity, reputational and strategic risks, interest rate risk in the banking book, and risks arising from the macroeconomic environment.

The Bank's ICAAP contains three year projections as well as the capital plan, and the Board monitors that there are adequate capital resources to support the corporate goals contained within the Bank's plan and the associated risks.

The Bank also covers Pillar II capital requirements through stress testing processes to forecast the Bank's projected capital requirements and resources in a range of stress scenarios. This enables the Bank to guarantee that it can meet its minimum regulatory capital requirements in a stressed environment. The results of the ICAAP once again show that the Bank maintains a comfortable level of excess capital and substantial liquidity that ensured the flexibility and resources needed to achieve the long-term strategic objectives of the Bank, even in situations of market stress.

7 Leverage

The leverage ratio is a regulatory and supervisory tool intended to provide a transparent and non-risk based measurement of an institution to supplement the risk-based capital requirements.

The leverage ratio is calculated on a three-month average of capital as a proportion of total exposures. Capital is defined as Tier 1 capital in line with Article 25 of the CRR, while total exposure relates to the total on- and off-balance sheet exposures less the deductions applied to Tier 1 capital.

During 2016, the European Commission published a Proposal to amend Regulation 575/2013 (CRR), which included the introduction of a 3% leverage ratio as a binding Pillar I requirement. Although this Proposal is still in draft and further discussions are expected, the Bank complies with a 3% leverage ratio based on fully-transitioned Basel III standards.

For the Year Ended 31 December 2018

7 Leverage (continued)

The following table represents the Bank's estimated leverage ratio determined in accordance with the requirements stipulated by Implementing Regulation EU 2016/200.

	2018
	€ 000
Tier 1 capital	98,677
Leverage ratio total exposure measure	948,200
Leverage ratio	10.41%
The table shown hereunder represents the amounts making up the leverage ratio exposures.
	2018
	€ 000
On-balance sheet exposures (excluding derivatives and SFTs)
On-balance sheet items (excluding derivatives and SFTs, but including collateral)	915,000
Asset amounts deducted in determining Tier 1 capital	(546)
On-balance sheet exposures (excluding derivatives and SFTs)	914,454
Off-balance sheet exposures
Off-balance sheet exposures at gross notional amount	214,559
Adjustments for conversion to credit equivalent amounts	(180,813)
Off-balance sheet exposures	33,746

The following table provides a reconciliation of accounting assets and leverage ratio exposures.

	2018
	€000
Total assets as per published financial statements	919,236
Adjustment for off-balance sheet items	33,746
Other adjustments:	(4,782)
Deduction for Deferred Tax Liability	(4,236)
Deduction for minimum loss coverage	(171)
Deduction for intangible assets	(375)
Leverage ratio total exposure measure	948,200

For the Year Ended 31 December 2018

7 Leverage (continued)

The table below shows the different on-balance sheet exposures in relation to the calculation of the leverage ratio

	2018
	€ 000
Total on-balance sheet exposures (excluding derivatives and SFTs), of which:
Exposures treated as sovereigns	198,327
Institutions	131,413
Secured by mortgages on immovable property	351,350
Retail	15,916
Corporate	61,876
Exposures in default	18,417
Other exposures	137,155
	914,454

The leverage ratio is a regulatory and supervisory instrument used by Regulator to limit the build-up of excessive leverage. The leverage ratio has increased between 2017 and 2018 to 10.4%.

As a result, the relative increase in the Group's CET1 capital of 11.1% surpassed the Bank's increase of 6.1% in the total exposure measure. While the Bank is currently not at risk at curtailing excessive leverage, the leverage ratio is expected to remain well above the mandatory requirement with the re-investment of profits leading to a greater increase in equity than the growth in assets. Board limits to the leverage ratio are set and reviewed annually and the ratio is monitored at every Audit & Risk Committee to ensure that it remains above the tolerance limit set by the Board of Directors. This limit supports the Bank's attitude towards finding a suitable balance between risk and returns provided to shareholders.

8 Remuneration policy

Information on the Bank's remuneration policy and practices is disclosed in the Remuneration Report within the Annual Report located on page 25.

9 Other Directorships

In terms of Article 91 of Directive 2013/36/EU (CRD IV), directors of an institution that is significant in terms of its size, internal organisation and the nature, scope and complexity of its activities shall not hold more than one of the following combinations of directorships at the same time:

(a) one executive directorship with two non-executive directorships;

(b) four non-executive directorships.

For the Year Ended 31 December 2018

9 Other Directorships (continued)

According to the 'Guide to banking supervision' issued by the European Central Bank in November 2014, a credit institution will be considered significant if any one of the following conditions is met:

the total value of its assets exceeds €30 billion or unless the total value of its assets is below €5 billion exceeds 20% of national GDP;
it is one of the three most significant credit institutions established in a Member State;
it is a recipient of direct assistance from the European Stability Mechanism; or
the total value of its assets exceeds €5 billion and the ratio of its cross-border assets/liabilities in more than one other participating Member State to its total assets/liabilities is above 20%.

Lombard Bank Malta p.l.c. does not meet any of the above criteria, and therefore is currently not considered significant by banking supervisors. Accordingly, the Bank is exempt from the requirements of Article 91 of CRD IV.

The Bank is not disclosing the number of directorships held by the members of the Bank's Board of Directors on the basis of materiality in terms of Article 432 of the CRR.

10 Recruitment and Diversity policy

The Bank is aware that a vigorous and professional approach to recruitment and selection of prospective staff members within the Bank helps it to attract and appoint those individuals having the necessary skills and attributes compatible with achieving the Bank's overall objectives. Thus, the Bank ensures that appointments at all levels are based on each individual's knowledge, skills, expertise and merit, as required by laws, rules, regulations, etc. and in line with policy.

The Bank undertakes a rigorous selection process for all prospective staff members bearing in mind the key activities, tasks and skills required. As part of the selection process, multiple interviews are conducted, during which the individual's knowledge, experience, skills and competence are evaluated against those of other individuals.

The Bank continues to promote diversity with no discrimination as to gender, race, family, disability, sexual orientation, identity or preference etc.

Bearing its objectives in mind, the Bank, particularly by virtue of the Board appointed Suitabilities & Evaluations Committee, endeavours to have a Board of Directors composed of members possessing diverse skills and expertise that allow the Board to create value for shareholders by ensuring that the specific risks pursued by the Bank as well as risks that are intrinsic to banking business are appropriately managed and mitigated within the Bank's risk appetite.

Five Year Summary Statements of Financial Position As at 31 December

Group

	2018	2017	2016	2015	2014
	€ 000	€ 000	€ 000	€ 000	€ 000
Assets
Balances with Central Bank of Malta,
treasury bills and cash	128,726	215,133	218,148	115,884	84,311
Cheques in course of collection	1,422	1,755	1,374	475	1,656
Investments	100,070	75,895	80,515	76,246	55,077
Loans and advances to banks	140,581	97,048	161,728	229,788	185,918
Loans and advances to customers	511,124	428,611	343,487	305,891	318,742
Investment in associate	1,684	1,575	1,681	1,645	-
Intangible assets	1,701	1,648	1,809	1,490	1,422
Property, plant and equipment	38,554	31,753	30,198	26,931	24,574
Assets classified as held for sale	778	822	833	1,023	1,022
Current tax assets	865	1,557	190	533	1,665
Deferred tax assets	9,221	8,980	8,973	7,695	6,582
Inventories	1,360	1,164	1,197	1,106	996
Trade and other receivables	5,010	8,826	8,136	8,170	5,545
Accrued income and other assets	8,973	7,979	4,462	5,043	5,835
Total assets
	950,069	882,746	862,731	781,920	693,345
Equity and liabilities
Equity
Share capital	11,044	11,044	11,044	10,943	10,422
Share premium	18,530	18,530	18,530	17,746	17,746
Property revaluation reserve	6,384	2,420	2,420	2,420	1,978
Investment revaluation reserve	4,975	4,113	5,204	4,865	1,827
Reserve for General Banking Risks	2,903	2,903	2,903	2,620	1,834
Other reserves	3,094	3,226	3,196	3,247	2,690
Retained earnings	61,380	53,904	50,541	47,556	46,291
Equity attributable to equity holders
of the Bank	108,310	96,140	93,838	89,397	82,788
Non-controlling interests	7,525	6,734	6,510	6,101	5,519
Total equity
	115,835	102,874	100,348	95,498	88,307
Liabilities
Amounts owed to banks	854	5,362	9,036	1,059	73
Amounts owed to customers	788,044	733,151	721,559	650,516	573,946
Provisions for liabilities and other charges	3,135	3,177	2,823	2,378	2,258
Current tax liabilities	-	229	310	346	-
Deferred tax liabilities	5,264	3,914	4,449	4,377	1,818
Other liabilities	27,138	23,217	16,100	18,404	16,919
Accruals and deferred income	9,799	10,822	8,106	9,342	10,024
Total liabilities	834,234	779,872	762,383	686,422	605,038
Total equity and liabilities	950,069	882,746	862,731	781,920	693,345
Memorandum items
Contingent liabilities	14,148	9,078	8,775	7,479	8,023
Commitments	202,384	247,737	182,919	106,925	72,115

Five Year Summary Income Statements

For the Year Ended 31 December

Group
	2018	2017	2016	2015	2014
	€ 000	€ 000	€ 000	€ 000	€ 000
Interest receivable and similar income Interest expense	23,188 (5,677)	21,426 (5,992)	20,905 (6,703)	20,742 (7,603)	23,608 (9,302)
Net interest income	17,511	15,434	14,202	13,139	14,306
Other operating income	45,609	42,747	33,285	29,348	26,364
Other operating charges	(49,225)	(46,372)	(35,337)	(31,569)	(29,812)
Credit impairment losses	(234)	(2,835)	(3,950)	(3,081)	(4,618)
Share of profit/(loss) of investment
accounted for using equity method	109	(106)	35	-	-
Profit before taxation	13,770	8,868	8,235	7,837	6,240
Income tax expense	(4,831)	(3,165)	(2,905)	(2,800)	(2,333)
Profit for the year	8,939	5,703	5,330	5,037	3,907
Attributable to:
Equity holders of the Bank	8,447	5,129	4,726	4,382	3,362
Non-controlling interests	492	574	604	655	545
Profit for the year	8,939	5,703	5,330	5,037	3,907

Five Year Summary Statements of Cash Flows

For the Year Ended 31 December

Group
	2018	2017	2016	2015	2014
	€ 000	€ 000	€ 000	€ 000	€ 000
Net cash flows (used in)/generated from
operating activities	(30,882)	(27,882)	(5,617)	92,464	96,097
Cash flows from investing activities
Dividends received	369	326	361	240	159
Interest received from investments	2,011	2,196	2,157	2,274	2,359
Proceeds on maturity/disposal of investments	4,406	3,285	2,995	2,687	2,414
Purchase of investments	(27,850)	(905)	(5,873)	(19,353)	(11,982)
Purchase of property, plant and equipment	(2,921)	(2,943)	(4,604)	(3,174)	(2,210)
Proceeds from disposal of property,
plant and equipment	-	-	-	-	4
Acquisition of non-controlling interests	-	(429)	(283)	-	(44)
Net cash flows (used in)/generated from
operating activities	(23,985)	1,530	(5,247)	(17,326)	(9,300)
Cash flows from financing activities
Dividends paid to equity holders of the Bank	(1,149)	(1,149)	(252)	(1,084)	(1,032)
Dividends paid to non-controlling interests	(427)	(244)	(228)	(218)	(217)
Net cash flows used in financing activities	(1,576)	(1,393)	(480)	(1,302)	(1,249)

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Lombard Bank Malta Plc

2050_rns_2019-03-25_8de61021-9328-47ee-97ab-fd68c9a79324.pdf

COMPANY ANNOUNCEMENT

ANNUAL REPORT 2018

Contents

Chairman's Statement to the Members

Chairman's Statement to the Members

Summary Overview

Review of Financial Performance

Liquidity and Own Funds

Treasury Management

Risk Management

Human Resources

Projects

Community Involvement

Outlook

The Group

Principal Activities

Review of Performance

Results for 2018

Board of Directors, Senior Management and Heads of Department

Risk Management

Statement of Directors' Responsibilities for the Financial Statements

Statement of the Directors pursuant to Listing Rule 5.68

Investment Services Rules for Investment Service Providers

Information provided in accordance with Listing Rule 5.70.1

Going Concern

Listing Rules – Disclosures

Directors' Interest in Group Companies

Group as follows: Shares in Lombard Bank Malta p.l.c. at 31 December 2018 at 5 March 2019 Safaco Ltd 42,188 42,188 First Gemini p.l.c. 2,344,134 2,344,134 Shares in MaltaPost p.l.c. at 31 December 2018 at 5 March 2019 Safaco Ltd 44,745 44,745 First Gemini p.l.c. 36,341 36,341

Other Matters

The NDSF reaffirmed that:

Audit & Risk Committee

Auditors

Non-Financial Statement

A. Introduction

B. Compliance with the Code

Principle 1: The Board

Principle 2: Chairman and Chief Executive Officer

Principle 3: Composition of the Board

Principle 4: The Responsibility of the Board

Principle 5: Board Meetings

Principle 6: Information and Professional Development

Principle 7: Evaluation of the Board's Performance

Principle 8: Committees

Audit & Risk Committee

Assets & Liabilities Committee (ALCO)

Credit Committee

Suitabilities & Evaluations Committee

Remuneration Committee

Principle 9 and 10: Relations with Shareholders and Markets and Institutional Shareholders

Principle 11: Conflicts of Interest

Principle 12: Corporate Social Responsibility

C. Non-Compliance with the Code

Principle 4: (Code Provision 4.2.7)

Principle 8A: (Remuneration Committee)

Principle 8B: (Nomination Committee)

Principle 9: (Code Provision 9.3)

D. Internal Control (Listing Rule 5.97.4)

E. General Meetings (Listing Rule 5.97.6)

Remuneration Report

Remuneration Policy

Directors

Remuneration Report

Senior Management

Other

Company Information

Number of shareholders at 31 December 2018 analysed by range:

Number of shareholders at 5 March 2019 analysed by range:

Company Information

Senior Management

Heads of Departments

Company Information

Registered Office

Branches

Credit

Independent Auditor's Report

Our opinion

What we have audited