REG - Manx Financial Group - Half-year Report
FOR IMMEDIATE RELEASE 28 August 2020
Manx Financial Group PLC (the 'Company')
Unaudited Interim Results for the 6 months to 30 June 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 the Interim results for the six months ended 30 June 2020.
Jim Mellon, Executive Chairman, commented: "The Board's fundamental objective continues to be that of increasing shareholder value, both in a prudent yet progressive manner. Having started the year in great shape, we have undertaken a number of initiatives to minimise and respond to the demands of dealing with the effects of COVID-19 and are lucky to have a diverse range of financial services upon which we can rely."
Copies of the Interim Report will shortly be available on our website www.mfg.im
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
I am pleased to present my half-year report for the period ended 30 June 2020.
When I last wrote to you in June this year, I explained that we have undertaken a number of initiatives to minimise the effects of COVID-19 on our businesses. Our immediate concern was to ensure the safety and well-being of our staff and our customers, and in doing so, I believe we have been extremely effective, more than managing to carry on our businesses seamlessly.
In operational terms, our staff on the Isle of Man, having implemented a successful working-from-home regime, are now all back at their desks and serving customers on near-normal terms. Since April 2020, Conister Bank (the "Bank") has been working closely with the Isle of Man Government and, as a result, have been appointed as accredited lenders for the provision of Disruption Loans ("DLGA") and Working Capital ("CBWCLA") loans, both government-backed at 80% and 100% respectively, for a combined value of up to £15 million. In addition, and outside these facilities, the Bank had committed a further £10 million to support local businesses prior to the activation of the government schemes.
Since the start of the year, Isle of Man new business remains ahead of forecast and with minimal arrears and defaults. Significantly, the Bank achieved a new monthly lending record in June 2020, beating pre-COVID outcomes and continues to have a robust pipeline.
It is also pleasing to note that Edgewater Associates Limited and Manx FX Limited - our principal Manx subsidiaries - are performing well with the latter recording an excellent first-half outcome.
However, the situation with our businesses in the UK is more complex as our customers experience the effects of the economic down-turn, compounded by a fall in business confidence. As a result: -
§ we have streamlined our UK operations by merging Blue Star Business Solutions Limited within Conister Finance & Leasing Ltd, taking the difficult decision to close our Newbury and Manchester offices. We will now spearhead all our UK activities from our Alton, Hampshire office. These initiatives should save us in excess of £0.4 million in a full year;
§ we have strengthened our lending criteria, moving away from the more vulnerable business sectors into Tier 1 opportunities;
§ I am particularly pleased to note that we have been recognised and appointed as accredited lenders under both the UK state-owned British Bank's Business Interruption ("CBILS") and Bounce Back ("BBILS") loan schemes. CBILS lending affords us an 80% government guarantee and BBILS affords us a 100% government guarantee;
§ our UK-based Wholesale and Block Funding division remains unchanged, and both these activities have an encouraging forward order book; and
§ finally, we have established a stand-alone Debt Management and Collections operation to help any customers in distress by offering forbearance or alternative repayment planning - an initiative that is proving extremely successful. At its height, 2,000 customers availed themselves of this service and by mid-August 2020, this figure had reduced to less than 300 as our customers were able to return to their planned repayment schedules.
Outside our COVID measures, at the beginning of February 2020, the Bank increased its holding in Beer Swaps Limited - a niche loan broker to the brewing industry - from 20% to 75%. This investment is already proving its worth and is performing in excess of our internal forecasts.
I have reported previously on our purchase and immediate cancellation of the shares held by Southern Rock Insurance Company Limited following the positive EGM vote in March 2020. This action has removed a significant uncertainty surrounding a market over-hang of our shares, whilst at the same time increasing the Net Asset Value per share for all remaining shareholders.
Lastly, during the period, we announced a change in directors with the appointment of John Spellman as an independent non-executive director to both the Group and the Bank. I am sure that you will join me in welcoming John, and also in wishing John Banks every success for the future following his resignation from the Group's board in March 2020.
Financial Performance
Our operating income showed an increase of 8.3% to £8.7 million (2019: £8.0 million), despite a fall of 12% in our net interest income to £7.8 million (2019: £8.9 million), offset by a further 36.3% reduction in commission expense to £1.9 million (2019: £2.9 million). Our net interest yield has fallen slightly to 6.6% (2019: 7.5%), partially as a result of continuing to move our lending away from unsecured consumer loans. Against this, our pure operating expenses have grown by 6.6% to £5.1 million (2019: £4.8 million). We have taken a prudent 29.0% increase in the Bank's provisions to £1.9 million (2019: £1.5 million) following a careful review of our loan book in the light of the likely effects of COVID-19 upon our customers' businesses. It is worth noting that despite this, our cumulative provisions against the gross loan book stand at only 2.9% (2019: 2.3%) - a continuing reflection of the excellence of the Bank's credit underwriting. Thus, profit after tax for the six months was slightly lower at £1.0 million (2019: £1.2 million).
Turning to our balance sheet, despite the difficult trading environment, our loan book has increased by 6.8% to £181.6 million (2019: £170.0 million). We have taken the decision to increase our liquidity as much as possible to provide a prudent buffer until the economic situation normalises and I am pleased to report that our cash and near cash has increased by 75.4% to £64.0 million (2019: £36.5 million), placing us in a more advantageous position than the majority of our competitors. Our customer deposits have grown by 22.7% to £217.8 million (2019: £177.4 million) - all of which leads to an 19.0% growth in our total asset base to £260.7 million (2019: £219.1 million). Shareholder equity has increased by 3.9% to £21.8 million (2019: £21.0 million), providing net assets per share of 19.1 pence (2019: 16.0 pence).
Strategic Objectives for 2020
Our strategic priorities for 2020 remain unchanged, but our implementation of these has modified as we respond to demands of dealing with the effects of COVID-19. In particular, we have streamlined the Bank's UK operations to better serve the evolving market requirement.
I must reiterate that your Board's fundamental objective continues to be that of increasing shareholder value, both in a prudent yet progressive manner. I set out our 2020 key objectives in the 2019 year-end accounts and now review our progress at the six-month point: -
§ Providing the highest quality service throughout our operations to all customers, ensuring that their treatment is both fair and appropriate.
We continue to enhance our Treating Customers Fairly ("TCF") regime throughout our businesses and this is the cornerstone of all our operations as we strive to ensure that our customer service offering is second to none. Our TCF Committee regularly reviews complaints and compliments to identify trends which will improve our customer experience. We have undertaken further training for our teams, thus enhancing our TCF culture. We keep detailed records throughout the Group of any customer complaints and their resolution and I am pleased to report that we have again received a minimal number of complaints so far this year, of which only 6 were partially upheld following investigation (2019: 11) - this against a combined active customer base of over 20,000 accounts. All TCF investigations are thoroughly reviewed which allows us, if necessary, to amend and enhance any relevant policy, procedure or training module.
§ Adopting a pro-active strategy of managing risk, especially following the implementation of IFRS 9 in full. In doing so, we are committed to regularly review our loan book to allow for any credit impairment resulting from observing strict Expected Credit Loss criteria.
Our response to the COVID pandemic has meant a refinement to our credit risk management process. We have brought forward the implementation of systems for electronic identification and verification and have installed enhanced credit scoring software. These enhancements allow our key staff more time to analyse propositions, rather than concentrating on processing. We are now reducing our exposure to unsecured consumer finance by replacement lending into prime and near prime sectors. We have implemented a segregated debt collection department to help customers deal with any financial hardship. Where possible, we have offered either forbearance or repayment plans should any loan fall into arrears. This allows us to more clearly identify potential credit issues at an early course and thus improve the Bank's ability to achieve a better outcome. We have increased our impairment allowance and we will continue our policy of strengthening our balance sheet to minimise the risk of any unforeseen event adversely affecting our profitability.
§ Concentrating on developing our core businesses by considered acquisitions, increased prudential lending and augmenting the range of financial services we offer.
The current economic environment has produced a number of interesting potential acquisition opportunities. These are in the process of careful evaluation and I will report should any of these opportunities achieve fruition. Our recent relationships with the Isle of Man and UK government entities will provide the means for the Bank to lend up to £35 million of new business on secure or near-secure terms during the second half of the year.
§ Implementing 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.
We continue with our investment in core systems and have recently upgraded both our deposit and lending systems. Our successful UK online portal now offers straight-through processing for our broker network, allowing us to redeploy staff into more productive areas. A review of our management information and accounting system needs is nearing completion and we anticipate a significant improvement following further investment in these key areas.
§ Focusing on the liabilities side of our balance sheet by introducing a new treasury management function and structure.
Our new Group Treasury Management process is bearing fruit and I am pleased to report a realised gain of £212,000 for the first six months (2019: £80,000) - useful income in the continuing low interest rate environment. Our recently launched Isle of Man variable rate deposit account is gaining considerable traction and we will continue to develop attractive deposit products with competitive interest rates for our depositors.
§ Managing our balance sheet to exceed, as far as possible, the regulatory requirements for capital adequacy.
We are well capitalised with our Total Capital Ratio standing at 16.04% (Year-end 2019: 16.86%). We will maintain our strategy of converting Group retained earnings into Tier 1 capital for the Bank to support our lending growth. Meanwhile, we will continue to maintain a heightened level of cash liquidity.
Current trading and outlook
Thus far, the Isle of Man economy is bearing up well under the strain of COVID-19 and our local new business growth shows no signs of diminishing. The UK, however, is experiencing considerable uncertainty with the biggest fall in quarterly Gross Domestic Product on record at 20.4% for Quarter 2 this year. Thus, it is difficult for me to provide a clear steer as to our full year outcome in this changing environment. We have, however, started the beginning of the year in great shape and we are lucky in having a diverse range of financial services upon which to rely. I am also confident that worthwhile acquisition opportunities will emerge during the inevitable shake-out to come.
The Bank's appointments as accredited lenders to the various government-backed schemes will serve as an impetus to secure second-half lending growth, and we will continue to protect our existing loan book as far as possible by helping any customer in difficulty with revised payment planning or similar forbearance. Our recent streamlining and cost-cutting exercises will make a positive impact on profits for the second half and beyond. Meanwhile, we will continue to strengthen our balance sheet by maintaining adequate liquidity and ensuring our provisioning regime is both appropriate and prudent.
One matter that I intend to progress is the provision of a dividend scheme. Many shareholders have questioned me over the years on the lack of tangible return. Until now, our concentration has been on building up the balance sheet to reflect the success of the Group. I am pleased to say that we are in advanced discussions with our financial advisors as to how best to implement a dividend scheme to reward shareholder loyalty and I hope to announce the full details before the year-end.
It remains for me, as always, to thank on behalf of the Board, our staff for their splendid efforts coping with the additional demands of dealing with the COVID pandemic whilst continuing to develop the Group in such a successful manner and, finally, to thank our shareholders for their enduring loyalty.
Jim Mellon
Executive Chairman
25 August 2020
Condensed Consolidated Statement of Profit or Loss and Other Comprehensive Income
Notes
For the six months ended
30 June
2020
£'000
(unaudited)
For the six months ended
30 June
2019
£'000
(unaudited)
For the year ended
31 December 2019
£'000
(audited)
Interest income
6
10,428
10,813
22,320
Interest expense
(2,617)
(1,936)
(4,391)
Net interest income
7,811
8,877
17,929
Fee and commission income
2,157
1,816
3,796
Fee and commission expense
(1,870)
(2,934)
(5,426)
Net trading income
8,098
7,759
16,299
Other operating income
81
139
308
Gain / (loss) on trading assets
6
(3)
(1)
Realised gain on debt securities
212
80
179
Terminal funding
8
30
27
80
Gain from acquisition of subsidiary
18
237
-
-
Operating income
8,664
8,002
16,865
Personnel expenses
(3,337)
(3,102)
(6,762)
Other expenses
(1,772)
(1,692)
(4,135)
Impairment on loans and advances to customers
(1,895)
(1,469)
(1,900)
Depreciation
(425)
(281)
(638)
Amortisation and impairment of intangibles
(172)
(136)
(430)
Share of (loss) / profit of equity accounted investees, net of tax
(91)
46
124
VAT recovery
13
36
52
(101)
Profit before tax payable
1,008
1,420
3,023
Income tax expense
(16)
(184)
(350)
Profit for the period / year
992
1,236
2,673
Notes
For the six months ended
30 June
2020
£'000
(unaudited)
For the six months ended
30 June
2019
£'000
(unaudited)
For the year ended
31 December 2019
£'000
(audited)
Profit for the period / year
992
1,236
2,673
Other comprehensive income:
Items that will be reclassified to profit or loss
Unrealised gain on debt securities
102
27
51
Items that will never be reclassified to profit or loss
Actuarial loss on defined benefit pension scheme taken to equity
-
-
(128)
Total comprehensive income for the period / year
1,094
1,263
2,596
Profit attributable to:
Owners of the Company
997
1,236
2,673
Non-controlling interests
(5)
-
-
992
1,236
2,673
Total comprehensive income attributable to:
Owners of the Company
1,099
1,263
2,596
Non-controlling interests
(5)
-
-
1,094
1,263
2,596
Earnings per share - Profit for the period / year
Basic earnings per share (pence)
9
0.87
0.94
2.04
Diluted earnings per share (pence)
9
0.66
0.77
1.66
Earnings per share - Total comprehensive income
for the period / year
Basic earnings per share (pence)
9
0.96
0.96
1.98
Diluted earnings per share (pence)
9
0.73
0.79
1.62
Condensed Consolidated Statement of Financial Position
As at
Notes
30 June
2020
£'000
(unaudited)
30 June
2019
£'000
(unaudited)
31 December 2019
£'000
(audited)
Assets
Cash and cash equivalents
6,991
8,916
14,620
Debt securities
10
57,036
27,583
46,792
Trading assets
11
4
17
19
Loans and advances to customers
5,12
181,581
170,035
179,370
Trade and other receivables
13
2,521
2,555
2,478
Property, plant and equipment
5,793
3,406
3,299
Intangible assets
2,290
1,864
2,293
Goodwill
14
4,361
4,532
3,734
Investment in associate
171
204
282
Total assets
260,748
219,112
252,887
Liabilities
Deposits from customers
217,758
177,414
209,933
Creditors and accrued charges
15
3,148
3,202
2,972
Contingent consideration
921
954
863
Loan notes
16
16,222
15,871
15,971
Pension liability
688
543
688
Deferred tax liability
141
142
141
Total liabilities
238,878
198,126
230,568
Equity
Called up share capital
17
19,121
20,732
20,732
Retained earnings
2,686
254
1,587
Equity attributable to owners of the Company
21,807
20,986
22,319
Non-controlling interest
18
63
-
-
Total equity
21,870
20,986
22,319
Total liabilities and equity
260,748
219,112
252,887
Condensed Consolidated Statement of Changes in Equity
Attributable to owners of the Company
For the six months ended 30 June 2020
Share capital
£'000
Retained earnings
£'000
Total
£'000
Non-controlling interests
£'000
Total
equity
£'000
Balance at 1 January 2020
20,732
1,587
22,319
-
22,319
Total comprehensive income for the period:
Profit for the period
-
997
997
(5)
992
Other comprehensive income
-
102
102
-
102
Total comprehensive income for the period
-
1,099
1,099
(5)
1,094
Transactions with owners:
Share-based payment expense
-
-
-
-
-
Purchase of ordinary shares (Note 17)
(1,611)
-
(1,611)
-
(1,611)
Total transactions with owners of the Company
(1,611)
-
(1,611)
-
(1,611)
Changes in ownership interests:
Acquisition of subsidiary with non-controlling interest
-
-
-
68
68
Total changes in ownership interests
-
-
-
68
68
Balance at 30 June 2020
19,121
2,686
21,807
63
21,870
For the six months ended 30 June 2019
Share capital
£'000
Retained earnings
£'000
Total
equity
£'000
Balance at 1 January 2019
20,732
(1,009)
19,723
Total comprehensive income for the period:
Profit for the period
-
1,236
1,236
Other comprehensive income
-
27
27
Total comprehensive income for the period
-
1,263
1,263
Transactions with owners:
Share-based payment expense
-
-
-
Shares issued
-
-
-
Total transactions with owners of the Company
-
-
-
Balance at 30 June 2019
20,732
254
20,986
Condensed Consolidated Statement of Cash Flows
Notes
For the six months ended
30 June
2020
£'000
(unaudited)
For the six months ended
30 June
2019
£'000
(unaudited)
For the year ended
31 December 2019
£'000
(audited)
RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS
Profit before tax
1,008
1,420
3,023
Adjustments for:
Depreciation
425
281
638
Amortisation and impairment of intangibles
172
136
430
Realised gain on debt securities
(212)
(80)
(179)
Share of loss / (profit) of equity accounted investees
91
(46)
(124)
Contingent consideration interest expense
58
8
88
Pension charge included in personnel costs
-
-
17
Gain on acquisition of subsidiary
(237)
-
-
Lease interest
20
-
-
Loan note interest capitalised
16
26
-
-
1,351
1,719
3,893
Changes in:
Trading asset
15
3
1
Trade and other receivables
13
73
43
118
Creditors and accrued charges
15
(15)
230
144
Net cash flow from trading activities
1,424
1,995
4,156
Changes in:
Loans and advances to customers
5,12
(4,461)
(21,757)
(31,092)
Deposits from customers
7,825
18,914
51,433
Pension contribution
-
(41)
(41)
Cash inflow / (outflow) from operating activities
4,788
(889)
24,456
Notes
For the six months ended
30 June
2020
£'000
(unaudited)
For the six months ended
30 June
2019
£'000
(unaudited)
For the year ended
31 December 2019
£'000
(audited)
CASH FLOW STATEMENT
Cash from operating activities
Cash inflow / (outflow) from operating activities
4,788
(889)
24,456
Income taxes paid
-
(149)
(379)
Net cash inflow / (outflow) from operating activities
4,788
(1,038)
24,077
Cash flows from investing activities
Purchase of property, plant and equipment
(322)
(1,279)
(1,634)
Purchase of intangible assets
(35)
(48)
(132)
Acquisition of subsidiary or associate, net of cash acquired
18
(622)
(1,324)
107
(Purchase) / sale of debt securities at fair value through other comprehensive income
10
(3,608)
(6,001)
(1,337)
(Purchase) / sale of debt securities at amortised cost
10
(6,322)
9,059
(16,028)
Net cash (outflow) / inflow from investing activities
(10,909)
407
(19,024)
Cash flows from financing activities
(Repayment) / receipt of loan notes
16
(1,386)
-
100
Lease payments
(122)
(68)
(148)
Decrease in borrowings from block creditors
-
(138)
(138)
Net cash outflow from financing activities
(1,508)
(206)
(186)
Net (decrease) / increase in cash and cash equivalents
(7,629)
(837)
4,867
Cash and cash equivalents - opening
14,620
9,753
9,753
Cash and cash equivalents - closing
6,991
8,916
14,620
Included in cash flows are:
Interest received - cash amounts
10,741
10,489
21,441
Interest paid - cash amounts
(2,669)
(1,917)
(4,251)
Non-cash investing and financing activities disclosed in other notes are:
§ £1.60m acquisition of 16,966,158 of the Group's own Ordinary Shares (30 June 2019: nil and 31 December 2019: nil) - Note 17
§ £2.25m settlement of pre-existing relationship on acquisition of subsidiary (30 June 2019: nil and 31 December 2019: nil) - Note 18
The notes are an integral part of these condensed consolidated interim financial statements.
Notes
For the six months ended 30 June 2020
1. Reporting entity
Manx Financial Group PLC ("the Company" or "MFG") is a company incorporated in the Isle of Man. These condensed consolidated interim financial statements ("interim financial statements") as at and for the six months ended 30 June 2020 comprise the Company and its subsidiaries (the "Group").
2. Basis of accounting
These interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting and should be read in conjunction with the last annual consolidated financial statements as at and for the year ended 31 December 2019 ("last annual financial statements"). They do not include all of the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last annual financial statements.
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
In preparing these interim financial statements, management 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 significant judgements made by management in applying the Group's accounting policies and key sources of estimation uncertainty were the same as those described in the last annual financial statements other than noted below.
COVID-19
The extent to which COVID-19 impacts the Group's business will depend on:
§ the duration of COVID-19;
§ 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.
i. Impairment of financial assets
The Group's Expected Credit Losses ("ECL") model contains accounting judgements and estimates which include the:
§ grouping of financial assets by product when ECL is assessed at the product level;
§ determination of model inputs such as probability of default, loss given default rate and loss rate;
§ association of the Group's macroeconomic outlook to the ECL model inputs; and
§ determination of significant increase in credit risk ("SICR").
In determining the ECL, a more severe economic outlook has been used at the interim reporting date when compared to the outlook used at the annual reporting date which has led to an increase in loss rate and probability of default estimates.
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 exceptionally stressed due to COVID-19.
ii. Impairment of non-financial assets
The Group has performed reviews for indicators of impairment at the interim reporting date in the same manner as at the annual reporting date. In performing this assessment, the Group has considered the definition and allocation of assets and liabilities to cash generating units ("CGU"), the estimate and allocation of future cash flows to CGU and applicable discount rates. No impairment loss has been recognised.
5. Credit risk
A summary of the Group's current policies and practices for the management of credit risk is set out in Note 8 - Financial risk review and Note 36 - Financial risk management on page 43 and 67 respectively of the Annual Financial Statements 2019.
An explanation of the terms Stage 1, Stage 2 and Stage 3 is included in Note 38 (G)(vii) on page 75 of the last annual financial statements.
A. Summary of credit risk on loans and advances to customers
As at 30 June 2020
Stage 1
£'000
Stage 2
£'000
Stage 3
£'000
Total
£'000
(unaudited)
Grade A1
164,648
-
-
164,648
Grade B
-
2,252
-
2,252
Grade C
5,558
2,211
13,074
20,843
Gross value
170,206
4,463
13,074
187,743
Allowance for ECL
(220)
(38)
(5,904)
(6,162)
Carrying value
169,986
4,425
7,170
181,581
As at 30 June 2019
Stage 1
£'000
Stage 2
£'000
Stage 3
£'000
Total
£'000
(unaudited)
Grade A1
161,124
-
-
161,124
Grade B
1,439
3,077
98
4,614
Grade C
-
1,627
7,206
8,833
Gross value
162,563
4,704
7,304
174,571
Allowance for ECL
(170)
(862)
(3,504)
(4,536)
Carrying value
162,393
3,842
3,800
170,035
As at 31 December 2019
Stage 1
£'000
Stage 2
£'000
Stage 3
£'000
Total
£'000
(audited)
Grade A1
168,796
-
-
168,796
Grade B
1,143
1,675
-
2,818
Grade C
-
1,985
10,544
12,529
Gross value
169,939
3,660
10,544
184,143
Allowance for ECL
(116)
(467)
(4,190)
(4,773)
Carrying value
169,823
3,193
6,354
179,370
1 Loans are graded A to C depending on the level of risk. Grade C relates to agreements with the highest of risk, Grade B with medium risk and Grade A relates to agreements with the lowest risk.
B. Summary of overdue status of loans and advances to customers
As at 30 June 2020
Stage 1
£'000
Stage 2
£'000
Stage 3
£'000
Total
£'000
(unaudited)
Current
159,467
-
-
159,467
Overdue less than 30 days
5,181
-
-
5,181
Overdue 30 days or more
5,558
4,463
13,074
23,095
170,206
4,463
13,074
187,743
As at 30 June 2019
Stage 1
£'000
Stage 2
£'000
Stage 3
£'000
Total
£'000
(unaudited)
Current
161,469
-
-
161,469
Overdue less than 30 days
4,562
-
-
4,562
Overdue 30 days or more
64
2,975
5,501
8,540
166,095
2,975
5,501
174,571
As at 31 December 2019
Stage 1
£'000
Stage 2
£'000
Stage 3
£'000
Total
£'000
(audited)
Current
145,373
-
-
145,373
Overdue less than 30 days
24,259
-
-
24,259
Overdue 30 days or more
307
3,660
10,544
14,511
169,939
3,660
10,544
184,143
6. Interest income
Interest income represents charges and interest on finance and leasing agreements attributable to the period or year after adjusting for early settlements and interest on bank balances, excluding the Terminal funding portfolio.
7. 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); Edgewater Associates and Manx FX.
For the 6 months ended
30 June 2020 (unaudited)
Asset and
Personal
Finance
£'000
Edgewater Associates
£'000
Manx FX
£'000
Investing
Activities
£'000
Total
£'000
Net interest income / (expense)
8,287
-
-
(476)
7,811
Operating income / (expense)
6,932
1,075
872
(215)
8,664
Profit / (loss) before tax payable
843
6
785
(626)
1,008
Capital expenditure
357
-
-
-
357
Total assets
257,310
2,292
321
825
260,748
For the 6 months ended
30 June 2019 (unaudited)
Manx Incahoot
£'000
Asset and
Personal
Finance
£'000
Edgewater Associates
£'000
Manx FX
£'000
Investing
Activities
£'000
Total
£'000
Net interest income / (expense)
-
9,332
-
-
(455)
8,877
Operating income / (expense)
(10)
6,591
1,276
290
(145)
8,002
Profit / (loss) before tax payable
(98)
1,863
278
79
(702)
1,420
Capital expenditure
-
1,327
-
-
-
1,327
Total assets
118
211,106
3,388
239
4,261
219,112
For the year ended
31 December 2019 (audited)
Manx Incahoot
£'000
Asset and
Personal
Finance
£'000
Edgewater Associates
£'000
Manx FX
£'000
Investing
Activities
£'000
Total
£'000
Net interest income
-
17,929
-
-
-
17,929
Operating income / (expense)
(10)
13,518
2,529
828
-
16,865
Profit / (loss) before tax payable
(295)
2,944
219
502
(347)
3,023
Capital expenditure
-
1,744
14
-
8
1,766
Total assets
14
249,449
2,292
321
811
252,887
8. Terminal funding
In September 2014, the Bank discontinued funding handheld payment devices (referred to as Terminal funding) due to the volume of write-offs. Subsequently, the book has been placed in run-off whilst the Bank vigorously pursues historical write-offs. A decision was made by the Board during 2016 to cease funding and to run-off the book upon the final repayment date of August 2019. Terminal funding continues to generate secondary term rental income following the last repayment date.
For the 6 months ended
30 June 2020
£'000
(unaudited)
For the 6
months ended
30 June 2019
£'000
(unaudited)
For the
year ended
31 Dec 2019
£'000
(audited)
Interest income
22
27
78
Release of provisions
8
-
2
30
27
80
9. Earnings per share
For the 6 months ended
30 June 2020
£'000
(unaudited)
For the 6 months ended
30 June 2019
£'000
(unaudited)
For the
year ended
31 Dec 2019
£'000
(audited)
Profit for the period / year
992
1,236
2,673
Weighted average number of ordinary shares in issue (basic)
114,130,077
131,096,235
131,096,235
Basic earnings per share (pence)
0.87
0.94
2.04
Diluted earnings per share (pence)
0.66
0.77
1.66
Total comprehensive income for the period / year
1,094
1,263
2,596
Weighted average number of ordinary shares in issue (basic)
114,130,077
131,096,235
131,096,235
Basic earnings per share (pence)
0.96
0.96
1.98
Diluted earnings per share (pence)
0.73
0.79
1.62
The basic earnings per share calculation is based upon the profit for the period / year after taxation and the weighted average of the number of shares in issue throughout the period / year.
As at
30 June 2020
(unaudited)
30 June 2019
(unaudited)
31 Dec 2019
(audited)
Reconciliation of weighted average number of ordinary shares in issue between basic and diluted
Weighted average number of ordinary shares (basic)
114,130,077
131,096,235
131,096,235
Number of shares issued if all convertible loan notes were exchanged for equity
36,555,556
41,666,667
41,666,667
Dilutive element of share options if exercised
-
10,366
10,366
Weighted average number of ordinary shares (diluted)
150,685,633
172,773,268
172,762,902
Reconciliation of profit for the period / year between basic and diluted
Profit for the period / year (basic)
992
1,236
2,673
Interest expense saved if all convertible loan notes were exchanged for equity
83
98
196
Profit for the period / year (diluted)
1,075
1,334
2,869
The diluted earnings per share calculation assumes that all convertible loan notes, warrants (where applicable) and share options have been converted / exercised at the beginning of the period where they are dilutive.
As at
30 June 2020
£'000
(unaudited)
30 June 2019
£'000
(unaudited)
31 Dec 2019
£'000
(audited)
Reconciliation of total comprehensive income for the period / year between basic and diluted
Total comprehensive income for the period / year (basic)
1,094
1,263
2,596
Interest expense saved if all convertible loan notes were exchanged for equity
83
98
196
Total comprehensive income for the period / year (diluted)
1,177
1,361
2,792
10. Debt securities
As at
30 June 2020
£'000
(unaudited)
30 June 2019
£'000
(unaudited)
31 Dec 2019
£'000
(audited)
Financial assets at fair value through other comprehensive income:
UK Government treasury bills
48,612
21,581
44,690
Financial assets at amortised cost:
UK Certificates of Deposit
8,424
6,002
2,102
57,036
27,583
46,792
UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in equity.
11. Trading assets
The investment represents shares 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.
12. Loans and advances to customers
As at
Gross
Amount
£'000
Specific Provision
£'000
ECL Allowance
£'000
30 June 2020
Carrying
Value
£'000
(unaudited)
30 June 2019
Carrying
Value
£'000
(unaudited)
31 Dec 2019
Carrying
Value
£'000
(audited)
HP
71,893
(1,687)
(38)
70,168
61,434
64,309
Finance lease
38,855
(2,825)
(189)
35,841
30,620
38,234
Wholesale funding arrangements
19,290
(458)
-
18,832
28,421
23,540
Block discounting
15,161
(250)
-
14,911
20,437
15,493
Unsecured personal loans
25,101
(293)
(20)
24,788
11,448
20,911
Secured commercial loans
12,638
(374)
(27)
12,237
10,391
11,276
Secured personal loans
3,183
-
(1)
3,182
5,725
4,149
Vehicle stocking plans
1,622
-
-
1,622
1,559
1,458
187,743
(5,887)
(275)
181,581
170,035
179,370
13. Trade and other receivables
As at
30 June 2020
£'000
(unaudited)
30 June 2019
£'000
(unaudited)
31 Dec 2019
£'000
(audited)
VAT claim
871
988
835
Prepayments
309
217
385
Other debtors
1,341
1,350
1,258
2,521
2,555
2,478
Included in trade and other receivables is an amount of £0.871 million (30 June 2019: £0.988 million and 31 December 2019: £0.835 million) relating to a reclaim of VAT. For some time the Bank, as the Group VAT registered entity, has considered the VAT recovery rate being obtained by the business as 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. Queries have been raised with the Isle of Man Government Customs & Excise Division ("C&E"), and several reviews of the mechanics of the recovery process were undertaken by the Company's professional advisors.
The Group's position rests on the outcome of discussions with C&E which in turn will take into account the final assessment by UK Her Majesty's Revenue and Customs ("HMRC") of the impact of the European Union's ruling in favour of Volkswagen Financial Services (UK) Limited ("VWFS") vs HMRC. In June 2020, HMRC released a note setting out a standard methodology for how the industry should calculate recoveries. The Bank has subsequently entered into discussions with C&E who have invited the Bank to calculate their historic claims based on this note.
The Bank has a total exposure in relation to this matter of £0.942 million (30 June 2019: £1.101 million and 31 December 2019: £0.906 million), comprising the debtor balance referred to above plus an additional £71,000 (30 June 2019: £113,000 and 31 December 2019: £71,000) VAT reclaimed under the partial Exemption Special Method, in the period from Q4 2011 to Q3 2012. From Q4 2012 the Bank reverted back to the previous method.
14. Goodwill
As at
30 June 2020
£'000
(unaudited)
30 June 2019
£'000
(unaudited)
31 Dec 2019
£'000
(audited)
Blue Star Business Solutions Limited ("BBSL")
1,390
2,188
1,390
Edgewater Associates Limited ("EAL")
1,849
1,849
1,849
ECF Asset finance PLC
454
454
454
Three Spires Insurance Services Limited
41
41
41
Beer Swaps Limited ("BSL") (Note 18)
627
-
-
4,361
4,532
3,734
15. Creditors and accrued charges
As at
30 June 2020
£'000
(unaudited)
30 June 2019
£'000
(unaudited)
31 Dec 2019
£'000
(audited)
Commission creditors
1,110
1,031
1,044
Other creditors and accruals
1,089
997
893
Lease liability
605
787
707
Taxation creditors
344
387
328
3,148
3,202
2,972
16. Loan notes
As at
Notes
30 June 2020
£'000
(unaudited)
30 June 2019
£'000
(unaudited)
31 Dec 2019
£'000
(audited)
Related parties
J Mellon
JM
1,750
1,750
1,750
Burnbrae Limited
BL
2,200
1,200
1,200
Southern Rock Insurance Company Limited
SR
2,097
460
460
6,047
3,410
3,410
Unrelated parties
UP
10,175
12,461
12,561
16,222
15,871
15,971
JM - Two loans, one of £0.5 million maturing on 31 July 2022 with interest payable of 5.0% per annum, and one of £1.250 million maturing on 26 February 2025, paying interest of 5.4% per annum. Both loans are convertible at the rate of 7.5 pence and 9 pence respectively.
BL - A loan of £1.2 million maturing on 31 July 2022 with interest payable of 5.0% per annum and convertible at a rate of 7.5 pence. Another loan of £1.0 million maturing on 25 February 2025 with interest payable of 5.4%. Jim Mellon is the beneficial owner of BL and Denham Eke is also a director - both are Directors of MFG.
SR - One loan consisting of £2.097 million maturing on 14 April 2025 with interest payable of 5.4% per annum. See Note 18 for details of the transactions between the Group and SR during the period.
UP - Thirty-two loans consisting of an average £317,969 (30 June 2019: £377,606 and 31 December 2019: £380,636) with a weighted average interest payable of 5.6% per annum (30 June 2019: 5.4% and 31 December 2019: 5.5%). The earliest maturity date is 18 August 2020 for £100,000 and the latest maturity date is 30 April 2025 for £150,000.
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.
17. Called up share capital
Ordinary shares of no-par value available for issue
Number
At 30 June 2020, 31 December 2019 and 30 June 2019
200,200,000
Issued and fully paid ordinary shares of no par value
Number
£'000
At 31 December 2019 and 30 June 2019
131,096,235
20,732
At 30 June 2020
114,130,077
19,121
On 9 April 2020, the Company and Southern Rock Insurance Company Limited ("SR") entered into the 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 16). 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 of £2,950,000 (30 June and 31 December 2019: four convertible loans of £3,410,000).
1,050,000 (30 June and 31 December 2019:1,050,000) share options with an exercise price of 14 pence, issued to Executive Directors and senior management within the Group on 23 June 2014 remain outstanding. The share options have vested and expire on 22 June 2024.
18. Acquisition of subsidiary
On 28 February 2020, 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.
In the six months to 30 June 2020, BSL contributed revenue of £183,000 and profit of £43,000 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 £307,000 and the impact on consolidated profit for the period would have been £65,000.
A. 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. 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. 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 condensed consolidated statement of profit or loss and other comprehensive income.
D. 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
2,597
Cash and cash equivalents
85
Trade and other receivables
116
Creditors and accrued charges
(277)
Intangible assets - customer related
71
Intangible assets - contract related
63
Total identifiable net assets acquired
2,655
E. 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
68
Fair value of existing interest in BSL
257
Fair value of identifiable net assets
(2,655)
Goodwill
627
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 condensed statement of profit or loss and other comprehensive income.
19. Regulators
Certain Group subsidiaries are regulated by the Isle of Man Government Financial Services Authority ("FSA") and the Financial Conduct Authority (FCA) in the United Kingdom as detailed below.
The Bank and EAL are regulated by the FSA under a Class 1(1) - Deposit Taking licence and Class 2 - Investment Business licence respectively. The Bank and CFL are regulated by the FCA to provide regulated products and services.
20. Contingent Liabilities
The Bank is required to be a member of the Isle of Man Government Depositors' Compensation Scheme which was introduced by the Isle of Man Government under the Banking Business (Compensation of Depositors) Regulations 1991 and creates a liability on the Bank to participate in the compensation of depositors should it be activated.
21. Subsequent events
There were no significant subsequent events identified after 30 June 2020.
22. Approval of interim financial statements
The interim financial statements were approved by the Board on 25 August 2020. The interim report will be available from that date at the Group's website - www.mfg.im and at the Registered Office: Clarendon House, Victoria Street, Douglas, Isle of Man, IM1 2LN. The Group's nominated adviser and broker is Beaumont Cornish Limited, Building 3, 566 Chiswick High Road, London, W4 5YA. The interim and annual financial statements along with other supplementary information of interest to shareholders, are included on the Group's website. The website includes investor relations information, including corporate governance observance and contact details.
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