Manx Financial Group
Annual Report 2012

Plain-text annual report

M A N X F I N A N C I A L GROUP PLC ANNUAL REPORT 2012 Welcome to Manx Financial Group PLC Integrity through independence and service An independent banking group founded in 1935, domiciled in the Isle of Man Edgewater Associates Limited (EWA) is one of the pre-eminent independent financial advisers in the Isle of Man. It provides a bespoke and personal service to Isle of Man residents and to the Group's business and personal customers and manages assets in excess of £156 million. EWA specialises in the areas of wealth management, mortgage and general insurance, and retirement planning. Manx Financial Group PLC (MFG) is an AIM listed company which holds the entire issued share capital of a suite of financial service companies based in the UK and the Isle of Man. These companies offer financial services to both retail and commercial customers. MFG's strategy is to grow organically and through strategic acquisition to further augment the range of services it offers. Principal wholly owned subsidiaries: • Conister Bank Limited • Edgewater Associates Limited • Conister Card Services Limited the Conister Bank Limited (The Bank) is a licensed independent bank, regulated Supervision Financial by Commission in the Isle of Man and a full member of the MasterCard® network and Isle of Man's the Association of Licensed Banks. The Bank provides a variety of financial products and services, including saving accounts, fiduciary deposits, asset financing, personal loans, loans to small and medium sized entities (SMEs), block discounting and other specialist secured credit facilities to both the Isle of Man and the UK consumer and business sectors. Contents Financial Highlights 01 Chairman’s Statement 02 Directors and Advisers 04 Report of the Directors 06 Directors’ Remuneration Report 09 Statement of Directors’ Responsibilities 11 Report of the Independent Auditors 12 Consolidated Comprehensive Statement of Income 13 Consolidated and Company Statement of Financial Position 14 Consolidated Statement of Cash Flows 15 Consolidated and Company Statement of Changes in Equity 16 Notes to the Consolidated Financial Statements 17 Conister Card Services Limited (CCS) is the Group's prepaid card division providing business clients with payment solutions that are cost- effective and create new revenue opportunities. CCS has in excess of 180,000 MasterCard® prepaid cards in issue and loading circa £795 million a year. ® MasterCard is a registered trademark of MasterCard International Incorporated Manx Financial Group PLC Financial Highlights 01 Financial Highlights Manx Financial Group PLC: Net interest income £5.5 million (2011: £4.6 million) Net trading income £5.1 million (2011: £5.0 million) Operating income £5.3 million (2011: £5.5 million) Profit before specific items £0.4 million (2011: loss of £0.6 million) Loss for the year £0.3 million (2011: loss of £0.8 million) Headcount at 31 December 2012 was 54 people (2011: 68 people) Conister Bank Limited: Profit before specific items for the year £0.5 million (2011: loss of £0.9 million) Net loans and advances £58.5 million (2011: £49.6 million) Deferred income £8.7 million (2011: £7.6 million) New advances £38.2 million (2011: £32.0 million) Deposits £63.7 million (2011: £55.9 million) Edgewater Associates Limited: Profit before specific items for the year £0.024 million (2011: £0.010 million) Assets under management £140 million (2011: £130 million) Conister Card Services Limited: Profit before specific items for the year £0.02 million (2011: £0.20 million) Operating costs reduced to £0.6 million (2011: 0.7 million) Manx Financial Group PLC Chairman’s Statement 02 Jim Mellon Chairman Dear Shareholders, Each year since I became Executive Chairman, I have ended my reports to you with a commitment that the Group will return to profitability. Although the 2012 results do not fully reflect this - as inevitably this statement is largely retrospective - I believe that we have at last turned the corner. The start to the current year continues the promising performance for the second half of 2012: our cost reductions taken in 2012 are now filtering through to the Income Statement and our new business generation is improving each month. I look forward to being able to provide a positive update on this progress at the half year. Manx Financial Group PLC As I stated in the 2012 Interim Report, I expected an improvement in the second half of the year. I am pleased to record that my confidence was not misplaced. By the end of June 2012, our Profit before specific items was £92,000. At the end of the full year this figure had increased to £390,000 (2011: loss of £641,000) – a turnaround of just over £1 million in twelve months. Adding in the specific items, the Total comprehensive loss at the Interim stood at a loss of £567,000 with the full year figure being a loss of £435,000 (2011: loss of £799,000) – a positive improvement of £132,000. figures might not in themselves seem Whilst these noteworthy, they disguise the benefits following the extensive restructuring undertaken in 2012 to deal with the considerable legacy overhead issues. By the end of 2012, our Personnel expenses had reduced by nearly 15% to £2.8 million (2011: £3.3 million) and our Other expenses had reduced by nearly 8% to £2.1 million (2011: £2.3 million). Overall, the costs of continuing operations had fallen by 16% to £5.3 million (2011: £6.3 million). Non-recurrent Acquisition and redundancy costs, together with the provision for the Edgewater Associates variable final acquisition payment, alone amounted to £864,000 (2011: £537,000). Despite these one-off costs, the Group returned a Total comprehensive profit of £132,000 in the second half of the year (2011: a loss of £446,000). Turning to the Statement of Financial Position, our Total assets have grown 16% to £78.0 million (2011: £67.2 million). Our Total liabilities have grown 19% to £70.8 million (2011: £59.5 million), and Total liabilities and equity by 16% to £78.0 million (2011: £67.2 million). The most significant figures within these totals are the growth in Loan and advances to £58.5 million (2011: £49.6 million) and the growth in Customer accounts to £63.7 million (2011: £55.9 million). Strategically, we will continue our short-term focus on organic growth for the subsidiaries engaged in banking, prepaid cards and financial advisory services to consolidate our profitability and only consider acquisitions if the business rationale warrants. This focus will eliminate over £500,000 worth of aborted transaction fees incurred during 2012. Conister Bank Limited Our banking subsidiary continues to experience excellent growth with interest income up 17% to £7.8 million (2011: £6.7 million) driven by a 19% increase in new lending to £38.2 million (2011: £32.0 million). In turn, the Net loan book has grown by just over 18% to £58.5 million (2011: £49.6 million). This net loan book growth has in turn increased our deferred income by 14% to £8.7 million (2011: £7.6 million). The consistent application of our underwriting policies has allowed provision levels to reduce by £0.2 million to £4.3 million (2011: £4.5 million) whilst retaining prudent provision balances which represented 6% of our gross loan book (2011: 7%). Good progress has also been achieved in matching deposits to loans and this key ratio improved by 3% to 92%. Also, the cost income ratio before specific items improved by 15% as the benefits of the rationalisation plan started to flow through the Income statement. The deposit base remains loyal and our brand awareness within the local deposit market is positive. Growth should not be restrained as our ability to attract deposits at competitive rates shows no sign of abating. In line with best banking practice, I am pleased to report that our Tier 1 capital stood at nearly £10.0 million at the year-end which provided a Regulatory Risk Asset Ratio of nearly 17%. This figure is greatly in excess of the UK major banks and provides a solid foundation for our banking business. We believe that the provision of additional regulatory capital to fuel our expansion plans will not be a concern, and indeed our strategic plan for organic growth allows for the Bank to become self-sufficient in capital generation by the third quarter of 2013. As I stated last year the Bank has for some time considered its VAT recovery rate as being neither fair nor reasonable and has raised this concern with the Isle of Man Government’s Manx Financial Group PLC 03 Technology advances within the mobile and tablet arena are providing new, more convenient connectivity opportunities for both businesses and customers to send and receive payments. Choosing the correct partners within this market will be critical to the economic success of our entry into this opportunity. We are currently engaged in discussions with a mobile phone operator and a supermarket chain about operating a test to prove the technology and to review the market opportunity. Outlook In conclusion, I am pleased to say that all our businesses are on stream to achieve sustainable profitability. The Group’s growth will be mainly driven by Conister Bank as I expect little change in the current economic environment for some considerable time. The benefit to us will be that during this period the ‘High Street’ banks will continue on their present course of balance sheet reconstruction which, inevitably, limits lending. This will, in turn, provide a time of opportunity for smaller banks such as our own to improve the quality of their counterparties and become the longer term funder of choice. We will continue to improve our system technology to ensure that our customers benefit from the competitive efficiency that an internet interface provides. Thus this year’s objective is to build upon a solid platform of sustainable profitability. With this achieved, we will be well positioned to move the Group to the next stage of its development which I anticipate will involve the consideration of strategic acquisitions to both broaden and strengthen our customer offering. Finally, it remains for me to thank the executive and all our staff for their hard work and loyalty during this transformational year and to also thank you, our shareholders, for your continued support. Jim Mellon Executive Chairman 28 May 2013 Customs & Excise Division. Some progress has been made with a £0.1 million benefit agreed so far. The balance will follow the decision of the Volkswagen Financial Services Limited case against HM Revenue & Customs, with the next appeal scheduled to be heard in Autumn 2013. The continued absence of the traditional ‘High Street’ banks from both the UK consumer and Small & Medium Enterprises markets has created a void which our banking subsidiary is in an advantageous position to help fill. With Conister Bank’s easy access to the Isle of Man retail deposit market, it will not be liquidity constrained and its rate structure should deliver steady returns for the foreseeable future. This, in conjunction with our growing UK distribution network, should ensure our route to market is stronger and more comprehensive than has been the case historically. In short, I believe that we have created a strong platform for growth within profitable market sectors. Edgewater Associates Limited Our Isle of Man regulated IFA business remains profitable and is well placed to benefit from the introduction on 1 January 2014 of the Island’s equivalent to the UK’s Retail Distribution Review whereby only those appropriately qualified can provide financial advice. Although the current economic climate is proving challenging to write new business, Edgewater Associates had the foresight to move to a renewal income model in 2010 which now represents over half of its turnover. The strategy for growth is two pronged. Firstly we will continue to grow renewal income to cover the cost of the business’s main asset, its people. This is expected to be achieved in the first half of 2013. Secondly, we will accelerate our new business income by increasing the ratio of sales to support staff within the current establishment. The latter will generate income greater than overheads and will create a more consistent return on our investment. Whilst this will have a positive impact in 2013, the full benefit of the re-structuring will not flow through the financial statements until 2014. We also continue to seek suitable acquisitions to increase the business’ scale. Conister Card Services Limited We continue to act as a BIN sponsor whilst reviewing other ways to monetise our MasterCard® Principal Membership. Manx Financial Group PLC Directors and Advisers 04 Jim Mellon (56)‡ Executive Chairman Denham Eke (61)‡ Chief Executive Officer Juan Kelly (42)‡ Executive Director Jim Mellon holds directorships in a number of publicly quoted companies, many of which are in the financial services sector. He is a life tenant of the trust which owns Burnbrae Group Limited which, in turn, indirectly holds approximately 20% of Manx Financial Group PLC. He is the founder, principal shareholder and co-chairman of the Regent Pacific Group, quoted on the Hong Kong Stock Exchange, with total assets of approximately US$ 250 million. He is also founder, principal shareholder and a non- executive director of Charlemagne Capital, based on the Isle of Man and quoted on the London AIM market, which has approximately US$ 3.48 billion of assets under management. Appointment Denham Eke is the Managing Director of Burnbrae Group Limited, a private international asset management company. Mr Eke began his career in stockbroking with Sheppards & Chase before moving into corporate planning for Hogg Robinson plc, a major multinational insurance broker. He is a director of many years standing, of both public and private companies involved in the financial services, property, mining, and manufacturing sectors. He is chairman of Webis Holdings PLC, chief executive officer of Speymill PLC, chief finance officer of West African Minerals Corporation Limited, chief finance officer of Copper Development Corporation, chief finance officer of Port Erin Biopharma Investments Limited, and a non- executive director of Billing Services Group Limited - all quoted on the London AIM market. Juan Kelly was appointed as an Executive Director of Manx Financial Group PLC and Managing Director of Conister Bank Limited on 19 September 2011. His career started with Maersk before moving into structured finance with ABN AMRO in Chile and subsequently The Netherlands. Following this he joined SG Hambros in London, acting as adviser to a range of transactions. In 2004, he joined the London based structured finance team of Allied Irish Bank with a focus on large ticket asset finance, before being posted to Sydney as head of corporate & asset finance in the Asia Pacific region. Juan has a wide range of experience within commercial and investment banking including building quality loan books and reviewing merger and acquisition opportunities. Appointed to the Board on 2 November 2007 and appointed as Executive Chairman on 12 February 2009. Appointment Appointed to the Board on 2 November 2007 and appointed as Chief Executive on 12 February 2009. Appointment Appointed to the Board on 19 September 2011. Douglas Grant (48)‡ Executive Director Don McCrickard (76)‡ Non-Executive Director Douglas Grant was appointed as the Group Finance Director having worked as a financial consultant to the Group since November 2008. He has over 25 years’ experience working in finance, initially with Scottish Power before moving to the industrial sector to work with ICI and then Allenwest. Prior to joining Manx Financial Group PLC he was the group financial controller and later finance director of various UK and Isle of Man private sector companies and has extensive capital raising experience. Appointment Appointed to the Board on 14 January 2010. From 1975 to 1983 Don McCrickard was employed by American Express where he headed their businesses in the UK, Europe/Middle East/Africa and Asia/Pacific/ Australia and was a director of American Express International. He was employed by the TSB Group (now Lloyds Banking Group) from 1983 to 1992 and became group chief executive as well as chairman of Hill Samuel, the group's merchant banking subsidiary. He was chairman of the group's executive committee, a member of the executive committee of the British Bankers Association and a member of the Bank of England's Deposit Protection Board. He has since held chairmanships and directorships of a number of listed and private companies and specialises in Far Eastern affairs. Appointment Appointed to the Board on 2 November 2007. * Member of the Audit, Risk and Compliance Committee † Member of the Renumeration Committee ‡ Member of Nominations Committee Manx Financial Group PLC 05 Alan Clarke (62)‡†* Non-Executive Director David Gibson (66)‡†* Non-Executive Director Alan Clarke is a chartered accountant and former senior partner of Ernst & Young during which time he worked closely with HSBC offshore operations in both the Channel Islands and the Isle of Man. Currently he specialises in corporate finance and strategic consultancy, advising a variety of both listed and private companies. He holds several non-executive directorships and is chairman of the investment committee for the University of Manchester. He is also a registered auditor, being the senior partner of Downham Mayer Clarke. Appointment Appointed to the Board on 2 Novernber 2007. Chairman of the Audit, Risk and Compliance Committee and Chairman of the Remuneration Committee. David Gibson qualified as a certified accountant whilst holding posts with Shell-Mex and BP and CIBA-Geigy throughout the UK and abroad before transferring into treasury management in senior positions with Turner and Newall and Westland Helicopters where he qualified as a corporate treasurer. He joined the Trustee Savings Bank of the Channel Islands as finance director prior to becoming general manager finance at TSB Retail Bank where he gained his forrnal qualifications as a banker. Prior to retiring from executive life for family reasons, he was group finance director of Portman Building Society for 9 years. He is currently deputy chairman of commercial property investment companies Chellbrook Properties plc and Mountstephen Investments Limited and a non-executive director for Rivington Street Holdings PLC, an Isle of Man financial media conglomerate. Appointment Appointed to the Board on 12 February 2009. Advisers Company Secretary Lesley Crossley Registered Office Clarendon House, Victoria Street, Douglas, Isle of Man, IM1 2LN. Registered Agent CW Corporate Services Limited Bank Chambers, 15-19 Athol Street, Douglas, Isle of Man, IM1 1LB. Independent Auditors KPMG Audit LLC Heritage Court, 41 Athol Street, Douglas, Isle of Man, IM99 1HN. Legal Advisers Kerman & Co LLP 200 Strand, London, WC2R 1DJ. Long & Humphrey The Old Courthouse, Athol Street, Douglas, Isle of Man, IM1 1LD. Principal Bankers Barclays Private Clients International Limited Barclays House, Victoria Street, Douglas, Isle of Man, IM99 1AJ. Lloyds TSB Offshore PO Box 103, Peveril Buildings, Peveril Square, Douglas, Isle of Man, IM99 2LB. Consulting Actuaries BWCI Consulting Limited Albert House, South Esplanade, St Peter Port, Guernsey, GY1 3BY. Presentation of Annual Report and Accounts Presented here is the Annual Report and Accounts of Manx Financial Group PLC. Company Information The Annual and Interim reports, along with other supplementary information of interest to Shareholders, are included on our website. The address of the website is www.mfg.im which includes investor relations information and contact details. Pension Fund Investment Manager Thomas Miller Investment (Isle of Man) Limited Level 2, Samual Harris House, 5-11 St George’s Street, Douglas, Isle of Man, IM1 1AJ. Nominated Advisor and Broker Beaumont Cornish Limited 2nd Floor, Bowman House, 29 Wilson Street, London, EC2M 2SJ. Manx Financial Group PLC Report of the Directors 06 The Directors present their annual report and the audited financial statements for the year ended 31 December 2012. The Directors are not aware of any other individual holding of greater than 3% as at 29 April 2013. Principal activities The principal activities of Manx Financial Group PLC (the Company) and its subsidiaries (together referred to as the Group) are the provision of asset and personal finance, investing activities and wealth management. Directors and Directors’ share interests Details of current Directors are set out on pages 4 and 5. Details of changes in Directors in the year are shown below: Arron Banks resigned on 19 July 2012, Oliver Hare on 11 September 2012 and Nick Sheard on 22 March 2013. Conister Bank Limited (the Bank), a wholly owned subsidiary of the Company, holds a banking licence issued under the Isle of Man Banking Act 1998 (as amended). Deposits made with the Bank are covered by the Depositors’ Compensation Scheme contained in the Banking Business (Compensation of Depositors) Regulations 1991. Edgewater Associates Limited is authorised by the Isle of Man Financial Supervision Commission under section 7 of the Financial Services Act 2008 to conduct investment business as a class 2, sub-classes (3) and (7) licence holder. Results and dividends The proposed transfers to and from reserves are as set out in the Statement of Changes in Equity on page 16. The Directors do not recommend the payment of a dividend (2011: nil). Share capital Particulars of the authorised and issued share capital of the Company are set out in note 26 to the financial statements. Significant shareholdings The number of shares held and the percentage of the issued shares which that number represented as at 29 April 2013 are: The number of shares held by the current Directors is as follows: Jim Mellon1 Douglas Grant David Gibson2 Don McCrickard3 Alan Clarke Juan Kelly Number 31/12/12 17,635,332 680,821 428,853 66,666 52,149 27,860 Number 31/12/11 17,585,332 580,821 178,853 66,666 52,149 – 1 Burnbrae Limited holds 16,000,000 Ordinary Shares. Jim Mellon, Executive Chairman of MFG, is a director of Burnbrae Limited. Burnbrae Limited is wholly owned by a trustee of a settlement of which Jim Mellon has a life interest. Denham Eke, CEO of MFG, is also a director of Burnbrae Limited. Pershing Nominees Limited holds 968,666 Ordinary Shares on trust for Jim Mellon. Jim Mellon holds 666,666 Ordinary Shares in his own name. 2 Comprises 428,853 Ordinary Shares held by TD Direct Investing Nominees (Europe) Ltd on trust for David Gibson. 3 Comprises 66,666 Ordinary Shares held by Hargreaves Landsdown Nominees Limited on trust for Don McCrickard. The number of share options held by the current Directors is as follows: Number 31/12/12 342,466 Number 31/12/11 342,466 Number % of issued capital Douglas Grant Jim Mellon Arron Banks Lynchwood Nominees Limited Island Farms Limited David Hathersich-Jones Hargreaves Lansdown (Nominees) Limited 17,635,332 16,124,825 7,485,412 4,222,319 4,154,291 4,133,012 19.69 18.00 8.36 4.71 4.64 4.61 Manx Financial Group PLC 07 Directors’ liability insurance The Group maintains insurance cover for Directors’ potential liability. ■ Oversight of Group operations; ■ Changes to structure and capital; Fixed assets The movement in fixed assets during the year is set out in note 19 to the financial statements. Staff At 31 December 2012 there were 54 members of staff (2011: 68), of whom 5 were part-time (2011: 10). Investments in subsidiaries Investments in the Company’s subsidiaries are disclosed in note 20 to the financial statements. Auditors KPMG Audit LLC, being eligible, have expressed their willingness to continue in office. Corporate governance The UK Corporate Governance Code (the Code) sets out standards of good practice in relation to issues such as board composition and development, remuneration, relations with shareholders, accountability and audit. As an AIM listed company, MFG materially complies with the provisions of the Code to the extent which is appropriate to the Company’s nature and scale of operations. The Board of Directors The Board currently consists of seven Directors. Three of these are Non-Executive Directors and four are Executive Directors, including the Chairman. The role of Executive Chairman is undertaken by Jim Mellon and the role of Chief Executive by Denham Eke. Brief biographical details of the Directors are provided on pages 4 and 5. All of the three Non-Executive Directors are considered independent. These are Alan Clarke, David Gibson and Don McCrickard. The Company’s Articles of Association require that all Directors seek election by Shareholders at the first Annual General Meeting following their appointment and all Directors seek re-election at least every three years. The Board of Directors meets at least once a quarter and more often if required and its responsibilities include: ■ Strategy and management of the Company including its long-term objectives and commercial strategy; ■ Approval of the annual operational and capital expenditure budgets; The maintenance of effective financial reporting and controls; Ensuring maintenance of a sound system of internal control and risk management; ■ Approval of major capital projects; and ■ Communication with Shareholders. It is within the power of the Board, unless expressly forbidden by the Articles of Association or statute, to delegate authority to a duly authorised committee or a member of the Executive. Typically this would relate to operational issues or processes which are within agreed policy and not of strategic impact. The Board has implemented a share dealing policy for the Directors and applicable employees of all Group entities requiring observance of AIM rules, the Model Code and the Takeover Code requirements. All Non-Executive Directors may take independent professional advice at the Company’s expense in order to fulfil their duties. Risk management and internal control The MFG risk management systems are designed to provide assurance that risk is appropriately identified and effectively managed. The Board has overall responsibility for risk management and reviewing the effectiveness of internal controls with assistance from the Audit, Risk & Compliance Committee. The Executive is responsible for the implementation of Board strategies and the maintenance of effective systems of control. Board Committees The Board has established three committees, The Audit, Risk & Compliance Committee, The Remuneration Committee and The Nomination Committee. The duties of each are formally delegated by the Board and are detailed in specific Terms of Reference approved by the Board each year. Copies of the Terms of Reference are on the MFG website www.mfg.im. The Audit, Risk & Compliance Committee (ARCC) The ARCC meets quarterly or more often as required. It is responsible for assisting the Board to discharge its responsibilities relating to accounting policies, internal control and financial reporting. The Committee members, Alan Clarke (Chairman) and David Gibson, are qualified accountants and both of whom are independent Non-Executive Directors with current and relevant financial experience. The external Auditors, Executive Directors and senior managers are invited to attend meetings as appropriate, while the external Auditors and the Internal Audit and Compliance functions have unfettered access to Committee members. ■ ■ Manx Financial Group PLC Report of the Directors 08 The ARCC also monitors the provision of non-audit services by the external Auditors to ensure the provision of such services does not impair the external Auditors’ independence of objectivity. The Remuneration Committee Refer to the Directors’ Remuneration Report on page 9 for further details. The Nomination Committee The full Board forms the Nomination Committee which considers all new Board appointments and succession planning in the light of the needs of the Company from time to time. By order of the Board Lesley Crossley Company Secretary 28 May 2013 Manx Financial Group PLC Directors’ Remuneration Report 09 Introduction As an Isle of Man registered company there is no requirement to produce a directors’ remuneration report. However, the Board follows best practice and therefore has prepared such a report. In preparing the report the Directors have referred to the regulations and rules in force for UK companies as a basis. There is no Isle of Man requirement for any part of this report to be audited. Remuneration Committee The Remuneration Committee is constituted in accordance with the recommendations of the Combined Code. It comprises two Independent Non-Executive Directors, Alan Clarke (Chairman) and David Gibson. The Committee makes recommendations to the Board. No Director plays a part in any discussion about his own remuneration. Remuneration policy for the Executive Directors’ remuneration packages is designed to attract, motivate and retain Directors of the high calibre needed to enhance the Group’s position and to reward them for improving Shareholder value. The performance measurement of the Executive Directors and key members of senior management and the determination of their annual remuneration packages are undertaken by the Committee. There are five potential elements of the remuneration package for Executive Directors and senior management: ■ Basic annual salary; ■ Benefits-in-kind; ■ Annual bonus payment; ■ Share option incentives; and ■ Pension arrangements. Basic salary Executive Directors and senior management basic salary is reviewed by the Committee prior to the beginning of each year and when an individual changes position or responsibility. In deciding appropriate levels, the Committee considers the Group as a whole. Benefits-in-kind No Directors or senior management currently receive benefits-in- kind. Annual bonus payment The Committee believes that any incentive compensation awarded should be aligned to the interests of the Company’s Shareholders and that the principal measure of their interest is total Shareholder return. Account is also taken of the relative success of the different parts of the business for which the Chief Executive Officer or Executive Director is responsible and the extent to which the strategic objectives set by the Board are being met. Share option incentives The Company believes these to be a key element of remuneration given the direct link with Shareholder interests. Those awarded at the balance sheet date are disclosed in note 26 to the financial statements. Pension arrangements Neither the Chief Executive Officer nor the Executive Chairman receive pension contributions. Non-Executive Directors Non-Executive Directors have no fixed term of appointment and are subject to re-appointment by Shareholders. Manx Financial Group PLC Directors’ Remuneration Report 10 Directors’ emoluments Executive Chairman Jim Mellon Executive Denham Eke Juan Kelly1 Douglas Grant Nick Sheard2 Simon Hull3 Non-Executive Alan Clarke David Gibson Don McCrickard Arron Banks4 Oliver Hare5 Aggregate emoluments Remuneration/ Performance Related Pay £ Fees £ Pension £ 2012 Total £ 2011 Total £ 25,000 25,000 135,740 128,740 93,740 – 37,500 37,500 37,500 7,292 18,750 546,762 – – – – – – – – – – – – – 25,000 25,000 – 13,700 12,500 9,000 – – – – – – 25,000 149,440 141,240 102,740 – 37,500 37,500 37,500 7,292 18,750 25,000 42,944 140,417 100,516 51,726 37,500 37,500 37,500 12,500 23,782 35,200 581,962 534,385 1 Juan Kelly was appointed on 19 September 2011. 2 Nick Sheard resigned on 22 March 2013. 3 Simon Hull resigned on 11 March 2011. 4 Arron Banks resigned on 19 July 2012. 5 Oliver Hare resigned on 11 September 2012. Approval This report was approved by the Board of Directors on 28 May 2013 and signed on its behalf by: Alan Clarke Chairman of the Remuneration Committee 28 May 2013 Manx Financial Group PLC Statement of Directors’ Responsibilities in respect of the Directors’ Report and the Financial Statements 11 The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy at any time its financial position. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and regulations. In addition, the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. The financial statements are required to give a true and fair view of the state of affairs of the Group and Parent Company and of the profit or loss of the Group for that year. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; ■ make judgements and estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRS as adopted by the EU; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Parent Company will continue in business. ■ ■ ■ Manx Financial Group PLC Report of the Independent Auditors 12 Report of the Independent Auditors, KPMG Audit LLC, to the members of Manx Financial Group PLC We have audited the financial statements of Manx Financial Group PLC for the year ended 31 December 2012 which comprise the Group Statement of Comprehensive Income, the Group and Parent Company Statements of Financial Position, the Group Statement of Cash Flows and the Group and Parent Company Statements of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. This report is made solely to the Company’s members, as a body. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an Auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 11, the Directors are responsible for the preparation of financial statements that give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. Opinion on the financial statements In our opinion the financial statements: give a true and fair view of the state of the Group’s and Parent Company’s affairs as at 31 December 2012 and of the Group’s loss for the year then ended; and have been properly prepared in accordance with IFRSs as adopted by the EU. Emphasis of Matter – Reclaim of Value Added Tax In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosures made in note 21 to the financial statements concerning the reclaim of Value Added Tax (VAT). The Bank’s total exposure in relation to this matter is £589,000, comprising a debtor balance of £466,000 plus an additional £123,000 VAT reclaimed under the Partial Exemption Special Method in the period from Q4 2011 to Q3 2012. Conister Bank Limited, as the Group VAT registered agent, has for some time considered the VAT recovery rate being obtained by the business to be 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 and have raised a number of queries with the Isle of Man Government Customs and Excise Division (C&E) in this regard over a number of years. The Group considers that the Volkswagen Financial Services Limited (“VWFS”) decision in August 2011 by the First Tier Tax Tribunal (the Tribunal) of HM Revenue & Customs in relation to the basis of calculation of VAT recovery on instalment credit transactions added significant weight to the case put forward by the Bank to C&E, including the request to C&E for a revised Partial Exemption Special Method as submitted in December 2011. The proposal put forward by the Bank was that the revised method would allocate 50% of costs in respect of HP transactions to a taxable supply and 50% to an exempt supply. In addition, at this time a Voluntary Disclosure was made as a retrospective claim for input VAT under-claimed in the last 4 years. 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 is scheduled to be heard in October 2013 (“the VWFS Appeal”). On the basis of the discussions and correspondence which have taken place between the Bank and C&E, in addition to the VWFS Appeal, the Directors are confident that the total VAT claimed of £589,000 will be secured and accordingly a debtor balance of £466,000 has been included in the financial statements for the year ended 31 December 2012 and no provision has been made for the possible repayment of the £123,000 VAT reclaimed to date, which might become repayable depending on the ultimate outcome of the VWFS decision. Due to the inherent uncertainty associated with the outcome of the VWFS Appeal and its impact on negotiations with C&E, the amount of retrospective VAT recovered and the amount of provision in respect of VAT reclaimed to date in relation to this matter may differ materially from the amounts stated in the financial statements. KPMG Audit LLC Chartered Accountants Heritage Court, 41 Athol Street, Douglas, Isle of Man, IM99 1HN. 28 May 2013 ■ ■ Manx Financial Group PLC Consolidated Statement of Comprehensive Income 13 2012 £000 7,800) (2,259) 1,226) (612) (1,032) (2,831) (2,144) (7) 37) (864) 71) 28) )(128) (214) –) 2012 £000 2011 £000 6,650) (2,065) 2011 £000 5,541) 4,585) 1,191) (322) (417) (3,314) (2,319) (463) –) (537) 684) 41) 15) (234) (111) 452) 5,037) 418) 5,455) (6,096) (641) (142) (783) –) (783) 3) (19) (799) (0.88) (418) 5,123) 212) 5,335) (4,945)) 390) (1,107) (717) 380) (337) –) (98) (435) (0.38) Notes 6 11 7 8 10 9 21 16 19 11 12 17 25 13 For the year ended 31 December Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Profit share on joint lending schemes Net fee and commission (expense)/income Net trading income Other operating income Operating income Personnel expenses Other expenses Provision for impairment of loan assets Depositors’ Compensation Scheme Profit/(loss) before specific items Acquisition and restructuring costs VAT recoverable Realised gains on available-for-sale investments Unrealised (Ioss)/gain on financial assets carried at fair value Depreciation Impairment of goodwill Loss before income tax recovery Income tax recovery Loss for the year Other comprehensive income Available-for-sale gains taken to equity Actuarial loss on defined benefit pension scheme Total comprehensive loss for the period attributable to owners Basic and diluted loss per share (pence) The notes on pages 17 to 44 form part of these Financial Statements. The Directors believe that all results derive from continuing activities. Manx Financial Group PLC Consolidated and Company Statement of Financial Position 14 As at 31 December Assets Cash and cash equivalents Financial assets at a fair value through profit or loss Available-for-sale financial instruments Loans and advances to customers Commissions receivable Property, plant and equipment Investment in Group undertakings Trade and other receivables Deferred tax asset Goodwill Total assets Liabilities Customer accounts Creditors and accrued charges Amounts owed to Group undertakings Loan notes Deferred consideration Pension liability Total liabilities Equity Called up share capital Profit and loss account Total equity Group 2012 £000 2011 £000 Company 2012 £000 2011 £000 Notes 15 16 17 18 19 20 21 12 20 22 23 24 23 25 26 1,918) 51) 12,484) 58,495) 312) 742) –) 1,252) 380) 2,344) 2,335) 189) 10,495) 49,525) 234) 814) –) 1,260) –)) 2,344) –) –) –) –) –) –) 12,072) 98) –) –) –) –) –) –) –) –) 12,067) 31) –) –) 77,978) 67,196) 12,170) 12,098) 63,731) 2,162) –) 4,510) 160) 200) 55,910) 855) –) 2,210) 492) 79) –) 339) 1,512) 4,510) 160) –) –) 93) 2,962) 2,210) 492) –) 70,763) 59,546) 6,521) 5,757) 18,433) (11,218) 18,433) (10,783) 18,433) (12,784) 18,433) (12,092) 7,215) 7,650) 5,649) 6,341) Total liabilities and equity 77,978) 67,196) 12,170) 12,098) The Financial Statements were approved by the Board of Directors on 28 May 2013 and signed on its behalf by: Jim Mellon Executive Chairman Denham Eke Chief Executive Officer Douglas Grant Group Finance Director The notes on pages 17 to 44 form part of these Financial Statements. Manx Financial Group PLC Consolidated Statement of Cash Flows For the year ended 31 December RECONCILIATION OF LOSS BEFORE TAXATION TO OPERATING CASH FLOWS Loss before tax on continuing activities Unrealised loss/(gain) on financial assets carried at fair value (Gain)/loss on disposal of property, plant and equipment Depreciation charge Realised gains on available-for-sale investments Available-for-sale gains taken to equity Actuarial loss on defined benefit pension scheme taken to equity Pension liability Share-based payment credit Decrease/(increase) in trade and other receivables Increase /(decrease) in trade and other payables (Increase)/decrease in commission debtors Impairment of goodwill Notes 11,19 25 25 26 2012 £000 (717) 128) (7) 214) (28) –) (98) 121) –) 18) 1,307) (78) –) 15 2011 £000 (783) (15) 6) 234) (41) 3) (19) 19) 4) (820) (123) 3) 111) Net cash inflow/(outflow) from trading activities Increase in loans and advances to customers Increase in deposit accounts Cash (outflow)/inflow from operating activities CASH FLOW STATEMENT Cash flows from operating activities Cash (outflow)/inflow from operating activities Taxation paid Net cash (outflow)/inflow from operating activities Cash (outflow)/inflow from investing activities Purchase of property, plant and equipment Purchase of available-for-sale financial instruments Sale of property, plant and equipment Acquisition of subsidiaries net of cash acquired Payment of deferred consideration 860) (1,421) (8,970) 7,821) (1,058) 3,165) (289) 686) (289) –) (289) (186) (1,961) 51) –) (332) 686) –) 686) (323) (3,162) 29) (32) (158) 19 17 20 Net cash outflow from investing activities (2,428) (3,646) Cash flows from financing activities Issue of loan notes Net cash inflow from financing activities Decrease in cash and cash equivalents Included in cash flows are: Interest received - cash amounts Interest paid - cash amounts The notes on pages 17 to 44 form part of these Financial Statements. 24 2,300) 500) 2,300) 500) (417) (2,460) 8,003) (2,396) 6,749) (2,306) Manx Financial Group PLC Consolidated and Company Statement of Changes in Equity 16 For the year ended Group Balance as at 1 January Loss for the year Other comprehensive expense Transactions with owners: Shares to be issued (see note 23) Share-based payment expense Share capital £000 18,433) –) –) Retained earnings £000 (10,783) (337) (98) 2012 £000 7,650) (337) (98) 2011 £000 8,620) (783) (16) –) –) –) –) –) –) (175) 4) Balance as at 31 December 18,433) (11,218) 7,215) 7,650) For the year ended Company Balance as at 1 January Loss for the year Transactions with owners: Shares to be issued (see note 23) Share-based payment expense Share capital £000 18,433) –) Retained earnings £000 (12,092) (692) 2012 £000 6,341) (692) 2011 £000 7,444) (932) –) –) –) –) –) –) (175) 4) Balance as at 31 December 18,433) (12,784) 5,649) 6,341) The notes on pages 17 to 44 form part of these Financial Statements. Manx Financial Group PLC Notes to the Consolidated Financial Statements 17 Reporting entity 1. 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 2012 comprise the Company and its subsidiaries (the Group). A summary of the principal accounting policies, which have been applied consistently, are set out below: Basis of preparation 2. (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and International Financial Reporting Interpretations Committee (IFRIC) interpretations applicable to companies reporting under IFRS. The Group has continued to apply the accounting policies used for the 2011 annual report. (b) Basis of measurement The financial statements are prepared on a historical cost basis except: financial instruments at fair value through profit or loss and available for sale financial instruments are measured at fair value; and 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 the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. 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. ■ ■ Manx Financial Group PLC Notes to the Consolidated Financial Statements 18 Significant accounting policies (continued) 3. (b) Accounting for business combinations Business combinations are accounted for 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: The fair value of the consideration transferred; plus The recognised amount of any non-controlling interests in the acquiree; plus If the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less 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 statement of comprehensive income. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in the statement of comprehensive income. (c) Property, plant and equipment Items of property, plant and equipment are stated at historical cost less accumulated depreciation (see below). Historical cost includes expenditure that is directly attributable to the acquisition of the items. The assets’ residual values and useful economic lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate items of property, plant and equipment. Depreciation Assets are depreciated on a straight-line basis except furniture, which is written down on the reducing balance basis, so as to write off the book value over their estimated useful lives. Leasehold improvements Equipment Vehicles Furniture 7 years 4-5 years 4 years 10% per annum (d) Financial assets Management have determined the classification of the Group’s financial assets into one of the following categories: Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money directly to a customer with no intention of trading the receivable. This classification includes advances made to customers under HP and finance lease agreements, litigation finance loans, personal loans, block discounting, secured commercial loans and stocking plans. Loans are recognised when cash is advanced to the borrowers. Loans and receivables are carried at amortised cost using the effective interest rate method with all movements being recognised in the statement of comprehensive income after taking into account provision for impairment losses (see note 3(e)). ■ ■ ■ ■ Manx Financial Group PLC 19 Significant accounting policies (continued) 3. (d) Financial assets (continued) 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 statement of comprehensive income 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 statement of comprehensive income. 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. (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 statement of comprehensive income 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 assets 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 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) 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. Manx Financial Group PLC Notes to the Consolidated Financial Statements 20 Significant accounting policies (continued) 3. (h) Employee benefits (continued) Pension obligations (continued) 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 statement of comprehensive income. 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 statement of comprehensive income. 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 statement of comprehensive income 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 AA 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 statement of comprehensive income represent the contributions payable during the year. Share-based compensation The Group maintains a share option programme which allows certain Group employees to acquire shares of the Group. The change in the fair value of options granted is recognised as an employee expense with a corresponding change in equity. The fair value of the options is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. At each statement of financial position date, the Group revises its estimate of the number of options that are expected to vest and recognises the impact of the revision to original estimates, if any, in the statement of comprehensive income, with a corresponding adjustment to equity. The share option programme was originally set up for Group employees to subscribe for shares in Conister Trust Limited (now Conister Bank Limited). Since the Scheme of Arrangement, the shareholders of Conister Bank Limited became shareholders of Manx Financial Group PLC. The share option programme is now operated by Manx Financial Group PLC. The fair value is estimated by an independent actuary using a proprietary binomial probability model. The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised. Other obligations Provision is made for short-term benefits payable for salaries, holiday pay, social security costs and sick leave on a pro-rata basis and is included within creditors and accrued charges. (i) Leases i) A Group company is the lessor Finance leases and HP contracts When assets are subject to a finance lease or HP contract, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. HP and lease income is recognised over the term of the contract or lease reflecting a constant periodic rate of return on the net investment in the contract or lease. Initial direct costs, which may include commissions and legal fees directly attributable to negotiating and arranging the contract or lease, are included in the measurement of the net investment of the contract or lease at inception. Manx Financial Group PLC 21 Significant accounting policies (continued) 3. (i) Leases (continued) ii) 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 statement of comprehensive income on a straight-line basis over the period of the lease. (j) Deferred taxation 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 income 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 statement of comprehensive income 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. (I) Fees and commission income Fees and commission income other than that directly related to 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. Manx Financial Group PLC Notes to the Consolidated Financial Statements 22 3. Significant accounting policies (continued) (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 Financial Reporting Standards (IAS/IFRS) Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) Government Loans (Amendments to IFRS 1) Disclosures: Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12) IFRS 13 Fair Value Measurement IAS 19 Employee Benefits (amended 2011) IAS 27 Separate Financial Statements (2011) IAS 28 Investments in Associates and Joint Ventures (2011) IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine Annual Improvements to IFRS 2009-2011 Cycle – various standards Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) IFRS 9 Financial Instruments 1 July 2012 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2014 1 January 2014 1 January 2015 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. (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. 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 litigation funding loan book has in recent years seen volatility in repayment patterns and there is therefore greater uncertainty surrounding it. The accuracy of the impairment allowances and provisions for counter clairns and legal costs depend on how closely the estimated future cash flows mirror actual experience. Manx Financial Group PLC 23 Significant accounting policies (continued) 3. (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 receives funds for its prepaid card activities. These funds are held in a fiduciary capacity for the sole purpose of making payments as and when card-holders utilise the credit on their cards, and are therefore not 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 statement of comprehensive income. Risk and capital management 4. (a) Risk management Introduction and overview The Group has exposure to the following risks from its use of financial instruments: credit risk; liquidity risk; operational risk; and ■ 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 Group. 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). The ARCC is responsible for monitoring compliance with the Group’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Group. 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 Group if a customer or counterparty to a financial instrument fails to meet its contractual obligation. For risk management reporting purposes, the Group considers and consolidates all elements of credit risk exposure (such as individual obligor default, country and sector risk). The Group is principally exposed to credit risk with regard to loans and advances to customers, comprising HP and finance lease receivables, litigation funding loans, unsecured personal loans, secured commercial loans, block discounting and stocking plan loans. It is also exposed to credit risk with regard to cash balances and trade and other receivables. ■ ■ ■ Manx Financial Group PLC Notes to the Consolidated Financial Statements 24 Risk and capital management (continued) 4. (a) Risk management (continued) i) Credit risk (continued) 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: Explicit credit policies, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements; ■ 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; ■ 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); Limiting concentrations of exposure to counterparties, geographies and industries (defining sector limits and lending caps); Limiting the term of exposure to minimise interest rate risk; Ensuring that appropriate records of all sanctioned facilities are maintained; Ensuring regular account reviews are carried out for all accounts agreed by the CC; and Ensuring Board of the Bank approval is obtained on all decisions of the CC above the limits set out in the Bank’s credit risk policy. An analysis of the credit risk on loans and advances to customers is as follows: Loans and advances to customers Carrying amount Individually impaired1 Grade A Grade B Grade C Gross value Allowance for impairment Carrying value Collective allowance for impairment Past due but not impaired Less than 1 month 1 month but less than 2 months 2 months but less than 3 months 3 months and over Carrying value Neither past due nor impaired 2012 £000 2011 £000 58,495) 49,525) –) –) 5,423) 5,423) (4,150) 189) 29) 5,954) 6,172) (4,305) 1,273) 1,867) (163) (225) 819) 467) 555) 478) 2,319) 1,996) 849) 207) 334) 3,386) 55,066) 44,497) 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. ■ ■ ■ ■ ■ ■ Manx Financial Group PLC 25 Risk and capital management (continued) 4. (a) Risk management (continued) i) Credit risk (continued) Management of credit risk (continued) 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, finance leases, vehicle stocking plans, block discounting and secured commercial loan balances, which are sub-categories of loans and advances to customers. 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 United Kingdom or Isle of Man addresses. Segmental The Group is exposed to credit risk with regard to customer loan accounts, comprising HP and finance lease balances, litigation funding balances, unsecured personal loans, secured commercial loans, block discounting and vehicle stocking plan loans. ii) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting financial liability obligations as they fall due. Management of liquidity risk The Group’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group uses various methods, including forecasting of cash positions, to monitor and manage its liquidity risk to avoid undue concentration of funding requirements at any point in time or from any particular source. Maturity mismatches between lending and funding are managed within internal risk policy limits. Manx Financial Group PLC Notes to the Consolidated Financial Statements 26 Risk and capital management (continued) 4. (a) Risk management (continued) ii) Liquidity risk (continued) Management of liquidity risk (continued) Minimum liquidity The Isle of Man Financial Supervision Commission (FSC) requires that the Bank should be able to meet its obligations for a period of at least one month. In order to meet this requirement, the Bank measures its cash flow commitments, and maintains its liquid balances in a diversified portfolio of short-term bank balances and short dated UK Government Treasury Bills. Bank balances are only held with financial institutions approved by the Board of the Bank and which meet the requirements of the FSC. Measurement of liquidity risk The key measure used by the Group for managing liquidity risk is the assets and liabilities maturity profile. The table below shows the Group’s financial liabilities classified by their earliest possible contractual maturity, on an undiscounted basis including interest due at the end of the deposit term. Based on historical data, the Group’s expected actual cash flow from these items vary from this analysis due to the expected re-investment of maturing customer deposits. Residual contractual maturities of financial liabilities as at the balance sheet date (undiscounted) 31 December 2012 Sight- 8 days £000 > 8 days > 1 month > 3 months > 6 months - 1 year £000 - 1 month - 3 months - 6 months £000 £000 £000 > 1 year - 3 years £000 > 3 years - 5 years £000 > 5 years £000 Customer accounts Other liabilities 1,762 50 2,164 672 3,017 162 5,081 613 20,818 326 22,765 1,247 11,889 5,587 Total liabilities 1,812 2,836 3,179 5,694 21,144 24,012 17,476 31 December 2011 Customer accounts Other liabilities Sight- 8 days £000 1,479 861 > 8 days - 1 month - 3 months £000 > 1 month > 3 months > 6 months - 1 year - 6 months £000 £000 £000 2,094 16 1,986 41 5,081 396 20,818 129 > 1 year - 3 years £000 21,765 673 > 3 years - 5 years £000 11,889 2,803 Total liabilities 2,340 2,110 2,027 5,477 20,947 22,438 14,692 – – – > 5 years £000 – – – Total £000 67,496 8,657 76,153 Total £000 65,112 4,919 70,031 Manx Financial Group PLC 27 > 1 year - 3 years £000 > 3 years - 5 years £000 > 5 years £000 Total £000 Risk and capital management (continued) 4. (a) Risk management (continued) ii) Liquidity risk (continued) Management of liquidity risk (continued) Measurement of liquidity risk(continued) Maturity of assets and liabilities at the balance sheet date 31 December 2012 Sight- 8 days - 1 month - 3 months - 6 months £000 > 8 days > 1 month > 3 months > 6 months - 1 year £000 £000 £000 £000 Assets Cash and cash equivalents 1,918 Available-for-sale financial instruments Customer accounts receivable Commission debtors Other assets 1,307 – – – – – 3,229 152 – – 5,497 3,623 128 – – – 5,368 24 – – 6,987 9,343 8 90 – – – – – – 29,389 – 179 6,236 – 179 – – 4,321 1,918 12,484 58,495 312 4,769 Total assets 3,225 3,381 9,248 5,392 16,428 29,568 6,415 4,321 77,978 Liabilities Customer accounts Other liabilities 1,762 43 2,161 651 3,004 107 5,023 529 20,375 156 21,230 571 10,176 4,975 Total liabilities 1,805 2,812 3,111 5,552 20,531 21,801 15,151 – – – 63,731 7,032 70,763 31 December 2011 Sight- 8 days £000 Assets Cash and cash equivalents 2,335 Available-for-sale financial instruments Customer accounts receivable Commission debtors Other assets 2,322 – – 1,000 > 8 days > 1 month > 3 months > 6 months - 1 year - 1 month - 3 months - 6 months £000 £000 £000 £000 > 1 year - 3 years £000 > 3 years - 5 years £000 > 5 years £000 Total £000 – 9,495 1,226 73 – – – – – – – – – – – – – 3,274 143 – 5,103 7 – 8,720 11 90 23,532 – 179 5,348 – 179 – – 4,159 2,335 10,495 49,525 234 4,607 Total assets 5,657 10,794 3,417 5,110 8,821 23,711 5,527 4,159 67,196 Liabilities Customer accounts Other liabilities 1,478 856 2,091 – 1,978 – 4,130 333 19,179 – 18,585 158 8,469 2,210 Total liabilities 2,334 2,091 1,978 4,463 19,179 18,743 10,679 – 79 79 55,910 3,636 59,546 Manx Financial Group PLC Notes to the Consolidated Financial Statements 28 Risk and capital management (continued) 4. (a) Risk management (continued) iii) Operational risk Operational risk arises from the potential for inadequate systems (including systems’ breakdown), errors, poor management, breaches in intemal controls, fraud and external events to result in financial loss or reputational damage. Operational risk also arises through the use of an outsourcing partner, which is the case with a loan administration provider. The Group manages this 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 2012 and 2011, 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 £51,000 at 31 December 2012 (2011: £189,000) 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 risk 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: 31 December 2012 Sight - 1 month - 3 months - 6 months £000 > 1 month > 3 months > 6 months - 1 year £000 £000 £000 > 1 year - 3 years £000 > 3 years - 5 years £000 Non-Interest Bearing £000 > 5 years £000 Total £000 Assets Cash and cash equivalents Available-for-sale financial instruments Customer accounts receivable Commission debtors Other assets 1,918) –) 4,536) –) –) –) 5,497) 3,623) –) –) –) –) 5,368) –) –) –) 6,987) 9,343) –) –) –) –) 29,389) –) –) –) –) 6,236) –) –) Total assets 6,454) 9,120) 5,368) 16,330) 29,389) 6,236) Liabilities Customer accounts Other liabilities Total capital and reserves 3,923) –) –) 3,004) –) –) 5,023) –) –) 20,375) –) –) 21,230) –) –) 10,176) –) –) Total liabilities and equity 3,923) 3,004) 5,023) 20,375) 21,230) 10,176) Interest rate sensitivity gap 2,531) 6,116) 345) (4,045) 8,159) (3,940) –) –) –) –) –) –) –) –) –) –) –) –) –) –) 312) 4,769) 1,918) 12,484) 58,495) 312) 4,769) 5,081) 77,978) –) 7,032) 7,215) 63,731) 7,032) 7,215) 14,247) 77,978) (9,166) –) –) Cumulative 2,531) 8,647) 8,992) 4,947) 13,106) 9,166) 9,166) –) Manx Financial Group PLC 29 Risk and capital management (continued) 4. (a) Risk management (continued) (iv) Market risk (continued) Interest risk re-pricing table (continued) 31 December 2011 Sight - 1 month £000 > 1 month > 3 months > 6 months - 1 year - 6 months - 3 months £000 £000 £000 > 1 year - 3 years £000 > 3 years - 5 years £000 > 5 years £000 Non-Interest Bearing £000 Total £000 Assets Cash and cash equivalents 2,335) Available-for-sale financial instruments 10,495) 3,548) Customer accounts receivable –) Commission debtors –) Other assets –) –) 3,274) –) –) –) –) 5,103) –) –) –) –) 8,720) –) –) –) –) 23,532) –) –) –) –) 5,348) –) –) Total assets 16,378) 3,274) 5,103) 8,720) 23,532) 5,348) Liabilities Customer accounts Other liabilities Total capital and reserves 3,568) –) –) 1,978) –) –) 4,130) –) –) 19,179) –) –) 18,586) –) –) 8,469) –) –) Total liabilities and equity 3,568) 1,978) 4,130) 19,179) 18,586) 8,469) Interest rate sensitivity gap 12,810) 1,296) 973) (10,459) 4,946) (3,121) –) –) –) –) –) –) –) –) –) –) –) –) –) –) 234) 4,607) 2,335) 10,495) 49,525) 234) 4,607) 4,841) 67,196) –) 3,636) 7,650) 55,910) 3,636) 7,650) 11,286) 67,196) (6,445) –) –) Cumulative 12,810) 14,106) 15,079) 4,620) 9,566) 6,445) 6,445) –) 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 FSC 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% per annum (2011: 2%). The following tables set out the estimated total impact of such a change based on the mismatch at the balance sheet date. 31 December 2012 Sight - 1 month - 3 months - 6 months £000 > 1 month > 3 months > 6 months - 1 year £000 £000 £000 > 1 year - 3 years £000 > 3 years - 5 years £000 Non-Interest Bearing £000 > 5 years £000 Interest rate sensitivity gap 2,531) 6,116 345) (4,045) 8,159 (3,940) – (9,166) Weighting £000 31 December 2011 0.000 0.003 0.007 0.014 0.027 0.054 0.115 0.000 – 18 2) (57) 220 (213) – – (30) Sight - 1 month £000 > 1 month > 3 months > 6 months - 1 year - 6 months - 3 months £000 £000 £000 > 1 year - 3 years £000 > 3 years - 5 years £000 > 5 years £000 Non-Interest Bearing £000 Interest rate sensitivity gap 12,810) 1,296) 973) (10,459) 4,946) (3,121) –) (6,445) Weighting £000 0.000) 0.003) 0.007) 0.014) 0.027) 0.054) 0.115) 0.000) –) 4) 7) (146) 134) (169) –) –) (171) Total £000 –) –) Total £000 –)) –) Manx Financial Group PLC Notes to the Consolidated Financial Statements 30 Risk and capital management (continued) 4. (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 of Directors 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 FSC in respect of the ratio of total capital to total risk-weighted assets. This requirement applies to the Bank (a wholly owned subsidiary of Manx Financial Group PLC) as a component of Manx Financial Group PLC and has been adhered to throughout the year. Segmental analysis 5. Segmental information is presented in respect of the Group’s business segments. The Directors consider that the Group currently operates in one geographic segment, the Isle of Man and UK. The primary format, business segments, is based on the Group’s management and internal reporting structure. The Directors consider that the Group operates in four product orientated segments in addition to its investing activities: Asset and Personal Finance (including provision of HP contracts, finance leases, personal loans, commercial loans and block discounting); Litigation Finance; a Prepaid Card division, Conister Card Services; and a Wealth Management division, Edgewater Associates Limited. The Group ceased to provide new Litigation Finance in June 2007. For the year ended 31 December 2012 Net interest income Operating income Profit before specific items Capital expenditure Total assets For the year ended 31 December 2011 Net interest income Operating income Loss before specific items Capital expenditure Total assets Asset and Personal Finance £000 5,782) 4,255) 610) 184) 76,367) Asset and Personal Finance £000 4,242) 3,575) (1,174) 307) Litigation Finance £000 –) –) 141) –) 899) Litigation Finance £000 343) 343) 343) –) Conister Card Wealth Services Management £000 £000 –) 112) 16) –) 134) –) 1,205) 24) 2) 578) Conister Card Wealth Services Management £000 £000 –) 369) 180) –) –) 1,168) 10) 16) 63,526) 1,137) 144) 2,389) Investing Activities £000 (241) (237) (401) –) –) Investing Activities £000 –) –) –) –) –) Total £000 5,541) 5,335) 390) 186) 77,978) Total £000 4,585) 5,455) (641) 323) 67,196) Interest income 6. Interest receivable and similar income represents charges and interest on finance and leasing agreements attributable to the year after adjusting for early settlements, income on litigation funding receivables and interest on bank balances. Manx Financial Group PLC 31 2012 £000 1,032) 1,032) 2011 £000 417) 417) 7. Profit share on joint lending schemes Scheme one On 3 February 2010, a joint lending scheme was entered into by the Bank. The development of this relationship has led to interest income on loan advances funded by the Bank, being divided up between the parties in a profit sharing ratio. As at 31 December 2012 advances had grown by £8.7 million to £18.9 million. The amount by which the other party has received in profits shared is analysed above. 8. Allowance for impairment The charge in respect of specific allowances for impairment comprises: Specific impairment allowances made Reversal of allowances previously made Total charge for specific provision for impairment The credit in respect of collective allowances for impairment comprises: Collective impairment allowances made Release of allowances previously made Total credit for collective allowances for impairment Total charge for allowances for impairment 9. Acquisition and restructuring costs Restructuring costs in the current and prior year relate to a re-organisation and rationalisation across the Group. Acquisition costs Legal, professional and other acquisition costs Re-organisation of UK and IOM operations Salary and redundancy costs Notes 23 2012 £000 465) (396) 69) 2012 £000 75) (137) (62) 7) 2012 £000 493) 371) 864) 2011 £000 781) (62) 719) 2011 £000 129) (385) (256) 463) 2011 £000 –) 537) 537) 10. Depositors’ Compensation Scheme On 27 May 2009, the Isle of Man Government Depositors’ Compensation Scheme (the Scheme) was activated in connection with the liquidation of Kaupthing Singer & Friedlander (Isle of Man) Limited. Three payments of £73,880 were made in to the scheme. In 2011, a payment was made which was expected to be repaid, therefore no charge was made to prior year’s Consolidated Statement of Comprehensive Income. In the current year, a partial repayment from the Financial Supervision Commission of £133,506 from the scheme released a £36,940 credit to the Consolidated Statement of Comprehensive Income. Further repayments from the scheme are anticipated. Manx Financial Group PLC Notes to the Consolidated Financial Statements 32 11. Loss before taxation The loss before taxation for the year is stated after charging: Interest expense payable to depositors Interest expense payable on loan notes Depreciation (Profit)/Loss on sale of fixed assets Share option expense Directors’ remuneration Directors’ fees Directors’ pensions Directors’ bonuses Auditors’ remuneration as Auditors current year as Auditors under-accrual for prior year non-audit services Pension cost defined contribution scheme Operating lease rentals for property 12. Income tax expense 2012 £000 2,018 241 214 (7) – 362 159 35 – 72 – 133 35 300 2011 £000 1,901 164 234 6 4 307 199 28 – 79 4 131 122 322 The main rate of income tax in the Isle of Man is 0% (2011: 0%), however the profits of the Group’s Manx banking activities are taxed at 10% (2011: 10%). The profits of the Group’s subsidiaries that are subject to UK corporation tax are taxed at a rate of 26.5% (2011: 26.5%). The Group had sufficient tax losses brought forward to offset any profits in income streams that are taxable at a rate above 0% and therefore no provision is required. The value of tax losses carried forward is £380,000 (2011: £nil) which has been recognised as a deferred tax asset in the current year. 13. Loss per share Loss for the year Weighted average number of ordinary shares in issue Basic and diluted loss per share 2012 £000 (337) 2011 £000 (783) Number Number 89,570,252 89,213,979 (0.88)p (0.38)p The basic loss per share calculation is based upon the loss for the year after taxation and the weighted average of the number of shares in issue throughout the year. Diluted earnings per share is the same as basic loss per share, as for the year ended 31 December 2011 there is no dilution from potential ordinary shares. 14. Company loss The loss on ordinary activities after taxation of the Company is £692,000 (2011: £932,000). Manx Financial Group PLC 33 Group 2011 £000 1,789 546 2,335 2012 £000 1,872 46 1,918 Company 2012 £000 2011 £000 – – – – – – 15. Cash and cash equivalents Cash at bank and in hand Short-term deposits Cash at bank includes an amount of £18,809 (2011: £8,949) representing cheques issued in the course of transmission. The remaining maturity of short-term deposits is as follows: Less than 8 days Group Company 2012 £000 46 46 2011 £000 546 546 2012 £000 – – 2011 £000 – – 16. Financial assets at fair value through profit or loss The investment represents shares in Billing Services Group PLC, a UK quoted company, which was 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 IFRS7 fair value hierarchy. The cost of the shares was £471,000. The unrealised difference between cost and market value has been taken to the income statement. 17. Available-for-sale financial instruments UK Government Treasury Bills Group 2012 £000 2011 £000 12,484 10,495 12,484 10,495 Company 2012 £000 – – 2011 £000 – – UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in equity, see page 13. Manx Financial Group PLC Notes to the Consolidated Financial Statements 34 18. Loans and advances to customers Group HP balances Finance lease balances Litigation funding Unsecured personal loans Vehicle stocking plans Block discounting Secured commercial loans Gross Amount £000 37,955) 6,543) 2,526) 3,913) 1,404) 4,601) 5,866) 2012 Impairment Allowance £000 (883) (696) (1,627) (362) –) –) (745) Carrying Value £000 37,072) 5,847) 899) 3,551) 1,404) 4,601) 5,121) Gross Amount £000 33,810) 5,640) 2,972) 3,399) 1,397) 3,724) 3,113) 2011 Impairment Allowance £000 (624) (628) (1,835) (434) –) (9) (1,000) Carrying Value £000 33,186) 5,012) 1,137) 2,965) 1,397) 3,715) 2,113) 62,808) (4,313) 58,495) 54,055) (4,530) 49,525) Collateral is held, in the form of underlying assets, for HP, finance leases, vehicle stocking plans, block discounting and secured commercial loans. An estimate of the fair value of collateral on past due or impaired loans and advances is not disclosed as it would be impractical to do so. Specific allowance for impairment Balance at 1 January Specific allowance for impairment made Write-offs Balance at 31 December Collective allowance for impairment Balance at 1 January Collective allowance for impairment made Release of allowances previously made Balance at 31 December Total allowances for impairment 2012 £000 4,305) 69) (224) 2011 £000 4,173) 781) (649) 4,150) 4,305) 2012 £000 225) –) (62) 163) 2011 £000 490) 129) (394) 225) 4,313) 4,530) Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2012 £133,740 (2011: £166,710) was 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 one loan exposure exceeded 10% of the capital base of the Group (2011: three loan exposures). Exposure Finance lease Secured commercial loan Block discounting facility Outstanding Outstanding balance balance 2012 £000 Facility limit 2011 (if applicable) £000 £000 –) 4,176) –) 1,037) 1,849) 767) N/a) 5,000) 1,000) Manx Financial Group PLC 35 18. Loans and advances to customers (continued) HP and finance lease receivables Loans and advances to customers include the following HP and finance lease receivables: Gross investment in HP and finance lease receivables Less than one year Between one and five years The investment in HP and finance lease receivables net of unearned income comprises Less than one year Between one and five years Net investment in HP and finance lease receivables 19. Property, plant and equipment Group Cost As at 1 January 2012 Additions Disposals As at 31 December 2012 Accumulated depreciation As at 1 January 2012 Charge for year Disposals As at 31 December 2012 Carrying value at 31 December 2012 Carrying value at 31 December 2011 Leashold IT Furniture & Improvements Equipment Equipment £000 £000 £000 170) 10) –) 180) (1) (6) –) (7) 173) 169) 786) 143) –) 929) (360) (161) 6) (515) 414) 426) 582) 33) –) 615) (436) (42) –) (478) 137) 146) 2012 £000 21,841) 30,520) 2011 £000 19,295) 26,962) 52,361) 46,257) 2012 £000 18,454) 26,044) 2011 £000 16,049) 23,401) 44,498) 39,450) Motor Vehicles £000 184) –) (100) Total £000 1,722) 186) (100) 84) 1,808) (111) (5) 50) (908) (214) 56) (66) (1,066) 18) 73) 742) 814) Manx Financial Group PLC Notes to the Consolidated Financial Statements 36 Investment in Group undertakings 20. The Company has the following investments in subsidiaries incorporated in the Isle of Man: Carrying value of investments 31 December 2012 Date of Nature of Business % Holding incorporation Total 2012 £ Total 2011 £ Conister Bank Limited TransSend Holdings Limited Bradburn Limited Edgewater Associates Limited Asset and personal finance Holding Company for prepaid card division Holding Company Wealth Management 100 100 100 100 5.12.1935 5.11.2007 15.05.2009 24.12.1996 10,067,000 – 1 2,005,000 10,067,000 – 1 2,000,000 Goodwill Goodwill Edgewater Associates Limited (EWA) ECF Asset Finance PLC (ECF) Three Spires Insurance Services Limited (Three Spires) 12,072,001 12,067,001 Group 2012 £000 1,849) 454) 41) 2,344) Group 2011 £000 1,849) 454) 41) 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 5% annual increment, and then discounted using a 12% discount factor (2011: discount factor 10%). The sensitivity of the analysis was tested using additional discount factors of 15% and 20% 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% margin), extrapolated to 10 years using a 5% annual increment, and then discounted using a 12% discount factor (2011: discount factor 10%). The sensitivity of the analysis was tested using additional discount factors of 15% and 20% on varying sales volumes. On the basis of the above reviews no impairment to goodwill has been made in the current year. 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. Manx Financial Group PLC 37 Group Company 2012 £000 53) 733) 466) 2011 £000 114) 462) 684) 1,252) 1,260) 2012 £000 –) 30) 68) 98) 2011 £000 –) 20) 11) 31) 21. Trade and other receivables Trade debtors Prepayments and other debtors VAT recoverable Included in trade and other receivables is an amount of £466,000 (2011: £684,000) relating to a reclaim of value added tax (VAT). Conister Bank Limited (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 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% of costs in respect of HP transactions to a taxable supply and 50% to an exempt supply. In addition at this time a Voluntary Disclosure was made as a retrospective claim for input VAT under-claimed in the last 4 years. 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 is scheduled to be heard in October 2013. The Bank’s total exposure in relation to this matter is £589,000, comprising the debtor balance referred to above plus an additional £123,000 VAT reclaimed under the Partial Exemption Special Method, in the period from Q4 2011 to Q3 2012. On the basis of the discussions and correspondence which have taken place between the Bank and C&E, in addition to the VWFS appeal, the Directors are confident that the VAT claimed referred to above will be secured. 22. Customer accounts Retail customers: Term deposits Corporate customers: Term deposits 2012 £000 61,647) 2,084) 2011 £000 54,569) 1,341) 63,731) 55,910) Fiduciary deposits The Bank acts as agent bank to a number of customers, for balances totalling £19.9 million (2011: £19.0 million). The Bank invests these customer assets with third party banks on their behalf and in return for this service receives a fee. These balances are not included within the statement of financial position. Manx Financial Group PLC Notes to the Consolidated Financial Statements 38 23. Creditors and accrued charges Creditors and accruals VAT payable Short-term employee benefits Deferred consideration Edgewater Associates Limited Group Company 2011 £000 698) 81) 76) 855) 2011 £000 492 492 2012 £000 339) –) –) 339) 2012 £000 160) 160) 2011 £000 93) –) –) 93) 2011 £000 492) 492) 2012 £000 2,153) –) 9) 2,162) 2012 £000 160) 160) Deferred consideration The deferred consideration is payable to the previous shareholders of Edgewater Associates Limited between 2012 and 2013 on approval of the respective company’s accounts for each of the financial years ending 31 December 2011 and 2012. The deferred element, payable on the approval of the respective accounts, is: 31 December 2012: £160,000 in cash and £175,000 payable in consideration shares; and ■ A top up payment, payable in cash to reimburse the shortfall in consideration shares previously issued. The consideration shares shall be issued on the basis of the mean average offer price of the Group’s ordinary shares for the five business days immediately preceding the date on which the obligation arises. The cash consideration will be financed from existing cash resources. In March 2012 it was agreed by all parties that the full amount of deferred consideration due in respect of the 31 December 2011 Financial Statements would be paid in cash and no consideration shares would be issued. Incentive commission It was also agreed that an incentive commission would be paid to Edgewater Associates Limited’s principals, calculated as 40% of the EBITDA in excess of £400,000, £450,000 and £500,000 thresholds in each of the financial years ending 31 December 2010, 2011 and 2012 on a cumulative basis so as to make good any prior year or years’ shortfall before triggering any additional consideration. The incentive commission will be payable 50% in cash and 50% in the Group’s shares. Such additional shares will be issued at the same price as the consideration shares for that year. No incentive commission has been paid to date, and based on current expectations no provision has been made in the accounts of the Group in respect of the incentive commission. 24. Loan notes Related parties J Mellon Burnbrae Limited Southern Rock Insurance Company Limited Copper Development Corporation Rock Holdings Limited Unrelated parties Notes JM BL SR CDC RH UP Group Company 2011 £000 1,750 – – – 460 2,210 – 2,210 2012 £000 1,750 1,200 500 500 460 4,410 100 4,510 2011 £000 1,750 – – – 460 2,210 – 2,210 2012 £000 1,750 1,200 500 500 460 4,410 100 4,510 ■ Manx Financial Group PLC 39 24. Loan notes (continued) JM - Two loans consisting of £500,000, maturing on 31 July 2017 with interest payable of 7% p.a. and £1,250,000 maturing on 26 February 2015 paying interest of 9% p.a. Both loans are convertible at the rate of 4 pence and 9 pence respectively. The £500,000 loan is also entitled to 8.3 million warrants at an exercise price of 6 pence. BL - One loan consisting of £1,200,000, maturing on 31 July 2017 with interest payable of 7% p.a. Jim Mellon is the beneficial owner of BL and Denham Eke is also a director. The loan is convertible at a rate of 4 pence and is entitled to 20 million warrants at an exercise price of 6 pence. SR - One loan consisting of £500,000, maturing on 9 October 2017, paying interest of 7% p.a. Arron Banks, a significant shareholder and previous Non-Executive Director holds a 100% stake in SR. The loan is convertible at the rate of 4 pence, with an entitlement to 8.3 million warrants at an exercise price of 6 pence. See note 32 for details of converting this loan post year end. CDC - Two loans consisting of £350,000, maturing on 7 September 2017 with interest payable of 5% p.a. and £150,000 maturing on 4 October 2017 paying interest of 5% p.a. Denham Eke is a director of CDC. RH - One loan consisting of £460,000, maturing on 26 February 2015 with interest payable of 9% p.a. The loan is convertable at the rate of 9 pence. RH is linked to Arron Banks. See note 32 for details on assigning this loan to SR post year end. UP - One loan consisting of £100,000, maturing on 16 November 2017 with interest payable of 5% p.a. With respect to the convertable loans, the interest rate applied was deemed by the Directors to be equivalent to the market rate with no conversion option hence no equity component has been recognised with respect to any of these loans. 25. Pension liability The Group operates a funded defined benefit pension scheme, the Conister Trust Pension and Life Assurance Scheme (the Scheme), providing benefits to members based on final pensionable pay. The Scheme was closed to new entrants on 31 March 1997. Contributions to the Scheme are determined by a firm of independent actuaries employed by the Trustees of the Scheme. The most recent full actuarial valuation carried out at 1 April 2010 showed that the market value of the Scheme’s assets was £1,346,464, representing 97.7% of the benefits that had accrued to members, after allowing for expected future increases in earnings. As required by IAS19 this valuation has been updated by the actuary as at 31 December 2012. The actuarial assumptions used to calculate Scheme liabilities under IAS19 are as follows Rate of increase in salaries Rate of increase in pension in payment: – service up to 5 April 1997 – service from 6 April 1997 to 13 September 2005 – service from 14 September 2005 Discount rate applied to scheme liabilities Return on assets 2012 % N/A – 2.30 1.80 4.90 2.90 2011 % N/A – 2.90 2.10 5.70 3.10 2010 % 3.70 – 3.40 2.20 5.70 5.20 2009 % 3.80 – 3.50 2.30 5.70 5.95 2008 % 2.80 – 2.70 2.00 6.70 6.60 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. The amounts recognised in the Consolidated Statement of Financial Position are as follows: Total underfunding in funded plans recognised as a liability Fair value of plan assets Present value of funded obligations 2012 £000 1,227) (1,427) (200) 2011 £000 1,192) (1,271) (79) Manx Financial Group PLC Notes to the Consolidated Financial Statements 40 25. Pension liability (continued) Plan assets consist of the following Equity securities Corporate bonds Government bonds Cash Movement in the liability for defined benefit obligations Opening defined benefit obligations at 1 January Benefits paid by the plan Interest on obligations Actuarial loss/(gain) Liability for defined benefit obligations at 31 December Movement in plan assets Opening fair value of plan assets at 1 January Expected return on assets Contribution by employer Acturial gain/(loss) Benefits paid Closing fair value of plan assets at 31 December Expense recognised in income statement Interest on obligation Expected return on plan assets Total included in personnel costs Actual return on plan assets Income recognised in other comprehensive income and expense Acturial gain/(loss) on plan assets Acturial (loss)/gain on defined benefit obligations 2012 % 33) 39) 22) 6) 2011 % 24) 20) 18) 38) )100) 100) 2012 £000 1,271) (57) 72) 141) 1,427) 2012 £000 1,192) 39) 10) 43) (57) 1,227) 2012 £000 72) (37) 35) (93) 2012 £000 43) (141) (98) 2011 £000 1,417) (200) 75) (21) 1,271) 2011 £000 1,357) 65) 10) (40) (200) 1,192) 2011 £000 75) (65) 10) (25) 2011 £000 (40) 21) (19) Manx Financial Group PLC 41 Number 150,000,000 Number £000 89,570,252 18,433 26. Called up share capital Authorised: Ordinary shares of no par value At 31 December 2011 & 2012 Issued and fully paid: Ordinary shares of no par value As at 31 December 2011 & 2012 The number of warrants in issue at 31 December 2012 is 36.6 million (2011: nil) (see note 24 for further details). In addition there are a number of convertible loans (see note 24 for futher details). Share options Performance conditions attached to share options that have not fully vested. (a) The options granted on 6 July 2007 vested as follows: 30% on the first anniversary of grant (i.e. 6 July 2008) 30% on the second anniversary of grant (i.e. 6 July 2009) 40% on the third anniversary of grant (i.e. 6 July 2010) No shares resulting from the exercise of an option may be sold by the employee until he/she has worked a minimum of three years for Manx Financial Group PLC or a subsidiary company from the date of grant (e.g. 6 July 2010). (b) The options granted on 1 February 2008 will vest if a mid market share price of £1.75, over 30 consecutive days is achieved within three years from the date of the grant. No shares resulting from the exercise of an option may be sold unless the individual is an employee of the Company on 1 February 2011. (c) The options granted on 25 June 2010 will vest if the mid market share price of £0.30 is achieved during the period of grant (10 years ending 25 June 2020). No shares resulting from the exercise of an option may be sold for at least three years from the date of grant. ■ ■ ■ Manx Financial Group PLC Notes to the Consolidated Financial Statements 42 26. Called up share capital (continued) Dates Exercisable Executive Plan Options Grant date On 9 June 2003 Balance at 31 December 2011 Lapsed Balance at 31 December 2012 On 28 April 2004 Balance at 31 December 2011 Lapsed Balance at 31 December 2012 On 25 April 2005 Balance at 31 December 2011 Lapsed Balance at 31 December 2012 On 1 November 2006 Balance at 31 December 2011 Lapsed Balance at 31 December 2012 On 6 July 2007 Balance at 31 December 2011 Lapsed Balance at 31 December 2012 On 1 February 2008 Balance at 31 December 2011 Lapsed Balance at 31 December 2012 On 25 June 2010 Balance at 31 December 2011 Lapsed Balance at 31 December 2012 Perfomance Conditions From To Exercise Price Fully vested 9 June 2009 9 Dec 2013 34p Fully vested 28 Apr 2004 27 Apr 2014 29p Fully vested 25 Apr 2005 24 Apr 2015 32p 1 Nov 2006 31 Oct 2011 54.1p Fully vested (a) 6 July 2007 6 July 2017 65p Fully vested (b) 1 Feb 2008 1 Feb 2018 70p (c) 25 June 2010 25 June 2020 10.95p Number of ordinary shares 2,092,500 28,500 – 28,500 350,000 68,500 – 68,500 205,500 12,500 – 12,500 1,375,000 – – – 625,000 50,000 – 50,000 1,275,000 100,000 – 100,000 1,410,447 776,154 – 776,154 Manx Financial Group PLC 43 26. Called up share capital (continued) 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: Fair value at date of grant Share price Exercise price Expected volatility Option life Expected dividends Risk-free interest rate (based on government bonds) Forfeiture rate *modified on 25 April 2008 Fair value at date of grant Share price Exercise price Expected volatility Option life Expected dividends Risk-free interest rate (based on government bonds) Forfeiture rate Expense in statement of comprehensive income Share options granted in: 2003 2004 2005 2006 2007 2008 2010 9 June 2003 £0.08 £0.34 £0.34 30% 10 0.00% 4.11% 0% 28 April 2004 25 April 1 November 6 July 2007 (Tranche 1) 2006* 2005 £0.03 £0.29 £0.29 30% 10 0.00% 4.96% 30% £0.03 £0.32 £0.32 30% 10 0.00% 4.62% 60% £0.14 £0.55 £0.54 35% 10 0.00% 4.40% 100% £0.24 £0.60 £0.65 36% 10 0.00% 5.71% 16% 6 July 2007 6 July 2007 (Tranche 3) (Tranche 2) 1 February 2008 25 June 2010 £0.27 £0.64 £0.65 36% 10 0.00% 5.71% 0% £0.31 £0.67 £0.65 36% 10 0.00% 5.71% 0% £0.31 £0.77 £0.81 35% 10 0.00% 4.28% 0% £0.03 £0.11 £0.11 47% 10 0.00% 2.24% 0% 2012 £000 2011 £000 – – – – – – – – – – – – – – 4 4 Manx Financial Group PLC Notes to the Consolidated Financial Statements 44 27. Analysis of changes in financing during the year Analysis of changes in financing during the year Balance at 1 January Issue of ordinary shares as part consideration for purchase of subsidiary undertaking Issue of loan notes Balance at 31 December 2012 £000 20,643) –) 2,300) 2011 £000 19,968) 175) 500) 22,943) 20,643 The 2012 closing balance is represented by £18,433,000 (2011: £18,433,000) share capital and £4,510,000 (2011: £2,210,000) of loan notes. 28. Regulator Conister Bank Limited is licensed to undertake banking activities by the Isle of Man Government Financial Supervision Commission. 29. Related party transactions Staff loans Details of staff loans are given in note 18 to the financial statements. Edgewater Subordinated Loan On 14 May 2012, the Company made a subordinated loan to Edgewater Associates Limited for £128,000. This is an unsecured loan for 5 years and interest is charged at 7% per annum. Convertible loans and loan notes Details of convertible loan arrangements and loan notes are given in note 24 to the financial statements. Key management personnel (including Executive Directors’) compensation Short-term employee benefits Total 30. Operating leases Non-cancellable lease rentals are payable in respect of property and motor vehicles as follows: 2012 £000 397) 397) Less than one year Between one and five years Over five years 31. Litigation 2012 2011 Leasehold Property £000 Other £000 Leasehold Property £000 297) 825) 1,078) 2,200) 6) –) –) 6) 257) 789) 673) 1,719) 2011 £000 336) 336) Other £000 14) 6) –) 20) The Bank is vigorously pursuing the repayment of litigation funding loans made to clients of solicitor firms and further litigation may be required in this regard. Counter claims have been received and there is the possibility of litigation being necessary. There is a risk of an adverse outcome in all litigation and the costs and timescale to resolve these matters are uncertain. 32. Post balance sheet events On 24 April 2013, Rock Holdings Limited assigned £460,000 loan note to Southern Rock Insurance Company Limited. Southern Rock Insurance Company has also sent a conversion notice in respect of the £500,000 loan note and these will be converted into equity at the rate of 4 pence per share on 31 May 2013. M A N X F I N A N C I A L GROUP PLC Clarendon House Victoria Street Douglas Isle of Man IM1 2LN Tel: (01624) 694694 Fax: (01624) 624278 www.mfg.im 

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