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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Manx Financial Group Plc | LSE:MFX | London | Ordinary Share | IM00B28ZPX83 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 21.00 | 20.00 | 22.00 | 21.00 | 21.00 | 21.00 | 17,500 | 07:31:04 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Personal Credit Institutions | 36.05M | 4.67M | 0.0405 | 5.19 | 24.25M |
From Apr 2019 to Apr 2024
TIDMMFX
RNS Number : 7727D
Manx Financial Group PLC
02 May 2017
FOR IMMEDIATE RELEASE 2(nd) May 2017
Manx Financial Group PLC (the 'Company')
Report and accounts for the year ended 31 December 2016
Manx Financial Group PLC (LSE: MFX), the financial services group which includes Conister Bank Limited, Edgewater Associates Limited, Conister Card Services Limited and Manx Incahoot Limited, presents its final results for the year ended 31 December 2016.
Jim Mellon, Executive Chairman, commented: "Although 2016 showed a commendable 18% growth in our net interest income, the increased cost of commissions and a rise in early loan terminations meant that we did not achieve the overall increase in profitability for which I had hoped. I am pleased to note, however, that the results for the second half demonstrate a clear indication that our decision to change the lending mix at Conister Bank will provide a more profitable foundation for the future. Of our other subsidiaries, the acquisitions made by Edgewater Associates have set that company well on the road to being a substantial earnings generator for the future."
The 2016 Audited Annual Report and Accounts will be available from the Company's website www.mfg.im shortly and will also be posted to shareholders.
Contacts:
Manx Financial Group PLC
Denham Eke, Chief Executive
Tel: +44 (0)1624 694694
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Beaumont Cornish Limited
Roland Cornish/James Biddle
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Britton Financial PR
Tim Blackstone
Tel: +44 (0)7957 140416
Chairman's Statement
Dear Shareholders,
When I wrote to you in September 2016 presenting the Interim Results, I had every expectation that the full year would see a return to the previous levels of profitability. In the event, although net interest income has increased by 18% to GBP16.0 million (2015: GBP13.5 million), profit before tax for the year has fallen by 33% to GBP1.5 million (2015: GBP2.3 million). As I previously commented, the main reason for this reduction was the significant increase in the amounts paid away by our principal subsidiary, Conister Bank Limited (the "Bank"), to our UK introducers in commissions and the settlement of early terminations - a total of GBP9.1 million (2015: GBP7.0 million).
However, whilst this overall result is disappointing, our second half profit before tax at GBP0.8 million (2015: GBP1.3 million) showed a respectable improvement of 17% over the first half as we changed our Bank's lending mix to encompass a greater proportion of direct business, thus lessening our reliance on third-party introductions. Also, as a concomitant, we are experiencing a fall in early terminations. I anticipate that the full benefit of this change will be reflected in 2017 and already we are seeing considerable progress by the end of 2017 first quarter results. I will return to this point later.
I am also encouraged that the second half operating income of GBP4.7 million (2015: GBP4.2 million) is the highest that we have ever achieved. Thus, I am confident that by re-focussing the lending mix, we have taken the correct steps to build a base for a profitable future.
Manx Financial Group PLC
As stated, profit before income tax for the year was GBP1.5 million (2015: GBP2.3 million) on a net interest income of GBP16.0 million (2015: GBP13.5 million). Our key metrics remain positive: our return on equity was 10% (2015: 17%), which remains within the range of that of our peer group. Our lending grew by 15% (2015: 13%) over the year. The level of performing loans remains impressive at 94%, a testament to our prudent lending policy.
Turning to the balance sheet, our loan book grew by GBP14.7 million to GBP116.1 million (2015: GBP101.4 million) and our deposit base increased to GBP126.0 million (2015: GBP106.3 million), a growth of 15% and 18% respectively. In turn, our equity increased by 8% to GBP13.2 million (2015: GBP12.1 million).
It is important to remember that almost the entirety of this equity is used to support the regulatory capital base of the Bank. Each year, as we grow the Bank's balance sheet, we require ever increasing Tier 1 capital, being the regulatory measure of applicable assets, to support that growth. One of the Board's main aims is to reach the optimum size whereby we become self-supporting in our regulatory capital requirements, thus achieving a prudential balance between growth and the future ability to distribute any excess capital to our shareholders. It is important to remember that the cash and near-cash figure of GBP6.1 million (2015: GBP7.2 million) sitting on the balance sheet is solely available for further lending, representing as it does a mismatch between customers' deposits and advances.
Certain loans supporting the Bank's capital provided by the principal shareholders - mostly from myself - will come up for renewal during the course of this year. I have indicated to the Board that I will renew these loans and, as before, the independent directors, in conjunction with our advisors, will determine fair and equitable renewal terms for the benefit of both parties.
We made one acquisition in 2016, when on 23 December our wholly owned subsidiary, Edgewater Associates Limited, acquired the MBL book of Independent Financial Advisory ("IFA") business. This acquisition created the largest IFA operation on the Isle of Man and I can report that the integration of the two businesses is proceeding as planned. The full benefit of this acquisition will materialise in future periods.
Conister Bank Limited
Our strategy of providing our existing products to new markets and developing new products to our existing markets is creating consistent growth. During the year on the Isle of Man, we launched a unique bridging loan product, and an Approved Partner lending programme focused on SMEs - both attracting considerable interest. In the UK, we launched a PCP product in conjunction with one of our long-standing partners. We have entered the Jersey secured lending market on a local regulated basis, and we are currently evaluating a Hire Purchase product for the Irish market and intend to launch an Isle of Man PCP product shortly.
With regard to the UK, we see continuing growth opportunities in both hire and lease purchase, block discounting and secured personal loans. Indeed, we will look to increase our UK presence during 2017 and beyond, by significantly broadening our lending distribution. However, our view of the UK unsecured lending market, now representing less than 6% of our total advances, has led us to become more cautious as the macro environment of increasing inflation and unprecedented levels of unsecured consumer debt will, we believe, drive future arrears. Furthermore, the competitive environment for this product has worsened with more liquidity driving down yields which is counter intuitive when the wider market dynamics are considered. Our risk appetite continues to be prudent and, therefore, we access this market through our capital indemnified partners which partially insulates us from suffering a loss. We test our entire loan book each month and it is a reflection of our careful credit scoring that our arrears' profile continues at a low level.
With loan advances increasing by 25% to GBP72.5 million (2015: GBP58.0 million), interest income increased by 16% to GBP19.1 million (2015: GBP16.5 million). Our net interest income margin showed a small increase to 83% (2015: 82%) as our cost of funds continued to decrease. Operating income, however, decreased by 0.2% to GBP6.9 million (2015: GBP7.0 million) as commissions paid to our introducers grew by 30% to GBP9.1 million (2015: GBP7.0 million). Our personnel and other costs increased by GBP0.9 million in the year, largely driven by additional headcount to support our forecasted plans for growth.
New lending increased our loan book by 15% to GBP115.2 million (2015: GBP100.6 million). The most notable contributors to this positive performance were direct lending in the Isle of Man, our direct UK broker network and our block lending product. Provisions have increased by only 5% (despite a 15% increase in net loans) to GBP2.2 million (2015: GBP2.1 million) which represents 1.9% of the net loan book (2015: 2.1%). As I reported previously, we have ceased funding UK hand-held card terminals and our legal action continues to ensure we recover any losses to the fullest extent possible. This discontinued lending stream will be materially run off by the end of 2017.
The Bank's asset base grew by 17% to GBP147.5 million (2015: GBP126.2 million) and total equity increased by 2% to GBP13.0 million (2015: GBP12.6 million).
As I reported in the Interim Accounts, under the HMRC's Partial Exemption Special Method, we have increased our VAT debtor by a further GBP0.3 million, to a total of GBP0.8 million. Following further discussions and correspondence with the Isle of Man Customs & Excise, the Board remains confident that the VAT debtor claimed will be secured, reinforced by a very recent ruling by the Supreme Court that, despite referring the entire matter to the European Court of Justice, a 50% allowance is both fair and equitable. As our VAT debtor reflects 50% of the recoverable amount, this can only be positive news.
Finally, I am pleased to welcome both Douglas Grant as the new Managing Director of the Bank, and James Smeed who takes his place as the Finance Director and joins the Board. I am pleased to note that both appointments are well deserved internal promotions, demonstrating that the Bank now offers meaningful career path at all levels.
Edgewater Associates Limited
Our IFA business continues to grow, supported by its general insurance and loan brokering units. Indeed, 2016 was the most profitable year so far, with pre-MBL acquisition profit for the year increasing by 149% to GBP0.4 million (2015: GBP0.1 million) on a 6% increased turnover of GBP1.5 million (2015: GBP1.4 million). Edgewater Associates unconsolidated total assets have grown by 93% to GBP2.3 million (2015: GBP1.2 million) and equity has increased by 40% to GBP1.3 million (2015: GBP0.9 million).
One pleasing fact to note is that assets under management have grown by 38% to GBP213 million following the MBL acquisition (2015: GBP154 million).
The December 2016 MBL acquisition will enhance future profitability and brings with it talented staff who are already making a significant contribution to the business. As part of the overall acquisition transaction, we exercised the Lazenby Knox option at the beginning of 2017 which will further enhance profits and add to what is already the Isle of Man's largest IFA business. We are well positioned to add other local IFA books to this business subject to strict due diligence.
Other operating subsidiaries
As I reported previously our foreign exchange advisory service, Manx FX Limited, is now trading profitably and continues to tender for new accounts and to look for additional ways to enhance its niche Isle of Man position.
Our IT-enriched employee benefit subsidiary, Manx Incahoot Limited, was successfully re-launched at the Olympia UK Employee Benefit Show in London during November 2016. Following which, it is in advanced negotiations with a number of companies to provide their staff with tailor-made incentives to promote increased loyalty. I hope to be able to announce more on this in the near future.
Outlook
Following the internal publication of our Quarter 1, 2017 figures, I am confident we are well set for a meaningful increase in profit at both the Interim and full-year stage. Whilst I am the first to admit that our 2016 performance appears lack-lustre, we were able to implement certain changes in the second half which will serve us well in the next twelve months. We have placed additional emphasis on new business generation which is bearing fruit. We have moved Edgewater into being a main player in the Isle of Man market. We are reviewing our IT systems with a view to a further upgrade. But most importantly, we are considering a significant increase in our presence in the UK and elsewhere, bolstered by our belief that Brexit offers enhanced opportunities. This year will see a simplification of our capital structure and will be the year that we do more to reach out to the investing public.
Finally, it remains for me to thank you, our shareholders; our excellent executive and staff who contribute so much to the development of business; and our customers, be they depositors or borrowers, for your continued loyalty.
Jim Mellon
Executive Chairman
28 April 2017
Consolidated Income Statement
(Note
33)
2015
2016
For the year ended 31 December Notes GBP000 GBP000
-------------------------------------------- ------ -------- ---------
Interest income 6 19,369 16,545
Interest expense 10 (3,368) (3,002)
Net interest income 16,001 13,543
Fee and commission income 1,660 1,527
Profit on joint venture 20 - 28
Fee and commission expense (1,266) (792)
Commission sharing schemes 3(t) (7,840) (6,196)
Net trading income 8,555 8,110
Other operating income 198 166
Terminal funding 3(v) (154) 157
Operating income 8,599 8,433
Personnel expenses (3,935) (3,515)
Other expenses 7 (2,706) (2,385)
Provision for impairment on loan
assets 8 (447) (397)
Depositors' Compensation Scheme
recovery 9 - 10
Depreciation 18 (246) (226)
Amortisation and impairment of intangibles 19 (80) (44)
VAT recovery 21 295 -
Realised gains on available for
sale financial assets 16 71 80
Unrealised (loss) / gain on financial
assets carried at fair value 15 (6) 30
Gain on acquisition of subsidiary 20 - 28
Bargain purchase 20 - 295
Profit before tax payable 10 1,545 2,309
Tax payable 11 (244) (207)
Profit for the year 1,301 2,102
-------- ---------
Basic earnings per share (pence) 12 1.27 2.06
Diluted earnings per share (pence) 12 0.87 1.29
Consolidated Statement of Other Comprehensive Income
(Note
33)
2016 2015
For the year ended 31 December Notes GBP000 GBP000
--------------------------------- ------ --------- ---------
Profit for the year 1,301 2,102
Other comprehensive income:
Items that will be reclassified
to profit or loss
Losses on available for sale financial
instruments taken to equity 16 (8) -
Items that will never be reclassified
to profit or loss
Actuarial (losses) / gains on defined
benefit pension scheme taken to
equity 26 (316) 19
------ ---
Total comprehensive income for
the period attributable to owners 977 2,121
Basic earnings per share (pence) 12 0.96 2.08
Diluted earnings per share (pence) 12 0.68 1.30
Consolidated and Company Statement of Financial Position
Group Company
2016 2015 2016 2015
As at 31 December Notes GBP000 GBP000 GBP000 GBP000
------------------------------ -------- ----------- ----------- --------- ---------
Assets
Cash and cash equivalents 14 6,129 7,156 - 100
Financial assets at
a fair value through
profit or loss 15 70 77 - -
Available for sale financial
instruments 16 23,991 15,981 - -
Loans and advances to
customers 17 116,053 101,356 - -
Commissions receivable 332 361 - -
Property, plant and
equipment 18 719 872 207 247
Intangible assets 19 1,316 398 - -
Investment in Group
undertakings 20 - - 12,072 12,072
Amounts due from Group
undertakings 20 - - 296 285
Trade and other receivables 21 1,732 1,377 29 98
Subordinated loan 20 - - 5,178 4,078
Deferred tax asset 11 - 83 - -
Goodwill 20 2,344 2,344 - -
Total assets 152,686 130,005 17,782 16,880
Liabilities
Customer accounts 22 125,952 106,328 - -
Creditors and accrued
charges 23 2,975 3,343 82 12
Block creditors 24 1,390 588 - -
Amounts owed to Group
undertakings 20 - - 2,499 2,874
Loan notes 25 8,545 7,265 8,545 7,265
Pension liability 26 614 334 - -
Deferred tax liability 11 40 - - -
Total liabilities 139,516 117,858 11,126 10,151
Equity
Called up share capital 27 18,933 18,933 18,933 18,933
Profit and loss account (5,763) (6,786) (12,277) (12,204)
Total equity 13,170 12,147 6,656 6,729
Total liabilities and
equity 152,686 130,005 17,782 16,880
Consolidated Statement of Cash Flows
2016 2015
For the year ended 31 December Notes GBP000 GBP000
-------------------------------------------- -------- --------- ---------
RECONCILIATION OF PROFIT BEFORE TAXATION
TO OPERATING CASH FLOWS
Profit before tax on continuing activities 1,545 2,309
Unrealised loss / (gain) on financial
assets carried at fair value 6 (30)
Gain on disposal of property, plant
and equipment - (12)
Profit on joint venture - (28)
Gain on acquisition of subsidiary 20 - (28)
Depreciation 18 246 226
Amortisation and impairment of intangibles 19 80 44
Bargain purchase 20 - (295)
Actuarial (loss) / gain on defined
benefit pension scheme taken to equity 26 (316) 19
Increase / (decrease) in pension
liability 26 280 (54)
Share-based payment expense 27 46 46
Increase in trade and other receivables (355) (208)
Increase in trade and other payables 47 1,168
Decrease / (increase) in commission
debtors 29 (35)
Net cash inflow from trading activities 1,608 3,122
Increase in loans and advances to
customers (14,697) (11,369)
Increase in deposit accounts 19,624 6,069
Cash inflow / (outflow) from operating
activities 6,535 (2,178)
CASH FLOW STATEMENT
Cash flows from operating activities
Cash inflow / (outflow) from operating
activities 6,535 (2,178)
Taxation paid (36) (6)
Net cash inflow / (outflow) from
operating activities 6,499 (2,184)
Cash (outflow) / inflow from investing
activities
Purchase of property, plant and equipment 18 (93) (493)
Purchase of intangible assets 19 (50) (21)
Acquisition of Incahoot Limited business 20 - (101)
Acquisition of Manx Financial Limited 20 (500) -
Acquisition of MBL business 19 (948) -
(Purchase) / sale of available for
sale financial instruments 16 (8,017) 2,794
Sale of property, plant and equipment - 12
Cash acquired on acquisition of subsidiary 20 - 926
Net cash (outflow) / inflow from
investing activities (9,608) 3,117
Cash flows from financing activities
Receipt of loan notes 25 1,280 100
Increase borrowings from block creditors 802 -
Net cash inflow from financing activities 2,082 100
(Decrease) / increase in cash and
cash equivalents (1,027) 1,033
--------- ---------
Included in cash flows are:
Interest received - cash amounts 18,628 17,203
Interest paid - cash amounts (3,260) (2,906)
.
Consolidated and Company Statement of Changes in Equity
Share Retained
For the year ended 31 December Capital Earnings 2016 2015
Group GBP000 GBP000 GBP000 GBP000
---------------------------------- --------- ---------- --------- ---------
Balance as at 1 January 18,933 (6,786) 12,147 9,980
Profit for the year - 1,301 1,301 2,102
Other comprehensive income - (324) (324) 19
Transactions with owners:
Share-based payment expense
(see notes 10 and 27) - 46 46 46
Balance as at 31 December 18,933 (5,763) 13,170 12,147
Share Retained
For the year ended 31 December Capital Earnings 2016 2015
Company GBP000 GBP000 GBP000 GBP000
---------------------------------- --------- ---------- --------- ---------
Balance as at 1 January 18,933 (12,204) 6,729 6,778
Loss for the year - (119) (119) (95)
Transactions with owners:
Share-based payment expense
(see notes 10 and 27) - 46 46 46
Balance as at 31 December 18,933 (12,277) 6,656 6,729
Notes to the Consolidated Financial Statements
1. Reporting entity
Manx Financial Group PLC is a company incorporated in the Isle of Man. The consolidated financial statements of Manx Financial Group PLC (the "Company") for the year ended 31 December 2016 comprise the Company and its subsidiaries (the "Group").
A summary of the principal accounting policies, which have been applied consistently, are set out below.
2. Basis of preparation (a) Statement of compliance
The consolidated financial statements 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").
The Group has continued to apply the accounting policies used for the 2015 annual report, with the exception of those detailed below.
The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2016:
n IFRS 14 Regulatory Deferral Accounts;
n Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11);
n Investment Entities: Applying the Consideration Exception (Amendments to IFRS 10, 12 and IAS 28);
n Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38);
n Equity Method in Separate Financial Statements (Amendments to IAS 27);
n Disclosure Initiative (Amendments to IAS 1); and
n Annual Improvements to IFRSs 2012-2014 Cycle - various standards.
No significant changes following the implementation of these standards and amendments.
(b) Basis of measurement
The financial statements are prepared on a historical cost basis except:
n financial instruments at fair value through profit or loss and available for sale financial instruments are measured at fair value; and
n equity settled share-based payment arrangements are measured at fair value.
(c) Functional and presentation currency
These financial statements are presented in pounds sterling, which is the Group's functional currency. Except as indicated, financial information presented in pounds sterling has been rounded to the nearest thousand. All subsidiaries of the Group have pounds sterling as their functional currency.
(d) Use of estimates and judgements
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.
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.
In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described in note 3(p).
3. Significant accounting policies (a) Basis of consolidation of subsidiaries
Subsidiaries are entities controlled by the Group. Control exists when the Group has power over an investee, exposure or rights to variable returns from its involvement with the investee and the ability to use its power to affect those returns. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Intra-Group balances, income and expenses and unrealised losses or gains arising from intra-Group transactions, are eliminated in preparing the consolidated financial statements.
(b) Accounting for business combinations
Business combinations are accounted for by using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable.
The Group measures goodwill at the acquisition date as:
n the fair value of the consideration transferred; plus
n the recognised amount of any non-controlling interests in the acquiree; plus
n if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less
n the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
When the excess is negative, a bargain purchase gain is recognised immediately in the income statement.
The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in the income statement.
(c) Property, plant and equipment and intangible assets
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.
An intangible asset is an identifiable non-monetary asset without physical substance. An item is identifiable if it is separable or arises from contractual or other legal rights. The initial measurement of an intangible asset depends on whether it has been acquired separately or has been acquired as part of a business combination.
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.
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 useful lives of property, plant and equipment and intangibles are as follows:
Property, plant and equipment
Leasehold improvements to expiration of the lease
Equipment 4-5 years
Vehicles 4 years
Furniture 10 years
Intangible assets
Customer contracts and lists to expiration of the agreement
Business intellectual property rights indefinite Website development costs indefinite (d) Financial assets
Management have determined the classification of the Group's financial assets into one of the following categories:
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money directly to a customer with no intention of trading the receivable. This classification includes advances made to customers under HP and finance lease agreements, finance loans, personal loans, block discounting, secured commercial loans and stocking plans.
Loans are recognised when cash is advanced to the borrowers. Loans and receivables are carried at amortised cost using the effective interest rate method with all movements being recognised in the income statement after taking into account provision for impairment losses (see note 3(e)).
Financial assets at fair value through profit or loss
A financial asset is classified in this category if it is acquired principally for the purpose of selling in the short term or if so designated by management. The fair value of the financial asset at fair value through profit or loss is based on the quoted bid price at the reporting date.
Available for sale financial instruments
Available for sale investments are non-derivative investments that are designated as available for sale or are not classified as another category of financial assets. Available for sale investments are carried at fair value.
Dividend income is recognised in the income statement when the Group becomes entitled to the dividend. Other fair value changes are recognised in other comprehensive income until the investment is sold or impaired, whereupon the cumulative gains and losses previously recognised in other comprehensive income are recognised in the income statement.
Investments in subsidiary undertakings
Investments in subsidiary undertakings in the parent company statement of financial position are measured at cost less any provision for impairment.
Fair value
The fair value hierarchy is applied to all financial assets. Refer to note 4(c) for further information.
(e) Impairment of financial assets
The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. This arises if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset, or group of financial assets, that can be reliably estimated. Impairment losses are recognised in the income statement for the year.
Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider indications that a borrower or issuer will enter bankruptcy or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers.
Loans and other receivables are reviewed for impairment where there are repayment arrears and doubt exists regarding recoverability. The impairment allowance is based on the level of arrears together with an assessment of the expected future cash flows, and the value of any underlying collateral after taking into account any irrecoverable interest due. Amounts are written off when it is considered that there is no further prospect of recovery.
Where past experience has indicated that, over time, a particular category of financial asset has suffered a trend of impairment losses, a collective impairment allowance is made for expected losses to reflect the continuing historical trend.
(f) 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.
(g) Financial liabilities
Financial liabilities consist of customer deposit accounts, other creditors, loan notes, block creditors and accrued charges. Customer accounts are recognised immediately upon receipt of cash from the customer. Interest payable on customer deposits is provided for using the interest rate prevailing for the type of account.
(h) 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 actually 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.
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 statement of financial position 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 share option programme was originally set up for Group employees to subscribe for shares in Conister Trust Limited (now Conister Bank Limited). Since the Scheme of Arrangement, the shareholders of Conister Bank Limited became shareholders of Manx Financial Group PLC. The share option programme is now operated by Manx Financial Group PLC. 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.
Other obligations
Provision is made for short-term benefits payable for salaries, holiday pay, social security costs and sick leave on a pro-rata basis and is included within creditors and accrued charges.
(i) Leases
A Group company is the lessor
Finance leases and HP contracts
When assets are subject to a finance lease or HP contract, the present fair 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.
A Group company is the lessee
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 the income statement on a straight-line basis over the period of the lease.
(j) 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 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.
(k) Interest income and expense
Interest income and expense are recognised in the income statement using the effective interest rate method.
Effective interest rate
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts of the financial instrument to the net carrying amount of the financial asset or financial liability. The discount period is the expected life or, where appropriate, a shorter period. The calculation includes all amounts receivable or payable by the Group that are an integral part of the overall return, 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.
Once a financial asset or a group of similar financial assets has been written down as a result of impairment, subsequent interest income continues to be recognised using the original effective interest rate applied to the reduced carrying value of the financial instrument.
(l) Fees and commission income
Fees and commission 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 fees relate.
(m) Programme costs
Programme costs are direct expenditure incurred in relation to prepaid card programmes. The costs are recognised over the period in which income is derived from operating the programmes.
(n) 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.
(o) New standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations are not effective for the year and have not been applied in preparing these consolidated financial statements.
New/revised International Accounting Standards/International Effective
Financial Reporting Standards (IAS/IFRS) date
(accounting
periods
commencing
on or after)
------------------------------------------------------------- --------------
Disclosure initiative (Amendments to IAS 1 January
7) 2017
Recognition of Deferred Tax Assets for Unrealised 1 January
Losses (Amendments to IAS 12) 2017
Annual improvements to IFRSs 2014-2016 Cycle 1 January
(Amendments to IFRS 12 Disclosure of Interests 2017
in Other Entities)
IFRS 15 Revenue from Contracts with Customers 1 January
2018
IFRS 9 Financial Instruments 1 January
2018
Classification and Measurement of Share-based 1 January
Payment Transactions (Amendments to IFRS 2018
2)
Applying IFRS 9 Financial Instruments with 1 January
IFRS 4 Insurance Contracts (Amendments to 2018
IFRS 4)
Transfers of Investment Property (Amendments 1 January
to IAS 40) 2018
Annual Improvements to IFRSs 2014-2016 Cycle 1 January
(Amendments to IFRS 1 First-time Adoption 2018
of IFRSs and IAS 28 Investments in Associates
and Joint Ventures)
IFRIC 22 Foreign Currency Transactions and 1 January
Advance Consideration 2018
IFRS 16 Leases 1 January
2019
------------------------------------------------------------- --------------
The Directors do not expect the adoption of the standards and interpretations to have a material impact on the Group's financial statements in the period of initial application with the exception of IFRS 9 Financial Instruments.
IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and de-recognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.
The Group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 9. Given the nature of the Group's operations, this standard is expected to have a pervasive impact on the Group's financial statements. In particular, calculation of impairment of financial instruments on an expected credit loss basis is expected to result in an increase in the overall level of impairment allowances.
(p) Key sources of estimation uncertainty
Management believe that a key area of estimation and uncertainty is in respect of the impairment allowances on loans and advances to customers, goodwill, defined benefit pension valuation and the Incahoot bargain purchase. Loans and advances to customers are evaluated for impairment on a basis described in note 4a(i), credit risk. The Group has substantial historical data upon which to base collective estimates for impairment on HP contracts, finance leases and personal loans. The accuracy of the impairment allowances and provisions for counter claims and legal costs depend on how closely the estimated future cash flows mirror actual experience. An impairment review is performed annually for goodwill at different discount rates to allow for any uncertainty.
(q) Fiduciary deposits
Deposits received on behalf of clients by way of a fiduciary agreement are placed with external parties and are not recognised in the statement of financial position. Income in respect of fiduciary deposit taking is included within interest income and recognised on an accruals basis.
(r) Prepaid card funds
The Group could receive funds for its prepaid card activities. These funds would be held in a fiduciary capacity for the sole purpose of making payments as and when card-holders utilise the credit on their cards and therefore would not be recognised in the statement of financial position.
(s) Foreign exchange
Foreign currency assets and liabilities (applicable to the Conister Card Services division only) are translated at the rates of exchange ruling at the reporting date. Transactions during the year are recorded at rates of exchange in effect when the transaction occurs. The exchange movements are dealt with in the income statement.
(t) Commission sharing schemes
This represents the cost incurred in relation to certain loan books where commission is paid based on the overall profitability of the relevant book. Each such lending scheme has its own commercially agreed terms.
(u) Joint ventures
Investments in joint ventures are initially recognised at cost. Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Joint ventures are accounted for using the equity method. The consolidated financial statements include the Group's share of the income and expenses of the equity accounted investees, after adjustments to align the accounting policies with those of the Group, from the date that joint control commences until it ceases. When the Group's share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee.
Unrealised gains on transactions between the Company and its equity accounted investees are eliminated to the extent of the Company's interest in the equity accounted investees. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
(v) Terminal funding
In September 2014, the Bank discontinued funding handheld payment devices (referred to as Terminal Funding) due to the volume of write offs. Ever since, the book is being run off whilst the Bank vigorously pursues historical write offs. A decision was made by the Board this year to permanently cease funding and wind up the book upon the final repayment date of August 2019.
(note
33)
2016 2015
GBP000 GBP000
Interest income 601 1,011
Fee and commission expense (166) (192)
Provision for impairment on loan assets (589) (662)
(154) 157
4. Risk and capital management
(a) Risk management
Introduction and overview
The Group has exposure to the following risks from its use of financial instruments:
n credit risk;
n liquidity risk;
n operational risk; and
n market risk.
This note presents information about the Group's exposure to each of the above risks, the Group's objectives, policies and processes for managing risk and capital within the Bank. The Bank is the main operating entity exposed to these risks.
Risk management framework
The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework within the Group. 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. Risk management policies and systems are reviewed regularly to reflect changes in market conditions. The Group has a disciplined and constructive control environment, in which all employees understand their roles and obligations.
The Board of Directors of the Bank (the "Board of the Bank") delegate responsibility for risk management to the Executive Risk Committee ("ERC") which reports to the Audit, Risk and Compliance Committee ("ARCC"). It is responsible for the effective risk management of the Bank. Operational responsibility for asset and liability management is delegated to the Executive Directors of the Bank, through the Bank's Assets and Liabilities Committee ("ALCO").
ARCC is responsible for monitoring compliance with the risk management policies and procedures faced by the Group's regulated entities, and for reviewing the adequacy of the risk management framework. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the ARCC.
i) Credit risk
Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure, such as individual obligor default, country and sector risk. The Bank is principally exposed to credit risk with regard to loans and advances to customers, comprising HP and finance lease receivables, unsecured personal loans, secured commercial loans, block discounting and stocking plan loans. It is also exposed to credit risk with regard to cash balances and trade and other receivables.
Management of credit risk
The Board of the Bank delegates responsibility for the management of credit risk to the Credit Committee ("CC") for loans and ALCO for other assets. The following measures are taken in order to manage the exposure to credit risk:
n explicit credit policies, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements;
n a rigorous authorisation structure for the approval and renewal of credit facilities. Each opportunity is researched for viability, legal/regulatory restriction and risk. If recommended, the proposal is submitted to Board of the Bank or the CC. The CC reviews lending assessments in excess of individual credit control or executive discretionary limits;
n reviewing and assessing existing credit risk and collateral. The CC assesses all credit exposures in excess of designated limits, as set out in the underwriting manual for asset and personal finance;
n limiting concentrations of exposure to counterparties, geographies and industries defining sector limits, lending caps and exposure to minimise interest rate risk;
n ensuring that appropriate records of all sanctioned facilities are maintained;
n ensuring regular account reviews are carried out for all accounts agreed by the CC; and
n ensuring Board of the Bank approval is obtained on all decisions of the CC above the limits set out in the Bank's credit risk policy.
An analysis of the credit risk on loans and advances to customers is as follows:
2016 2015
GBP000 GBP000
-------------------------------------- -------- --------
Carrying amount 116,053 101,356
Individually impaired(1)
Grade A - -
Grade B - -
Grade C 3,010 2,916
Gross value 3,010 2,916
Allowance for impairment (2,099) (2,011)
Carrying value 911 905
Collective allowance for impairment (57) (50)
Past due but not impaired
Less than 1 month 2,558 3,070
1 month but less than 2 months 1,314 1,507
2 months but less than 3 months 575 397
3 months and over 1,146 630
Carrying value 5,593 5,604
Neither past due nor impaired 109,606 94,897
(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.
Impaired loans
Impaired loans are loans where the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan agreements.
Past due but not impaired loans
Past due but not impaired loans are loans where the contractual interest or principal payments are past due but the Group believes that impairment is not appropriate on the basis of the level of security, collateral available and/or the stage of collection of amounts owed to the Group.
Allowances for impairment
The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss allowance that relates to individually significant exposures, and a collective loan loss allowance, which is established for the Group's assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. The collective loan loss allowance is based on historical experience, the current economic environment and an assessment of its impact on loan collectability. Guidelines regarding specific impairment allowances are laid out in the Bank's Debt Recovery Process Manual which is reviewed annually.
Write-off policy
The Group writes off a loan balance (and any related allowances for impairment losses) when management determines that the loans are uncollectable. This determination is reached after considering information such as the occurrence of significant changes in the borrower's financial position such that the borrower can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure.
Collateral
The Group holds collateral in the form of the underlying assets (typically private and commercial vehicles, plant and machinery) as security for HP, finances leases, vehicle stocking plans, block discounting 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, 2016: 54.4% of loans and advances (2015: 57.6%). 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 (see note 17 for further details).
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 and vehicle stocking plan loans. In addition, the Bank lends via significant introducers into the UK. There was one introducer that accounted for more than 20% of the Bank's total lending portfolio at the end of 31 December 2016 (2015: two introducers).
ii) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting financial liability obligations as they fall due.
Management of liquidity risk
The Group's approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.
The Group uses various methods, including forecasting of cash positions, to monitor and manage its liquidity risk to avoid undue concentration of funding requirements at any point in time or from any particular source. Maturity mismatches between lending and funding are managed within internal risk policy limits.
Minimum liquidity
The Isle of Man Financial Services Authority ("FSA") requires that the Bank should be able to meet its obligations for a period of at least one month. In order to meet this requirement, the Bank measures its cash flow commitments, and maintains its liquid balances in a diversified portfolio of short-term bank balances and short dated UK Government Treasury Bills.
Bank balances are only held with financial institutions approved by the Board of the Bank and which meet the requirements of the FSA.
Measurement of liquidity risk
The key measure used by the Bank for managing liquidity risk is the assets and liabilities maturity profile.
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 balance sheet date (undiscounted)
>8 >1 >3 >3
days month months >6 >1 years
31 December Sight- - - - months year -
2016 8 1 3 6 - 1 - 3 5 >5
days month months months year years years years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Customer
accounts 2,831 4,601 8,257 8,079 35,517 53,280 18,024 - 130,589
Other
liabilities 3,026 90 198 301 2,509 3,787 3,691 614 14,216
Total
liabilities 5,857 4,691 8,455 8,380 38,026 57,067 21,715 614 144,805
>8 >3 >1 >3
days >1 months >6 year years
31 December Sight- - month - months - -
2015 8 1 - 3 6 - 1 3 5 >5
days month months months year years years years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Customer
accounts 2,312 1,176 2,287 4,213 25,279 52,859 23,533 - 111,659
Other
liabilities 3,353 58 131 199 1,288 4,061 3,386 334 12,810
Total
liabilities 5,665 1,234 2,418 4,412 26,567 56,920 26,919 334 124,469
Maturity of assets and liabilities at the balance sheet date
>8 >1 >6 >1 >3
days month >3 month year years
31 December Sight- - - month- - - -
2016 8 1 3 6 1 3 5 >5
days month months months year years years years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------- ------- -------- -------- -------- -------- -------- -------- -------- --------
Assets
Cash &
cash
equivalents 6,129 - - - - - - - 6,129
Available
for sale
financial
instruments - 6,499 6,499 10,993 - - - - 23,991
Customer
accounts
receivable 4,198 3,067 7,650 10,037 18,675 54,074 17,704 648 116,053
Commission
debtors 29 110 193 - - - - - 332
Other assets 70 - - - - - - 6,111 6,181
Total assets 10,426 9,676 14,342 21,030 18,675 54,074 17,704 6,759 152,686
Liabilities
Customer
accounts 2,840 4,597 8,235 8,028 34,988 50,931 16,333 - 125,952
Other
liabilities 3,028 39 104 159 2,276 3,754 3,590 614 13,564
Total
liabilities 5,868 4,636 8,339 8,187 37,264 54,685 19,923 614 139,516
>8 >1 >6 >1 >3
days month >3 month year years
31 December Sight- - - month- - - -
2015 8 1 3 6 1 3 5 >5
days month months months year years years years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------- ------- -------- -------- -------- -------- -------- -------- -------- --------
Assets
Cash &
cash
equivalents 7,156 - - - - - - - 7,156
Available
for sale
financial
instruments - 3,000 6,995 5,986 - - - - 15,981
Customer
accounts
receivable 2,054 1,765 6,367 9,006 16,746 47,742 16,782 894 101,356
Commission
debtors 33 88 240 - - - - - 361
Other assets 77 - - - - - - 5,074 5,151
Total assets 9,320 4,853 13,602 14,992 16,746 47,742 16,782 5,968 130,005
Liabilities
Customer
accounts 2,313 1,175 2,283 4,179 24,869 50,498 21,011 - 106,328
Other
liabilities 3,343 28 56 84 1,072 3,453 3,160 334 11,530
Total
liabilities 5,656 1,203 2,339 4,263 25,941 53,951 24,171 334 117,858
(iii) Operational risk
Operational risk arises from the potential for inadequate systems including systems' breakdown, errors, poor management, breaches in internal controls, fraud and external events to result in financial loss or reputational damage. Operational risk also occurs when lending through an outsourced partner. The Group manages the risk through appropriate risk controls and loss mitigation actions. These actions include a balance of policies, procedures, internal controls and business continuity arrangements. Operational risk across the Group is analysed and discussed at all Board meetings, with ongoing monitoring of actions arising to address the risks identified.
(iv) Market risk
Market risk is the risk that changes in the level of interest rates, changes in the rate of exchange between currencies or changes in the price of securities and other financial contracts including derivatives will have an adverse financial impact. The primary market risk within the Group is interest rate risk exposure in the Bank. As at 31 December 2016 and 2015, the fair value of the financial instruments as presented in the interest risk table below are considered to be equal to their carrying amounts.
During the year the Group was exposed to market price risk through holding available for sale financial instruments, and a financial asset carried at fair value through profit and loss. The only significant exposure relates to the financial asset carried at fair value through profit and loss, which is an equity investment stated at market value. Given the size of this holding, which was GBP70,000 at 31 December 2016 (2015: GBP77,000) the potential impact on the results of the Group is relatively small and no sensitivity analysis has been provided for the market price risk.
Interest rate risk
Interest rate risk exposure in the Bank arises from the difference between the maturity of capital and interest payable on customer deposit accounts, and the maturity of capital and interest receivable on loans and financing. The differing maturities on these products create interest rate risk exposures due to the imperfect matching of different financial assets and liabilities. The risk is managed on a continuous basis by management and reviewed by the Board of the Bank. The Bank monitors interest rate risk on a monthly basis via the ALCO. The matching of the maturity interest rates of assets and liabilities is fundamental to the management of the Bank. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Bank and its exposure to changes in interest rates.
Interest rate re-pricing table
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 customer accounts at their earliest.
>1 >3
>6month year years
31 December Sight- - - -
2016 1 1 3 5 >5 Non-Int.
month >1month-3month >3month-6months year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash & cash
equivalents 6,129 - - - - - - - 6,129
Available
for
sale
financial
instruments - 6,499 6,499 10,993 - - - - 23,991
Customer
accounts
receivable 4,198 3,067 7,650 10,037 18,675 54,074 17,704 648 116,053
Commission
debtors 29 110 193 - - - - - 332
Other assets 70 - - - - - - 6,111 6,181
Total assets 10,426 9,676 14,342 21,030 18,675 54,074 17,704 6,759 152,686
Liabilities
Customer
accounts 2,840 4,597 8,235 8,028 34,988 50,931 16,333 - 125,952
Other
liabilities 3,028 39 104 159 2,276 3,754 3,590 614 13,564
Total
capital
and
reserves - - - - - - - 13,170 13,170
Total
liabilities
and equity 5,868 4,636 8,339 8,187 37,264 54,685 19,923 13,784 152,686
Interest
rate
sensitivity
gap 4,558 5,040 6,003 12,843 (18,589) (611) (2,219) (7,025) -
Cumulative 4,558 9,598 15,601 28,444 9,855 9,244 7,025 - -
>1 >3
>6month year years
31 December Sight- - - -
2015 1 1 3 5 >5 Non-Int.
month >1month-3month >3month-6months year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash & cash
equivalents 7,156 - - - - - - - 7,156
Available
for
sale
financial
instruments 3,000 6,995 5,986 - - - - - 15,981
Customer
accounts
receivable 3,819 6,367 9,006 16,746 47,742 16,782 894 - 101,356
Commission
debtors - - - - - - - 361 361
Other assets - - - - - - - 5,151 5,151
Total assets 13,975 13,362 14,992 16,746 47,742 16,782 894 5,512 130,005
Liabilities
Customer
accounts 3,488 2,283 4,179 24,869 50,498 21,011 - - 106,328
Other
liabilities 28 56 84 1,072 3,453 3,160 334 3,343 11,530
Total
capital
and
reserves - - - - - - - 12,147 12,147
Total
liabilities
and equity 3,516 2,339 4,263 25,941 53,951 24,171 334 15,490 130,005
Interest
rate
sensitivity
gap 10,459 11,023 10,729 (9,195) (6,209) (7,389) 560 (9,978) -
Cumulative 10,459 21,482 32,211 23,016 16,807 9,418 9,978 - -
Sensitivity analysis for interest rate risk
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 (2015: 2.0%). The following tables set out the estimated total impact of such a change based on the mismatch at the balance sheet date.
>1 >3
>6month year years
31 December Sight- - - -
2016 1 1 3 5 >5 Non-Int.
month >1month-3month >3month-6months year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Interest
rate
sensitivity
gap 4,558 5,040 6,003 12,843 (18,589) (611) (2,219) (7,025) -
Weighting 0.000 0.003 0.007 0.014 0.027 0.054 0.115 0.000 -
GBP000 - 15 42 180 (502) (33) (255) - (553)
>1 >3
>6month year years
31 December Sight- - - -
2015 1 1 3 5 >5 Non-Int.
month >1month-3month >3month-6months year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Interest
rate
sensitivity
gap 10,459 11,023 10,729 (9,195) (6,209) (7,389) 560 (9,978) -
Weighting 0.000 0.003 0.007 0.014 0.027 0.054 0.115 0.000 -
GBP000 - 33 75 (129) (168) (399) 63 - (525)
(b) Capital Management
Regulatory capital
The Group considers capital to comprise share capital, share premium, reserves and subordinated loans. Capital is deployed by the Board to meet the commercial objectives of the Group, whilst meeting regulatory requirements in the Bank. The Group's policy is to maintain a strong capital base so as to maintain investor, creditor, depositor and market confidence and to sustain future development of the business.
In implementing current capital requirements the capital position in the Bank is also subject to prescribed minimum requirements by the FSA in respect of the ratio of total capital to total risk-weighted assets. The requirement applies to the Bank (a wholly owned subsidiary of Manx Financial Group PLC) as a component of Manx Financial Group PLC and has been adhered to throughout the year.
(c) Fair value of financial 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.
Valuation models
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.
Financial instruments measured at fair value - fair value hierarchy
The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position.
Level Level Level Total
31 December 2016 1 2 3 GBP000
GBP000 GBP000 GBP000
Investment securities
Government bonds 23,991 - - 23,991
Equities 70 - - 70
-------- --------
24,061 - - 24,061
------------------------- -------- -------- -------- --------
Financial instruments not measured at fair value
The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised.
Total Total
Level Level Level fair carrying
1 2 3 values amount
31 December 2016 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash and cash equivalents - 6,129 - 6,129 6,129
Loans and advances to
customers - 116,053 - 116,053 116,053
Commissions receivable - 332 - 332 332
Trade and other receivables - 1,732 - 1,732 1,732
- 124,246 - 124,246 124,246
----------- ---------- --------- ---------- ----------
Liabilities
Customer accounts - 125,952 - 125,952 125,952
Creditors and accrued
charges - 2,975 - 2,975 2,975
Block creditors - 1,390 - 1,390 1,390
Loan notes - 8,545 - 8,545 8,545
----------- ---------- --------- ---------- ----------
- 138,862 - 138,862 138,862
Where available, the fair value of loans and advances is based on observable market transactions. Where observable market transactions are not available, fair value is estimated using valuation models, such as discounted cash flow techniques. Input into the valuation techniques includes expected lifetime credit losses, interest rates, prepayment rates and primary origination or secondary market spreads. For collateral-dependent impaired loans, the fair value is measured based on the value of the underlying collateral. Input into the models may include data from third party brokers based on over the counter trading activity, and information obtained from other market participants, which includes observed primary and secondary transactions.
5. Segmental analysis
Segmental information is presented in respect of the Group's business segments. The Directors consider that the Group currently operates in one geographic segment, 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 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 and block discounting); Manx Incahoot; Conister Card Services; and Edgewater Associates Limited.
Asset Conister
and Manx Card Edgewater Investing
Personal Incahoot Services Associates Activities Total
For the year ended Finance GBP000 GBP000 GBP000 GBP000 GBP000
31 December 2016 GBP000
Net interest income 16,001 - - - - 16,001
Operating income 7,047 81 (106) 1,465 112 8,599
Profit/(loss)
before tax payable 1,787 (205) (223) 371 (185) 1,545
Capital expenditure 69 52 - 970 - 1,091
Total assets 148,523 418 2 1,546 2,197 152,686
Asset Conister
and Manx Card Edgewater Investing
Personal Incahoot Services Associates Activities Total
For the year ended Finance GBP000 GBP000 GBP000 GBP000 GBP000
31 December 2015 GBP000
Net interest income 13,543 - - - - 13,543
Operating income 6,929 84 (98) 1,369 149 8,433
Profit/(loss)
before tax payable 2,299 203 (71) 148 (270) 2,309
Capital expenditure 173 122 - 44 274 613
Total assets 128,357 447 123 580 498 130,005
6. Interest income
Interest receivable and similar income represents charges and interest on finance and leasing agreements attributable to the year after adjusting for early settlements and interest on bank balances.
7. Other expenses
2016 2015
GBP000 GBP000
Professional and legal fees 858 654
Marketing costs 167 161
IT costs 425 339
Establishment costs 362 547
Communication costs 61 66
Travel costs 79 75
Bank charges 136 115
Insurance 112 115
Irrecoverable VAT 238 228
Other costs 268 85
2,706 2,385
8. Allowance for impairment
The charge in respect of specific allowances for impairment comprises:
(note
33)
2016 2015
GBP000 GBP000
Specific impairment allowances made 915 593
Reversal of allowances previously made (475) (195)
Total charge for specific provision for
impairment 440 398
The charge / (credit) in respect of collective allowances for impairment comprises:
(note
33)
2016 2015
GBP000 GBP000
Collective impairment allowances made 12 2
Release of allowances previously made (5) (3)
Total charge / (credit) for collective allowances
for impairment 7 (1)
Total charge for allowances for impairment 447 397
9. Depositors' Compensation Scheme
2016 2015
GBP000 GBP000
-------------------------------------------------- -------- -------
Receipt in respect of the Isle of Man Government
Depositors' Compensation Scheme - 10
-------------------------------------------------- --------- -------
On 27 May 2009, Kaupthing Singer & Friedlander (Isle of Man) Limited activated the Isle of Man Government Depositors' Compensation Scheme (the Scheme) in connection with its liquidation. Three payments of GBP73,880 were made in to the Scheme. Repayments from the FSA of GBP133,506 and GBP34,424 have been received and a further GBP53,710 is expected from the Scheme. In 2015, the Bank received as a final repayment for a Scheme for the Bank of Credit and Commerce Overseas Limited launched in 1991.
10. Profit before tax payable
The profit before tax payable for the year is stated after charging:
2016 2015
GBP000 GBP000
Interest expense payable to depositors 2,795 2,544
Interest expense payable on loan notes 475 429
Interest expense payable to block funders 98 29
Profit on sale of fixed assets - (12)
Share options expense 46 46
Directors' remuneration 304 297
Directors' fees 195 202
Directors' pensions 30 30
Directors' performance related pay 60 54
Auditors' remuneration: as Auditors current
year 78 86
non-audit services 38 19
Pension cost defined benefit scheme 13 14
Operating lease rentals for property 231 342
11. Tax expense
2016 2015
GBP000 GBP000
--------------------------------------------------- ------- -------
Current tax expense
Current year 114 21
Changes to estimates for prior years 7 (15)
121 6
Deferred tax expense
Origination and reversal of temporary differences 24 6
Utilisation of previously recognised tax
losses 78 197
Changes to estimates for prior years 21 (2)
123 201
Total tax expense 244 207
--------------------------------------------------- ------- -------
2016 2015
GBP000 GBP000
--------------------------------------- ------- ------- ------- -------
Reconciliation of effective tax
rate
Profit before tax on continuing
operations 1,545 2,309
Tax using the Banking division's
domestic tax rate 10.0% 155 10.0% 231
Effect of tax rates in foreign
jurisdictions 1.5% 24 0.4% 8
Non-deductible expenses 1.8% 28 0.6% 15
Tax exempt income (0.4)% (6) (0.8)% (18)
Timing differences in current
year (0.6)% (9) (0.8)% (18)
Origination and reversal of temporary
differences in deferred tax 1.6% 24 0.3% 6
Changes to estimates for prior
years 1.8% 28 (0.7)% (17)
------- ------- ------- -------
Total tax expense 15.8% 244 9.0% 207
--------------------------------------- ------- ------- ------- -------
The main rate of corporation tax in the Isle of Man is 0.0% (2015: 0.0%). However the profits of the Group's Manx banking activities are taxed at 10.0% (2015: 10.0%). The profits of the Group's subsidiaries that are subject to UK corporation tax are taxed at a rate of 20.0% (2015: 20.0%).
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 GBP40,000 liability (2015: GBP83,000 asset). This resulted in an expense of GBP123,000 (2015: GBP201,000) to the income statement.
12. Earnings per share
2016 2015
Profit for the year GBP1,301,000 GBP2,102,000
------------------------------------- ------------- -------------
Weighted average number of ordinary
shares in issue 102,070,252 102,070,252
Basic earnings per share (pence) 1.27 2.06
Diluted earnings per share (pence) 0.87 1.29
--------------------------------------- ------------- -------------
Total comprehensive income for the GBP977,000 GBP2,121,000
period
------------------------------------- ------------- -------------
Weighted average number of ordinary
shares in issue 102,070,252 102,070,252
Basic earnings per share (pence) 0.96 2.08
Diluted earnings per share (pence) 0.68 1.30
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.
2016 2015
Reconciliation of weighted average
number of ordinary shares in issue
between basic and diluted earnings
per share
As per basic earnings per share 102,070,252 102,070,252
Number of shares issued if all convertible
loan notes were exchanged for equity
(note 25) 61,500,000 61,500,000
Dilutive element of warrants if taken
up (note 25) 12,733,968 17,641,990
Dilutive element of share options
if exercised (note 27) - 22,665
As per dilutive earnings per share 176,304,220 181,234,907
Reconciliation of earnings between
basic and diluted earnings per share
As per basic earnings per share GBP1,301,000 GBP2,102,000
Interest expense saved if all convertible GBP230,150 GBP230,150
loan notes were exchanged for equity
(note 25)
As per dilutive earnings per share GBP1,531,150 GBP2,332,150
The diluted earnings per share calculation assumes that all convertible loan notes, warrants and share options have been converted/exercised at the beginning of the year where they are dilutive.
13. Company loss
The loss on ordinary activities after taxation of the Company is GBP119,000 (2015: GBP95,000).
14. Cash and cash equivalents
Group Company
2016 2015 2016 2015
GBP000 GBP000 GBP000 GBP000
Cash at bank and in hand 6,129 7,156 - 100
Short-term deposits - - - -
6,129 7,156 - 100
Cash at bank includes an amount of GBP63,000 (2015: GBP140,000) representing receipts which are in the course of transmission.
15. Financial assets at fair value through profit or loss
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. The cost of the shares was GBP471,000. The unrealised difference between cost and market value has been taken to the income statement. Dividend income of GBP350,000 has been received from this investment since it was made.
16. Available for sale financial instruments
Group Company
2016 2015 2016 2015
GBP000 GBP000 GBP000 GBP000
UK Government Treasury Bills 23,991 15,981 - -
23,991 15,981 - -
UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in equity.
17. Loans and advances to customers
2016 2015
Gross Impairment Carrying Gross Impairment Carrying
Amount Allowance Value Amount Allowance Value
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Hire Purchase
balances 61,952 (1,309) 60,643 62,814 (1,136) 61,678
Finance lease
balances 14,779 (673) 14,106 10,240 (656) 9,584
Unsecured personal
loans 6,638 (162) 6,476 4,023 (180) 3,843
Vehicle stocking
plans 1,366 - 1,366 1,119 - 1,119
Block discounting 13,213 - 13,213 8,935 - 8,935
Secured commercial
loans 2,257 (12) 2,245 4,947 (89) 4,858
Secured personal
loans 18,004 - 18,004 11,339 - 11,339
118,209 (2,156) 116,053 103,417 (2,061) 101,356
Collateral is held, in the form of underlying assets, for HP, finance leases, vehicles stocking plans, block discounting, secured commercial and personal loans. An estimate of the fair value of collateral on past due or impaired loans and advances is not disclosed as it would be impractical to do so.
2016 2015
Specific allowance for impairment GBP000 GBP000
Balance at 1 January 2,011 1,754
Specific allowance for impairment made 915 1,255
Release of allowances previously made (475) (130)
Write-offs (352) (868)
-------- --------
Balance at 31 December 2,099 2,011
2016 2015
Collective allowance for impairment GBP000 GBP000
Balance at 1 January 50 51
Collective allowance for impairment
made 12 2
Release of allowances previously made (5) (3)
Balance at 31 December 57 50
Total allowances for impairment 2,156 2,061
Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2016 GBP306,895 (2015: GBP208,017) 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.
As detailed below, at the end of the current financial year three loan exposures, both in connection with block discounting lending, exceeded 10.0% of the capital base of the Bank (2015: four loan exposures):
Outstanding Outstanding
Balance Balance Facility
2016 2015 limit
Exposure GBP000 GBP000 GBP000
Block discounting facility 9,302 7,345 11,000
HP and finance lease receivables
Loans and advances to customers include the following Hire Purchase and finance lease receivables:
2016 2015
GBP000 GBP000
Less than one year 35,537 33,987
Between one and five years 60,542 60,501
Gross investment in HP and finance
lease receivables 96,079 94,488
The investment in HP and finance lease receivables net of unearned income comprises:
2016 2015
GBP000 GBP000
Less than one year 26,562 24,425
Between one and five years 50,168 48,629
Net investment in HP and finance lease
receivables 76,730 73,054
18. Property, plant and equipment
Leasehold IT Furniture Motor
Improvements Equipment & Vehicles Total
Group GBP000 GBP000 Equipment GBP000 GBP000
GBP000
Cost
As at 1 January
2016 417 1,468 623 57 2,565
Additions - 87 6 - 93
Disposals - - - - -
As at 31 December
2016 417 1,555 629 57 2,658
Accumulated depreciation
As at 1 January
2016 70 1,025 578 20 1,693
Charge for year 59 164 10 13 246
Disposals - - - - -
As at 31 December
2016 129 1,189 588 33 1,939
Carrying value
at 31 December
2016 288 366 41 24 719
Carrying value
at 31 December
2015 347 443 45 37 872
Leasehold IT Furniture
Improvements Equipment & Total
Company GBP000 GBP000 Equipment GBP000
GBP000
Cost
As at 1 January
2016 234 13 15 262
Additions - - - -
Disposals - - - -
As at 31 December
2016 234 13 15 262
Accumulated depreciation
As at 1 January
2016 15 - - 15
Charge for year 38 1 1 40
Disposals - - - -
As at 31 December
2016 53 1 1 55
Carrying value
at 31 December
2016 181 12 14 207
Carrying value
at 31 December
2015 219 13 15 247
19. Intangible assets
Customer Intellectual Website
Contracts Property Development Total
Group & Lists Rights GBP000 GBP000
GBP000 GBP000
Cost
As at 1 January
2016 76 345 21 442
Additions - - 50 50
Acqusitions 948 - - 948
Disposals - - - -
As at 31 December
2016 1,024 345 71 1,440
Accumulated amortisation
As at 1 January
2016 44 - - 44
Charge for year 32 - - 32
Impairment (see note 20) - 48 - 48 Disposals - - - - As at 31 December 2016 76 48 - 124 Carrying value at 31 December 2016 948 297 71 1,316 Carrying value at 31 December 2015 32 345 21 398
Acquisition of MBL
On 23 December 2016, EWA acquired the majority of the Isle of Man's IFA business held by Knox Financial Services Limited ("KFSL") carrying a trading name of MBL. The initial acquisition includes approximately 4,000 clients together with 6 members of staff. The basis of consideration is in part contingent, as it is determined by 4 times renewal income received in the first 12 months of ownership, reduced down by any clawbacks in the same period. The final value cannot fall below GBP800,000. EWA entered into a loan agreement with Conister Bank Limited (see note 30 for terms) and paid the non-refundable minimum of GBP800,000 and a further GBP200,000 into an escrow account until the final valuation has been determined. When the value has been finalised, any surplus or shortfall will be settled.
By reference to the renewal income received by KFSL in the 12 months prior to disposal, an estimate of GBP236,906 has been assumed for the next 12 months, which would generate a consideration sum of GBP947,624. Therefore, EWA has accounted for this transaction by recognising an intangible asset of GBP947,624 and a receivable of GBP52,376 (see note 21) of the monies held in escrow. The fair value of the assets acquired is considered to be of the same amount as the sum estimated to be paid and principally relates to customer contracts. The period by which these contracts are amortised over is estimated to be 18.75 years given the average duration of EWA's existing portfolio for renewal income.
In tandem, both parties entered into an option agreement, exercisable within three months from the transaction date, for EWA to acquire the remainder of the vendor's IFA business which includes approximately 150 clients. This option was exercised on 18 January 2017. The fair value of this option agreement was estimated to be nil.
20. Investment in Group undertakings
The Company has the following investments in subsidiaries incorporated in the Isle of Man:
Nature of 31 December Date Total Total
of
Business 2016 Incorporation 2016 2015
Carrying value % Holding GBP000 GBP000
of investments
Conister Bank Asset and Personal
Limited Finance 100 05/12/1935 10,067 10,067
Edgewater
Associates
Limited Wealth Management 100 24/12/1996 2,005 2,005
TransSend Holding Company 100 05/11/2007 - -
Holdings Limited for Prepaid Card
Division
Bradburn Limited Holding Company 100 15/05/2009 - -
12,072 12,072
Amounts owed to and from 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 EWA. Interest charged is at the discretion of the lender.
Company Company
2016 2015
Creation Maturity Interest rate GBP000 GBP000
---------------------- ----------------- -------------- -------- --------
Conister Bank
Limited
11 February 11 February
2014 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 17 September
2014 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 23 September
2016 2036 7.0% 1,100 -
Edgewater Associates
Limited
14 May 2012 14 May 2017 7.0% 128 128
28 February 28 February
2013 2018 7.0% 50 50
5,178 4,078
Goodwill
Group Group
2016 2015
GBP000 GBP000
Edgewater Associates Limited ("EWA") 1,849 1,849
ECF Asset Finance PLC ("ECF") 454 454
Three Spires Insurance Services Limited ("Three Spires") 41 41
2,344 2,344
Goodwill impairment
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 EWA 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 12.0% 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 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 12.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on varying sales volumes.
There has been no change in the detailed method of measurement for EWA and ECF when compared to 2015. 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 EWA. On the basis of the above reviews no impairment to goodwill has been made in the current year.
Investment in joint venture and acquisition of subsidiary
On 7 August 2014, a joint venture agreement was entered into between Manx Financial Limited ("MFL"), previously a subsidiary of the Group, and Andrew Flowers. Additional shares were issued such that 49.9% of the voting share capital was sold for GBP500,000, creating GBP1,000 share premium in the company. Control was lost on this day and consequently the assets and liabilities of the subsidiary were derecognised. There was no profit or loss incurred upon ceding control. Manx Financial Group PLC has invested GBP501,000 for 50.1% of the voting share capital and has provided a corporate guarantee to block funders in Manx Financial Limited. In December 2015, Andrew Flowers disposed of his shares to the parent of MFL, Bradburn Limited, for GBP500,000 when the net assets of MFL at the time were GBP1,053,000. This generated a gain on acquisition of the joint venture of GBP28,000 and MFL became a subsidiary of the Group.
Acquisition of Incahoot
On 6 March 2015, the business of Incahoot Limited was acquired by Manx Incahoot Limited, a subsidiary of the Group. Incahoot Limited was in administration at the time and sold its intellectual property rights, a customer contract and property, plant and equipment. Two employees were also transferred under the Transfer of Undertakings (Protection of Employment) Regulations 2006 which carried over GBP26,000 of unpaid wages.
In exchange for the net assets acquired, Manx Incahoot Limited paid GBP101,000 in cash and pledged a further 10.0% share of future revenue streams on pipeline listed at the time of acquisition generated within 2 years of purchase, up to a cap of GBP100,000. No revenue has yet been generated from this pipeline and the Directors believe that it is unlikely that any will. Therefore the contingent consideration has been valued at nil.
2015 2015
GBP000 GBP000
Fair value of consideration
Cash 101
Contingent consideration -
Fair value of assets acquired 101
Intellectual property rights (including website) 35
Fair value increase on intellectual property rights 310
Customer contract 76
Property, plant and equipment 1
(422)
Fair value of liabilities acquired
Unpaid employee wages 26
(396)
Bargain purchase (295)
On 12 November 2015, a valuation was conducted by an independent firm of professional advisers on the intellectual property rights acquired for the purpose of including within these financial statements as determined by IFRS 3: Business Combinations. The independent firm addressed the three levels of the IFRS fair value hierarchy and concluded that level 3 was most appropriate as the intellectual property rights acquired had no active markets (Level 1), or comparable assets against which to index prices (Level 2). Therefore, the report valued the intellectual property rights acquired based on internally generated data (Level 3) being: costs incurred to date and cash flow projections. The replacement cost approach was determined as GBP310,500 after tax and the income approach valued the business at GBP233,701 using a discount factor of 42.5%. The report averaged the two approaches to arrive at a final valuation of GBP276,000. In addition, the domain name was separately valued as an intangible asset, citing comparable domains sold recently with a range of GBP6,000 to GBP35,000.
It is the view of the Directors that only one approach should be used when valuing the assets acquired and that the replacement cost approach is the better of the two due to the uncertainty of the cash flows given its recent acquisition. Thus the replacement cost has been adopted as the basis for the valuation in order to arrive at a reliable estimate. In addition, the Directors believe that the value of the domain name should be valued at the upper end of the range cited given market conditions for this product. Therefore, the value attributed in these financial statements on the assets acquired is GBP345,500, being GBP310,500 for the intellectual property and GBP35,000 for the domain name. The Directors believe that the assets acquired will have an enduring benefit to the company and therefore have adopted an indefinite life as the appropriate basis for determining its useful life for amortisation purposes.
This valuation gave rise to the fair value of assets and liabilities acquired being GBP295,000 greater than what was paid and consequently in accordance with IFRS 3: Business Combinations has been recognised as a gain on bargain purchase in the consolidated income statement as a separate line item.
On 9 December 2016, this valuation was conducted again which led to a reduced valuation of GBP262,474 for the intellectual property. This created an impairment of GBP48,026. There were no adverse trends arising from comparable market disposals of domain names to warrant any impairment to this intangible.
21. Trade and other receivables
Group Company
2016 2015 2016 2015
GBP000 GBP000 GBP000 GBP000
Prepayments and other debtors 874 857 29 98
VAT recoverable 752 466 - -
Depositors Compensation Scheme Receivable 54 54 - -
Monies held in escrow from MBL acquisition (see note 19) 52 - - -
1,732 1,377 29 98
Included in trade and other receivables is an amount of GBP752,000 (2015: GBP466,000) relating to a reclaim of value added tax ("VAT"). Conister Bank Limited, as the Group VAT registered entity, has 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. 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 decision of the First-Tier Tax Tribunal released 18 August 2011 in respect of Volkswagen Financial Services (UK) Limited ("VWFS") v HM Revenue & Customs (TC01401) ("VWFS Decision") added significant weight to the case put by the Bank and a request for a revised Partial Exemption Special Method was submitted in December 2011. The proposal put forward by the Bank was that the revised method would allocate 50.0% of costs in respect of HP transactions to a taxable supply and 50.0% to an exempt supply. In addition at this time a Voluntary Disclosure was made as a retrospective claim for input VAT under-claimed in the last 4 years. A secondary claim was also made to cover periods Q4 2012 to Q4 2016 for the value of GBP295,000.
In November 2012, it was announced that the HMRC Upper Tribunal had overturned the First-Tier Tribunal in relation to the VWFS Decision. VWFS has subsequently been given leave to appeal and this was scheduled to be heard in October 2013. However, this was delayed and the case was heard by the Court of Appeal on 17 April 2015 who overturned the Upper Tribunal's decision ruling in favour of VWFS. HMRC have appealed this decision to the Supreme Court, which has referred the issue to the European Court of Justice.
The Bank's total exposure in relation to this matter is GBP865,000, comprising the debtor balance referred to above plus an additional GBP113,000 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). On the basis of the discussions and correspondence which have taken place between the Bank and C&E, in addition to the VWFS case, the Directors are confident that the VAT claimed referred to above will be secured.
22. Customer accounts
2016 2015
GBP000 GBP000
Retail customers: term deposits 124,398 103,041
Corporate customers: term deposits 1,554 3,287
125,952 106,328
23. Creditors and accrued charges
Group Company
2016 2015 2016 2015
GBP000 GBP000 GBP000 GBP000
Commission creditors 2,504 2,313 - -
Other creditors and accruals 363 332 82 12
Taxation creditors 108 198 - -
Consideration for acquisition
of MFL (see note 20) - 500 - -
2,975 3,343 82 12
24. Block creditors
2016 2015
GBP000 GBP000
Drawdown 1 - repayable 25/12/2016, interest payable at 5.6%, secured on assets of MFL - 194
Drawdown 2 - repayable 25/07/2018,
interest payable at 5.6%, secured on
assets of MFL 248 394
Drawdown 3 - repayable 08/03/2019, 1,142 -
interest payable at 6.5%, secured on
assets of MFL
1,390 588
25. Loan notes
Group Company
2016 2015 2016 2015
Notes GBP000 GBP000 GBP000 GBP000
Related parties
J Mellon JM 1,750 1,750 1,750 1,750
Burnbrae Limited BL 1,200 1,200 1,200 1,200
Southern Rock Insurance Company Limited SR 460 460 460 460
Life Science Developments Limited LS 350 500 350 500
3,760 3,910 3,760 3,910
Unrelated parties UP 4,785 3,355 4,785 3,355
8,545 7,265 8,545 7,265
JM - Two loans, one of GBP500,000 maturing on 31 July 2017 with interest payable of 7.0% per annum, and one of GBP1,250,000 maturing on 26 February 2020, paying interest of 6.5% per annum. Both loans are convertible at the rate of 4 pence and 9 pence respectively. JM is also entitled to 8.3 million warrants at an exercise price of 6 pence which lapse on 31 July 2017.
BL - One loan consisting of GBP1,200,000 maturing on 31 July 2017 with interest payable of 7.0% per annum. Jim Mellon is the beneficial owner of BL and Denham Eke is also a director. The loan is convertible at a rate of 4 pence. BL is also entitled to 20 million warrants at an exercise price of 6 pence which lapse on 31 July 2017.
SR - One loan consisting of GBP460,000 maturing on 26 February 2020 with interest payable of 6.5% per annum. The loan is convertible at a rate of 9 pence. SR is also entitled to 8.3 million warrants on a previously converted loan note at an exercise price of 6 pence which lapse on 24 October 2017. Arron Banks is a non-executive director and is a major shareholder of SR. John Banks, a Non-executive Director is also a director of SR.
LS - One loan of GBP350,000 maturing on 5 September 2017 with interest payable of 5.0% per annum. Denham Eke is a director of LS.
UP - Twenty one loans consisting of an average GBP227,857, with an average interest payable of 5.3% per annum. The earliest maturity date is 1 October 2017 and the latest maturity is 3 November 2021.
With respect to the convertible loans, the interest rate applied was deemed by the Directors to be equivalent to the market rate with no conversion option.
26. Pension liability
The Conister Trust Pension and Life Assurance Scheme ("Scheme") operated by the Company 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 balance sheet items as a result of the requirements of IFRIC 14 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 2016 (2015: 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 full actuarial valuation was carried out at 1 April 2016, which showed that the market value of the Scheme's assets was GBP1,379,000 representing 80.7% of the benefits that had accrued to members, after allowing for expected future increases in earnings. As required by IAS 19 this valuation has been updated by the actuary as at 31 December 2016.
The amounts recognised in the Consolidated Statement of Financial Position are as follows:
2016 2015
Total underfunding in funded plans GBP000 GBP000
recognised as a liability
Fair value of plan assets 1,420 1,332
Present value of funded obligations (2,034) (1,666)
(614) (334)
2016 2015
Movement in the liability for defined GBP000 GBP000
benefit obligations
Opening defined benefit obligations at 1 January 1,666 1,733
Benefits paid by the plan (68) (82)
Interest on obligations 64 64
Actuarial loss / (gain) 372 (49)
Liability for defined benefit obligations
at 31 December 2,034 1,666
2016 2015
Movement in plan assets GBP000 GBP000
Opening fair value of plan assets at 1 January 1,332 1,345
Expected return on assets 51 50
Contribution by employer 49 49
Actuarial gain / (loss) 56 (30)
Benefits paid (68) (82)
Closing fair value of plan assets at
31 December 1,420 1,332
2016 2015
Expense recognised in income statement GBP000 GBP000
Interest on obligation 64 64
Expected return on plan assets (51) (50)
Total included in personnel costs 13 14
Actual return on plan assets 107 20
2016 2015
Actuarial (loss) / gain recognised GBP000 GBP000
in other comprehensive income
Actuarial gain / (loss) on plan assets 56 (30)
Actuarial (loss) / gain on defined
benefit obligations (372) 49
(316) 19
2016 2015
Plan assets consist of the following % %
Equity securities 47 27
Corporate bonds 16 23
Government bonds 25 41
Cash 7 3
Other 5 6
100 100
The actuarial assumptions used to calculate Scheme liabilities under IAS19 are as follows: 2016 2015 2014
% % %
Rate of increase in pension in payment:
- - -
* service up to 5 April 1997
* service from 6 April 1997 to 13 September 2005 3.1 2.7 2.7
* service from 14 September 2005 2.1 2.0 2.0
Rate of increase in deferred pensions 5.0 5.0 5.0
Discount rate applied to scheme liabilities 2.7 3.9 3.8
Inflation 3.2 2.8 2.8
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.
27. Called up share capital
Authorised: Ordinary shares of no par value Number At 31 December 2015 & 2016 150,000,000 Issued and fully paid: Ordinary shares of no par value Number GBP000 At 31 December 2015 & 2016 102,070,252 18,933
There are a number of convertible loans at 31 December 2016 of GBP3.41 million (2015: GBP3.41 million) involving warrants of 28.3 million (31 December 2015: 28.3 million) (see note 25 for further details). The total number of warrants in issue at 31 December 2016 is 36.6 million (2015: 36.6 million) (see note 25 for further details).
On 23 June 2014, 1.75 million 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.
Performance and service conditions attached to share options that have not fully vested are as follows:
(a) The options granted on 25 June 2010 (1,056,000 options) will vest if the mid-market share price of GBP0.30 is achieved during the period of grant (10 years ending 25 June 2020).
(b) The options granted on 25 June 2010 and 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 25 June
2014 2010
Fair value at date of grant GBP0.08 GBP0.03
Share price GBP0.14 GBP0.11
Exercise price GBP0.14 GBP0.11
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%
28. Analysis of changes in financing during the year
2015 2015
Analysis of changes in financing during the year GBP000 GBP000
Balance at 1 January 26,198 26,098
Issue of loan notes 1,280 100
27,478 26,198
The 2016 closing balance is represented by GBP18.933 million share capital (2015: GBP18.933 million) and GBP8.545 million of loan notes (2015: GBP7.265 million).
29. Regulator
The Group is regulated by the Isle of Man FSA and is licensed to undertake banking activities and conduct investment business. In addition the Group is regulated by the Financial Conduct Authority in the United Kingdom for credit and brokerage related activities.
30. 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 (Chief Executive Officer of MFG). Total deposits amounted to GBP0.076 million (2015: GBP0.031 million), at normal commercial interest rates in accordance with the standard rates offered by the Bank.
Funds held in a fiduciary capacity
Fiduciary deposits
The Bank acts as agent bank to a number of customers, for balances totalling GBP3.4 million (2015: GBP4.0 million). The Bank invests these customer assets with third party banks on their behalf and in return for this service receives a fee. These balances are not included within the statement of financial position.
All funds held and accounts maintained in connection with the fiduciary services that the Bank offers in 2016 are to companies connected with Jim Mellon and Denham Eke.
Staff and commercial loans
Details of staff loans are given in note 17 to the financial statements.
Normal commercial loans are made to various companies connected to Jim Mellon and Denham Eke. As at 31 December 2016, GBP0.401 million of capital and interest was outstanding (2015: GBP0.132 million).
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. EWA provides services to the Group in arranging its insurance and defined contribution pension arrangements.
Loan advance to EWA
On 14 December 2016, a loan advance was made to EWA by the Bank in order to provide the finance required to acquire MBL (see note 19). The advance was for GBP700,000 at an interest rate of 8% repayable over 6 years. A negative pledge was given by EWA to not encumber any property or assets or enter into an arrangement to borrow any further monies.
Investments
The Bank holds less than 1% equity in the share capital of an investment of which Jim Mellon is a shareholder (note 15). Denham Eke acts as a non-executive director.
Subordinated loans
Manx Financial Group PLC has advanced GBP1.1m of subordinated loans in 2016 to the Bank (2015: none) (see note 20).
Loan notes
See note 25 for a list of related party loan notes as at 31 December 2016 and 2015.
Key management personnel's remuneration including Executive Directors
2016 2015
GBP000 GBP000
Short-term employee benefits 414 402
31. Operating leases
Non-cancellable lease rentals are payable in respect of property and motor vehicles as follows:
2016 2015
Leasehold Leasehold
Property Other Property Other
GBP000 GBP000 GBP000 GBP000
Less than one year 187 - 193 -
Between one and five years 801 - 782 -
Over five years 390 - 594 -
1,378 - 1,569 -
32. Subsequent events
On 18 January 2017, an option was exercised to acquire an IFA business which includes 150 clients. The price of the acquisition will be calculated by four times the renewal income received over the 12 month period subsequent to completion. The price is estimated to be GBP75,000.
33. Comparative figures
The Consolidated Income Statement for the previous year has been restated in order to present Terminal funding, as analysed by note 3(v), in a consistent manner to the current year.
This information is provided by RNS
The company news service from the London Stock Exchange
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