REG - Manx Financial Group - Report and Accounts to 31 December 2020
FOR IMMEDIATE RELEASE 4th March 2021
Manx Financial Group PLC (the 'Company')
Report and accounts for the year ended 31 December 2020
Manx Financial Group PLC (LSE: MFX), the financial services group which includes Conister Bank Limited, Conister Finance & Leasing Ltd, Blue Star Business Solutions Limited, Edgewater Associates Limited and Manx FX Limited presents its audited final results for the year ended 31 December 2020.
Jim Mellon, Executive Chairman, commented: "I believe that our diversity continues to be our strength and each of our operations is well poised to take advantage of any economic upturn during 2021 and beyond."
The 2020 Audited Annual Report and Accounts will be posted to Shareholders and will be available from the Company's website www.mfg.im shortly.
This announcement contains inside information for the purposes of Article 7 of EU Regulation No. 596/2014 on market abuse. Upon the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.
For further information, please contact:
Manx Financial Group PLC
Denham Eke, Chief Executive
Tel +44 (0)1624 694694
Beaumont Cornish Limited
Roland Cornish/James Biddle
Tel +44 (0) 20 7628 3396
Greentarget Limited
Dafina Grapci-Penney
Tel +44 (0) 203 963 1887
Dear Shareholders
Introduction
As reported in my Interim Statement, the Group was well prepared for the economic downturn caused by Covid-19 and Brexit. Our staff have risen magnificently to the challenge and I would like to thank them for their teamwork, commitment and focus on helping both their colleagues and our customers through these difficult times.
During the year we successfully agreed our long-term VAT dispute with the Isle of Man Customs & Excise regarding the unfair recovery rate applied to the Company. We received full recovery of our debtor.
Our banking subsidiary, Conister Bank Limited (the "Bank"), quickly recognised the difficulties that Covid-19 would bring and, consequently, announced it would set aside £10 million to help Isle of Man businesses. Following this, when the Manx government announced two business support schemes, the Bank became the only lender on the Island to become accredited for both - clearly demonstrating our commitment to help. The Bank then became accredited through the British Business Bank for the two UK government business support schemes. All four schemes provide an 80 -100% government guarantee against loss. These schemes together provided much needed support to companies both on-and off-Island and, via these guarantees, afforded a safe lending proposition to the Bank.
In April 2020, the Company entered into a share buyback agreement to purchase and cancel 16,966,158 ordinary shares in the Company. The positive impact of this transaction increased the Net Asset Value per share for all the remaining shareholders by approximately 15%. Further, in December 2020, after an absence of 15 years, the Company announced the return of a dividend scheme which will allow shareholders to either increase their shareholding in the Company at no cost or, alternatively, to take a cash dividend. The terms for the 2020 dividend will be announced at our forthcoming Annual General Meeting.
Financial Performance
At the peak of the first UK lockdown, the Bank had negotiated forbearance or payment holidays to help over 2,000 customers. This figure was managed down to only 144 just before the UK went into its third lockdown in December. Whilst this demonstrated the underlying quality of the loan book, it also necessitated an increase in provisions as we continued to prudently manage the balance sheet. By year-end, provisions stood at £3.95 million (2019: £1.90 million) with a significant amount of the increase relating to one customer. Consequently, our profit before tax decreased by £1.0 million to £2.0 million (2019: £3.0 million), a figure ameliorated by credits totalling £1.3 million relating to our recent acquisitions, VAT recovery and treasury management, partially offsetting some of the increase in provisions.
Despite the economic headwinds, lending at the Bank was a record £167.2 million (2019: 158.8 million) and our total assets increased by £15.1 million to £268.0 million (2019: £252.9 million), a growth of 6%. Also, this volatility created opportunity for Manx FX Limited, our foreign exchange advisory business, which recorded a record profit of £1.1 million (2019: £0.5 million) and is well positioned for a strong 2021.
Our operating expenses, excluding provisions and the VAT credit, decreased by £0.2 million to £11.3 million (2019: £11.5 million), reflecting our improved cost control which was achieved without compromising lending growth. In turn, our operating income ratio, less provisions and VAT, improved by 0.5% to 69.1% (2019: 69.6%).
Our loyal Isle of Man depositors have underpinned our loan book growth with deposits increasing by £8.4 million to £218.3 million (2019: £209.9 million) and our loan to deposit ratio improved by 3% to 89% (2019: 86%) - a key measure in demonstrating operational efficiency.
Following the Bank increasing its holding in Beer Swaps Limited to 75%, we were able to recognize a £2.6 million increase in our fixed assets.
Liabilities increased by £14.9 million to £245.5 million (2019: £230.6 million) driven mostly by an £8.4 million increase in deposits to support lending, and a £6.3 million increase in loan notes. The latter figure relates to the share buy back and cancellation, together with further loans providing incremental regulatory capital to allow the Bank to continue to make additional acquisitions and to increase lending to underpin further growth.
Key objectives
In this economic environment, our fundamental focus continues to be the protection of shareholder value. Thus, following a recent review, our strategic concentration remains to:
n Provide the highest quality service throughout our operations to all customers, ensuring that their treatment is both fair and appropriate;
n Adopt a pro-active strategy of managing risk within a structured compliant regime;
n Concentrate on developing our core business by considered acquisitions, increasing prudential lending and augmenting the range of financial services we offer;
n Continue the implementation of an enhanced and scalable IT infrastructure to better service the operational requirements of a growing Group without the requirement for a disproportionate increase in headcount and other associated operational costs;
n Continue to develop our Treasury management to improve the return on the liabilities side of our balance sheet; and
n Manage our balance sheet to continue to exceed the regulatory requirements for capital adequacy.
Strategic Report / Risk and Governance
Immediately following this statement, I detail our approach to strategy, and our assessment of risk and our implementation of compliance and governance. In particular, I set out our perceived risks and how these are managed, together with a review of our regulatory requirements and also how we meet the obligations of the QCA Code. Rather than reiterate these methodologies at this point, I would ask that you take the opportunity to review these topics in conjunction with my report.
Conister Bank Limited
The Bank finally and successfully resolved its position with the Isle of Man Customs and Excise ("C&E") with regards to its VAT recovery rate. This has taken 13 years and numerous court cases for the claim, amounting to £1.3 million, to be settled in our favour. I would like to thank our Executives for their perseverance in this matter. Shortly after this claim was resolved, a second claim of £0.6 million was made to C&E, and I expect to be able to provide an update on its resolution at the half-year.
Having positioned the business for growth in 2019, the 2020 strategy was impacted by the onset of Covid-19, even though the Manx market quickly returned to a near-normal level after the initial lockdown, with the Manx loan book growing by £8.4 million to £54.3 million (2019: £45.9 million). However, our UK business was badly impacted by the three lockdowns which eventually drove the economy into a sharp recession. We re-positioned UK lending to the more prime sectors, exiting those with a higher risk exposure and provided liquidity to markets that had already demonstrated a level of resilience to the recession. Whilst this move has reduced new business lending, with a consequent £6.1 million decline of the UK loan book to £35.7 million (2019: 41.8 million), the quality of the loans now underwritten has improved considerably.
During the year, the Bank acquired a controlling interest in Beer Swaps Limited (trading as Ninkasi), the largest lessor of fermenting vessels to the UK brewing industry. This move takes the Bank's shareholding from 20% to 75%. The investment is already outperforming our expectations and we retain an option to acquire a further 15% in the coming months.
The Bank continues to attract deposits at historically low market rates which will position it well against any inflationary pressure and competition. With negative interest rates experienced in the UK Gilts primary market for the first time, our treasury management strategy was to leave our liquidity of £31.8 million (2019: £13.5 million) in cash and cash equivalents for the short-term. Over the next year, the Bank intends to utilise this excess liquidity to sustain lending in our preferred markets, with a particular focus on the Isle of Man commercial market and the UK wholesale market.
I have discussed over the last few years the need to reduce our dependence on overly expensive introducers and I am pleased to report continued progress on this project with commissions paid reducing by 36.3% to £3.6 million (2019: £5.7 million).
Personnel expenses increased by £0.4 million as the Bank's headcount increased by seven as part of the Beer Swaps Limited transaction. Overheads reduced by £0.2 million to £2.9 million (2019: £3.1 million), reflecting various cost-saving initiatives in the Bank's response to the impact of the pandemic. With our loan book growth, provisioning increased in the year by £2.1 million to £4.0 million (2019: £1.9 million). This increase in provisions reflected the deteriorating credit conditions in the UK as the economic lockdowns impacted Small and Medium-Sized Enterprises. Depreciation and amortisation increased by £0.2 million to £0.5 million (2019: £0.3 million), driven by continued investment in IT implementation as discussed in the 2020 Interim Statement. With other costs offsetting each other, the Bank's cost base increased by £2.5 million to £11.9 million (2019: £9.4 million).
Bearing in mind the economic backdrop and our prudent management of the balance sheet, I am pleased to report the £0.7 million reduction in profit to £1.9 million (2019: £2.6 million) is less of a contraction than our peers.
Total assets, driven by loan book growth, increased by £14.4 million to £260.2 million (2019: £245.7 million), an improvement of 5.9%. During the year, we continued to expand the capital base of the Bank by increasing the issued share capital by a further £4.8 million to £15.5 million (2019: £10.8 million). Shareholder funds increased by £5.1 million to £30.1 million (2019: £25.0 million), a growth of 20.1%. Thus, the Bank finished the year in a stronger financial position than at the start.
Edgewater Associates Limited ("EAL")
Our independent financial advisory business remains the largest on the Isle of Man and had a difficult year with the trading conditions negatively impacted by Covid-19. Meeting clients became problematic and many sought to delay investment decisions due to market turbulence. Whilst a UK economic recovery is expected later in 2021, the Gross Domestic Product fell steeply by 19% in the second quarter of 2020, which created market uncertainty around the potential length of the UK recession. As a result, net income fell by £0.4 million in the year to £2.1 million (2019: £2.5 million). Operating costs remained constant at £2.1 million, leading to a small loss of £0.1 million (2019 profit: £0.2 million).
Notwithstanding the result, assets under management increased by 11.4% to £361 million (2019: £324 million) and renewal income remained consistent at £1.1 million, indicating positive customer satisfaction with portfolio management. The growth in assets under management is also a strong indication that the renewal income stream will increase in 2021.
Manx FX Limited ("MFX")
Our foreign exchange advisory business has had a remarkable year. Whereas our IFA business suffered from market volatility, MFX benefitted, demonstrating the importance in having a fully diversified financial services group.
Turnover increased to £1.3 million (2019: £0.8 million) as customers moved into safer, stable currencies such as Euros and USD and hedged their future exposures. With its cost income ratio improving significantly to 17.3% (2019: 39.4%), profitability increased by 118.3% to £1.1 million (2019: £0.5 million)
The business continues to have a very liquid balance sheet and declared an interim dividend of £0.6 million for the year (2019: £1.1 million).
Beer Swaps Limited ("BSL")
On 28 February 2020, the Bank acquired further shares in BSL to increase its ordinary shareholding to 75% for a cash consideration of £0.7 million. For the period under ownership, BSL reported turnover of £0.6 million and a profit before tax of £0.2 million with net assets of £0.2 million. BSL is the largest tank lessor in the UK brewing market and is developing new related products to offer both its existing UK customers and, potentially, Europe.
Blue Star Business Solutions Limited ("BBSL")
In April 2019, the Group acquired 100% of the shares in BBSL for a total expected cash consideration of £2.0 million. This UK business complements the Bank as it contracts directly with the end customer as opposed to through an intermediary and specialises in markets in which the Bank has little exposure. It is worth noting that despite BBSL operating within the same negative trading environment, it originated £4.1 million of advances to the Bank, generating £0.7 million of interest income (2019: £0.6 million) and its introductions generating little to no arrears. This business is a specialist in its market, and this is reflected in the quality of the loans it introduces. BBSL brokered a further £4.0 million of loans to other funders, providing a second revenue stream for the business.
Outlook
The Isle of Man has successfully bounced back from lockdowns, as shown by the less than expected uptake in the government support schemes, our positive lending figures and the encouraging recent government budget. As such, I expect a continued improvement in the economy on Island which will, in turn, create a positive environment for our lending and wealth management businesses to operate within.
The early signs show a sustained recovery is within the UK government's grasp, assuming infection rates continue to decrease and the well-managed roll-out of its vaccination strategy continues. However, there will be numerous sectors of the economy which will continue to require sustained government support. The Bank has been monitoring sector performance and will apply its liquidity to those sectors that have proved more resilient to the pandemic and are aligned with its longer-term growth strategy. The careful selection of markets and the continued lending through the government support schemes should create an excellent opportunity for growing our loan book.
We continue to consider new sources of liquidity both on and off Island. Indeed, the Bank launched a successful series of notice accounts deposit products on Island in 2020 and it will progress accessing new sources of liquidity in the UK in the coming year to ensure it has a sustainable base in each jurisdiction.
I believe that we have proved that our diversity continues to be our strength. Our organic growth strategy for the Bank is well developed and we will also take this time of turbulence to consider further investments to gain footholds or to increase our market share in identified strategic sectors. Our cash reserves are considerable, and the Bank now enjoys the highest prudential ratios held over the last 10 years. In short, each of our operations is well poised to take advantage of any economic upturn during 2021 and beyond.
Once again, I would like to thank my fellow Board members, the Group's executive team and staff for their continued contribution to our ongoing business. I would also like to thank our shareholders and customers for their continued support.
Jim Mellon
Executive Chairman
3 March 2021
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
For the year ended 31 December
Notes
2020
£000
2019
£000
Interest income
20,692
22,320
Interest expense
(5,222)
(4,391)
Net interest income
9
15,470
17,929
Fee and commission income
10
3,865
3,796
Fee and commission expense
10
(3,481)
(5,426)
Depreciation on leasing assets
22
(406)
(333)
Net trading income
15,448
15,966
Other operating income
200
388
Gain / (loss) on financial instruments
19
259
(1)
Realised gains on debt securities
18
261
179
Revaluation on acquisition of subsidiary
31
237
-
Operating income
16,405
16,532
Personnel expenses
11
(6,823)
(6,762)
Other expenses
12
(3,707)
(4,135)
Impairment on loans and advances to customers
13
(3,950)
(1,900)
Depreciation
22
(490)
(305)
Amortisation and impairment of intangibles
23
(374)
(430)
Share of profit of equity accounted investees, net of tax
29
54
124
VAT recovery
21
906
(101)
Profit before tax payable
14
2,021
3,023
Income tax expense
15
(53)
(350)
Profit for the year
1,968
2,673
For the year ended 31 December
Notes
2020
£000
2019
£000
Profit for the year
1,968
2,673
Other comprehensive income:
Items that will be reclassified to profit or loss
Unrealised (loss)/gains on debt securities
18
(51)
51
Items that will never be reclassified to profit or loss
Actuarial loss on defined benefit pension scheme taken to equity
27
(241)
(128)
Total comprehensive income for the period attributable to owners
1,676
2,596
Profit attributable to:
Owners of the Company
1,935
2,673
Non-controlling interests
33
-
1,968
2,673
Total comprehensive income attributable to:
Owners of the Company
1,643
2,596
Non-controlling interests
33
-
1,676
2,596
Earnings per share - Profit for the year
Basic earnings per share (pence)
16
1.65
2.04
Diluted earnings per share (pence)
16
1.37
1.66
Earnings per share - Total comprehensive income for the year
Basic earnings per share (pence)
16
1.41
1.98
Diluted earnings per share (pence)
16
1.19
1.62
The Directors believe that all results derive from continuing activities.
COMPANY STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
For the year ended 31 December
Notes
2020
£000
2019
£000
Dividend income
572
1,466
Interest income
522
564
Operating income
1,094
2,030
Personnel expenses
(74)
(146)
Administration expenses
(122)
(100)
Depreciation expense
(101)
(101)
Profit before tax payable
14
797
1,683
Tax payable
-
-
Profit for the year
797
1,683
Total comprehensive income for the year
797
1,683
The Directors believe that all results derive from continuing activities.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 December
Notes
2020
£000
2019
£000
Assets
Cash and cash equivalents
17
34,053
14,620
Debt securities
18
25,532
46,792
Trading asset
19
4
19
Loans and advances to customers
20
193,143
179,370
Trade and other receivables
21
2,170
2,478
Property, plant and equipment
22
6,045
3,299
Intangible assets
23
2,286
2,293
Investment in associates
29
316
282
Goodwill
32
4,412
3,734
Total assets
267,961
252,887
Liabilities
Deposits from customers
24
218,285
209,933
Creditors and accrued charges
25
3,206
2,972
Contingent consideration
6(ii)
672
863
Loan notes
26
22,222
15,971
Pension liability
27
944
688
Deferred tax liability
15
197
141
Total liabilities
245,526
230,568
Equity
Called up share capital
28
19,121
20,732
Profit and loss account
3,230
1,587
Non-controlling interest
84
-
Total equity
22,435
22,319
Total liabilities and equity
267,961
252,887
COMPANY STATEMENT OF FINANCIAL POSITION
As at 31 December
Notes
2020
£000
2019
£000
Assets
Cash and cash equivalents
17
1,378
119
Trade and other receivables
21
309
231
Amounts due from Group undertakings
33
1,935
1,016
Property, plant and equipment
22
354
450
Intangible assets
7
7
Investment in subsidiaries
30
22,597
17,822
Subordinated loans
33
7,728
7,778
Total assets
34,308
27,423
Liabilities
Creditors and accrued charges
25
501
575
Amounts due to Group undertakings
33
2,297
775
Loan notes
26
22,222
15,971
Total liabilities
25,020
17,321
Equity
Called up share capital
28
19,121
20,732
Profit and loss account
(9,833)
(10,630)
Total equity
9,288
10,102
Total liabilities and equity
34,308
27,423
CONSOLIDATED AND COMPANY STATEMENTS OF CHANGES IN EQUITY
Attributable to owners of the Company
Group
Share capital
£000
Profit and loss account
£000
Total
£000
Non-controlling interests
£000
Total
equity
£000
Balance as at 1 January 2019
20,732
(1,009)
19,723
-
19,723
Profit for the year
-
2,673
2,673
-
2,673
Other comprehensive income
-
(77)
(77)
-
(77)
Transactions with owners
-
-
-
-
-
Balance as at 31 December 2019
20,732
1,587
22,319
-
22,319
Profit for the year
-
1,935
1,935
33
1,968
Other comprehensive income
-
(292)
(292)
-
(292)
Transactions with owners
Changes in ownership interests
(1,611)
-
(1,611)
-
(1,611)
Acquisition of subsidiary with non-controlling interest
-
-
-
51
51
Balance as at 31 December 2020
19,121
3,230
22,351
84
22,435
Company
Share Capital
£000
Profit and loss account
£000
Total
equity
£000
Balance as at 1 January 2019
20,732
(12,313)
8,419
Profit for the year
-
1,683
1,683
Transactions with owners
-
-
-
Balance as at 31 December 2019
20,732
(10,630)
10,102
Profit for the year
-
797
797
Transactions with owners
Changes in ownership interests
(1,611)
-
(1,611)
Balance as at 31 December 2020
19,121
(9,833)
9,288
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December
Notes
2020
£000
2019
£000
RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS
Profit before tax
2,021
3,023
Adjustments for:
Depreciation
22
896
638
Amortisation and impairment of intangibles
23
374
430
Share of profit of equity accounted investees
29
(54)
(124)
Contingent consideration interest expense
6(ii)
122
88
Pension charge included in personnel expenses
27
15
17
Gain on financial instruments
6(ii)
(253)
-
Revaluation on acquisition of subsidiary
31
(237)
-
2,884
4,072
Changes in:
Trading asset
19
15
1
Trade and other receivables
415
118
Creditors and accrued charges
315
144
Net cash flow from trading activities
3,629
4,335
Changes in:
Loans and advances to customers
(16,023)
(31,092)
Deposits from customers
8,352
51,433
Pension contribution
27
-
(41)
Cash (outflow) / inflow from operating activities
(4,042)
24,635
CASH FLOW STATEMENT
Cash from operating activities
Cash (outflow) / inflow from operating activities
(4,042)
24,635
Income taxes paid
(172)
(379)
Net cash (outflow) / inflow from operating activities
(4,214)
24,256
Cash flows from investing activities
Purchase of property, plant and equipment
22
(1,187)
(1,634)
Purchase of intangible assets
23
(231)
(132)
Sale of tangible fixed assets
22
127
107
Acquisition of subsidiary or associate, net of cash acquired
31
(648)
(1,337)
Sale / (purchase) of debt securities
18
21,209
(16,207)
Contingent consideration
(59)
-
Net cash inflow / (outflow) from investing activities
19,211
(19,203)
Cash flows from financing activities
Receipt of loan notes
26
4,640
100
Payment of lease liabilities (capital)
35
(204)
(148)
Decrease in borrowings from block creditors
-
(138)
Net cash inflow / (outflow) from financing activities
4,436
(186)
Net increase in cash and cash equivalents
19,433
4,867
Cash and cash equivalents at 1 January
14,620
9,753
Cash and cash equivalents at 31 December
34,053
14,620
Included in cash flows are:
Interest received - cash amounts
20,274
21,441
Interest paid - cash amounts
(5,053)
(4,251)
COMPANY STATEMENT OF CASH FLOWS
.
For the year ended 31 December
Notes
2020
£000
2019
£000
RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS
Profit before tax
797
1,683
Adjustments for:
Depreciation
22
101
101
Dividend declared
(572)
(1,466)
326
318
Changes in:
Amounts due from group undertakings
(347)
-
Trade and other receivables
(78)
(199)
Creditors and accrued charges
17
98
Amounts due from / (to) Group undertakings
1,522
(595)
Cash inflow / (outflow) from operating activities
1,440
(378)
CASH FLOW STATEMENT
Cash from operating activities
Cash outflow from operating activities
1,440
(378)
Income taxes paid
-
-
Net cash inflow / (outflow) from operating activities
1,440
(378)
Cash flows from investing activities
Dividend received
-
450
Investment in subsidiaries
30
(4,775)
(1,650)
Purchase of property, plant and equipment
(5)
-
Purchase of intangible assets
-
(7)
Net cash outflow from investing activities
(4,780)
(1,207)
Cash flows from financing activities
Receipt of loan notes
26
4,640
100
Receipt of subordinated loan
50
Payment of finance lease liability
(91)
(42)
Net cash inflow from financing activities
4,599
58
Net increase / (decrease) in cash and cash equivalents
1,259
(1,527)
Cash and cash equivalents at 1 January
119
1,646
Cash and cash equivalents at 31 December
1,378
119
The notes form part of these financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Reporting entity
Manx Financial Group PLC ("Company") is a company incorporated in the Isle of Man. The consolidated financial statements of the Company for the year ended 31 December 2020 comprise the Company and its subsidiaries ("Group").
2. Basis of accounting
The consolidated and the separate financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and International Financial Reporting Interpretations Committee ("IFRIC") interpretations applicable to companies reporting under IFRS, including International Accounting Standards ("IAS"), on a going concern basis as disclosed in the Directors' Report.
3. Functional and presentation currency
These financial statements are presented in pounds sterling, which is the Group's functional currency. All amounts have been rounded to the nearest thousand, unless otherwise indicated. All subsidiaries of the Group have pounds sterling as their functional currency.
4. Use of judgements and estimates
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
The extent to which COVID-19 impacts the Group's business will depend on the effectiveness of government containment actions and the effectiveness of government and central bank stimulus measures. As the economic environment remains uncertain, actual results may differ from the estimates below.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
Assumptions and estimation uncertainties
Information about assumptions and estimation uncertainties at year-end that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year is included in the following notes:
n Note 21 - measurement of VAT receivable: key assumptions underlying carrying amount;
n Note 27 - measurement of defined benefit obligations: key actuarial assumptions;
n Note 23 and 32 - impairment test of intangible assets and goodwill: key assumptions underlying recoverable amounts;
n Note 39(G)(vii) - measurement of Expected Credit Loss ("ECL") allowance for loans and advances to customers and assessment of specific impairment allowances where loans are in default or arrears: key assumptions in determining the weighted-average loss rate; and
n Note 6 - measurement of contingent consideration.
5. Financial instruments - Classification
For description of how the Group classifies financial assets and liabilities, see note 39(G)(ii).
The following table provides reconciliation between line items in the statement of financial position and categories of financial instruments.
Mandatorily at FVTPL
Designated as at FVTPL
FVOCI - debt instruments
FVOCI - equity instruments
Amortised cost
Total carrying amount
31 December 2020
£000
£000
£000
£000
£000
£000
Cash and cash equivalents
-
-
-
-
34,053
34,053
Debt securities
-
-
25,532
-
-
25,532
Trading assets
4
-
-
-
-
4
Loans and advances to customers
-
-
-
-
193,143
193,143
Trade and other receivables
-
-
-
-
2,170
2,170
Total financial assets
4
-
25,532
-
229,366
254,902
Deposits from customers
-
-
-
-
218,285
218,285
Creditor and accrued charges
-
-
-
-
3,206
3,206
Loan notes
-
-
-
-
22,222
22,222
Total financial liabilities
-
-
-
-
243,713
243,713
Mandatorily at FVTPL
Designated as at FVTPL
FVOCI -
debt instruments
FVOCI - equity instruments
Amortised cost
Total carrying amount
31 December 2019
£000
£000
£000
£000
£000
£000
Cash and cash equivalents
-
-
-
-
14,620
14,620
Debt securities
-
-
46,792
-
-
46,792
Trading assets
19
-
-
-
-
19
Loans and advances to customers
-
-
-
-
179,370
179,370
Trade and other receivables
-
-
-
-
2,478
2,478
Total financial assets
19
-
46,792
-
196,468
243,279
Deposits from customers
-
-
-
-
209,933
209,933
Creditor and accrued charges
-
-
-
-
2,972
2,972
Block creditors
-
-
-
-
-
-
Loan notes
-
-
-
-
15,971
15,971
Total financial liabilities
-
-
-
-
228,876
228,876
6. Financial instruments - Fair values
For description of the Group's fair value measurement accounting policy, see note 39(G)(vi).
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.
Carrying amount
Fair value
31 December 2020
Total
£000
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Financial assets measured at fair value
Debt securities
25,532
25,532
-
-
25,532
Trading assets
4
4
-
-
4
25,536
25,536
-
-
25,536
Financial assets not measured at fair value
Cash and cash equivalents
34,053
-
-
-
-
Loans and advances to customers
193,143
-
-
-
-
Trade and other receivables
2,170
-
-
-
-
Investment in associate
316
-
-
-
-
229,682
-
-
-
-
Financial liabilities measured at fair value
Contingent consideration
672
-
-
672
672
672
-
-
672
672
Financial liabilities not measured at fair value
Deposits from customers
218,285
-
-
-
-
Creditors and accrued charges
3,206
-
-
-
-
Loan notes
22,222
-
-
-
-
243,713
-
-
-
-
Carrying amount
Fair value
31 December 2019
Total
£000
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Financial assets measured at fair value
Debt securities
46,792
46,792
-
-
46,792
Trading assets
19
19
-
-
19
46,811
46,811
-
-
46,811
Financial assets not measured at fair value
Cash and cash equivalents
14,620
-
-
-
-
Loans and advances to customers
179,370
-
-
-
-
Trade and other receivables
2,478
-
-
-
-
Investment in associate
282
-
-
-
-
196,750
-
-
-
-
Financial liabilities measured at fair value
Contingent consideration
863
-
-
863
863
863
-
-
863
863
Financial liabilities not measured at fair value
Deposits from customers
209,933
-
-
-
-
Creditors and accrued charges
2,972
-
-
-
-
Block creditors
-
-
-
-
-
Loan notes
15,971
-
-
-
-
228,876
-
-
-
-
Measurement of fair values
i. Valuation techniques and significant unobservable inputs
Type
Valuation technique
Significant unobservable inputs
Inter-relationship between significant unobservable inputs and fair value measurement
Debt securities
Market comparison/discounted cash flow: The fair value is estimated considering a net present value calculated using discount rates derived from quoted yields of securities with similar maturity and credit rating that are traded in active markets.
Not applicable.
Not applicable.
Contingent consideration
Discounted cash flows: The valuation model considers the present value of the expected future payments, discounted using a risk-adjusted discount rate.
Expected cash flows £790,869 (2019: £1,199,701)
Risk-adjusted discount rate 14% (2019: 16%)
The estimated fair value would increase (decrease) if:
-the expected cash flows were higher (lower); or
-the risk-adjusted discount rate were lower (higher).
ii. Level 3 recurring fair values
Reconciliation of Level 3 fair values
The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values.
2020
£000
2019
£000
Balance at 1 January
863
-
Assumed in a business combination (see note 31)
-
775
Finance costs
122
-
Net change in fair value (unrealised)
(253)
88
(131)
88
Payment
(60)
-
Balance at 31 December
672
863
Sensitivity analysis
For the fair value of contingent consideration, reasonably possible changes at the reporting date to one of the significant unobservable inputs, holding other inputs constant would have the following effects.
Profit or loss
31 December 2020
Increase
Decrease
Expected cash flows (10% movement)
(66)
66
Risk-adjusted discount rate (1% movement (100 bps))
7
(8)
7. Financial risk review
Risk management
This note presents information about the Group's exposure to financial risks and the Group's management of capital. For information on the Group's financial risk management framework, see note 37.
A. Credit risk
For definition of credit risk and information on how credit risk is mitigated by the Group, see note 37.
i. Credit quality analysis
Loans and advances to customers
Explanation of the terms 'Stage 1', 'Stage 2' and 'Stage 3' is included in note 39(G)(vii).
An analysis of the credit risk on loans and advances to customers is as follows:
2020
2019
Stage 1
£000
Stage 2
£000
Stage 3
£000
Total
£000
Stage 1
£000
Stage 2
£000
Stage 3
£000
Total
£000
Grade A
173,673
-
-
173,673
168,796
-
-
168,796
Grade B
-
5,728
7,751
13,479
1,143
1,675
-
2,818
Grade C
335
9
12,771
13,115
-
1,985
10,544
12,529
Gross value
174,008
5,737
20,522
200,267
169,939
3,660
10,544
184,143
Allowance for impairment
(423)
(18)
(6,683)
(7,124)
(116)
(467)
(4,190)
(4,773)
Carrying value
173,585
5,719
13,839
193,143
169,823
3,193
6,354
179,370
Loans are graded A to C depending on the level of risk. Grade A relates to agreements with the lowest risk, Grade B with medium risk and Grade C relates to agreements with the highest of risk.
The following table sets out information about the overdue status of loans and advances to customers in Stage 1, 2 and 3:
2020
2019
31 December
Stage 1
£000
Stage 2
£000
Stage 3
£000
Total
£000
Stage 1
£000
Stage 2
£000
Stage 3
£000
Total
£000
Current
170,436
-
-
170,436
145,373
-
-
145,373
Overdue < 30 days
3,572
-
-
3,572
24,259
-
-
24,259
Overdue > 30 days
-
5,737
20,522
26,259
307
3,660
10,544
14,511
174,008
5,737
20,522
200,267
169,939
3,660
10,544
184,143
For Stage 3 loans and advances that are overdue for more than 30 days, the Bank holds collateral with a value of £13,362,468 (2019: £8,706,600) representing security cover of 65% (2019: 60%).
Debt securities, cash and cash equivalents
The following table sets out the credit quality of liquid assets:
2020
2019
£000
£000
Government bonds and treasury bills
Rated A to A+
24,431
44,690
Floating rate notes
Rated A to A+
1,101
2,102
Cash and cash equivalents
Rated A to A+
34,053
14,620
59,585
61,412
The analysis has been based on Standard & Poor's ratings.
ii. Collateral and other credit enhancements
The Group holds collateral in the form of the underlying assets (typically private and commercial vehicles, plant and machinery) to loan arrangements as security for HP, finances leases, vehicle stocking plans, block discounting, wholesale funding arrangements, integrated wholesale funding arrangements and secured commercial loan balances, which are sub-categories of loans and advances to customers. In addition, the commission share schemes have an element of capital indemnified. During 2020, 34.0% of loans and advances had an element of capital indemnification (2019: 25.5%).
Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. At the time of granting credit within the sub-categories listed above, the loan balances due are secured over the underlying assets held as collateral.
iii. Amounts arising from ECL
See accounting policy in note 39(G)(vii).
IFRS 9 significantly overhauled the requirements and methodology used to assess credit impairments by transitioning to a forward-looking approach based on an expected credit loss model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments. Under IFRS 9, credit losses are recognised earlier than under IAS 39 - Financial Instruments: Recognition and Measurement.
After a detailed review, the Group devised and implemented an impairment methodology in light of the IFRS 9 requirements outlined above noting the following:
§ A Significant Increase in Credit Risk ("SICR") is always deemed to occur when the borrower is 30 days past due on its contractual payments. If the Group becomes aware ahead of this time of non-compliance or financial difficulties of the borrower, such as loss of employment, avoiding contact with the Group then a SICR has also deemed to occur.
§ The Group has granted payment holidays to customers with no prior arrears based on individual circumstances. These customers are not able to incur further arrears as no payments are being called whilst they are on the payment holiday. These customers have not been deemed to have a SICR unless the customer is under exceptional financial hardship due to COVID-19.
§ A receivable is always deemed to be in default and credit-impaired when the borrower is 90 days past due on its contractual payments or earlier if the Group becomes aware of severe financial difficulties such as bankruptcy, individual voluntary arrangements, abscond or disappearance, fraudulent activity or other similar events.
§ The ECL was derived by reviewing the Group's loss rate and loss-given-default over the past 8 years by product and geographical segment.
§ The Group has assumed that the future economic conditions will broadly mirror the current environment and therefore the forecasted loss levels in the next 3 years will match the Group's experience in recent years.
§ For portfolios where the Group has never had a default in its history or has robust credit enhancements such as credit insurance or default indemnities for the entire portfolio, then no IFRS 9 provision is made.
§ If the Group holds objective evidence through specifically assessing a credit-impaired receivable and believes it will go on to completely recover the debt due to the collateral held and cooperation with the borrower, then no IFRS 9 provision is made.
There have been no significant changes to ECL assumptions from the prior year.
iv. Concentration of credit risk
Geographical
Lending is restricted to individuals and entities with Isle of Man, UK or Channel Islands addresses.
Segmental
The Bank is exposed to credit risk with regard to customer loan accounts, comprising HP and finance lease balances, unsecured personal loans, secured commercial loans, block discounting, vehicle stocking plan loans and wholesale funding agreements. In addition, the Bank lends via significant introducers into the UK. There was no introducer that accounted for more than 20% of the Bank's total lending portfolio at the end of 31 December 2020 (2019: more than 20%).
B. Liquidity risk
For the definition of liquidity risk and information on how liquidity risk is manged by the Group, see note 37.
i. Exposure to liquidity risk
The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers and short-term funding. For this purpose, net liquid assets includes cash and cash equivalents and investment-grade debt securities for which there is an active and liquid market.
Details of the reported Group ratio of net liquid assets to deposits from customers at the reporting date and during the reporting year were as follows:
2020
2019
At 31 December
27%
29%
Average for the year
28%
23%
Maximum for the year
32%
29%
Minimum for the year
25%
19%
ii. Maturity analysis for financial liabilities and financial assets
The table below shows the Group's financial liabilities classified by their earliest possible contractual maturity, on an undiscounted basis including interest due at the end of the deposit term. Based on historical data, the Group's expected actual cash flow from these items vary from this analysis due to the expected re-investment of maturing customer deposits.
Residual contractual maturities of financial liabilities as at the reporting date (undiscounted):
31 December 2020
Sight-
8 days
£000
>8 days
- 1 month
£000
>1 month
- 3 months
£000
>3 months
- 6 months
£000
>6 months
- 1 year
£000
>1 year
- 3 years
£000
>3 years
- 5 years
£000
>5
years
£000
Total
£000
Deposits
3,106
3,194
19,775
53,380
59,023
61,491
25,221
-
225,190
Other liabilities
27
88
668
819
3,630
16,401
7,851
1,141
30,625
Total liabilities
3,133
3,282
20,443
54,199
62,653
77,892
33,072
1,141
255,815
31 December 2019
Sight-
8 days
£000
>8 days
- 1 month
£000
>1 month
- 3 months
£000
>3 months
- 6 months
£000
>6 months
- 1 year
£000
>1 year
- 3 years
£000
>3 years
- 5 years
£000
>5
years
£000
Total
£000
Deposits
2,900
5,127
19,670
40,315
43,792
77,746
22,397
-
211,947
Other liabilities
5,212
-
4,765
16
7,281
1,274
1,444
2,180
22,172
Total liabilities
8,112
5,127
24,435
40,331
51,073
79,020
23,841
2,180
234,119
Maturity of assets and liabilities at the reporting date:
31 December 2020
Sight-
8 days
£000
>8 days
- 1 month
£000
>1 month
- 3 months
£000
>3 months - 6 months
£000
>6 months
- 1 year
£000
>1 year
- 3 years
£000
>3 years
- 5 years
£000
>5 years
£000
Total
£000
Assets
Cash
34,053
-
-
-
-
-
-
-
34,053
Debt securities
-
5,301
14,000
-
6,231
-
-
-
25,532
Loans and advances
6,270
7,750
21,565
17,822
27,490
84,111
25,756
2,379
193,143
Other assets
4
-
-
-
2,578
-
5,637
7,014
15,233
Total assets
40,327
13,051
35,565
17,822
36,299
84,111
31,393
9,393
267,961
Liabilities
Deposits
3,106
2,736
18,981
52,478
57,922
58,805
24,257
-
218,285
Other liabilities
-
-
450
496
2,983
14,874
7,297
1,141
27,241
Total liabilities
3,106
2,736
19,431
52,974
60,905
73,679
31,554
1,141
245,526
31 December 2019
Sight-
8 days
£000
>8 days
- 1 month
£000
>1 month
- 3 months
£000
>3 months - 6 months
£000
>6 months
- 1 year
£000
>1 year
- 3 years
£000
>3 years
- 5 years
£000
>5
years
£000
Total
£000
Assets
Cash
14,620
-
-
-
-
-
-
-
14,620
Debt securities
-
5,795
15,748
17,751
-
7,498
-
-
46,792
Loans and advances
12,564
2,017
12,652
14,977
32,615
77,077
27,461
7
179,370
Other assets
19
-
-
-
-
-
-
12,086
12,105
Total assets
27,203
7,812
28,400
32,728
32,615
84,575
27,461
12,093
252,887
Liabilities
Deposits
2,889
5,060
19,411
39,867
43,574
76,953
22,179
-
209,933
Other liabilities
5,250
-
4,710
-
7,245
900
350
2,180
20,635
Total liabilities
8,139
5,060
24,121
39,867
50,819
77,853
22,529
2,180
230,568
iii. Liquidity reserves
The following table sets out the components of the Group's liquidity reserves:
2020
Carrying amount
2020
Fair
value
2019
Carrying amount
2019
Fair
value
£000
£000
£000
£000
Balances with other banks
34,053
34,053
14,620
14,620
Unencumbered debt securities
25,532
25,532
46,792
46,792
Total liquidity reserves
59,585
59,585
61,412
61,412
C. Market risk
For the definition of market risk and information on how the Group manages the market risks of trading and non-trading portfolios, see note 37.
The following table sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios:
Market risk measure
Carrying amount
Trading portfolios
Non-trading portfolios
31 December 2020
£000
£000
£000
Assets subject to market risk
Debt securities
25,532
-
25,532
Trading assets
4
4
-
Total
25,536
4
25,532
Market risk measure
Carrying amount
Trading portfolios
Non-trading portfolios
31 December 2019
£000
£000
£000
Assets subject to market risk
Debt securities
46,792
-
46,792
Trading assets
19
19
-
Total
46,811
19
46,792
i. Exposure to interest rate risk
The following tables present the interest rate mismatch position between assets and liabilities over the respective maturity dates. The maturity dates are presented on a worst-case basis, with assets being recorded at their latest maturity and deposits from customers at their earliest.
31 December 2020
Sight-
1 month
£000
>1month
- 3months
£000
>3months
- 6months
£000
>6months- 1 year
£000
>1 year
- 3 years
£000
>3 years
- 5 years
£000
>5 years
£000
Non-Interest Bearing
£000
Total
£000
Assets
Cash & cash equivalents
34,053
-
-
-
-
-
-
-
34,053
Debt securities
5,301
14,000
-
6,231
-
-
-
-
25,532
Loans and advances to customers
14,020
21,565
17,822
27,490
84,111
25,756
2,379
-
193,143
Other assets
-
-
-
-
-
-
-
15,233
15,233
Total assets
53,374
35,565
17,822
33,721
84,111
25,756
2,379
15,233
267,961
Liabilities and equity
Deposits from customers
5,842
18,981
52,478
57,922
58,805
24,257
-
-
218,285
Other liabilities
-
450
496
280
14,874
7,297
944
2,900
27,241
Total equity
-
-
-
-
-
-
-
22,435
22,535
Total liabilities and equity
5,842
19,431
52,974
58,202
73,679
31,554
944
25,335
267,961
Interest rate sensitivity gap
47,532
16,134
(35,152)
(24,481)
10,432
(5,798)
1,435
(10,102)
-
Cumulative
47,532
63,666
28,514
4,033
14,465
8,667
10,102
-
-
31 December 2019
Sight-
1 month
£000
>1month
- 3months
£000
>3months
- 6months
£000
>6months- 1 year
£000
>1 year
- 3 years
£000
>3 years
- 5 years
£000
>5 years
£000
Non-Interest Bearing
£000
Total
£000
Assets
Cash & cash equivalents
14,620
-
-
-
-
-
-
-
14,620
Debt securities
5,795
15,748
17,751
-
7,498
-
-
-
46,792
Loans and advances to customers
14,581
12,652
14,977
32,615
77,077
27,461
7
-
179,370
Other assets
-
-
-
-
-
-
-
12,105
12,105
Total assets
34,996
28,400
32,728
32,615
84,575
27,461
7
12,105
252,887
Liabilities and equity
Deposits from customers
7,949
19,411
39,867
43,574
76,953
22,179
-
-
209,933
Other liabilities
586
4,710
1,188
1,200
1,268
7,882
-
3,801
20,635
Total equity
-
-
-
-
-
-
-
22,319
22,319
Total liabilities and equity
8,535
24,121
41,055
44,774
78,221
30,061
-
26,120
252,887
Interest rate sensitivity gap
26,461
4,279
(8,327)
(12,159)
6,354
(2,600)
7
(14,015)
-
Cumulative
26,461
30,740
22,413
10,254
16,608
14,008
14,015
-
-
The Bank monitors the impact of changes in interest rates on interest rate mismatch positions using a method consistent with the FSA required reporting standard. The methodology applies weightings to the net interest rate sensitivity gap in order to quantify the impact of an adverse change in interest rates of 2.0% per annum (2019: 2.0%). The following tables set out the estimated total impact of such a change based on the mismatch at the reporting date:
31 December 2020
Sight-
1 month
>1month
-3months
>3months
- 6months
>6months
- 1 year
>1 year
- 3 years
>3 years
- 5 years
>5 years
Non-Interest Bearing
Total
Interest rate sensitivity gap £000
47,532
16,134
(35,152)
(24,481)
10,432
(5,798)
1,435
(10,102)
-
Weighting
-
0.003
0.007
0.014
0.027
0.054
0.115
-
-
£000
-
48
(246)
(343)
282
(313)
165
-
(407)
31 December 2019
Sight-
1 month
>1month
-3months
>3months
- 6months
>6months
- 1 year
>1 year
- 3 years
>3 years
- 5 years
>5 years
Non-Interest Bearing
Total
Interest rate sensitivity gap £000
26,461
4,279
(8,327)
(12,159)
6,354
(2,600)
7
(14,015)
-
Weighting
0.000
0.003
0.007
0.014
0.027
0.054
0.115
0.000
-
£000
-
13
(58)
(170)
172
(140)
1
-
(182)
D. Capital Management
i. Regulatory capital
The lead regulator of the Group's wholly owned subsidiary, the Bank, is the FSA. The FSA sets and monitors capital requirements for the Bank.
The Bank's regulatory capital consists of the following elements.
n Common Equity Tier 1 ("CET1") capital, which includes ordinary share capital, retained earnings and reserves after adjustment for deductions for goodwill, intangible assets and intercompany receivable.
n Tier 2 capital, which includes qualifying subordinated liabilities and any excess of impairment over expected losses.
The FSA's approach to the measurement of capital adequacy is primarily based on monitoring the relationship of the capital resources requirement to available capital resources. The FSA sets individual capital guidance ("ICG") for the Bank in excess of the minimum capital resources requirement. A key input to the ICG setting process is the Bank's internal capital adequacy assessment process ("ICAAP").
The Bank is also regulated by the FCA in the UK for credit and brokerage related activities.
ii. Capital allocation
Management uses regulatory capital ratios to monitor its capital base. The allocation of capital between specific operations and activities is, to a large extent, driven by optimisation of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily on regulatory capital requirements.
8. Operating segments
Segmental information is presented in respect of the Group's business segments. The Directors consider that the Group currently operates in one geographic segment comprising of the Isle of Man, UK and Channel Islands. The primary format, business segments, is based on the Group's management and internal reporting structure. The Directors consider that the Group operates in three (2019: four) product orientated segments in addition to its investing activities: Asset and Personal Finance (including provision of HP contracts, finance leases, personal loans, commercial loans, block discounting, vehicle stocking plans and wholesale funding agreements); EAL; and MFX.
For the year ended 31 December 2020
Asset and
Personal
Finance
£000
Edgewater Associates
£000
Manx FX
£000
Investing
Activities
£000
Total
£000
Net interest income
15,470
-
-
-
15,470
Fee and commission income
430
2,103
1,332
-
3,865
Operating income
13,206
2,103
1,096
-
16,405
Profit / (loss) before tax payable
1,316
(94)
1,096
(297)
2,021
Capital expenditure
1,138
46
2
1
1,187
Total assets
260,155
2,638
536
4,632
267,961
Total liabilities
230,001
660
12
14,853
245,526
For the year ended 31 December 2019
Asset and
Personal
Finance
£000
Manx Incahoot
£000
Edgewater Associates
£000
Manx FX
£000
Investing
Activities
£000
Total
£000
Net interest income
17,929
-
-
-
-
17,929
Fee and commission income
439
(9)
2,529
837
-
3,796
Operating income / (loss)
13,518
(10)
2,529
828
-
16,865
Profit / (loss) before tax payable
2,944
(295)
219
502
(347)
3,023
Capital expenditure
1,744
-
14
-
8
1,766
Total assets
249,449
14
2,292
321
811
252,887
Total liabilities
220,685
14
1,022
321
8,526
230,568
9. Net interest income
2020
2019
£000
£000
Interest income
Loans and advances to customers
19,484
21,824
Total interest income calculated using the effective interest method
19,484
21,824
Operating lease income
1,208
496
Total interest income
20,692
22,320
Interest expense
Deposits from customers
(4,044)
(3,383)
Loan note interest
(1,016)
(873)
Lease liability
(40)
(47)
Contingent consideration: interest expense
(122)
(88)
Total interest expense
(5,222)
(4,391)
Net interest income
15,470
17,929
10. Net fee and commission income
In the following table, fee and commission income from contracts with customers in the scope of IFRS 15 - Revenue from Contracts with Customers is disaggregated by major type of services. The table includes a reconciliation of the disaggregated fee and commission income with the Group's reportable segments.
2020
2019
£000
£000
Major service lines
EAL: Independent financial advice income
2,103
2,528
MFX: Foreign exchange trading income
1,332
837
Asset and personal finance: Brokerage services income
430
431
Fee and commission income
3,865
3,796
Fee and commission expense
(3,481)
(5,426)
Net fee and commission income / (expense)
384
(1,630)
11. Personnel expenses
2020
£000
2019
£000
Staff gross salaries
(5,331)
(5,142)
Executive Directors' remuneration
(299)
(259)
Non-executive Directors' fees
(163)
(152)
Executive Directors' pensions
(21)
(21)
Executive Directors' performance related pay
(50)
(50)
Staff pension costs
(297)
(302)
National insurance and payroll taxes
(606)
(628)
Staff training and recruitment costs
(56)
(208)
(6,823)
(6,762)
12. Other expenses
2020
£000
2019
£000
Professional and legal fees
(1,063)
(1,559)
Marketing costs
(177)
(261)
IT costs
(822)
(633)
Establishment costs
(270)
(286)
Communication costs
(105)
(155)
Travel costs
(95)
(219)
Bank charges
(151)
(137)
Insurance
(300)
(199)
Irrecoverable VAT
(436)
(340)
Other costs
(288)
(346)
(3,707)
(4,135)
13. Impairment on loans and advances to customers
The charge in respect of specific allowances for impairment comprises:
2020
£000
2019
£000
Specific impairment allowances made
(6,833)
(2,091)
Reversal of allowances previously made
3,039
64
Total charge for specific provision for impairment
(3,794)
(2,027)
The charge in respect of collective allowances for impairment comprises:
2020
£000
2019
£000
Collective impairment allowances made
(421)
(138)
Release of allowances previously made
265
265
Total (charge) / credit for collective allowances for impairment
(156)
127
Total charge for allowances for impairment
(3,950)
(1,900)
14. Profit before tax payable
The profit before tax payable for the year is stated after charging:
Group
Company
2020
£000
2019
£000
2020
£000
2019
£000
Auditor's remuneration: as Auditor current year
(167)
(110)
-
-
non-audit services
(10)
(96)
-
-
Pension cost defined benefit scheme
(16)
(17)
-
-
Operating lease rentals for property
(97)
(117)
-
-
15. Income tax expense
2020
2019
£000
£000
Current tax expense
Current year
3
(297)
Changes to estimates for prior years
-
3
(297)
Deferred tax expense
Origination and reversal of temporary differences
(56)
(53)
Utilisation of previously recognised tax losses
-
-
Changes to estimates for prior years
-
-
(56)
(53)
Tax expense
(53)
(350)
2020
2019
£000
£000
Reconciliation of effective tax rate
Profit before tax
2,021
3,023
Tax using the Bank's domestic tax rate
(10.0%)
(202)
(10.0)%
(302)
Effect of tax rates in foreign jurisdictions
1.4%
28
(0.8)%
(23)
Non-deductible expenses
0.0%
-
(2.6)%
(78)
Timing difference in current year
3.2%
65
0.0 %
-
Origination and reversal of temporary differences in deferred tax
2.8%
56
1.8 %
53
Tax expense
(2.6%)
(53)
(11.6)%
(350)
The main rate of corporation tax in the Isle of Man is 0.0% (2019: 0.0%). However, the profits of the Group's Isle of Man banking activities are taxed at 10.0% (2019: 10.0%). The profits of the Group's subsidiaries that are subject to UK corporation tax are taxed at a rate of 19.0% (2019: 19.0%).
The value of tax losses carried forward reduced to nil and there is now a timing difference related to accelerated capital allowances resulting in a £197,000 liability (2019: £141,000 liability). This resulted in an expense of £56,000 (2019: £53,000) to the Consolidated Income Statement.
16. Earnings per share
2020
2019
Profit for the year
£1,968,000
£2,673,000
Weighted average number of ordinary shares in issue (basic)
118,964,270
131,096,235
Basic earnings per share (pence)
1.65
2.04
Diluted earnings per share (pence)
1.37
1.66
Total comprehensive income for the year
£1,676,000
£2,596,000
Weighted average number of ordinary shares in issue (basic)
118,964,270
131,096,235
Basic earnings per share (pence)
1.41
1.98
Diluted earnings per share (pence)
1.19
1.62
The basic earnings per share calculation is based upon the profit for the year after taxation and the weighted average of the number of shares in issue throughout the year.
As at:
2020
2019
Reconciliation of weighted average number of ordinary shares in issue between basic and diluted
Weighted average number of ordinary shares (basic)
118,964,270
131,096,235
Number of shares issued if all convertible loan notes were exchanged for equity
36,555,556
41,666,667
Dilutive element of share options if exercised
-
-
Weighted average number of ordinary shares (diluted)
155,519,826
172,762,902
Reconciliation of profit for the year between basic and diluted
Profit for the year (basic)
£1,968,000
£2,673,000
Interest expense saved if all convertible loan notes were exchanged for equity
£166,250
£196,150
Profit for the year (diluted)
£2,134,250
£2,869,150
The diluted earnings per share calculation assumes that all convertible loan notes and share options have been converted / exercised at the beginning of the year where they are dilutive.
As at:
2020
2019
Reconciliation of total comprehensive income for the year between basic and diluted
Total comprehensive income for the year (basic)
£1,676,000
£2,596,000
Interest expense saved if all convertible loan notes were exchanged for equity
£166,250
£196,150
Total comprehensive income for the year (diluted)
£1,842,250
£2,792,150
17. Cash and cash equivalents
Group
Company
2020
£000
2019
£000
2020
£000
2019
£000
Cash at bank and in hand
11,728
14,620
1,378
119
Notice account balance (less than 95 days)
21,025
-
-
-
Fixed deposit (less than 90 days)
1,300
-
-
-
34,053
14,620
1,378
119
Cash at bank includes an amount of £120,000 (2019: £1,060,000) representing receipts which are in the course of transmission.
18. Debt securities
Group
Company
2020
£000
2019
£000
2020
£000
2019
£000
Financial assets at FVOCI:
UK Government Treasury Bills
24,431
44,690
-
-
Floating Rate Notes
1,101
2,102
-
-
25,532
46,792
-
-
UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in other comprehensive income. There were realised gains of £261,000 (2019: £179,000) and unrealised losses of £51,000 (2019: unrealised gain of £51,000) during the year.
19. Financial assets
Group
Company
2020
£000
2019
£000
2020
£000
2019
£000
Financial assets at FVOCI:
Gain on Contingent consideration (see note 6(ii))
253
-
-
-
Gain on equity instrument
6
(1)
-
-
259
(1)
-
-
The equity instrument represents an investment in a UK quoted company, elected to be classified as a financial asset at fair value through profit or loss. The investment is stated at market value and is classified as a level 1 investment in the IFRS 13 fair value hierarchy. The cost of the shares was £471,000. The unrealised difference between cost and market value has been taken to the Consolidated Income Statement. The investment made a net gain of £6,000 (2019: £1,000) during the year.
20. Loans and advances to customers
Group
Gross
Amount
£000
2020
Impairment
Allowance
£000
Carrying
Value
£000
Gross
Amount
£000
2019
Impairment
Allowance
£000
Carrying
Value
£000
HP balances
72,930
(1,779)
71,151
65,846
(1,537)
64,309
Finance lease balances
34,373
(3,241)
31,132
40,359
(2,125)
38,234
Unsecured personal loans
27,762
(364)
27,398
21,110
(199)
20,911
Vehicle stocking plans
1,807
-
1,807
1,494
(36)
1,458
Wholesale funding arrangements
18,080
(808)
17,272
23,840
(300)
23,540
Block discounting
13,848
(418)
13,430
15,693
(200)
15,493
Secured commercial loans
9,602
(511)
9,091
11,652
(376)
11,276
Secured personal loans
2,152
-
2,152
4,149
-
4,149
Government backed loans
19,710
-
19,710
200,264
(7,121)
193,143
184,143
(4,773)
179,370
Collateral is held in the form of underlying assets for HP, finance leases, vehicles stocking plans, block discounting, secured commercial and personal loans and wholesale funding arrangements.
Specific allowance for impairment
2020
£000
2019
£000
Balance at 1 January
4,632
3,126
Specific allowance for impairment made
5,231
2,091
Release of allowances previously made
(1,519)
(64)
Write-offs
(1,520)
(521)
Balance at 31 December
6,824
4,632
Collective allowance for impairment
2020
£000
2019
£000
Balance at 1 January
141
268
Collective allowance for impairment made
421
138
Release of allowances previously made
(265)
(265)
Balance at 31 December
297
141
Total allowances for impairment
7,121
4,773
Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2020 £629,345 (2019: £490,641) had been lent on this basis. In the Group's ordinary course of business, advances may be made to Shareholders, but all such advances are made on normal commercial terms.
At the end of the current financial year 6 loan exposures (2019: 5) exceeded 10.0% of the capital base of the Bank:
Exposure
Outstanding Balance
2020
£000
Outstanding Balance
2019
£000
Facility
limit
£000
Block discounting facility
5,878
15,693
8,250
Wholesale funding agreement
16,315
23,840
17,482
HP and finance lease receivables
Loans and advances to customers include the following HP and finance lease receivables:
2020
£000
2019
£000
Less than one year
52,028
51,865
Between one and five years
71,348
71,124
Gross investment in HP and finance lease receivables
123,376
122,989
The investment in HP and finance lease receivables net of unearned income comprises:
2020
£000
2019
£000
Less than one year
45,250
44,787
Between one and five years
62,053
61,418
Net investment in HP and finance lease receivables
107,303
106,205
21. Trade and other receivables
Group
Company
2020
£000
2019
£000
2020
£000
2019
£000
Prepayments
482
385
53
44
VAT recoverable
586
835
256
187
Other debtors
1,102
1,258
-
-
2,170
2,478
309
231
The Bank, as the Group VAT registered entity, had for some time considered the VAT recovery rate being obtained by the business was neither fair nor reasonable, specifically regarding the attribution of part of the residual input tax relating to the HP business not being considered as a taxable supply. In 2019, the Bank had a VAT receivable of £835,000. During the year, the Bank recognised an additional receivable and income of £372,000. This matter was resolved during the year and the Bank received full settlement.
After consultation with its professional advisors, the Bank made a notice of error correction ("NEC") to the Isle of Man Government Customs & Exercise Division in respect of a repayment for overpaid VAT to the amount of £534,000 exclusive of statutory interest. The NEC relates to bad debt relief that was not claimed during the period from 1 April 1989 to 18 March 1997. The Bank has recognised a receivable and income of £534,000 during the year.
22. Property, plant and equipment and right-of-use assets
Group
Leasehold
Improvements
£000
IT
Equipment
£000
Furniture and
Equipment
£000
Motor
Vehicles1
£000
Right-of-use assets
£000
Total
£000
Cost
As at 1 January 2020
674
393
686
2,574
737
5,064
Acquisition of subsidiary
-
-
2,582
-
-
2,582
Additions
24
69
1,064
30
-
1,187
Disposals
-
-
-
(127)
-
(127)
As at 31 December 2020
698
462
4,332
2,477
737
8,706
Accumulated depreciation
As at 1 January 2020
315
272
622
391
165
1,765
Charge for year
69
71
179
413
164
896
Disposals
-
-
-
-
-
-
As at 31 December 2020
384
343
801
804
329
2,661
Carrying value at 31 December 2020
314
119
3,531
1,673
408
6,045
Carrying value at 31 December 2019
359
121
64
2,183
572
3,299
1Motor vehicles relate to operating leases with the Group as lessor.
Company
Leasehold
Improvements
£000
IT
Equipment
£000
Furniture and
Equipment
£000
Right-of use-assets
£000
Total
£000
Cost
As at 1 January 2020
234
13
17
424
688
Additions
-
5
-
-
5
Disposals
-
-
-
-
-
As at 31 December 2020
234
18
17
424
693
Accumulated depreciation
As at 1 January 2020
169
4
5
60
238
Charge for year
38
1
2
60
101
Disposals
-
-
-
-
-
As at 31 December 2020
207
5
7
120
339
Carrying value at 31 December 2020
27
13
10
304
354
Carrying value at 31 December 2019
65
9
12
364
450
23. Intangible assets
Group
Customer Contracts
£000
Intellectual
Property Rights
£000
IT Software and Website Development
£000
Total
£000
Cost
As at 1 January 2020
1,920
539
2,163
4,622
Acquisition of subsidiary (note 31)
-
134
2
136
Additions
-
76
155
231
Disposals
-
-
-
-
As at 31 December 2020
1,920
749
2,320
4,989
Accumulated amortisation
As at 1 January 2020
302
443
1,584
2,329
Charge for year / impairment
106
80
188
374
Disposals
-
-
-
-
As at 31 December 2020
408
523
1,772
2,703
Carrying value at 31 December 2020
1,512
226
548
2,286
Carrying value at 31 December 2019
1,618
96
579
2,293
24. Deposits from customers
2020
£000
2019
£000
Retail customers: term deposits
209,235
203,241
Corporate customers: term deposits
9,050
6,692
218,285
209,933
25. Creditors and accrued charges
Group
Company
2020
£000
2019
£000
2020
£000
2019
£000
Commission creditors
1,748
1,044
-
-
Other creditors and accruals
822
893
83
66
Lease liability
503
707
418
509
Taxation creditors
133
328
-
-
3,206
2,972
501
575
26. Loan notes
Group
Company
Notes
2020
£000
2019
£000
2020
£000
2019
£000
Related parties
J Mellon
JM
1,750
1,750
1,750
1,750
Burnbrae Limited
BL
3,200
1,200
3,200
1,200
Southern Rock Insurance Company Limited
SR
2,097
460
2,097
460
7,047
3,410
7,047
3,410
Unrelated parties
UP
15,175
12,561
15,175
12,561
22,222
15,971
22,222
15,971
JM - Two loans, one of £1,250,000 maturing on 26 February 2025, paying interest of 5.4% per annum, and one of £500,000 maturing on 31 July 2022 paying interest of 5.0% per annum. Both loans are convertible at the rate of 7.5 pence and 9 pence respectively.
BL - Three loans, one of £1,200,000 maturing on 31 July 2022, paying interest of 5.0% per annum, and one of £1,000,000 maturing 25 February 2025, paying interest of 5.4% per annum, and one of £1,000,000 maturing 28 February 2025 paying interest of 6% per annum. Jim Mellon is the beneficial owner of BL and Denham Eke is also a director. The £1,200,000 loan is convertible at a rate of 7.5 pence.
SR - One loan consisting of £2,097,085 maturing on 14 April 2025, paying interest of 6.5% per annum.
UP - Thirty-three loans consisting of an average £459,848 with an average interest payable of 5.8% (2019: 5.5%) per annum. The earliest maturity date is 9 February 2021 and the latest maturity is 12 October 2025.
With respect to the convertible loans, the interest rate applied was deemed by the Directors to be equivalent to the market rate at the time with no conversion option.
27. Pension liability
The Conister Trust Pension and Life Assurance Scheme ("Scheme") operated by the Bank is a funded defined benefit arrangement which provides retirement benefits based on final pensionable salary. The Scheme is closed to new entrants and the last active member of the Scheme left pensionable service in 2011.
The Scheme is approved in the Isle of Man by the Assessor of Income Tax under the Income Tax (Retirement Benefit Schemes) Act 1978 and must comply with the relevant legislation. In addition, it is registered as an authorised scheme with the FSA in the Isle of Man under the Retirement Benefits Scheme Act 2000. The Scheme is subject to regulation by the FSA but there is no minimum funding regime in the Isle of Man.
The Scheme is governed by two corporate trustees, Conister Bank Limited and Boal & Co (Pensions) Limited. The trustees are responsible for the Scheme's investment policy and for the exercise of discretionary powers in respect of the Scheme's benefits.
The rules of the Scheme state: "Each Employer shall pay such sums in each Scheme Year as are estimated to be required to provide the benefits of the Scheme in respect of the Members in its employ".
Exposure to risk
The Company is exposed to the risk that additional contributions will be required in order to fund the Scheme as a result of poor experience. Some of the key factors that could lead to shortfalls are:
n investment performance - the return achieved on the Scheme's assets may be lower than expected; and
n mortality - members could live longer than foreseen. This would mean that benefits are paid for longer than expected, increasing the value of the related liabilities.
In order to assess the sensitivity of the Scheme's pension liability to these risks, sensitivity analyses have been carried out. Each sensitivity analysis is based on changing one of the assumptions used in the calculations, with no change in the other assumptions. The same method has been applied as was used to calculate the original pension liability and the results are presented in comparison to that liability. It should be noted that in practice it is unlikely that one assumption will change without a movement in the other assumptions; there may also be some correlation between some of these assumptions. It should also be noted that the value placed on the liabilities does not change on a straight line basis when one of the assumptions is changed. For example, a 2.0% change in an assumption will not necessarily produce twice the effect on the liabilities of a 1.0% change.
No changes have been made to the method or to the assumptions stress-tested for these sensitivity analyses compared to the previous period. The investment strategy of the Scheme has been set with regard to the liability profile of the Scheme. However, there are no explicit asset-liability matching strategies in place.
Restriction of assets
No adjustments have been made to the statement of financial position items as a result of the requirements of IFRIC 14 - IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, issued by IASB's International Financial Reporting Interpretations Committee.
Scheme amendments
There have not been any past service costs or settlements in the financial year ending 31 December 2020 (2019: none).
Funding policy
The funding method employed to calculate the value of previously accrued benefits is the Projected Unit Method. Following the cessation of accrual of benefits when the last active member left service in 2011, regular future service contributions to the Scheme are no longer required. However, additional contributions will still be required to cover any shortfalls that might arise following each funding valuation.
The most recent triennial full actuarial valuation was carried out at 31 March 2020, which showed that the market value of the Scheme's assets was £1,432,000 representing 65.2% of the benefits that had accrued to members, after allowing for expected future increases in earnings. As required by IAS 19: Employee Benefits, this valuation has been updated by the actuary as at 31 December 2020.
The amounts recognised in the Consolidated Statement of Financial Position are as follows:
Total underfunding in funded plans recognised as a liability
2020
£000
2019
£000
Fair value of plan assets
1,406
1,471
Present value of funded obligations
(2,350)
(2,159)
(944)
(688)
Movement in the liability for defined benefit obligations
2020
£000
2019
£000
Opening defined benefit obligations at 1 January
2,159
1,945
Benefits paid by the plan
(76)
(69)
Interest on obligations
45
55
Actuarial loss
222
228
Liability for defined benefit obligations at 31 December
2,350
2,159
Movement in plan assets
2020
£000
2019
£000
Opening fair value of plan assets at 1 January
1,471
1,361
Expected return on assets
30
38
Contribution by employer
-
41
Actuarial (loss) / gain
(19)
100
Benefits paid
(76)
(69)
Closing fair value of plan assets at 31 December
1,406
1,471
Expense recognised in income statement
2020
£000
2019
£000
Interest on obligation
45
55
Expected return on plan assets
(30)
(38)
Total included in personnel costs
15
17
Actual return on plan assets
11
142
Actuarial loss recognised in other comprehensive income
2020
£000
2019
£000
Actuarial (loss) / gain on plan assets
(19)
100
Actuarial loss on defined benefit obligations
(222)
(228)
(241)
(128)
2020
2019
Plan assets consist of the following
%
%
Equity securities
47
50
Corporate bonds
19
18
Government bonds
29
30
Cash
2
2
Other
3
-
100
100
The actuarial assumptions used to calculate Scheme liabilities under IAS19 are as follows:
2020
%
2019
%
2018
%
Rate of increase in pension in payment:
- Service up to 5 April 1997
-
-
-
- Service from 6 April 1997 to 13 September 2005
2.9
3.0
3.0
- Service from 14 September 2005
2.1
2.1
2.1
Rate of increase in deferred pensions
5.0
5.0
5.0
Discount rate applied to scheme liabilities
1.8
2.9
2.6
Inflation
3.0
3.1
3.1
The assumptions used by the actuary are best estimates chosen from a range of possible assumptions, which due to the timescale covered, may not necessarily be borne out in practice.
28. Called up share capital
Ordinary shares of no par value available for issue
Number
At 31 December 2020
200,200,000
At 31 December 2019
200,200,000
Issued and fully paid: Ordinary shares of no par value
Number
£000
At 31 December 2020
114,130,077
19,121
At 31 December 2019
131,096,235
20,732
On 9 April 2020, the Company and Southern Rock Insurance Company Limited ("SR") entered into a share buyback agreement ("SBA"), pursuant to which SR agreed to sell 16,966,158 Ordinary Shares for a consideration of £1,611,785. The consideration was left outstanding as a loan agreement (See note 26). The Ordinary Shares acquired were cancelled, and the Company's issued share capital reduced to 114,130,077 Ordinary Shares effective 14 April 2020.
Prior to the SBA, SR had a loan of £460,000, made to the Company, which was due to be repaid or converted into Ordinary Shares on or before 26 April 2020. Upon completion of the SBA, the Company and SR entered into an agreement varying the terms of the convertible loan such that they became subject to the terms of the SBA which contains no ability to convert the amounts outstanding into Ordinary Shares. The principal amount outstanding in respect of the convertible loan was increased by £25,300 to account for the reduction of the interest rate in transition to the SBA.
There are three convertible loans totalling £2,950,000 (2019: four convertible loans totalling £3,410,000).
On 23 June 2014, 1,750,000 share options were issued to Executive Directors and senior management within the Group at an exercise price of 14 pence. The options vest over three years with a charge based on the fair value of 8 pence per option at the date of grant. The period of grant is for 10 years less 1 day ending 22 June 2024. Of the 1,750,000 share options issued, 707,534 (2019:1,050,000) remain outstanding. 342,466 options expired during the year.
Performance and service conditions attached to share options that have not fully vested are as follows: The options granted on 23 June 2014 require a minimum of three years' continuous employment service in order to exercise upon the vesting date.
The fair value of services received in return for share options granted is based on the fair value of share options granted, measured using a binomial probability model with the following inputs for each award:
23 June
2014
25 June
2010
Fair value at date of grant
£0.08
£0.03
Share price at date of grant
£0.14
£0.11
Exercise price
£0.14
£0.11
Expected volatility
55.0%
47.0%
Option life
3
3
Risk-free interest rate (based on government bonds)
0.5%
2.2%
Forfeiture rate
33.3%
0.0%
The charge for the year for share options granted was £nil (2019: £nil).
Analysis of changes in financing during the year
Analysis of changes in financing during the year
2020
£000
2019
£000
Balance at 1 January
37,410
36,603
Issue of loan notes
4,640
100
Issue of lease liability
-
855
Payment of lease liabilities
(204)
(148)
41,846
37,410
The 2019 closing balance is represented by £19,121,000 share capital (2019: £20,732,000), £22,222,000 of loan notes (2019: £15,971,000) and £503,000 lease liability (2019: £707,000).
29. List of associates
Set out below is a list of associates of the Group:
Group
2020
£000
Group
2019
£000
The Business Lending Exchange ("BLX")
190
167
Beer Swaps Limited ("BSL") (See note 31)
-
20
Payitmonthly Ltd ("PIML")
126
95
316
282
In December 2017, 40.0% of the share capital of BLX was acquired for nil consideration. The Group's share of the associate's total comprehensive income during the year was £23,000 (2019: £110,000).
In August 2018, 30% of the share capital of PIML was acquired for £90,000 consideration. The Group's resulting share of the associate's total comprehensive income during the year was £31,000 (2019: £4,000).
In April 2018, 20% of the share capital of BSL was acquired for nil consideration. During the year, the Group obtained control of the subsidiary. Prior to obtaining control, the share of the associate's total comprehensive income during the year was £nil (2019: 10,000).
30. List of subsidiaries
Set out below is a list of subsidiaries of the Group:
Carrying value of investments
Nature of
Business
31 December
2020
% Holding
Date of
Incorporation
Total
2020
£000
Total
2019
£000
Conister Bank Limited
Asset and Personal Finance
100
05/12/1935
20,592
15,817
Edgewater Associates Limited
Wealth Management
100
24/12/1996
2,005
2,005
TranSend Holdings Limited
Holding Company
100
05/11/2007
-
-
Bradburn Limited
Holding Company
100
15/05/2009
-
-
22,597
17,822
All subsidiaries are incorporated in the Isle of Man
31. Acquisition of subsidiary
Beer Swaps Limited ("BSL")
On 28 February 2020, the Group (through the Bank) announced that it entered into an agreement to acquire 55% of the shares and voting interests in BSL. As a result, the Group's equity interest in BSL increased from 20% to 75%, thereby obtaining control of BSL.
BSL provides equipment finance and rental products to UK based craft and micro-breweries.
This acquisition strengthens the Group's strategy of developing a network of niche loan brokers within the UK.
For the 10 months ended 31 December 2020, BSL contributed revenue of £620,285 and profit of £21,659 to the Group's results. If the acquisition had occurred on 1 January 2020, management estimates that the impact on consolidated fee income would have been £790,891 and the impact on consolidated profit for the period would have been £21,982.
A. BSL - Consideration transferred
The following table summarises the acquisition date fair value of each major class of consideration transferred:
£'000
Cash
707
Settlement of pre-existing relationship
2,250
2,957
B. BSL - Settlement of pre-existing relationship
The Bank and BSL were parties to a wholesale loan agreement with the Bank as lender and BSL as borrower. This pre-existing relationship was effectively terminated when the Bank acquired BSL.
C. BSL - Acquisition-related costs
The Group incurred acquisition-related costs of £30,000 relating to external legal fees and due diligence costs. These costs have been included in 'other costs' in the consolidated statement of profit or loss and other comprehensive income.
D. BSL - Identifiable assets acquired, and liabilities assumed
The following table summarises the recognised amounts of assets acquired, and liabilities assumed at the date of acquisition:
£'000
Property, plant and equipment
2,582
Intangible assets - website
2
Intangible assets - customer related
71
Intangible assets - contract related
63
Cash and cash equivalents
59
Trade and other receivables
109
Creditors and accrued charges
(299)
Total identifiable net assets acquired
2,587
E. BSL - Measurement of fair values
The valuation techniques use for measuring the fair value of material assets acquired were as follows:
Assets acquired
Valuation technique
Property, plant and equipment
Market comparison technique and cost technique: The valuation model considers market prices for similar items when they are available, and the depreciated replacement cost when appropriate. Depreciated replacement cost reflects adjustments for physical deterioration as well as functional and economic obsolescence.
Intangible assets
Multi-period excess earnings method: The multi-period excess earnings method considers the present value of net cash flows expected to be generated by the customer relationships.
The trade and other receivables comprise gross contractual amounts due of £116,000, of which £nil was expected to be uncollectable at the date of acquisition.
F. BSL - Goodwill
The goodwill arising from the acquisition has been recognised as follows:
£'000
Total consideration transferred
2,957
Non-controlling interest, based on their proportionate interest in the recognised amounts of the assets and liabilities of BSL
51
Fair value of existing interest in BSL
257
Fair value of identifiable net assets
(2,587)
Goodwill
678
The remeasurement to fair value of the Bank's existing 20% interest in BSL resulted in a gain of £237,000 (£257,000 less the £20,000 carrying amount of the equity accounted investee at the date of acquisition). This amount has been included separately in the statement of profit or loss and other comprehensive income.
Blue Star Business Solutions Limited ("BBSL")
On 16 April 2019, the Group (through BBL) acquired 100% of the shares and voting interest in BBSL, obtaining control of BBSL. The Group agreed to pay the selling shareholders:
n 50% of net profits in BBSL for 3 years post completion; and
n 50% of the incremental net profit that the Group benefits from as a result of taking up BBSL loan proposals post completion up until the third anniversary.
This is to be paid on each anniversary with a final payment in year 4 for the unrealised lending profit. The total consideration is to have a cap of £4,000,000 in total. The contingent consideration is calculated by forecasting 3 years of net profits discounted using an interest rate of 16.0% per annum. The range of contingent consideration payable is £nil - £2,500,000.
See note 6 for the fair value of the Contingent Consideration at 31 December 2020.
32. Goodwill
Cash generating unit
Group
2020
£000
Group
2019
£000
EAL
1,849
1,849
BBSL
1,390
1,390
BSL
678
-
ECF Asset Finance Limited ("ECF")
454
454
Three Spires Insurance Services Limited ("Three Spires")
41
41
4,412
3,734
The goodwill is considered to have an indefinite life and is reviewed on an annual basis by comparing its estimated recoverable amount with its carrying value.
The estimated recoverable amount in relation to the goodwill generated on the purchase of EAL is based on the forecasted 3 year cash flow projections, extrapolated to 10 years using a 2.0% annual increment, and then discounted using a 11.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on stable profit levels.
The estimated recoverable amount in relation to the goodwill generated on the purchase of BBSL is based on forecasted 3 year interest income calculated at an average yield of 8%, with a terminal value calculated using a 3.0% growth rate of net income and then discounted using a 14.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0% on varying interest income growth rates.
The estimated recoverable amount in relation to the goodwill generated on the purchase of BSL is based on a 4 year sales forecast, extrapolated to 14 years using a 1.5% annual increment, and then discounted using a 12% discount factor. The sensitivity of the analysis was tested using additional discount factors of 11.0% and 20.0% on varying sales volumes. On the basis of the above reviews no impairment to goodwill has been made in the current year.
The estimated recoverable amount in relation to the goodwill generated on the purchase of ECF is based on forecasted 3 year sales interest income calculated at 5.0% margin, extrapolated to 10 years using a 2.0% annual increment, and then discounted using a 11.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on varying sales volumes.
The goodwill generated on the purchase of Three Spires has been reviewed at the current year end and is considered adequate given its income streams referred to EAL. Based on the above reviews no impairment to goodwill has been made in the current year.
33. Investment in Group undertakings
Amounts owed to Group undertakings
Amounts owed to Group undertakings are unsecured, interest-free and repayable on demand.
Subordinated loans
MFG has issued several subordinated loans as part of its equity funding into the Bank and EAL.
Creation
Maturity
Interest rate
% p.a.
2020
£000
2019
£000
Conister Bank Limited
11 February 2014
11 February 2024
7.0
500
500
27 May 2014
27 May 2024
7.0
500
500
9 July 2014
9 July 2024
7.0
500
500
17 September 2014
17 September 2026
7.0
400
400
22 July 2013
22 July 2033
7.0
1,000
1,000
25 October 2013
22 October 2033
7.0
1,000
1,000
23 September 2016
23 September 2036
7.0
1,100
1,100
14 June 2017
14 June 2037
7.0
450
450
12 June 2018
12 June 2038
7.0
2,000
2,000
Edgewater Associates Limited
28 February 2013
28 February 2018*
7.0
-
50
21 February 2017
21 February 2027
7.0
150
150
14 May 2017
14 May 2027
7.0
128
128
7,728
7,778
* The subordinated loan due for repayment on 28 February 2019 continued beyond maturity and was settled in 2020.
34. Related party transactions
Cash deposits
During the year, the Bank held cash on deposit on behalf of Jim Mellon (Executive Chairman of MFG) and companies related to Jim Mellon and Denham Eke (CEO of MFG). Total deposits amounted to £432,213 (2019: £446,366), at normal commercial interest rates in accordance with the standard rates offered by the Bank.
During the year, the Bank held cash on deposit on behalf of David Gibson (Non-executive Director of the Bank and MFG) of £50,282 (2019: £nil).
Staff and commercial loans
Details of staff loans are given in note 20.
Commercial loans have been made to various companies connected to Jim Mellon and Denham Eke on normal commercial terms. As at 31 December 2020, £23,742 of capital and interest was outstanding (2019: £62,746).
Intercompany recharges
Various intercompany recharges are made during the course of the year as a result of the Bank settling debts in other Group companies. EAL provides services to the Group in arranging its insurance and defined contribution pension arrangements.
Loan advance to EAL
On 14 December 2016, a loan advance was made to EAL by the Bank in order to provide the finance required to acquire MBL. The advance was for £700,000 at an interest rate of 8% per annum repayable over 6 years. A negative pledge was given by EAL to not encumber any property or assets or enter into an arrangement to borrow any further monies. The balance as at 31 December 2020 was £273,568 (2019: £395,172).
Loan advance to BLX
On 11 October 2017, a £4,000,000 loan facility was made available to BLX by the Bank in order to provide the finance required to expand its operations. The facility is for 12 months, followed by a 3 year amortisation period. Interest is charged at commercial rates. Due to subsequent facility increases, the loan facility available for draw down is £5,300,000 as at year-end, with £4,587,000 (2019: £4,000,000) having been advanced to BLX.
Loan advance to PIML
On 24 May 2018, a £500,000 loan facility was made available to PIML by the Bank in order to provide the finance required to expand its operations. The facility is for 12 months. Interest is charged at commercial rates. During the year, the facility was increased to £1,500,000. At 31 December 2020, £685,000 (2019: £1,424,000) had been advanced to PIML.
Investments
The Bank holds less than 1% equity in the share capital of an investment of which Jim Mellon is a Shareholder (note 19). Denham Eke acts as co-chairman.
Subordinated loans
The Company has advanced £7,450,000 (2019: £7,450,000) of subordinated loans to the Bank and £278,000 (2019: £328,000) to EAL at 31 December 2020. See note 33 for more details.
Loan notes
See note 26 for a list of related party loan notes as at 31 December 2020 and 2019.
Key management remuneration including Executive Directors
2020
£000
2019
£000
Short-term employee benefits
1,120
927
35. Leases
A. Leases as lessee
The Group leases the head office building in the Isle of Man. The leases typically run for a period of 10 years with an option to renew the lease after that date. Lease payments are renegotiated every 10 years to reflect market rentals.
The Group leases and office unit in the United Kingdom and IT equipment with contract terms of 2 to 3 years. These leases are short-term and/or leases of low-value items. The Group has elected not to recognise right-of-use assets and lease liabilities for these leases.
Information about leases for which the Group is a lessee is presented below.
i. Right-of-use assets
Right-of-use assets related to leased properties that do not meet the definition of investment property are presented as property, plant and equipment.
Land and buildings
Total
Group
£000
£000
Cost
As at 1 January 2020
737
737
Additions
-
-
Disposals
-
-
As at 31 December 2020
737
737
Accumulated depreciation
As at 1 January 2020
165
165
Charge for the year
164
164
Eliminated on disposals
-
-
As at 31 December 2020
329
329
Carrying value at 31 December 2020
408
408
Carrying value at 31 December 2019
572
572
ii. Amounts recognised in profit or loss
2020
2019
£000
£000
Interest on lease liabilities
40
47
Depreciation expense
164
165
Expenses relating to short-term leases and low-value assets
97
117
iii. Amounts recognised in statement of cash flows
2020
2019
£000
£000
Total cash outflow for leases
244
195
iv. Non-cancellable operating lease rentals are payable in respect of property as follows:
2020
2019
£000
£000
Less than one year
84
100
Between one and five years
-
-
Over five years
-
-
Total operating lease rentals payable
84
100
36. Subsequent events
There were no subsequent events occurring after 31 December 2020.
37. Financial risk management
A. Introduction and overview
The Group has exposure to the following risks from financial instruments:
n credit risk;
n liquidity risk;
n market risk; and
n operational risk.
i. Risk management framework
The Board has overall responsibility for the establishment and oversight of the Group's risk management framework. The Board has established the ARCC, which is responsible for approving and monitoring Group risk management policies. The ARCC is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the ARCC.
The Group's risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, though its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.
B. Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's loans and advances to customers and investment debt securities. Credit risk includes counterparty, concentration, underwriting and credit mitigation risks.
Management of credit risk
The Bank's Board of Directors created the Credit Committee which is responsible for managing credit risk, including the following:
n Formulating credit policies in consultation with business units, covering collateral requirements, credit assessments, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements;
n Establishing the authorisation structure for the approval and renewal of credit facilities. Authorisation limits are allocated to in line with credit policy;
n Reviewing and assessing credit risk: The Credit Committee assesses all credit exposures in excess of designated limits, before facilities are committed to customers. Renewals and reviews of facilities are subject to the same review process.
n Limiting concentrations of exposures to counterparties, geographies and industries, by issuer, credit rating band, market liquidity and country (for debt securities);
n Developing and maintaining risk gradings to categorise exposures according to the degree of risk of default. The current risk grading consists of 3 grades reflecting varying degrees of risk of default;
n Developing and maintaining the Group's process for measuring ECL: This includes processes for:
o initial approval, regular validation and back-testing of the models used;
o determining and monitoring significant increase in credit risk; and
o incorporation of forward-looking information; and
n Reviewing compliance with agreed exposure limits. Regular reports on the credit quality of portfolios are provided to the Credit Committee which may require corrective action to be taken.
C. Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises from mismatches in the timing and amounts of cash flows, which is inherent to the Group's operations and investments.
Management of liquidity risk
The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have enough liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The key elements of the Group's liquidity strategy are as follows:
n Funding base: offering six-months to five-year fixed term deposit structure with no early redemption option. This means the Bank is not subject to optionality risk where customers redeem fixed rate products where there may be a better rate available within the market;
n Funding profile: the Bank has a matched funding profile and does not engage in maturity transformation which means that on a cumulative mismatch position the Bank is forecast to be able to meet all liabilities as they fall due;
n Monitoring maturity mismatches, behavioural characteristics of the Group's financial assets and financial liabilities, and the extent to which the Group's assets are encumbered and so not available as potential collateral for obtaining funding;
n Liquidity buffer: the Bank maintains a liquidity buffer of 10.0% of its deposit liabilities, with strict short-term mismatch limits of 0.0% for sight to three months and -5.0% for sight to six months. This ensures that the Bank is able to withstand any short-term liquidity shock; and
n Interbank market: the Bank has no exposure to the interbank lending market. The Bank has no reliance on liquidity via the wholesale markets. In turn, if market conditions meant access to the wholesale funding was constrained as per the 2008 credit crisis, this would have no foreseeable effect on the Bank.
The Bank's liquidity position is monitored daily against internal and external limits agreed with the FSA and according to the Bank's Liquidity Policy. The Bank also has a Liquidity Contingency Policy and Liquidity Contingency Committee in the event of a liquidity crisis or potential liquidity disruption event occurring.
The Treasury department receives information from other business units regarding the liquidity profile of their financial assets and financial liabilities and details of other projected cash flows arising from projected future business. Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole.
Regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. The scenarios are developed considering both Group-specific events and market-related events (e.g. prolonged market illiquidity).
D. Market risk
Market risk is the risk that changes in market prices; e.g. interest rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor's/issuer's credit standing), will affect the Group's income or value of its holdings of financial instruments. The objective of the Group's market risk management is to manage and control market risk exposures within acceptable parameters to ensure the Group's solvency while optimising the return on risk.
Management of market risks
Overall authority for market risk is vested in the Assets and Liabilities Committee ("ALCO") which sets up limits for each type of risk. Group finance is responsible for the development of risk management policies (subject to review and approval by the ALCO) and for the day-to-day review of their implementation.
Foreign exchange risk
The Bank is not subject to foreign exchange risks and its business is conducted in pounds sterling.
Equity risk
The Group has investment in associates of £308,000 (2019: £282,000) which are carried at cost adjusted for the Group's share of net asset value. The investment is audited annually and the Bank has access to these accounts. The Bank's exposure to market risk is not considered significant given the low carrying amount of the investment.
The Group's investment in listed equities is not considered significant.
Interest rate risk
The principal potential interest rate risk that the Bank is exposed to is the risk that the fixed interest rate and term profile of its deposit base differs materially from the fixed interest rate and term profile of its asset base, or basis and term structure risk.
Additional interest rate risk may arise for banks where (a) customers are able to react to market sensitivity and redeem fixed rate products and (b) where a bank has taken out interest rate derivate hedges especially against longer-term interest rate risk, where the hedge moves against the bank.
Interest rate risk for the Bank is not deemed to be currently material due to the Bank's matched funding profile. Any interest rate risk assumed by the Bank will arise from a reduction in interest rates, in a rising environment due to the nature of the Bank's products and its matched funded profile. The Bank should be able to increase its lending rate to match any corresponding rise in its cost of funds, notwithstanding its inability to vary rates on its existing loan book. The Bank attempts to efficiently match its deposit taking to its funding requirements.
E. Operational risk
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group's processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks - e.g. those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group's operations.
Management of operational risk
The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and innovation. In all cases, Group policy requires compliance with all applicable legal and regulatory requirements.
The Group has developed standards for the management of operational risk in the following areas:
n Business continuity planning;
n Requirements for appropriate segregation of duties, including the independent authorisation of transactions;
n Requirements for the reconciliation and monitoring of transactions;
n Compliance with regulatory and other legal requirements;
n Documentation of controls and procedures;
n Periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;
n Requirements for the reporting of operational losses and proposed remedial action;
n Development of contingency plans;
n Training and professional development;
n Ethical and business standards;
n Information technology and cyber risks; and
n Risk mitigation, including insurance where this is cost-effective.
Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are reported to the ARCC.
38. Basis of measurement
The financial statements are prepared on a historical cost basis, except for the following material items:
Items
Measurement basis
FVTPL - Trading asset
Fair value
FVOCI - Debt securities
Fair value
Net defined benefit liability
Fair value of plan assets less the present value of the defined benefit obligation
39. Significant accounting policies
A number of new standards are effective from 1 January 2020 but they do not have a material effect on the Group's financial statements.
The Group has consistently applied the following accounting policies to all periods presented in these financial statements.
Set out below is an index of the significant accounting policies, the details of which are available on the pages that follow:
A. Basis of consolidation of subsidiaries and separate financial statements of the Company
i. Business combinations
The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if they are related to issue of debt or equity securities.
ii. Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity if it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its control over the entity. The Group reassesses whether it has control if there are changes to one or more of the elements of control. This includes circumstances in which protective rights held (e.g. those resulting from a lending relationship) become substantive and lead to the Group having power over an investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.
iii. Non-controlling interests
NCI are measured initially at their proportionate share of the acquiree's identifiable net assets at the date of acquisition.
Changes in the Group's interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
iv. Loss of control
When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related Non-Controlling Interest ("NCI") and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.
v. Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
vi. Separate financial statements of the Company
In the separate financial statements of the Company, interests in subsidiaries, associates and joint ventures are accounted for at cost.
B. Interests in equity accounted investees
The Group's interests in equity accounted investees may comprise interests in associates and joint ventures.
Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.
Interests in associates and joint ventures are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group's share of the profit or loss and OCI of equity accounted investees, until the date on which significant influence or joint control ceases.
C. Interest
Interest income and expense are recognised in profit or loss using the effective interest rate method.
i. Effective interest rate
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts of the financial instrument to the gross carrying amount of the financial asset or amortised cost of the financial liability. When calculating the effective interest rate for financial assets, the Group estimates future cash flows considering all contractual terms of the financial instruments, including origination fees, loan incentives, broker fees payable, estimated early repayment charges, balloon payments and all other premiums and discounts. It also includes direct incremental transaction costs related to the acquisition or issue of the financial instrument. The calculation does not consider future credit losses.
ii. Amortised cost and gross carrying amount
The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance.
The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any expected credit loss allowance.
iii. Calculation of interest income and expense
In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit-impaired) or to the amortised cost of the liability.
However, for financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortised cost of the financial asset. If the asset is no longer credit-impaired, then the calculation of interest income reverts to the gross basis.
D. Fee and commission income
The Group generates fee and commission income through provision of independent financial advice, insurance brokerage agency, introducer of foreign exchange services and commissions from brokering business finance for small and medium sized enterprises.
Independent financial advice and insurance brokerage agency
Income represents commission arising on services and premiums relating to policies and other investment products committed during the year, as well as renewal commissions having arisen on services and premiums relating to policies and other investment products committed during the year and previous years and effective at the balance sheet date. Income is recognised on the date that policies are submitted to product providers with an appropriate discount being applied for policies not completed. As a way to estimate what is due at the year-end, a "not proceeded with" rate of 10.0% for pipeline life insurance products and 0.0% for non-life insurance pipeline is assumed. Renewal commissions are estimated by taking the historical amount written pro-rata to 3 months.
Other
Income other than that directly related to the loans is recognised over the period for which service has been provided or on completion of an act to which the fee relates.
E. Leases
At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract coveys the right to control the use of an identified asset for a period of time in exchange for consideration.
i. As a lessee
At commencement or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of its relative stand-alone prices. However, for the leases of property the Group has elected not to separate non-lease components and as a result, accounts for the lease and non-lease components as a single lease component.
The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Group by the end of the lease term or the cost of the right-of-use asset reflects that the Group will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.
The Group determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and the type of the asset leased.
Lease payments included in the measurement of the lease liability comprise the following:
n Fixed payments, including in-substance fixed payments;
n Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;
n Amounts expected to be payable under a residual value guarantee; and
n The exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early.
The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group's estimate of the amount expected to be payable under a residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment.
When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
The Group presents right-of-use assets that do not meet the definition of investment property in 'property, plant and equipment' and lease liabilities in 'loans and borrowings' in the statement of financial position.
Short-term leases and leases of low-value assets
The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases, including IT equipment. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
ii. As a lessor
At inception or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices.
When the Group acts as a lessor, it determines at lease inception whether each lease is a finance or an operating lease.
To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset.
Finance leases and HP contracts
When assets are subject to a finance lease or HP contract, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. HP and lease income is recognised over the term of the contract or lease reflecting a constant periodic rate of return on the net investment in the contract or lease. Initial direct costs, which may include commissions and legal fees directly attributable to negotiating and arranging the contract or lease, are included in the measurement of the net investment of the contract or lease at inception.
Operating leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss and other comprehensive income on a straight-line basis over the period of the lease.
F. Income tax
Current and deferred taxation
Current taxation relates to the estimated corporation tax payable in the current financial year. Deferred taxation is provided in full, using the liability method, on timing differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill and temporary differences related to investments in subsidiaries and associates to the extent that the Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future.
Deferred taxation is determined using tax rates, and laws that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred tax is realised. Deferred taxation assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
G. Financial assets and financial liabilities
i. Recognition and initial measurement
The Group initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities on the date on which they are originated. All other financial instruments including regular-way purchases and sales of financial assets are recognised on the trade date, which is the date on which the Group becomes party to the contractual provisions of the instrument.
A financial asset or financial liability is measured initially at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue.
ii. Classification
Financial assets
On initial recognition, a financial asset is classified as measured at amortised cost, FVOCI or FVTPL.
A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:
n The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and
n The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest ("SPPI").
A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as FVTPL:
n The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and
n The contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI.
On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis.
All other financial assets are classified as measured at FVTPL.
In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
Business model assessment
The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information provided to management.
Assessment of whether contractual cash flows are solely payments of principal and interest
For the purposes of this assessment, 'principal' is defined as the fair value of the financial asset on initial recognition. 'Interest' is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin.
In assessing whether the contractual cash flows are SPPI, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition.
Reclassifications
Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets.
Financial liabilities
The Group classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost.
iii. Derecognition
Financial assets
The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.
On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss.
Financial liabilities
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire.
iv. Modifications of financial assets and financial liabilities
Financial assets
If the terms of a financial asset are modified, then the Group evaluates whether the cash flows of the modified asset are substantially different.
If the cash flows are substantially different, the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value plus any eligible transaction costs.
If the cash flows are modified when the borrower is in financial difficulties, then the objective of the modification is usually to maximise recovery of the original contractual terms rather than to originate a new asset with substantially different terms. If the Group plans to modify a financial asset in a way that would result in forgiveness of cash flows, then it first considers whether a portion of the asset should be written off before the modification takes place. This approach impacts the result of the quantitative evaluation and means that the derecognition criteria are not usually met in such cases.
If the modification of a financial asset measured at amortised cost or FVOCI does not result in derecognition of the financial asset, then the Group first recalculates the gross carrying amount of the financial asset using the original effective interest rate of the asset and recognises the resulting adjustment as a modification gain or loss in profit or loss. Any costs or fees incurred and fees received as part of the modification adjust the gross carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset. If such modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income calculated using the effective interest rate method.
Financial liabilities
The Group derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability derecognised and consideration paid is recognised in profit or loss. Consideration paid includes non-financial assets transferred, if any, and the assumption of liabilities, including the new modified financial liability.
If the modification of a financial liability is not accounted for as derecognition, then the amortised cost of the liability is recalculated by discounting the modified cash flows at the original effective interest rate and the resulting gain or losses recognised in profit or loss. Any costs and fee incurred are recognised as an adjustment of the carrying amount of the liability and amortised over the remaining term of the modified financial liability by re-computing the effective interest rate on the instrument.
v. Offsetting
Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously.
Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Group's trading activity.
vi. Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at the date. The fair value of a liability reflects its non-performance risk.
The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.
The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements:
n Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments;
n Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and
n Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair values using other valuation techniques.
For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.
vii. Impairment
A financial instrument that is not credit-impaired on initial recognition is classified in 'Stage 1' and has its credit risk continuously monitored by the Group.
If a SICR since initial recognition is identified, the financial instrument is moved to 'Stage 2' but is not yet deemed to be credit-impaired.
n An SICR is always deemed to occur when the borrower is 30 days past due on its contractual payments. If the Group becomes aware ahead of this time of non-compliance or financial difficulties of the borrower, such as loss of employment, avoiding contact with the Group then an SICR has also deemed to occur; and
n A receivable is always deemed to be in default and credit-impaired when the borrower is 90 days past due on its contractual payments or earlier if the Group becomes aware of severe financial difficulties such as bankruptcy, individual voluntary arragement, abscond or disappearance, fraudulent activity and other similar events.
If the financial instrument is credit-impaired, the financial instrument is then moved to 'Stage 3'. Financial instruments in Stage 3 have their ECL measured based on expected credit losses on an undiscounted lifetime basis.
The Group measures loss allowances at an amount equal to lifetime ECL, except for debt investment securities that are determined to have low credit risk at the reporting date for which they are measured as a 12-month ECL. Loss allowances for lease receivables are always measured at an amount equal to lifetime ECL.
12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Financial instruments for which a 12-month ECL is recognised are referred to as 'Stage 1 financial instruments'.
Lifetime ECL are the ECL that result from all possible default events over the expected life of a financial instrument. Financial instruments for which a lifetime ECL is recognised but which are not credit-impaired are referred to as 'Stage 2 financial instruments'.
Measurement of ECL
After a detailed review, the Group devised and implemented an impairment methodology in light of the IFRS 9 requirements outlined above noting the following:
n The ECL was derived by reviewing the Group's loss rate and loss given default over the past 8 years by product and geographical segment;
n The Group has assumed that the future economic conditions will broadly mirror the current environment and therefore the forecasted loss levels in the next 3 years will match the Group's experience in recent years;
n For portfolios where the Group has never had a default in its history or has robust credit enhancements such as credit insurance or default indemnities for the entire portfolio, then no IFRS 9 provision is made. At 2020 year-end, 36.6% had such credit enhancements (2019: 37.9%); and
n If the Group holds objective evidence through specifically assessing a credit-impaired receivable and believes it will go on to completely recover the debt due to the collateral held and cooperation with the borrower, then no IFRS 9 provision is made.
ECL are probability-weighted estimates of credit losses. They are measured as follows:
n Financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive);
n Financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; and
n Undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive.
Credit-impaired financial assets
At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI, and finance lease receivables are credit-impaired (referred to as 'Stage 3 financial assets'). A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.
Evidence that a financial asset is credit-impaired includes the following observable date:
n Significant financial difficulty of the borrower or issuer;
n A breach of contract such as a default or past due event;
n The restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise;
n It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or
n The disappearance of an active market for a security because of financial difficulties.
A loan that has been renegotiated due to a deterioration in the borrower's condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a retail loan that is overdue for 90 days or more is considered credit-impaired even when the regulatory definition of default is different.
In making an assessment of whether an investment in sovereign debt is credit impaired, the Group considers the following factors:
n The market's assessment of creditworthiness as reflected in the bond yields;
n The rating agencies' assessments of creditworthiness;
n The country's ability to access the capital markets for new debt issuance;
n The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness; and
n The international support mechanisms in place to provide the necessary support as 'lender of last resort' to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria.
Presentation of allowance for ECL in the statement of financial position
Loss allowances for ECL are presented in the statement of financial position as follows:
n Financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;
n Loan commitments: generally, as a provision; and
n Debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in the fair value reserve.
Write-off
Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level.
Recoveries of amounts previously written off are included in 'impairment losses on financial instruments' in the statement of profit or loss and OCI.
Financial assets that are written off could still be subject to enforcement activities in order to comply with the Group's procedures for recovery of amounts due.
H. Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash equivalents comprise cash and deposit balances with an original maturity date of three months or less.
I. Loans and advances
Loans and advances' captions in the statement of financial position include:
n Loans and advances measured at amortised cost (see 36 (I)). They are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortised cost using the effective interest method; and
n Finance lease receivables (see 36 (G)).
J. Property, plant and equipment
Items of property, plant and equipment are stated at historical cost less accumulated depreciation (see below). Historical cost includes expenditure that is directly attributable to the acquisition of the items.
The assets' residual values and useful economic lives are reviewed, and adjusted if appropriate, at each reporting date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.
When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate items of property, plant and equipment.
Depreciation and amortisation
Assets are depreciated or amortised on a straight-line basis, so as to write off the book value over their estimated useful lives. The estimated useful lives of property, plant and equipment and intangibles are as follows:
Property, plant and equipment
Leasehold improvements to expiration of the lease
IT equipment 4-5 years
Motor vehicles 2.5 years
Furniture and equipment 4 -10 years
Plant and machinery 5 - 20 years
K. Intangible assets and goodwill
i. Goodwill
Goodwill that arises on the acquisition of subsidiaries is measured at cost less accumulated impairment losses.
ii. Software
Software acquired by the Group is measured at cost less accumulated amortisation and any accumulated impairment losses.
Expenditure on internally developed software is recognised as an asset when the Group is able to demonstrate: that the product is technically feasible, its intention and ability to complete the development and use the software in a manner that will generate future economic benefits, and that it can reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs directly attributable to developing the software and capitalised borrowing costs, and are amortised over its useful life. Internally developed software is stated at capitalised cost less accumulated amortisation and any accumulated impairment losses.
Software is amortised on a straight-line basis in profit or loss over its estimated useful life, from the date on which it is available for use. Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
iii. Other
Intangible assets that are acquired by an entity and having finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses.
Intangible assets acquired as part of a business combination, with an indefinite useful live are measured at fair value. Intangible assets with indefinite useful lives are not amortised but instead are subject to impairment testing at least annually.
The useful lives of intangibles are as follows:
Customer contracts and lists to expiration of the agreement
Business intellectual property rights 4 years - indefinite
Website development costs indefinite
Software 5 years
L. Impairment of non-financial assets
At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. Goodwill is tested annually for impairment.
For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or Cash Generating Units ("CGUs"). Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less cost to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.
An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount.
The Group's corporate assets do not generate separate cash inflows and are used by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGUs to which the corporate assets are located.
Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
M. Deposits, debt securities issued and subordinated liabilities
Deposits, debt securities issued and subordinated liabilities are the Group's sources of debt funding.
The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments.
Deposits, debt securities issued and subordinated liabilities are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method.
N. Employee benefits
i. Long-term employee benefits
Pension obligations
The Group has pension obligations arising from both defined benefit and defined contribution pension plans.
A defined contribution pension plan is one under which the Group pays fixed contributions into a separate fund and has no legal or constructive obligations to pay further contributions. Defined benefit pension plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and remuneration.
Under the defined benefit pension plan, in accordance with IAS 19 Employee benefits, the full service cost for the period, adjusted for any changes to the plan, is charged to the income statement. A charge equal to the expected increase in the present value of the plan liabilities, as a result of the plan liabilities being one year closer to settlement, and a credit reflecting the long-term expected return on assets based on the market value of the scheme assets at the beginning of the period, is included in the income statement.
The statement of financial position records as an asset or liability as appropriate, the difference between the market value of the plan assets and the present value of the accrued plan liabilities. The difference between the expected return on assets and that achieved in the period, is recognised in the income statement in the year in which they arise. The defined benefit pension plan obligation is calculated by independent actuaries using the projected unit credit method and a discount rate based on the yield on high quality rated corporate bonds.
The Group's defined contribution pension obligations arise from contributions paid to a Group personal pension plan, an ex gratia pension plan, employee personal pension plans and employee co-operative insurance plans. For these pension plans, the amounts charged to the income statement represent the contributions payable during the year.
ii. Share-based compensation
The Group maintains a share option programme which allows certain Group employees to acquire shares of the Group. The change in the fair value of options granted is recognised as an employee expense with a corresponding change in equity. The fair value of the options is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options.
At each reporting date, the Group revises its estimate of the number of options that are expected to vest and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.
The fair value is estimated using a proprietary binomial probability model. The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised.
O. Share capital and reserves
Share issue costs
Incremental costs that are directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments.
P. Earnings per share ("EPS")
The Group presents basic and diluted EPS data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss that is attributable to ordinary shareholders of MFG by the weighted-average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting profit or loss that is attributable to ordinary shareholders and the weighted-average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted employees.
Q. Segmental reporting
A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Group's primary format for segmental reporting is based on business segments.
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with any of the Group's other components, whose operating results are regularly reviewed by the Group's chief operating decision maker ("CODM") to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.
Segment results reported to the Group's CEO (being the CODM) include items that are directly attributable to a segment as well as those that can be allocated on a reasonable basis.
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