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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 | 0.00 | 07:30:49 |
| 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 : 9105H
Manx Financial Group PLC
16 March 2018
FOR IMMEDIATE RELEASE 16(th) March 2018
Manx Financial Group PLC (the 'Company')
Report and accounts for the year ended 31 December 2017
Manx Financial Group PLC (LSE: MFX), the financial services group which includes Conister Bank Limited, Edgewater Associates Limited, Manx FX Limited and Manx Incahoot Limited, presents its final results for the year ended 31 December 2017.
Jim Mellon, Executive Chairman, commented: "I am pleased to report that the Report & Accounts for 2017 showed a marked improvement not only on 2016, but also on 2015. Our profit before tax has grown by 78% to GBP2.7 million (2016: GBP1.5 million), leading to a total comprehensive profit of GBP2.4 million (2016: GBP1.0 million) an increase of 150%. This is a very satisfactory outcome and reflects well on the performance of our newly restructured management and operations throughout the Group."
The 2017 Audited Annual Report and Accounts will be available from the Company's website www.mfg.im shortly.
Contacts:
Manx Financial Group PLC
Denham Eke, Chief Executive
Tel: +44 (0)1624 694694
Beaumont Cornish Limited
Roland Cornish/James Biddle
Tel: +44 (0)20 7628 3396
Britton Financial PR
Tim Blackstone
Tel: +44 (0)7957 140416
Chairman's Statement
Dear Shareholders,
When I wrote to you in the Interim Results for 2017, I was confident that the full year would continue the return to previous profitability. I am pleased to report that the Report & Accounts for 2017 show marked improvement, not only on 2016, but also on 2015 - our previous high watermark - and my earlier confidence was not misplaced.
Thus, our profit before tax has grown by 78% to GBP2.7 million (2016: GBP1.5 million), leading to a total comprehensive profit of GBP2.4 million (2016: GBP1.0 million), an increase of 150%. This is a very satisfactory outcome and reflects well on the performance of our newly restructured management and operations throughout the Group. I would also like to note that not only was the 2017 first half pre-tax profit of GBP0.9 million an Interim record (2016: GBP0.7 million), but also the second half 2017 pre-tax profit of GBP1.8 million (2016: GBP0.8 million) is again a record, demonstrating a sustained growth. The historic dependence on our banking subsidiary, Conister Bank Limited (the "Bank"), is reducing as Edgewater Associates Limited ("EWA"), our Independent Financial Advisory ("IFA") operation, has successfully integrated its recent acquisitions and is now making a significant contribution to the Group's overall financial performance. Our aim of becoming a diversified financial services group is coming to fruition and we are well placed to take advantage of opportunities as they arise.
Manx Financial Group PLC
As stated, profit before income tax for the year was GBP2.7 million (2016: GBP1.5 million) on a net interest income of GBP16.6 million (2016: GBP16.0 million). The positive impact of the enlarged EWA is evident at the net trading income level as it grew by GBP2.7 million to GBP11.3 million (2016: GBP8.6 million), a growth of 33%, and the increases in both personnel and administration expenses, in total GBP7.9 million (2016: GBP6.6 million), are mainly attributable to these acquisitions.
Turning to the Balance Sheet, our total assets increased by 13% to GBP173.2 million (2016: GBP152.7 million) and our total liabilities increased by 12% to GBP155.8 million (2016: GBP139.5 million). Within these figures, the Bank's loan book grew by GBP6.7 million to GBP122.7 million (2016: GBP116.1 million), the depositor base increased by GBP16.3 million to GBP142.3 million (2016: GBP126.0 million) - a growth of 6% and 13% respectively. Cash and equivalents stand at GBP44.0 million (2016: GBP30.1 million). As a result, the Group's equity increased by 32% to GBP17.4 million (2016: GBP13.2 million).
Our key metrics remain positive: the basic earnings per share have grown by 130% to 2.21 pence (2016: 0.96 pence) and our return on equity is now 16% (2016: 12%).
During the course of 2017, we extinguished all outstanding warrants over the Group and, as part of this exercise, Dr Gregory Bailey acquired 17.8 million shares, representing 13.6% of the current issued capital. I am pleased to welcome Dr Bailey to the board where his capital markets experience will be invaluable. The warrant exercise provided a further GBP1.8 million in aggregate to support the regulatory capital base of the Bank and was achieved without incurring onerous marketing costs. Dr Bailey is considered a concert party with me, and together we hold 29.9% of equity; Arron Banks and his associates hold 29.1%; leaving 41.0% of the issued capital in free float.
As I have previously explained, almost all of the Group's equity is utilised to underpin the Bank's regulatory capital. Maintaining and increasing our equity is fundamental in ensuring future growth to provide additional profitability. During the course of the year, I and my interests agreed to extend certain loans, at terms negotiated on an "arms-length" basis, that became due for repayment. As a result, both the coupon and conversion price for these loans have been changed in line with the market to 5% and 7.5 pence respectively (previously 7% and 4 pence). The Group will, however, require further regulatory capital to support the Bank's planned expansion and the executive is currently considering a number of ways in which we can expand this capital, but with the proviso that this will be only on a non-dilutive basis.
Conister Bank Limited
Our new loan advances totalled GBP73.7 million in 2017 which compares favourably with the previous year (2016: GBP72.5 million), with direct lending into the Isle of Man and the UK achieving notable success. Whilst the loan book appears only to have increased by 7% to GBP123.4 million (2016: GBP115.2 million), this figure disguises our successful elimination of GBP11.1 million in loan exposure to a single UK introducer where we suffered a disproportionate commission-sharing cost in relation to our perception of risk. Our underlying loan book growth was therefore GBP19.3 million, an improvement of 17%. Our net interest income increased by GBP0.8 million to GBP16.6 million (2016: GBP15.8 million), against a decrease in commission expense of GBP0.7 million to GBP8.4 million (2016: GBP9.1 million), leading to a GBP1.6 million growth in our operating income to GBP8.5 million (2016: GBP6.9 million) - an increase of 22%. Our new executive management has done well to stem the burden of commissions paid to introducers. Ensuring that we do not fall into the trap of "buying" business is a principal facet of our revised strategy.
Establishment costs grew by 9% to GBP5.7 million (2016: GBP5.2 million), largely as a result of implementing our new IT systems, including the replacement of the entire depositor software and the development of a fully-automated lending platform which has been introduced firstly in the Isle of Man in preparation for a UK launch. As a prudent measure, we have made further impairment provisions of GBP0.5 million (2016: GBP0.4 million), and have reduced intangible assets by GBP0.1 million (2016: nil). As a consequence, our profit after tax for the year increased by 223% to GBP2.0 million (2016: GBP0.6 million).
Turning to the Balance Sheet, the Bank's total asset base grew by 15% to GBP168.9 million (2016: GBP147.5 million) and total equity increased by 31% to GBP17.0 million (2016: GBP13.0 million). The loan book continues to perform well, with a total allowance for impairment of GBP2.5 million (2016: GBP2.2 million), representing 2% of the book (2016: 2%). The continuing excellent performance of the loans provides the confidence that our future income will continue throughout 2018 and beyond. The Bank has GBP29.1 million excess liquidity (2016: GBP17.0 million): the increase largely as a result of a number of Isle of Man banks having left the market, allowing us to accumulate deposits at historically low rates to fund future lending. Managing this sum becomes increasingly important and we will enhance our Treasury function in the coming year to ensure that we generate the maximum return on any excess balance remaining from our lending activities. As we do not access Inter-Bank funding, we are reliant on an Isle of Man consumer deposit base. Our belief is that we have secured approximately 20% of the available market. During 2018, we will review the opportunity of extending our coverage to include institutional funds, to be accessed as and when required.
Our operational costs to net income ratio stands at 69% (2016: 77%). Even though this is a marked year-on-year improvement, we believe that there is still considerable room to better this ratio and this will be a focus throughout 2018. Although much of these costs are of a fixed nature, they are scalable and thus our development of a specialised broker network coupled with the automated web-based loan processing platform will help achieve a favourable outcome.
The Bank acquired a 40% holding in the Business Lending Exchange Limited based in the UK, together with an option to acquire the remaining shareholding, exercisable by 2021, based on 60% of four times EBITA. I anticipate announcing further acquisitions in due course.
Surrounding the Bank's entire operation is our strict adherence to a robust credit and risk management framework. This enables us to ensure we maintain our growth in a controlled and safe manner in both the prime and near-prime markets. To this end, I am pleased to state that we augmented the Bank's executive management of Douglas Grant, Managing Director, and James Smeed, Finance Director with the appointment of Steven Quayle as Head of Risk and Compliance, Haseeb Qureshi as Chief Operating Officer and Andrew Bass as Isle of Man Sales Director: all three with the status of Associate Director and, pleasingly, the latter two being internal promotions. We have strengthened our Internal Audit function to further ensure that the Bank's culture continues to meet the highest professional standards possible.
Edgewater Associates Limited
Following the successful integration of the recent acquisition of the majority of the Isle of Man's IFA business held by Knox Financial Services Limited, followed by the acquisition of Balla Brokers (Insurance Services) Limited, I am pleased to report that EWA, under Managing Director Sandra Cardwell, increased its gross profit by 79% to GBP2.6 million (2016: GBP1.5 million), leading to a post-tax profit of GBP0.7 million (2016: GBP0.4 million) - a growth of 102%. Administrative expenses grew commensurately to GBP1.8 million (2016: GBP1.1 million). This excellent performance means that EWA's net assets now stand at GBP2.0 million (2016: GBP1.3 million) and, as a result, equity has grown by 58%. EWA's return on equity, based on its 2010 acquisition price of GBP2 million, was a very impressive 35%.
These consolidations have made EWA the largest IFA in the Isle of Man, with over 10,000 clients and advising on assets in excess of GBP273 million. Although principally dealing with private individuals, considerable inroads have been made into the local corporate market place and a team of experienced IFAs has been assembled to grow this business line.
EWA also includes a general insurance division which increased gross written premium in 2017 by 40% to GBP0.8 million (2016: GBP0.5 million) and has the organisational structure to support further acquisitions - an area in which I hope to make further announcements in due course.
Manx FX Limited
Our foreign exchange advisory service, Manx FX Limited, under Managing Director Garry Vernon, generated a post-tax profit in 2017 of GBP0.3 million (2016: GBP0.0 million) and has more than recovered the initial investment expenditure.
Manx FX Limited continues to tender for new accounts and to seek out new market sector opportunities by attending specialist conferences, working with the Isle of Man government and through customer referrals.
Manx Incahoot Limited
Not all of our incubator companies will immediately generate profits and whilst Manx Incahoot Limited has incurred development losses there is no doubt the employee benefit market remains a growing sector. Unfortunately, the gestation period between contract negotiation and completion is lengthy. There are challenges ahead for this business and 2018 will be a defining year for this subsidiary.
Corporate Governance
One of the Group Board's primary responsibilities is to ensure the provision of effective corporate governance. To this end, the Board undertook a full review of every aspect of governance in the light of the Quoted Companies Alliance Code, 2013. I am pleased to report that the Group is now fully compliant, well in advance of the AIM requirement to adopt a recognised code of conduct by September 2018.
Outlook
We have made a number of important changes during the year, the results of which are extremely encouraging in almost all areas and provide a strong platform to drive future profitability. Our Balance Sheet is stronger than it has ever been. Not only are we constantly seeking new lending opportunities, coupled with a pipeline of potential incremental acquisitions, but we are also considering prudential ways to maximise yield from our cash balances. Wherever possible, we are implementing IT solutions and systems development to free up our staff to take on more productive roles.
The Bank, being our largest operation, continues to benefit from an excellent loan book and the new lending opportunities available in both the Isle of Man and the UK - our only constraint being access to non-dilutive regulatory capital. For this, we have a number of potential solutions which the Board is currently evaluating.
EWA continues to increase its customer base and product offering, also seeking further acquisition opportunities to expand.
In doing all this, our underlying focus is always on an appreciation of risk and credit management and this focus is now embedded within the Group at all levels. We recognise that we have operated within a fairly beneficial financial environment over the last few years. I believe that this will continue within the short term, but we recognise that there is a possibility of a future economic downturn and we must be prepared for this. But we should always remember that change provides its own opportunities.
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 finally our customers, be they depositors or borrowers, for your continued loyalty.
Jim Mellon
Executive Chairman
15(th) March 2018
Consolidated Income Statement
Hot Features
Premium
2017 2016
For the year ended 31 December Notes GBP000 GBP000
-------------------------------------------- ------ -------- --------
Interest income 6 19,893 19,369
Interest expense 10 (3,256) (3,368)
Net interest income 16,637 16,001
Fee and commission income 3,115 1,660
Fee and commission expense (8,413) (9,106)
Net trading income 11,339 8,555
Other operating income 91 198
Terminal funding 3(u) 90 (154)
Operating income 11,520 8,599
Personnel expenses 7 (4,783) (3,935)
Other expenses 8 (3,152) (2,706)
Provision for impairment on loan
assets 9 (535) (447)
Loss on financial assets carried
at fair value 15 (21) (6)
Realised gains on available for
sale financial assets 16 36 71
Depreciation 19 (134) (246)
Amortisation and impairment of intangibles 20 (286) (80)
Change in share of net assets of
associate 21 38 -
VAT recovery 22 65 295
Profit before tax payable 10 2,748 1,545
Tax payable 11 (240) (244)
Profit for the year after taxation 2,508 1,301
-------- --------
Basic earnings per share (pence) 12 2.26 1.27
Diluted earnings per share (pence) 12 1.77 0.87
The Directors believe that all results
derive from continuing activities.
Consolidated Statement of Other Comprehensive Income
2017 2016
For the year ended 31 December Notes GBP000 GBP000
Profit for the year 2,508 1,301
Other comprehensive income: -
Items that will be reclassified
to profit or loss
Unrealised losses on available
for sale financial instruments
taken to equity 16 (93) (8)
Items that will never be reclassified
to profit or loss
Actuarial gains / (losses) on defined
benefit pension scheme taken to
equity 27 30 (316)
-------- ----------
Total comprehensive income for
the period attributable to owners 2,445 977
Basic earnings per share (pence) 12 2.21 0.96
Diluted earnings per share (pence) 12 1.73 0.68
Consolidated and Company Statement of Financial Position
Group Company
2017 2016 2017 2016
As at 31 December Notes GBP000 GBP000 GBP000 GBP000
------------------------------ -------- ----------- ----------- --------- ---------
Assets
Cash and cash equivalents 14 9,745 6,129 200 -
Financial assets at
a fair value through
profit or loss 15 24 70 - -
Available for sale financial
instruments 16 28,740 23,991 - -
Held to maturity financial
instruments 17 5,532 - - -
Loans and advances to
customers 18 122,720 116,053 - -
Commissions receivable 465 332 - -
Property, plant and
equipment 19 450 719 166 207
Intangible assets 20 1,719 1,316 - -
Investment in Group
undertakings 21 - - 13,772 12,072 Investment in associate 21 38 - - - Amounts due from Group undertakings 21 - - 16 296 Trade and other receivables 22 1,443 1,732 22 29 Subordinated loans 21 - - 5,778 5,178 Goodwill 21 2,344 2,344 - - Total assets 173,220 152,686 19,954 17,782 Liabilities Customer accounts 23 142,272 125,952 - - Creditors and accrued charges 24 3,164 2,975 139 82 Block creditors 25 751 1,390 - - Amounts owed to Group undertakings 21 - - 2,517 2,499 Loan notes 26 8,995 8,545 8,995 8,545 Pension liability 27 560 614 - - Deferred tax liability 11 42 40 - - Total liabilities 155,784 139,516 11,651 11,126 Equity Called up share capital 28 20,732 18,933 20,732 18,933 Profit and loss account (3,296) (5,763) (12,429) (12,277) Total equity 17,436 13,170 8,303 6,656 Total liabilities and equity 173,220 152,686 19,954 17,782
Consolidated Statement of Cash Flows
2017 2016
For the year ended 31 December Notes GBP000 GBP000
-------------------------------------------- -------- --------- ---------
RECONCILIATION OF PROFIT BEFORE TAXATION
TO OPERATING CASH FLOWS
Profit before tax on continuing activities 2,748 1,545
Loss on financial assets carried
at fair value 15 21 6
Change in share in net assets of
associate 21 (38) -
Depreciation 19 134 246
Amortisation and impairment of intangibles 20 286 80
Actuarial gain / (loss) on defined
benefit pension scheme taken to equity 27 30 (316)
(Decrease) / increase in pension
liability 27 (54) 280
10,
Share-based payment expense 28 22 46
Decrease / (increase) in trade and
other receivables 290 (355)
(Decrease) / increase in trade and
other payables (49) 47
(Increase) / decrease in commission
debtors (133) 29
Net cash inflow from trading activities 3,257 1,608
Increase in loans and advances to
customers (6,667) (14,697)
Increase in deposit accounts 16,320 19,624
Cash inflow from operating activities 12,910 6,535
CASH FLOW STATEMENT
Cash flows from operating activities
Cash inflow from operating activities 12,910 6,535
Taxation paid - (36)
Net cash inflow from operating activities 12,910 6,499
Cash flows from investing activities
Purchase of property, plant and equipment 19 (122) (93)
Purchase of intangible assets 20 (213) (50)
Sale of tangible fixed assets 19 20 -
Acquisition of Manx Financial Limited 21 - (500)
Acquisition of MBL business 20 (239) (948)
Purchase of available for sale financial
instruments 16 (4,842) (8,017)
Purchase of held to maturity financial
instruments 17 (5,532) -
Sale of financial assets at fair
value through profit or loss 15 24 -
Net cash outflow from investing activities (10,904) (9,608)
Cash flows from financing activities
Receipt of loan notes 26 450 1,280
Increase in share capital 28 1,799 -
(Decrease) / increase in borrowings
from block creditors 25 (639) 802
Net cash inflow from financing activities 1,610 2,082
Increase / (decrease) in cash and
cash equivalents 3,616 (1,027)
--------- ---------
Included in cash flows are: -
Interest received - cash amounts 19,109 18,628
Interest paid - cash amounts (3,152) (3,260)
Consolidated and Company Statement of Changes in Equity
Share Retained
For the year ended 31 December Capital Earnings 2017 2016
Group GBP000 GBP000 GBP000 GBP000
---------------------------------- --------- ---------- --------- ---------
Balance as at 1 January 18,933 (5,763) 13,170 12,147
Profit for the year - 2,508 2,508 1,301
Other comprehensive income - (63) (63) (324)
Transactions with owners:
-
Share-based payment expense
(see notes 10 and 28) - 22 22 46
Shares issued (see note
28) 1,799 - 1,799 -
Balance as at 31 December 20,732 (3,296) 17,436 13,170
Share Retained
For the year ended 31 December Capital Earnings 2017 2016
Company GBP000 GBP000 GBP000 GBP000
---------------------------------- --------- ---------- --------- ---------
Balance as at 1 January 18,933 (12,277) 6,656 6,729
Loss for the year - (174) (174) (119)
Transactions with owners:
-
Share-based payment expense
(see notes 10 and 28) - 22 22 46
Shares issued (see note 28) 1,799 - 1,799 -
Balance as at 31 December 20,732 (12,429) 8,303 6,656
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 2017 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 2016 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 2017: -
n Disclosure initiative (Amendments to IAS 7);
n Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12); and
n Annual Improvements to IFRSs 2014-2016 Cycle (Amendments to IFRS 12 Disclosures of Interests in Other Entities).
There are 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 4 years - indefinite Website development costs indefinite
Software 5 years
(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 hire purchase ("HP") and finance lease agreements, finance loans, personal loans, block discounting, secured commercial loans, stocking plans and wholesale funding agreements.
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.
Held to maturity financial instruments
Held to maturity investments are non-derivative investments that are initially measured at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest method.
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 reporting date, the Group revises its estimate of the number of options that are expected to vest and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.
The 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 the Bank became shareholders of the Company. The share option programme is now operated by the Company. 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.
(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)
------------------------------------------------------------- --------------
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
IFRS 17 Insurance Contracts 1 January
2021
------------------------------------------------------------- --------------
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 (IAS 39). 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 finalising its assessment of the potential impact on its consolidated financial statements resulting from the application of IFRS 9. Based on assessments performed to date, it is anticipated that impairment allowances could increase by 10 to 20%. Given the nature of the Group's operations, including its establishment of loss pools for much of its lending, this standard is not expected to have a pervasive impact on the Group's financial statements. However, calculation of impairment of financial instruments on an expected credit loss basis is expected to result in the recognition of losses earlier and, as noted above, an overall increase in the level of impairment allowances.
The impairment requirements apply to financial assets measured at amortised cost and fair value through other comprehensive income, loan receivables, certain loan commitments and financial guarantee contracts. At initial recognition, an allowance (or provision in the case of commitments and guarantees) is required for expected credit losses ("ECL") resulting from default events that are possible within the next 12 months ("12-month ECL"). In the event of a significant increase in the credit risk, allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ("lifetime ECL"). Financial assets where 12-month ECL is recognised are considered to be Stage 1; financial assets, which are considered to have experienced a significant increase in credit risk are in Stage 2; and financial assets, for which there is objective evidence of impairment, so are considered to be in default or otherwise credit impaired, are in Stage 3.
The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument, rather than by considering the increase in ECL.
The assessment of credit risk and estimated ECL are required to be unbiased and probability-weighted, and should incorporate all available information which is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money. As a result, the recognition and measurement of the impairment is intended to be more forward-looking than under IAS 39 and the resulting impairment charge will tend to be more volatile. It will also tend to result in an increase in the total level of impairment allowances, since all financial assets will be assessed for at least 12-month ECL and the population for financial assets to which lifetime ECL applies is likely to be larger than the population for which there is objective evidence of impairment in accordance with IAS 39.
(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, intangible assets and the recoverability of the value added tax ("VAT") receivable. 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 and intangible assets at different discount rates to allow for any uncertainty. The assessment of the recoverability of the VAT receivable balance is based on current discussions with the Isle of Man Government Customs and Excise Division and the status of the Volkswagen Financial Services (UK) Limited v HM Revenue & Customs (TC01401) case (see note 22).
(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) Interests in equity accounted investees
The Group's interests in equity accounted investees may comprise interests in associates and joint ventures.
Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.
Interests in associates and joint ventures are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group's share of the profit or loss and OCI of equity accounted investees, until the date on which significant influence or joint control ceases.
(u) 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 in the prior year to cease funding and wind up the book upon the final repayment date of August 2019.
2017 2016
GBP000 GBP000
Interest income 377 601
Fee and commission expense (92) (166)
Provision for impairment on loan assets (195) (589)
90 (154)
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, stocking plan loans and wholesale funding agreements. 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.
Management of credit risk (continued)
An analysis of the credit risk on loans and advances to customers is as follows: -
2017 2016
GBP000 GBP000
-------------------------------------- -------- --------
Carrying amount 122,720 116,053
Individually impaired(1)
Grade A - -
Grade B - -
Grade C 3,184 3,010
Gross value 3,184 3,010
Allowance for impairment (2,440) (2,099)
Carrying value 744 911
Collective allowance for impairment (73) (57)
Past due but not impaired
Less than 1 month 2,922 2,558
1 month but less than 2 months 1,941 1,314
2 months but less than 3 months 1,012 575
3 months and over 1,296 1,146
Carrying value 7,171 5,593
Neither past due nor impaired 114,878 109,606
(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. During 2017, 41.7% of loans and advances fell into this category (2016: 54.4%).
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 18 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, vehicle stocking plan loans and wholesale funding agreements. 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 2017 (2016: one introducer).
(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, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.
The 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, short dated UK Government Treasury Bills and Certificates of Deposit.
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 reporting date (undiscounted)
>8 >1 >3 >3
days month months >6 >1 years
31 December Sight- - - - months year -
2017 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 2,579 3,136 12,710 24,241 30,207 60,820 12,567 - 146,260
Other
liabilities 3,094 89 318 1,540 1,754 3,326 3,322 560 14,003
Total
liabilities 5,673 3,225 13,028 25,781 31,961 64,146 15,889 560 160,263
Residual contractual maturities of financial liabilities as at the reporting date (undiscounted) (continued)
>8 >3 >1 >3
days >1 months >6 year years
31 December - month - months - -
2016 Sight- 1 - 3 6 - 1 3 5 >5
8 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
Maturity of assets and liabilities at the reporting date
>8 >1 >6 >1 >3
days month >3 months year years
31 December Sight- - - months- - - -
2017 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 9,745 - - - - - - - 9,745
Available
for sale
financial
instruments - 1,998 16,983 2,992 - - 6,767 - 28,740
Held to
maturity
financial
instruments - - - 5,532 - - - - 5,532
Customer
accounts
receivable 3,713 3,654 7,956 10,823 25,886 54,950 15,717 21 122,720
Commission
debtors 79 194 192 - - - - - 465
Other assets 24 - - - - - - 5,994 6,018
Total assets 13,561 5,846 25,131 19,347 25,886 54,950 22,484 6,015 173,220
Liabilities
Customer
accounts 2,570 3,105 12,654 24,112 29,716 57,711 12,404 - 142,272
Other
liabilities 3,086 55 234 169 3,333 2,945 3,130 560 13,512
Total
liabilities 5,656 3,160 12,888 24,281 33,049 60,656 15,534 560 155,784
>8 >1 >6 >1 >3
days month >3 months year years
31 December Sight- - - months- - - -
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
(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 2017 and 2016, 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 GBP24,000 at 31 December 2017 (2016: GBP70,000) 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.
Sight- >1 >3
year years
31 December 1 >1month >3months >6months- - -
2017 month - - 1 3 5 >5 Non-Int.
3months 6months year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash & cash
equivalents 9,745 - - - - - - - 9,745
Available
for
sale
financial
instruments 1,998 16,983 2,992 - - 6,767 - - 28,740
Held to
maturity
financial
instruments - - 5,532 - - - - - 5,532
Customer
accounts
receivable 7,367 7,956 10,823 25,886 54,950 15,717 21 - 122,720
Commission
debtors 273 192 - - - - - - 465
Other assets 24 - - - - - - 5,994 6,018
Total assets 19,407 25,131 19,347 25,886 54,950 22,484 21 5,994 173,220
Liabilities
Customer
accounts 5,675 12,654 24,112 29,716 57,711 12,404 - - 142,272
Other
liabilities 3,141 234 169 3,333 2,945 3,130 560 - 13,512
Total
capital
and
reserves - - - - - - - 17,436 17,436
Total
liabilities
and equity 8,816 12,888 24,281 33,049 60,656 15,534 560 17,436 173,220
Interest
rate
sensitivity
gap 10,591 12,243 (4,934) (7,163) (5,706) 6,950 (539) (11,442) -
Cumulative 10,591 22,834 17,900 10,737 5,031 11,981 11,442 - -
>1 >3
>6months year years
31 December Sight- >3months - - -
2016 1 >1month - 1 3 5 >5 Non-Int.
month -3months 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 7,265 7,650 10,037 18,675 54,074 17,704 648 - 116,053
Commission
debtors 139 193 - - - - - - 332
Other assets 70 - - - - - - 6,111 6,181
Total assets 20,102 14,342 21,030 18,675 54,074 17,704 648 6,111 152,686
Liabilities
Customer
accounts 7,437 8,235 8,028 34,988 50,931 16,333 - - 125,952
Other
liabilities 3,067 104 159 2,276 3,754 3,590 614 - 13,564
Total
capital
and
reserves - - - - - - - 13,170 13,170
Total
liabilities
and equity 10,504 8,339 8,187 37,264 54,685 19,923 614 13,170 152,686
Interest
rate
sensitivity
gap 9,598 6,003 12,843 (18,589) (611) (2,219) 34 (7,059) -
Cumulative 9,598 15,601 28,444 9,855 9,244 7,025 7,059 - -
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 (2016: 2.0%). The following tables set out the estimated total impact of such a change based on the mismatch at the reporting date: -
>1 >3
>6months year years
31 December Sight- >3months - - -
2017 1 >1month - 1 3 5 >5 Non-Int.
month -3months 6months year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Interest
rate
sensitivity
gap 10,591 12,243 (4,934) (7,163) (5,706) 6,950 (539) (11,442) -
Weighting 0.000 0.003 0.007 0.014 0.027 0.054 0.115 0.000 -
GBP000 - 37 (35) (100) (154) 375 (62) - 61
>1 >3
>6months year years
31 December Sight- - - -
2016 1 >1month >3months 1 3 5 >5 Non-Int.
month -3months -6months year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Interest
rate
sensitivity
gap 9,598 6,003 12,843 (18,589) (611) (2,219) 34 (7,059) -
Weighting 0.000 0.003 0.007 0.014 0.027 0.054 0.115 0.000 -
GBP000 - 18 90 (260) (17) (120) 4 - (285)
(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 Common Equity Tier 1, Tier 1 and Total Capital to total risk-weighted assets. The requirement applies to the Bank (a wholly owned subsidiary of the Company) as a component of the Group 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 2017 1 2 3 GBP000
GBP000 GBP000 GBP000
Investment securities
Government bonds 28,740 - - 28,740
Equities 24 - - 24
-------- --------
28,764 - - 28,764
------------------------- -------- -------- -------- --------
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 2017 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash and cash equivalents - 9,745 - 9,745 9,745
Held to maturity financial
assets - 5,532 - 5,532 5,532
Loans and advances to
customers - 122,720 - 122,720 122,720
Commissions receivable - 465 - 465 465
Investment in associate - 38 - 38 38
Trade and other receivables - 1,443 - 1,443 1,443
- 139,943 - 139,943 139,943
----------- --------- --------- -------- ----------
Liabilities
Customer accounts - 142,272 - 142,272 142,272
Creditors and accrued
charges - 3,164 - 3,164 3,164
Block creditors - 751 - 751 751
Loan notes - 8,995 - 8,995 8,995
----------- --------- --------- -------- ----------
- 155,182 - 155,182 155,182
----------- ---------------------------- --------- --------- -------- ----------
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 comprising of the Isle of Man, UK and Channel Islands. The primary format, business segments, is based on the Group's management and internal reporting structure. The Directors consider that the Group operates in five (2016: four) product orientated segments in addition to its investing activities: - Asset and Personal Finance (including provision of HP contracts, finance leases, personal loans, commercial loans, block discounting, vehicle stocking plans and wholesale funding agreements); Manx Incahoot; Conister Card Services; Edgewater Associates; and Manx FX.
Asset Conister
and Manx Card Edgewater Investing
For the year Personal Incahoot Services Associates Manx Activities Total
ended 31 Finance GBP000 GBP000 GBP000 FX GBP000 GBP000
December GBP000 GBP000
2017
Net interest
income 16,637 - - - - - 16,637
Operating
income /(loss) 8,508 44 (104) 2,625 447 - 11,520
Profit / (loss)
before tax
payable 2,100 (293) (104) 742 249 (186) 2,508
Capital
expenditure 254 1 - 319 - - 574
Total assets 168,226 307 18 2,252 181 2,236 173,220
Asset Conister
and Manx Card Edgewater Investing
For the year Personal Incahoot Services Associates Manx Activities Total
ended 31 Finance GBP000 GBP000 GBP000 FX GBP000 GBP000
December GBP000 GBP000
2016
Net interest
income 16,001 - - - - - 16,001
Operating
income /(loss) 7,047 81 (106) 1,465 111 1 8,599
Profit / (loss)
before tax
payable 1,787 (205) (223) 371 (26)) (159) 1,545
Capital
expenditure 69 52 - 970 - - 1,091
Total assets 148,523 418 2 1,546 102 2,095 152,686
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 and held to maturity financial instruments.
7. Personnel expenses
2017 2016
GBP000 GBP000
Salaries and Directors' remuneration / fees 3,914 3,248
Pension costs 247 199
National insurance and payroll taxes 432 353
Training and recruitment costs 190 135
4,783 3,935
8. Other expenses
2017 2016
GBP000 GBP000
Professional and legal fees 848 858
Marketing costs 211 167
IT costs 528 425
Establishment costs 376 362
Communication costs 137 61
Travel costs 149 79
Bank charges 142 136
Insurance 133 112
Irrecoverable VAT 180 238
Other costs 448 268
3,152 2,706
9. Allowance for impairment
The charge in respect of specific allowances for impairment comprises: -
2017 2016
GBP000 GBP000
Specific impairment allowances made 1,295 915
Reversal of allowances previously made (776) (475)
Total charge for specific provision for
impairment 519 440
The charge in respect of collective allowances for impairment comprises: -
2017 2016
GBP000 GBP000
Collective impairment allowances made 28 12
Release of allowances previously made (12) (5)
Total charge for collective allowances for
impairment 16 7
Total charge for allowances for impairment 535 447
10. Profit before tax payable
The profit before tax payable for the year is stated after charging: -
2017 2016
GBP000 GBP000
Interest expense payable to depositors 2,690 2,795
Interest expense payable on loan notes 495 475
Interest expense payable to block funders 71 98
Share options expense 22 46
Directors' remuneration 214 304
Directors' fees 185 195
Directors' pensions 21 30
Directors' performance related pay 36 60
Auditor's remuneration: - as Auditor current
year 90 78
non-audit services 37 38
Pension cost defined benefit scheme 17 13
Operating lease rentals for property 220 231
11. Tax expense
2017 2016
GBP000 GBP000
--------------------------------------------------- ------- -------
Current tax expense
Current year 226 114
Changes to estimates for prior years 12 7
238 121
Deferred tax expense
Origination and reversal of temporary differences 2 24
Utilisation of previously recognised tax
losses - 78
Changes to estimates for prior years - 21
2 123
Total tax expense 240 244
--------------------------------------------------- ------- -------
2017 2016
GBP000 GBP000
--------------------------------------- ------- ------- ------- -------
Reconciliation of effective tax
rate
Profit before tax on continuing
operations 2,748 1,545
Tax using the Bank's domestic
tax rate 10.0% 275 10.0% 155
Effect of tax rates in foreign
jurisdictions 1.6% 44 1.5% 24
Non-deductible expenses 0.8% 23 1.8% 28
Tax exempt income (2.4)% (67) (0.4)% (6)
Timing differences in current
year (1.8)% (49) (0.6)% (9)
Origination and reversal of temporary
differences in deferred tax 0.1% 2 1.6% 24
Changes to estimates for prior
years 0.4% 12 1.8% 28
------- ------- ------- -------
Total tax expense 8.7% 240 15.8% 244
--------------------------------------- ------- ------- ------- -------
The main rate of corporation tax in the Isle of Man is 0.0% (2016: 0.0%). However the profits of the Group's Isle of Man banking activities are taxed at 10.0% (2016: 10.0%). The profits of the Group's subsidiaries that are subject to UK corporation tax are taxed at a rate of 19.0% (2016: 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 GBP42,000 liability (2016: GBP40,000 liability). This resulted in an expense of GBP2,000 (2016: GBP123,000) to the consolidated income statement.
12. Earnings per share
2017 2016
Profit for the year after taxation GBP2,508,000 GBP1,301,000
------------------------------------- ------------- -------------
Weighted average number of ordinary
shares in issue 110,880,711 102,070,252
Basic earnings per share (pence) 2.26 1.27
Diluted earnings per share (pence) 1.77 0.87
--------------------------------------- ------------- -------------
Total comprehensive income for the GBP2,445,000 GBP977,000
year
------------------------------------- ------------- -------------
Weighted average number of ordinary
shares in issue 110,880,711 102,070,252
Basic earnings per share (pence) 2.21 0.96
Diluted earnings per share (pence) 1.73 0.68
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.
2017 2016
Reconciliation of weighted average
number of ordinary shares in issue
between basic and diluted earnings
per share
As per basic earnings per share 110,880,711 102,070,252
Number of shares issued if all convertible
loan notes were exchanged for equity
(note 26) 41,666,667 61,500,000
Dilutive element of warrants if taken
up (note 26) - 12,733,968
Dilutive element of share options - -
if exercised (note 28)
As per dilutive earnings per share 152,547,378 176,304,220
Reconciliation of earnings between
basic and diluted earnings per share
As per basic earnings per share - GBP2,508,000 GBP1,301,000
profit for the year after taxation
Interest expense saved if all convertible GBP196,150 GBP230,150
loan notes were exchanged for equity
(note 26)
As per dilutive earnings per share GBP2,704,150 GBP1,531,150
---------------------------------------------- ------------- -------------
Reconciliation of earnings between
basic and diluted earnings per share
As per basic earnings per share - GBP2,445,000 GBP977,000
total comprehensive income
Interest expense saved if all convertible GBP196,150 GBP230,150
loan notes were exchanged for equity
(note 26)
------------- -------------
As per dilutive earnings per share GBP2,641,150 GBP1,207,150
---------------------------------------------- ------------- -------------
The diluted earnings per share calculations assume 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 GBP174,000 (2016: GBP119,000).
14. Cash and cash equivalents
Group Company
2017 2016 2017 2016
GBP000 GBP000 GBP000 GBP000
Cash at bank and in hand 9,745 6,129 200 -
--------- -------- -------- --------
9,745 6,129 200 -
Cash at bank includes an amount of GBPnil (2016: GBP63,000) 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 and GBP24,000 of sale proceeds have been received from this investment since it was made.
16. Available for sale financial instruments
Group Company
2017 2016 2017 2016
GBP000 GBP000 GBP000 GBP000
UK Government Treasury Bills 28,740 23,991 - -
28,740 23,991 - -
UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in equity. There were GBP93,000 of unrealised losses in the year ended 31 December 2017 (2016: GBP8,000).
17. Held to maturity financial instruments
Group Company
2017 2016 2017 2016
GBP000 GBP000 GBP000 GBP000
UK Certificates of Deposit 5,532 - - -
5,532 - - -
Held to maturity financial instruments represent certificates of deposit held with a UK banking institution with a Fitch credit rating of A (stable).
18. Loans and advances to customers
2017 2016
Gross Impairment Carrying Gross Impairment Carrying
Amount Allowance Value Amount Allowance Value
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
HP balances 59,909 (1,252) 58,657 61,952 (1,309) 60,643
Finance lease
balances 20,088 (1,046) 19,042 14,779 (673) 14,106
Unsecured personal
loans 10,521 (211) 10,310 6,638 (162) 6,476
Vehicle stocking
plans 1,613 - 1,613 1,366 - 1,366
Wholesale funding
arrangements 5,830 - 5,830 - - -
Block discounting 13,523 - 13,523 13,213 - 13,213
Secured commercial
loans 659 (4) 655 2,257 (12) 2,245
Secured personal
loans 13,090 - 13,090 18,004 - 18,004
125,233 (2,513) 122,720 118,209 (2,156) 116,053
Collateral is held in the form of underlying assets for HP, finance leases, vehicles stocking plans, block discounting, secured commercial and personal loans and wholesale funding arrangements. 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.
2017 2016
Specific allowance for impairment GBP000 GBP000
Balance at 1 January 2,099 2,011
Specific allowance for impairment made 1,295 915
Release of allowances previously made (776) (475)
Write-offs (178) (352)
-------- --------
Balance at 31 December 2,440 2,099
2017 2016
Collective allowance for impairment GBP000 GBP000
Balance at 1 January 57 50
Collective allowance for impairment
made 28 12
Release of allowances previously made (12) (5)
Balance at 31 December 73 57
Total allowances for impairment 2,513 2,156
Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2017 GBP347,328 (2016: GBP306,895) 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 (2016: three), all in connection with block discounting lending, exceeded 10.0% of the capital base of the Bank: -
Outstanding Outstanding
Balance Balance Facility
2017 2016 limit
Exposure GBP000 GBP000 GBP000
Block discounting facility 9,487 9,302 11,000
HP and finance lease receivables
Loans and advances to customers include the following HP and finance lease receivables: -
2017 2016
GBP000 GBP000
Less than one year 36,227 35,537
Between one and five years 60,576 60,542
Gross investment in HP and finance
lease receivables 96,803 96,079
The investment in HP and finance lease receivables net of unearned income comprises: -
2017 2016
GBP000 GBP000
Less than one year 29,317 26,562
Between one and five years 50,680 50,169
Net investment in HP and finance lease
receivables 79,997 76,731
19. Property, plant and equipment
Leasehold IT Furniture & Motor
Improvements Equipment Equipment Vehicles Total
Group GBP000 GBP000 GBP000 GBP000 GBP000
Cost
As at 1 January 2017 417 1,555 629 57 2,658
Reclassification(1) - (1,330) - - (1,330)
Additions 26 69 17 10 122
Disposals - - - (57) (57)
As at 31 December 2017 443 294 646 10 1,393
Accumulated depreciation
As at 1 January 2017 129 1,189 588 33 1,939
Reclassification(1) - (1,093) - - (1,093)
Charge for year 60 56 11 7 134
Disposals - - - (37) (37)
As at 31 December 2017 189 152 599 3 943
Carrying value at 31 December 2017 254 142 47 7 450
Carrying value at 31 December 2016 288 366 41 24 719
(1) During the year IT software has been reclassified from property, plant and equipment to intangible assets (see note 20) as it is being reported similarly for regulatory purposes in the Bank.
Leasehold IT Furniture &
Improvements Equipment Equipment Total
Company GBP000 GBP000 GBP000 GBP000
Cost
As at 1 January 2017 234 13 15 262
Additions - - - -
Disposals - - - -
As at 31 December 2017 234 13 15 262
Accumulated depreciation
As at 1 January 2017 53 1 1 55
Charge for year 39 1 1 41
Disposals - - - -
As at 31 December 2017 92 2 2 96
Carrying value at 31 December 2017 142 11 13 166
Carrying value at 31 December 2016 181 12 14 207
20. Intangible assets
IT Software and Website
Customer Contracts & Intellectual Development
Group Lists Property Rights GBP000 Total
GBP000 GBP000 GBP000
Cost
As at 1 January 2017 1,024 345 71 1,440
Reclassification(1) - - 1,330 1,330
Additions 21 43 149 213
Acquisition of MBL 239 - - 239
Disposals - - - -
As at 31 December 2017 1,284 388 1,550 3,222
Accumulated amortisation
As at 1 January 2017 76 48 - 124
Reclassification(1) - - 1,093 1,093
Charge for year /
impairment (note 21) 54 114 118 286
Disposals - - - -
As at 31 December 2017 130 162 1,211 1,503
Carrying value at 31
December 2017 1,154 226 339 1,719
Carrying value at 31
December 2016 948 297 71 1,316
(1) During the year IT software has been reclassified from property, plant and equipment (see note 19) to intangible assets as it is being reported similarly for regulatory purposes in the Bank.
Acquisition of MBL
On 23 December 2016, EWA acquired the majority of the Isle of Man IFA business held by Knox Financial Services Limited ("KFSL") carrying a trading name of MBL. The initial acquisition included 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 the Bank (see note 31 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.
At acquisition, by reference to the renewal income received by KFSL in the 12 months prior to disposal, an estimate of GBP236,906 was assumed for income over the preceding 12 months, which would have generated a consideration sum of GBP947,624. Therefore, EWA accounted for this transaction by recognising an intangible asset of GBP947,624 and a receivable of GBP52,376 (see note 22) of the monies held in escrow. Subsequent to acquisition this estimate has been updated to an estimated purchase price of GBP989,400 as at 31 December 2017. Consequently, the receivable from escrow has reduced to GBP10,600. 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.
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 included approximately 150 clients. This option was exercised on 18 January 2017. The price of the acquisition is calculated by four times the renewal income received over the 12 month period subsequent to completion. The purchase price is estimated to be GBP198,300, of which GBP75,000 was paid on exercise of the option.
The period over which these contracts are to be amortised is estimated to be 18.75 years given the average duration of the existing EWA portfolio for renewal income.
21. Investment in Group undertakings
The Company has the following investments in subsidiaries incorporated in the Isle of Man: -
Nature of 31 December Date of Total Total
Business 2017 Incorporation 2017 2016
Carrying value of investments % Holding GBP000 GBP000
Asset and Personal
Conister Bank Limited Finance 100 05/12/1935 11,767 10,067
Edgewater Associates Limited Wealth Management 100 24/12/1996 2,005 2,005
Holding Company for
Prepaid Card
TransSend Holdings Limited Division 100 05/11/2007 - -
Bradburn Limited Holding Company 100 15/05/2009 - -
13,772 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 2017 2016
Creation Maturity Interest rate GBP000 GBP000
------- -------
Conister Bank Limited
11 February 2014 11 February 2024 7.0% 500 500
27 May 2014 27 May 2024 7.0% 500 500
9 July 2014 9 July 2024 7.0% 500 500
17 September 2014 17 September 2026 7.0% 400 400
22 July 2013 22 July 2033 7.0% 1,000 1,000
25 October 2013 22 October 2033 7.0% 1,000 1,000
23 September 2016 23 September 2036 7.0% 1,100 1,100
14 June 2017 14 June 2037 7.0% 450 -
Edgewater Associates Limited
14 May 2012 14 May 2017 7.0% - 128
28 February 2013 28 February 2018 7.0% 50 50
21 February 2017 21 February 2027 7.0% 150 -
14 May 2017 14 May 2027 7.0% 128 -
5,778 5,178
Goodwill
Group Group
2017 2016
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 2016. 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.
Acquisition of subsidiary
In December 2015, Bradburn Limited acquired 49.9% of the remaining shares of Manx Financial Limited ("MFL") that it did not already hold, for GBP500,000. At that point MFL became a subsidiary of the Group.
Investment in associate
On 13 December 2017, 40.0% of the share capital of The Business Lending Exchange Limited ("BLX") was acquired for nil consideration. As at the date of acquisition the net assets of BLX were GBP94,000. The Group's resulting share of net assets is equal to GBP38,000 at that date.
Acquisition of Incahoot Limited
On 6 March 2015, the business of Incahoot Limited was acquired by Manx Incahoot Limited, a subsidiary of the Group.
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 was generated from this pipeline in the 2 year period.
On 9 December 2016, 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. 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 report averaged two valuation approaches, the replacement cost approach and the income approach using a discount factor of 42.5%, to arrive at a final valuation of GBP262,474. This created an impairment of GBP48,026. On 2 February 2018, the valuation was again updated which lead to a reduced valuation of GBP154,427. This created an additional impairment of GBP108,047.
There were no adverse trends arising from comparable market disposals of domain names to warrant any impairment to this intangible.
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.
22. Trade and other receivables
Group Company
2017 2016 2017 2016
GBP000 GBP000 GBP000 GBP000
Prepayments and other debtors 562 874 22 29
VAT recoverable 817 752 - -
Depositors Compensation Scheme Receivable 54 54 - -
Monies held in escrow from MBL acquisition (see note 20) 10 52 - -
1,443 1,732 22 29
Included in trade and other receivables is an amount of GBP817,000 (2016: GBP752,000) relating to a reclaim of VAT. The Bank, 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, 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 Q1 2016 for the value of GBP230,000 and an amount of GBP130,000 has been accrued to cover periods Q2 2016 to Q4 2017.
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 GBP930,000, 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 claim referred to above will be secured.
23. Customer accounts
2017 2016
GBP000 GBP000
Retail customers: term deposits 137,399 124,398
Corporate customers: term deposits 4,873 1,554
142,272 125,952
24. Creditors and accrued charges
Group Company
2017 2016 2017 2016
GBP000 GBP000 GBP000 GBP000
Commission creditors 2,042 2,504 - -
Other creditors and accruals 774 363 139 82
Taxation creditors 348 108 - -
3,164 2,975 139 82
25. Block creditors
2017 2016
GBP000 GBP000
Drawdown 2 - repayable 25/07/2018,
interest payable at 5.8%, secured on
assets of MFL 95 248
Drawdown 3 - repayable 08/03/2019,
interest payable at 6.5%, secured on
assets of MFL 656 1,142
751 1,390
26. Loan notes
Group Company
2017 2016 2017 2016
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 250 350 250 350
3,660 3,760 3,660 3,760
Unrelated parties UP 5,335 4,785 5,335 4,785
8,995 8,545 8,995 8,545
JM - Two loans, one of GBP500,000 maturing on 31 July 2022 with interest payable of 5.0% 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 7.5 pence and 9 pence respectively.
BL - One loan consisting of GBP1,200,000 maturing on 31 July 2022 with interest payable of 5.0% 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 7.5 pence.
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. John Banks, a Non-executive Director, is also a director of SR and Arron Banks is a major shareholder of SR.
LS - One loan of GBP250,000 maturing on 3 January 2018 with interest payable of 5.0% per annum. Denham Eke is a director of LS. The loan was repaid after maturing.
UP - Twenty four loans consisting of an average GBP222,292 with an average interest payable of 5.4% per annum. The earliest maturity date is 16 May 2018 and the latest maturity is 16 November 2022.
With respect to the convertible loans, the interest rate applied was deemed by the Directors to be equivalent to the market rate at the time with no conversion option.
27. Pension liability
The Conister Trust Pension and Life Assurance Scheme ("Scheme") operated by the 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 statement of financial position 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 2017 (2016: 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 2017.
The amounts recognised in the Consolidated Statement of Financial Position are as follows: -
2017 2016
Total underfunding in funded plans GBP000 GBP000
recognised as a liability
Fair value of plan assets 1,469 1,420
Present value of funded obligations (2,029) (2,034)
(560) (614)
2017 2016
Movement in the liability for defined GBP000 GBP000
benefit obligations
Opening defined benefit obligations at 1 January 2,034 1,666
Benefits paid by the plan (68) (68)
Interest on obligations 54 64
Actuarial loss 9 372
Liability for defined benefit obligations
at 31 December 2,029 2,034
2017 2016
Movement in plan assets GBP000 GBP000
Opening fair value of plan assets at 1 January 1,420 1,332
Expected return on assets 37 51
Contribution by employer 41 49
Actuarial gain 39 56
Benefits paid (68) (68)
Closing fair value of plan assets at
31 December 1,469 1,420
2017 2016
Expense recognised in income statement GBP000 GBP000
Interest on obligation 54 64
Expected return on plan assets (37) (51)
Total included in personnel costs 17 13
Actual return on plan assets 76 107
2017 2016
Actuarial gain / (loss) recognised GBP000 GBP000
in other comprehensive income
Actuarial gain on plan assets 39 56
Actuarial loss on defined benefit obligations (9) (372)
30 (316)
2017 2016
Plan assets consist of the following % %
Equity securities 48 47
Corporate bonds 18 16
Government bonds 25 25
Cash 5 7
Other 4 5
100 100
The actuarial assumptions used to calculate Scheme liabilities under IAS19 are as follows: 2017 2016 2015
-
% % %
Rate of increase in pension in payment: -
- - -
* Service up to 5 April 1997
* Service from 6 April 1997 to 13 September 2005 3.0 3.1 2.7
* Service from 14 September 2005 2.1 2.1 2.0
Rate of increase in deferred pensions 5.0 5.0 5.0
Discount rate applied to scheme liabilities 2.6 2.7 3.9
Inflation 3.1 3.2 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.
28. Called up share capital
Ordinary shares of no par value available for issue Number At 31 December 2017 200,200,000 At 31 December 2016 150,000,000 Issued and fully paid: - Ordinary shares of no par value Number GBP000 At 31 December 2017 131,096,235 20,732 At 31 December 2016 102,070,252 18,933
There are a number of convertible loans at 31 December 2017 of GBP3,410,000 (2016: GBP3,410,000). All attached warrants were exercised during the year (31 December 2016: 28,333,333 warrants outstanding) (see note 26 for further details). The total number of warrants in issue at 31 December 2017 is nil (2016: 36,666,666), 29,025,983 were exercised during the year, and the remainder lapsed.
On 23 June 2014, 1,750,000 share options were issued to Executive Directors and senior management within the Group at an exercise price of 14 pence. The options vest over three years with a charge based on the fair value of 8 pence per option at the date of grant. The period of grant is for 10 years less 1 day ending 22 June 2024. Of the 1,750,000 share options issued, 1,050,000 (2016:1,750,000) remain outstanding; the balance lapsed during the year.
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); and
(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%
The charge for the year for share options granted was GBP22,000 (2016: GBP46,000).
29. Analysis of changes in financing during the year
2017 2016
Analysis of changes in financing during the year GBP000 GBP000
Balance at 1 January 27,478 26,198
Issue of loan notes 450 1,280
Issue of shares 1,799 -
29,727 27,478
The 2017 closing balance is represented by GBP20,732,000 share capital (2016: GBP18,933,000) and GBP8,995,000 of loan notes (2016: GBP8,545,000).
30. 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.
31. 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 GBP40,000 (2016: GBP76,000), 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 GBP8,000 (2016: GBP3,374,000). 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. The remaining fiduciary deposits were closed out during January 2018.
All funds held and accounts maintained in connection with the fiduciary services that the Bank offers in 2017 are to companies connected with Jim Mellon and Denham Eke.
Staff and commercial loans
Details of staff loans are given in note 18.
Normal commercial loans have been made to various companies connected to Jim Mellon and Denham Eke. As at 31 December 2017, GBP299,000 of capital and interest was outstanding (2016: GBP401,000).
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 20). 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. The balance as at 31 December 2017 was GBP604,000 (2016: GBP700,000).
Loan advance to BLX
On 11 October 2017, a GBP4,000,000 loan facility was made available to BLX by the Bank in order to provide the finance required to expand its operations. The facility is for 12 months, followed by a 3 year amortisation period. Interest is charged at commercial rates. At 31 December 2017, GBP550,000 had been advanced to BLX.
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 co-chairman.
Subordinated loans
The Company has advanced GBP450,000 of subordinated loans in 2017 to the Bank (2016: GBP1,100,000) and GBP278,000 to EWA (2016 GBPnil) (see note 21).
Loan notes
See note 26 for a list of related party loan notes as at 31 December 2017 and 2016.
Key management personnel's remuneration including Executive Directors
2017 2016
GBP000 GBP000
Short-term employee benefits 300 414
32. Operating leases
Non-cancellable lease rentals are payable in respect of property and motor vehicles as follows: -
2017 2016
Leasehold Leasehold
Property Other Property Other
GBP000 GBP000 GBP000 GBP000
Less than one year 178 - 187 -
Between one and five years 738 - 801 -
Over five years 276 - 390 -
1,192 - 1,378 -
33. Subsequent events
A loan note for GBP250,000 from Life Science Developments Limited matured on 3 January 2018 and was repaid (note 26).
The remaining fiduciary deposits held were closed out during January 2018 and the Bank no longer has any customers utilising this product offering (note 31).
This information is provided by RNS
The company news service from the London Stock Exchange
END
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