Manx Financial Group
Annual Report 2014

Plain-text annual report

_________________________________ ANNUAL REPORT 2014 Welcome to Manx Financial Group PLC Integrity through independence and service An independent banking group founded in 1935, domiciled in the Isle of Man Manx Financial Group PLC (“MFG”) is an AIM-listed company (LSE : MFX) which holds the entire issued share capital of a suite of financial service companies based in the Isle of Man and the UK. These companies offer financial services to both retail and commercial customers. MFG's strategy is to grow both organically and to further through strategic acquisition augment the range of services it offers. Principal wholly owned subsidiaries: • Conister Bank Limited • Edgewater Associates Limited • Conister Card Services Limited. Contents Financial Highlights Chairman’s Statement Directors and Advisers Directors’ Report Corporate Governance Report Directors’ Remuneration Report Statement of Directors’ Responsibilities Report of the Independent Auditors Consolidated Income Statement 01 02 04 06 07 10 12 13 14 Conister Bank Limited (the “Bank”) is a licensed independent bank, regulated by the Financial Supervision Commission in the Isle of Man and a full member of the MasterCard® network and the Isle of Man’s Association of Licensed Banks. The Bank provides a variety of financial products and services, including saving asset accounts, 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. fiduciary deposits, Associates Edgewater 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 £157 million. EWA specialises in the areas of wealth management, mortgage and general retirement planning. insurance, and Conister Card Services Limited (“CCS”) is the Group’s pre-paid card division providing business clients with payment solutions that are both cost effective and create new revenue opportunities. Consolidated Statement of Other Comprehensive Income 15 Consolidated and Company Statement of Financial Position Consolidated Statement of Cash Flows Consolidated and Company Statement of Changes in Equity Notes to the Consolidated Financial Statements 16 17 18 19 ® MasterCard is a registered trademark of MasterCard International Incorporated Manx Financial Group PLC Financial Highlights 01 Profit for the year Profit before tax Net interest income Loans Total assets Customer accounts 46% £1.6 m 2013 : £1.1m 61% £1.7 m 2013 : £1.1m 31% £10.8 m 2013 : £8.3m 18% £89.3 m 2013 : £75.8m 28% £119.5 m 2013 : £93.7m 28% £100.3 m 2013 : £78.1m Manx Financial Group PLC Chairman’s Statement 02 Dear Shareholders, When I wrote to you last year, I commented that I believed that the Group had turned a significant corner by moving into sustained profitability. I am, therefore, pleased to report a record profit before tax for the Group of £1.73 million (2013: £1.07 million). This represents a growth of 61%, and has led to net profit for the year of £1.59 million (2013: £1.09 million), an increase of 46%, continuing progress from the 2014 Interim net profit of £0.72 million to a second half figure of £0.87 million. This outcome has further helped strengthen our balance sheet with a 17% increase in total equity to £9.98 million (2013: £8.53 million), providing a respectable Return on Equity of 15.9% and confirming that our strategy of growing lending through wholesale to funding partnerships and expenditure is working well for us. 2014 was also a year when we achieved an important milestone whereby our total assets exceeded £100 million for the first time, to reach nearly £120 million at year-end. Whilst increased liquidity is returning to the lending market in both the Isle of Man and the UK, there is still an imbalance between funding requirements and available loan finance. We remain well placed to take advantage of this gap. retaining a disciplined approach Having addressed the issue of profitability, we now intend to further improve the Group’s systems to provide enhanced functionality to our offering. Technology is rapidly changing how banks and financial services providers interact with their customers. For banks, both borrowers and lenders alike benefit from a more immediate delivery. The time of fully staffed branch networks, ATMs and overseas call centres is running out. New entrants to the lending market have taken advantage of the High Street banks’ lack of appetite or ability to embrace digital life. These new lenders recognise that customers now, and even more so in the future, want to engage with their bank in ways and at times convenient to themselves, and not be driven by the constraints of defined opening hours and menu-driven telephone systems. Equally, as the understanding of risk becomes ever more sophisticated, the use of data-driven algorithms allows credit decisions in real-time, rather than tardy rulings by remote committees. Unlike the traditional banks, we are not shackled with expensive branch networks or legacy IT systems which hamper implementing the service delivery now required by customers. The advances in technology driven service provision also benefit financial advisors, who are now able to offer more focussed and more competitive solutions to their clients. As such, we are in an enviable position to benefit from the enhancements provided by this financial technology revolution and we intend to invest in this area in the coming years. Manx Financial Group PLC In terms of the 2014 outcome, our net interest income increased by 31% to £10.83 million (2013: £8.26 million) and net trading income rose by 13% to £7.25 million (2013: £6.42 million), which together led to a 12% growth in operating income. Personnel and operations costs increased by only 2% which resulted in profit before income tax growing by 61% to £1.73 million (2013: £1.07 million). After taxation, our profit for the year of £1.59 million (2013: £1.09 million), showed a Jim Mellon Chairman growth of 46%. As a result, our basic earnings per share (“EPS”) increased by 39% to 1.56 pence (2013: 1.12 pence), providing an imputed earnings multiple of 7.9 (based on 12.29 pence, being the Group’s share Volume Weighted Average Price for January 2015) and our diluted EPS increased by 26% to 0.98 pence (2013: 0.78 pence). Our total assets increased by 28% to £119.51 million (2013: (£93.72 million), including loans and advances rising by 18% to £89.34 million (2013: £75.82 million) and cash and near equivalents growing by 89% to £24.90 million (2013: £13.18 million). This was supported by a 28% increase in our customer accounts to £100.26 million (2013: £78.12 million). During the period shareholder equity grew by 17% to £9.98 million (2013: £8.53 million). We announced the formation of Manx Financial Limited in the second half of 2014 and commenced trading in both the Isle of Man finance broking and the Isle of Man foreign exchange broking markets. These businesses are tapping into an unsatisfied demand and we already have a significant pipeline of opportunity, demonstrating encouraging progress to date. We expect all three new business streams to make a positive contribution to the Group during the course of the new financial year. Conister Bank Limited Net interest income grew by 26% to £10.83 million (2013: £8.61 million), leading to a 10% increase in net trading income to £6.02 million (2013: £5.46 million). Operating income grew by 11% to £6.15 million (2013: £5.54 million). Personnel and other costs reduced by 10% to £4.79 million (2013: £5.31 million). As a result, profit before tax increased by almost 400% to £1.02 million (2013: £0.21 million). This result was driven by a combination of improved lending through our wholesale funding partnerships, our interest rate strategy of locking in low cost of funds over the longer term, and by the prudent control of costs. We continue to take a conservative approach to lending as evidenced by the 30% reduction in impaired loans to £3.00 million (2013: £4.31 million). The introduction of wholesale funding arrangements which include a capital indemnity element provides an additional level of security against losses. We continue to match our loan and deposit books without the need to make any behavioural adjustments. Whilst this is a very prudent approach, we believe the reduced risk of any adverse liquidity event provides a greater level of stability upon which to grow our deposit base. Our matched funding also continues to provide a partial hedge against any future rise in interest rates. Manx Financial Group PLC 03 digitally to customers 24/7. Banking and financial services are rapidly transforming from a people-intensive business to a data management business. We intend fully to embrace this change which will allow our staff to concentrate on maintaining and developing business relationships with enhanced customer services, both within our banking and our financial advice divisions. Only by doing so will we ensure we continue to deliver superior shareholder returns. In 2014, the FCA initiated a review of every UK consumer credit license holder as a consequence of the responsibility for regulation moving from the Office of Fair Trading. The renewal process for FCA- approved consumer lending will commence in 2015. Thus the outlook for the Group remains very promising for 2015. I anticipate that the trend of increasing profits will continue in the year to come. In addition, and as I mention above, we continue to seek suitable potential acquisitions for the banking and financial services divisions that are both priced fairly and will add additional profitability to our operations. Finally, I would like to take this opportunity to thank both you, our shareholders, and our staff alike for their continued support of the Group and also remind you that 2015 will be the year that our principal subsidiary, Conister Bank, will have served the Isle of Man community continuously for 80 years – a notable achievement. Jim Mellon Executive Chairman 26 February 2015 on bevioural adjustments to create a matched position nor do we rely on the vagaries of Executive Chairman 24 February 2014 We continue to carry a VAT debtor of £589,000 in relation to an on- going negotiation with the Isle of Man Government Customs & Excise Division (C&E). We have believed for a number of years that the VAT recovery rate for the business was neither fair nor reasonable and we have raised a number of queries in this regard with C&E. In parallel, there is a case being taken against HM Revenue & Customs by Volkswagen Financial Services (UK) which covers substantially the same issue and we have agreed with C&E to await the outcome of this case before proceeding with ours. Currently, the re-appeal for this case is scheduled for April 2015. Edgewater Associates Limited After a slow start to the year, driven mainly by Retail Distribution Review factors, the business returned a second half growth in profit pre-exceptional items of 12% to £0.18 million (2013: £0.16 million), a run rate of £0.36 million in a full year. Our strategy is to focus on renewal income to reduce earnings volatility. To achieve this, we continue to recruit and employ the most experienced IFAs and also to invest further in our IT platforms as part of the up-grading of our Group-wide systems. We continue to look for additional IFA acquisitions to develop and consolidate this division of the Group’s business. We have considered a number of potential targets and I hope to be able to announce some progress in the near future. Conister Card Services Limited We continue to look for ways to monetise our MasterCard® licence to issue pre-paid cards in the Isle of Man and the UK. Despite a number of pre-paid card issuing companies struggling to gain market share and attain profitability, we believe that we found a viable strategy for success. As a consequence, I hope to be able to announce further developments in this area shortly. Outlook It is clear that the banking and financial services landscape is reaching a major watershed in which the twin forces of regulatory reform and the development of financial technology will allow those players capable of reacting quickly to gain a competitive advantage. In November 2014, the UK’s Competition and Markets Authority announced that it would launch a full investigation into retail banking. This is a move that we welcome and that we hope will produce positive outcomes for businesses such as our own by evening out the competitive landscape. The second strand is the benefit available to consumers following the digitisation of financial services. As I have already indicated, we see acquiring suitable technology as our key priority to allow us access to new distribution channels and enabling the provision of our services Manx Financial Group PLC Directors and Advisers 04 Executive Directors Jim Mellon (58)‡ Executive Chairman Denham Eke (63) ‡ Chief Executive Officer Juan Kelly (44) ‡ 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 17% 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. He is also founder, principal shareholder and non-executive director of Charlemagne Capital, based on the Isle of Man and quoted on the London AIM market. Appointment Appointed to the Board on 2 November 2007 and appointed as Executive Chairman on 12 February 2009. international Denham Eke is the Managing Director of Burnbrae asset Group Limited, a private in management company. He began his career 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. Appointment Appointed to the Board on 2 November 2007 and appointed as Chief Executive on 12 February 2009. Juan Kelly started his career with Maersk before moving into structured finance with ABN AMRO the Netherlands. in Chile and subsequently 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 and 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. Appointment Appointed to the Board on 19 September 2011. He is Managing Director of Conister Bank Limited. Douglas Grant (50) ‡ Group Finance Director Douglas Grant 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 financial 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. Non-Executive Directors Manx Financial Group PLC 05 Don McCrickard (78) ‡ Non-Executive Director Alan Clarke (64)‡†* Non-Executive Director David Gibson (67) ‡†* Non-Executive Director UK, East/Africa Europe/Middle From 1975 to 1983 Don McCrickard was employed by American Express where he headed their businesses in the 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 the group’s merchant chairman of Hill Samuel, 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. He is the Chairman of Conister Bank Limited. *Member of the Audit, Risk and Compliance Committee †Member of the Remunera(cid:27)on Commi(cid:28)ee ‡Member of the Nomina(cid:27)ons Commi(cid:28)ee John Banks (46) Non-Executive Director John Banks is a solicitor qualified in both England and Wales and Hong Kong. He has worked in private practice with Lovells, in both England and Hong Kong and as an in house counsel for Standard Chartered Bank in Hong Kong. He joined Group Direct Limited, later part of Brightside Group PLC as group legal counsel in 2006, where he worked on the group’s admission to trading on AIM. He joined Southern Rock Insurance Company Limited and Eldon Insurance Services Limited in 2013 and is a director of both companies. Gibson qualified as a certified accoun Appointment Appointed to the Board on 5 August 2014. 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 was chairman of the investment the University of Manchester. He is also a registered auditor, being the senior partner of Downham Mayer Clarke. committee for Appointment Appointed to the Board on 2 November 2007. the Audit, Risk and Compliance Chairman of Committee and Chairman of the Remuneration Committee. 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 Legal Advisers Long & Humphrey The Old Courthouse Athol Street Douglas Isle of Man IM1 1LD Kerman & Co LLP 200 Strand London WC2R 1DJ Independent Auditors KPMG Audit LLC Heritage Court 41 Athol Street Douglas Isle of Man IM99 1HN Principal Bankers Royal Bank of Scotland 135 Bishopsgate London EC2M 3UR Consulting Actuaries BWCI Consulting Limited Albert House South Esplanade St Peter Port Guernsey GY1 3BY Pension Fund Investment Manager Thomas Miller Investment (Isle of Man) Limited Level 2 Samuel Harris House 5-11 St George’s Street Douglas Isle of Man IM1 1AJ 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 formal 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 investment companies of commercial property Chellbrook Properties plc and Mountstephen Investments Limited. Appointment Appointed to the Board on 12 February 2009. Nominated Advisor and Broker Beaumont Cornish Limited 2nd Floor Bowman House 29 Wilson Street London EC2M 2SJ Registrar Computershare Investor Services (Jersey) Limited Queensway House Hilgrove Street St Helier Jersey JE1 1ES of Annual Presentation 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 is www.mfg.im which includes investor relations information and contact details. the website Manx Financial Group PLC Directors’ Report 06 The Directors present their annual report and the audited financial statements for the year ended 31 December 2014. The number of shares held by the current Directors is as follows: Principal activities The principal activities of Manx Financial Group PLC (the “Company”) and its subsidiaries (together referred to as the “Group”) are the provision investing activities and wealth of asset and personal finance, management. Conister Bank Limited (the “Bank”), a wholly owned subsidiary of the Company, holds a banking licence issued under section 7 of the Financial Services Act 2008. 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), (6) 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 18. The Directors do not recommend the payment of a dividend (2013: nil). Share capital Particulars of the authorised and issued share capital of the Company are set out in note 25 to the financial statements. Significant shareholdings The number of shares held and the percentage of the issued shares which that number represented as at 9 February 2015 are: Rene Nominees (IOM) Limited1 Jim Mellon Lynchwood Nominees Limited Island Farms Limited Number 26,288,992 17,635,332 10,509,537 4,222,319 % of issued capital 25.76 17.28 10.30 4.14 1 Together with other holdings, Arron Banks, a former Director of the Group, is beneficially interested in 30,339,825 ordinary shares (29.72%) of these 2,336,833 ordinary shares are held by Rene Nominees (IOM) Ltd in trust for Mr Arron Banks, his underage children and Mr John Banks’ underage children. The Directors are not aware of any other individual holding of greater than 3% as at 9 February 2015. 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: John Banks was appointed on 5 August 2014. Jim Mellon1 John Banks2 David Gibson3 Douglas Grant Don McCrickard4 Alan Clarke Juan Kelly Number 31/12/14 17,635,332 2,336,833 1,400,000 505,821 66,666 52,149 27,860 Number 31/12/13 17,635,332 N/A 1,300,000 680,821 66,666 52,149 27,860 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 Jim Mellon. Denham Eke, CEO of MFG, is also a director of Burnbrae Limited. Pershing Nominees Limited holds 968,666 Ordinary Shares and Vidacos Nominees holds 666,666 Ordinary Shares in trust for Jim Mellon. 2 Comprises 2,336,833 Ordinary Shares held by Rene Nominees (IOM) Ltd in trust for Mr John Bank’s underage children and Mr Arron Banks and his underage children. 3 Comprises 1,400,000 Ordinary Shares held by TD Direct Investing Nominees (Europe) Limited in trust for David Gibson. 4 Comprises 66,666 Ordinary Shares held by Hargreaves Lansdown (Nominees) Limited in trust for Don McCrickard. The number of share options held by the current Directors is as follows: Douglas Grant Juan Kelly Number 31/12/14 1,042,466 700,000 Number 31/12/13 342,466 - Directors’ liability insurance The Group maintains insurance cover for Directors’ potential liability. Fixed assets The movement in fixed assets during the year is set out in note 18 to the financial statements. Staff At 31 December 2014 there were 56 members of staff (2013: 54), of whom 6 were part-time (2013: 6). Investment in subsidiaries Investments in the Company’s subsidiaries are disclosed in note 19 to the financial statements. Auditors KPMG Audit LLC, being eligible, have expressed their willingness to continue in office. Manx Financial Group PLC Corporate Governance Report 07 Report on Corporate Governance As an Isle of Man registered company there is no requirement to produce a corporate governance report. However, the Board follows best practice and therefore has prepared such a report. This report illustrates how the Group would comply with the principles set out in the UK Corporate Governance Code principles found in the UK Corporate Governance Code 2012 to corporate governance. relating Remuneration Committee The Remuneration Committee usually meets at least twice a year and comprises of two Non-executive Directors, with the Chairman of the Board, Chief Executive Officer, Head of Human Resources and external advisers attending by invitation when appropriate. It is chaired by Alan Clarke, and is responsible for determining the remuneration of the Chief Executive, the Chairman, the Executive Directors, the Company Secretary and other members of the management. Committee members do not take part in discussions concerning their own remuneration. Nomination Committee The Nomination Committee, which meets at least once a year, is comprised of the whole Board. It is chaired by Jim Mellon and is responsible for making recommendations to the Board on matters relating to the composition of the Board, including executive and non- executive director succession planning, the appointment of new directors and the election and re-election of directors. The Role of the Board Code Principle A.1: Every company should be headed by an effective board, which is collectively responsible for the long-term success of the company. Group’s Approach The Group’s Board is collectively responsible for the long-term success of the organisation. Its principal function is to determine the strategy and policies of MFG Group within an effective control framework which enables risk to be assessed and managed. The Board ensures that the necessary financial and human resources are in place for the Group to meet its objectives and that business and management performances are reviewed. Furthermore, the Board ensures that the Group operates within its constitution, relevant legislation and regulation and that proper accounting records and effective systems of business control are established, maintained, documented and audited. There are at least four formal Board meetings each year. All Board members have the benefit, at the Group’s expense, of liability insurance in respect of their responsibilities as Directors and have access to independent legal or other professional advice if required. The Board has a formal schedule of matters which are reserved for its consideration and it has established three committees to consider specific issues in greater detail, being the Group Audit, Risk and Compliance, Remuneration and Nomination Committees. The Terms of Reference for each of these committees is published on the Group’s website. Group Audit, Risk and Compliance Committee The Group Audit, Risk and Compliance Committee meets at least three times each year and comprises two Non-executive Directors, currently Alan Clarke (Chairman) and David Gibson. The Executive Directors and representatives from the internal and external auditors attend by invitation. Its role is responsible for reviewing the integrity of the financial statements and the balance of information disclosed in the accompanying Directors’ Report, to review the effectiveness of internal controls and risk management systems, to monitor and review the effectiveness of the internal audit function and to consider and recommend to the Board (for approval by the members) the appointment or re-appointment of the external auditor. The Committee reviews and monitors the external auditor’s objectivity, competence, effectiveness and independence, ensuring that if they or their associates are invited to undertake non-audit work it will not compromise auditor objectivity and independence. Division of Responsibilities Code Principle A.2: There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision. Group’s Approach The offices of Chairman and Chief Executive are distinct and held by different people. The role of each is set out in their respective job descriptions. The Chairman is responsible for leading the Board, ensuring its effectiveness in all aspects of its role, promoting a culture of openness of debate and communicating with the Group’s members on behalf of the Board. The Chief Executive is responsible for managing the Group’s business and operations within the parameters set by the Board. The Chairman Code Principle A.3: The Chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role. Group’s Approach The Chairman sets the direction of the Board and promotes a culture of openness and debate by facilitating the effective contribution of Non- executive Directors and ensuring constructive relations between Executive and Non-executive Directors. The Chairman also ensures that Directors receive accurate, timely and clear information. The Board of Directors is committed to best practice in corporate governance. This report explains how the Group has regard to the principles in the UK Corporate Governance Code issued by the Financial Reporting Council in June 2010 and updated in September 2012 (the Code), which was the prevailing guidance for the year covered by this report. Non-executive Directors Code Principle A.4: As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy. Manx Financial Group PLC Corporate Governance Report 08 Group’s Approach The Non-executive Directors are responsible for bringing independent judgement to the discussions held by the Board, using their breadth of experience the business. Their key responsibilities are to constructively challenge and contribute to strategic proposals, and to monitor performance, resources, and standards of conduct, compliance and control, whilst providing support to executive management in developing the Group. and understanding of The Composition of the Board Code Principle B.1: The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. Group’s Approach At the year end, the Board comprised four Non-executive Directors and four Executive Directors. All Non-executive Directors are considered by the Board to be independent in character and judgement and to have an appropriate balance of skills and experience. They are all also considered to be free of any relationship or circumstances which could materially interfere with the exercise of their judgement, impede the provision of constructive challenge to management and provide assistance with the development of strategy. Development Code Principle B.4: All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge. Group’s Approach All new Directors undergo formal induction with any training or development needs being identified during this process. Directors continue to attend external and internal seminars and presentations to maintain and update their knowledge and skills. Information and Support Code Principle B.5: The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. Group’s Approach The Chairman ensures that the Board receives accurate, timely and clear information in a form and of sufficient quality to enable it to fulfil its responsibilities. All Directors have access to the advice and services of the Secretary who is responsible for ensuring compliance with all Board procedures and advising the Board on governance matters. Appointments to the Board Code Principle B.2: There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. Evaluation Code Principle B.6: The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. Group’s Approach The principal purpose of the Nomination Committee is to undertake the assessment of the balance of skills, experience, independence and knowledge on the Board against the requirements of the business, with a view to determining whether any shortages exist. Having completed the assessment, the Committee makes recommendations to the Board accordingly. Appointments to the Board are made on merit, with due regard to the benefits of diversity, including gender. Within this context, the paramount objective is the selection of the best candidate, irrespective of background, and it is the view of the Board that establishing quotas or targets for the diversity of the Board is not appropriate. All Director appointments must be approved by the Company’s Nominated Adviser, as required under the AIM Rules, before they are appointed to the Board. Commitment Code Principle B.3: All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively. to appointment Non-executive Directors are required Group’s Approach Prior to demonstrate that they are able to allocate sufficient time to undertake their duties. Group’s Approach An internal process exists to evaluate, on an annual basis, the performance and effectiveness of individual Directors and of the Board and its committees. The Non-executive Directors are evaluated by the Chairman, taking into account the views of other Directors. Executive Directors are evaluated in accordance with the appraisal framework for Group employees generally with the Chief Executive’s appraisal being conducted by the Chairman, after taking into account the views of other Directors and his immediate subordinates. Re-election Code Principle B.7: All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance. Group’s Approach The Group’s Rules require that all Directors are submitted for election at the AGM following their first appointment to the Board and one third of the Directors are subject to retirement by rotation on an annual basis and one third of the directors shall retire from office by rotation. As stated above, the Nomination Committee is responsible for recommending to the Board whether an individual should be submitted for re-election. Manx Financial Group PLC 09 Financial and Business Reporting Code Principle C.1: The board should present a fair, balanced and understandable assessment of the company’s position and prospects. is fair, balanced and understandable and provides Group’s Approach The Board confirms that the annual report and accounts, taken as a the whole, information necessary for members to assess the Group’s performance, business model and strategy. The responsibilities of the Directors in relation to the preparation of the Group’s accounts are set out on page 12. The Chairman’s Review on pages 2 and 3 provide a detailed review of the Group’s business activities and future prospects. Risk Management and Internal Control Code Principle C.2: The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems. Group’s Approach The Board is responsible for determining a framework for risk management and control, to include the Group’s risk appetite and tolerance. Senior management are responsible for designing, operating and monitoring risk management and internal control processes in line with the risk appetite and tolerance while the Group Audit Risk & Compliance Committee, on behalf of the Board, are responsible for reviewing the adequacy and effective operation of these processes. The role of the Group Audit, Risk and Compliance Committee is described previously, and provides the Board with independent assurance that the Group is operating specifically in accordance with the risk appetite parameters determined and approved by the Board and to ensure that the outcomes for the Group’s various activities are in line with those parameters. The system of internal control overall is designed to enable the Group to achieve its corporate objectives within the Board’s pre-determined risk appetite, not to eliminate risk. The internal audit function, performed in-house, provides independent and objective assurance that these processes are appropriate and effectively applied. Audit Committee and Auditors Code Principle C.3: The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors. Group’s Approach At the end of the year the Group Audit, Risk and Compliance Committee comprised of two Non-executive Directors. The Chairman of the Board is not a member of the Committee. The Board is satisfied that the Committee is comprised of members with recent relevant financial experience who are capable of discharging their duties and responsibilities. The role of the Committee is to review the integrity of the financial statements and the balance of information disclosed in the accompanying Directors’ Report, to review the effectiveness of internal controls and risk management systems, to monitor and review the effectiveness of the internal audit function and to consider and recommend to the Board (for approval by the members) the appointment or re-appointment of the external auditor. The Committee reviews and monitors the external auditor’s objectivity, competence, effectiveness and independence, ensuring that if they or their associates are invited to undertake non-audit work it will not compromise auditor objectivity and independence. The activities of the Group’s internal audit function, which is undertaken in-house, are overseen by the Executives and have direct access to the Committee Chairman. Remuneration Code Principle D.1: Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance. Code Principle D.2: There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration. Group’s Approach The Report on Directors’ Remuneration, prepared by the Chairman of the Group’s Remuneration Committee, is to be found on pages 10 and 11 and explains how the Group complies with the Code Principles relating to remuneration. Details of Directors’ Emoluments during 2014 can be found on page 11. Dialogue with Shareholders Code Principle E.1: There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. Group’s Approach The Group is owned by both individual and institutional shareholders. All shareholders are kept informed of developments and feedback is encouraged both at the AGM and through communication on the Group’s website. Constructive Use of the AGM Code Principle E.2: The board should use the AGM to communicate with investors and to encourage their participation. Group’s Approach Each year the Group sends details of the AGM, including appointment of proxy and voting forms, to members who are eligible to vote. Approval This report was approved by the Board of Directors on 26 February 2015 and signed on its behalf by: Jim Mellon Executive Chairman 26 February 2015 Manx Financial Group PLC Directors’ Remuneration Report 10 Report on Directors’ Remuneration 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. This report illustrates how the Group would comply with the principles set out in the UK Corporate Governance Code principles found in the UK Corporate Governance Code 2012 to Directors’ remuneration. The Group has adopted a Remuneration Policy. This Policy is reviewed periodically by the Remuneration Committee. relating The Level and Components of Executive Director Remuneration Code Principle D.1: Levels of remuneration should be sufficient to attract, retain and motivate Directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of Executive Directors’ remuneration should be structured so as to link rewards to corporate and individual performance. Group’s Approach: The Group’s remuneration policy reflects the Group’s business strategy and objectives as well as sustained and long-term value creation for shareholders. In addition, the policy aims to be fair and provide equality of opportunity, ensuring that: • The Group is able to attract, develop and retain high-performing and motivated employees in the competitive local and wider UK markets; • employees are offered a competitive remuneration package to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contribution to the success of the Group; reflects our culture and values; and that there is full transparency of the Group’s remuneration policy. • • In line with the Board’s approach, which reflects that adopted within other comparable organisations, the Group’s remuneration policy provides for the reward of Executive Directors through salaries and other benefits. Executive Directors’ Emoluments The remuneration for Executive Directors reflects their responsibilities. It comprises basic salary, performance related variable pay when this is considered appropriate, and various benefits detailed below. Performance related payments are not pensionable. As with staff generally, whose salaries are subject to annual reviews, basic salaries payable to Executive Directors are reviewed each year with reference to jobs carrying similar responsibilities in comparable financial organisations, market conditions generally and local employment competition in view of the Group’s geographical position. The Group operates a non-contractual discretionary annual performance related pay scheme based on the trading performance of the Group and the individual employee’s performance assessed for the period under review in a manner which promotes sound risk management and does not promote excess risk taking. The non- contractual discretionary annual performance related pay scheme may be paid in one year but that does not confer any entitlement in future years. Performance assessments are conducted annually to determine the performance rating of each employees’ achievements against a mix targets set and agreed at the beginning of each year between the employee and their manager. No incentives are paid to employees or executives where the performance rating reflects below an agreed expected level for the role employed. The non-contractual discretionary annual performance related pay scheme may be disbursed as a cash bonus through payroll, share based instruments (including share options) or a mixture of both. An element of deferment to align the interests of the employee to the longer term performance of the Group may also be included. Financial Advisors are salaried and commission is calculated on a pre- agreed percentage over target which is set at between 2 to 3 times annual gross salary depending on the size of the Advisor’s client base and their historical performance. Each Financial Advisor is set objectives at the beginning of the year including a 100% pass or pass with learning on their file checks. Where indemnified commission is paid and the underlying client policy lapses and the commission is clawed back then this is reviewed by an Executive Director in order to monitor trends and is then clawed back from the relevant Financial Advisor. Where the Group operates a contractually guaranteed performance bonus scheme, the contractual conditions must be considered by the Remuneration Committee. Executive Directors’ Contractual Terms In keeping with current recommended practice, the standard terms for Executive Director appointments include a contractual notice period of 6 months by the Executive Director. Non-executive Directors’ Remuneration Non-executive Directors do not receive any benefits other than their fees and travelling expenses for which they are reimbursed. The level of fees payable is assessed using to Non-executive Directors benchmarks from a group of comparable financial organisations. Manx Financial Group PLC 11 The Procedure for Determining Remuneration Code Principle D.2: There should be a formal and transparent procedure for developing policy on Executive remuneration and for fixing the remuneration packages of individual Directors. No Director should be involved in deciding his or her own remuneration. Group’s Approach: The Remuneration Committee, comprising two Non-executive Directors, is responsible for setting the remuneration of the Executive Directors and is chaired by Alan Clarke. The Committee also sets the additional payments for the Chairman of the Board, with Committee members not taking part in discussions concerning their own remuneration. The basic Non-executive Director fee is set by the Executive Directors. The Chairman of the Committee usually reports at the Board meeting following a Committee meeting. It is the view of the Committee that Directors’ remuneration for the year has been in accordance with the Group’s stated Remuneration Policy and on behalf of the Committee, I recommend that you endorse this report. An analysis of Directors’ emoluments is as follows: Directors’ emoluments Executives Denham Eke Douglas Grant Juan Kelly Jim Mellon Non-Executives John Banks1 Alan Clarke David Gibson Don McCrickard Remuneration/ Fees £ Performance Related Pay £ 25,000 140,619 146,192 25,000 10,417 37,500 37,500 37,500 - 30,000 30,000 - - - - - Pension £ - 14,135 14,693 - - - - - 2014 Total £ 25,000 184,754 190,885 25,000 10,417 37,500 37,500 37,500 2013 Total £ 25,000 164,407 171,784 25,000 - 37,500 37,500 37,500 Aggregate emoluments 459,728 60,000 28,828 548,556 595,155 1 John Banks was appointed on 5 August 2014. Approval This report was approved by the Board of Directors on 26 February 2015 and signed on its behalf by: Alan Clarke Chairman of the Remuneration Committee 26 February 2015 Manx Financial Group PLC Statement of Directors’ Responsibilities in respect of the Directors’ Report and the financial statements 12 The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and regulations. In addition, the Directors, as required by AIM, have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (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. 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. In preparing these financial statements, the Directors are required to: (cid:1) select suitable accounting policies and then apply them consistently; (cid:1) make judgements and estimates that are reasonable and prudent; (cid:1) (cid:1) 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 13 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 2014 which comprise the Consolidated Income Statement, Consolidated Statement of Other Comprehensive Income, the Consolidated and Parent Company Statements of Financial Position, the Consolidated Statement of Cash Flows and the Consolidated 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 Statements set out on page 12, 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 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: (cid:1) (cid:1) give a true and fair view of the state of the Group’s and Parent Company’s affairs as at 31 December 2014 and of the Group’s profit 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 (VAT) In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosures made in note 20 to the financial statements concerning the reclaim of 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 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 was scheduled to be heard in October 2013. However, this was delayed by HMRC pending reference to a relevant European Court of Judgement in the case of Banco Mais (C183/13). The judgement in this case was released on 10 July 2014 and ruled against the taxpayer; however the impact of the judgement on the VWFS case is unclear and the VWFS is still proceeding with the appeal to the Court of Appeal. The re-appeal is now scheduled for April 2015. 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 2014 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 26 February 2015 Manx Financial Group PLC Consolidated Income Statement 14 For the year ended 31 December Interest income Interest expense Net interest income Fee and commission income Loss on joint venture Fee and commission expense Commission share schemes Net trading income Other operating income Operating income Personnel expenses Other expenses Provision for impairment on loan assets Depositors’ Compensation Scheme recovery Depreciation Realised gains on available for sale financial assets Unrealised loss on financial assets carried at fair value Profit before tax (payable) / recovery Tax (payable) / recovery Profit for the year Basic earnings per share (pence) Diluted earnings per share (pence) The notes on pages 19 to 46 form part of these financial statements. The Directors believe that all results derive from continuing activities. Notes 6 10 19 3(t) 7 8 9 18 16 15 10 11 12 12 2014 £000 2013 £000 13,634 (2,809) 10,825 1,276 (2) (1,102) (3,749) 7,248 97 7,345 (2,931) (1,950) (550) 11 (228) 32 (1) 1,728 (139) 1,589 1.56 0.98 10,750 (2,493) 8,257 1,399 - (990) (2,249) 6,417 163 6,580 (2,863) (1,657) (850) 100 (252) 18 (3) 1,073 14 1,087 1.12 0.78 Manx Financial Group PLC Consolidated Statement of Other Comprehensive Income 15 Notes 2014 £000 2013 £000 16 24 12 12 6 10 (173) 1,422 1.39 0.89 (53) 1,044 1.08 0.76 For the year ended 31 December Other comprehensive income: Items that will be reclassified to profit or loss Available for sale gains taken to equity Items that will never be reclassified to profit or loss Actuarial losses on defined benefit pension scheme taken to equity Total comprehensive income for the period attributable to owners Basic earnings per share (pence) Diluted earnings per share (pence) The notes on pages 19 to 46 form part of these financial statements. Manx Financial Group PLC Consolidated and Company Statement of Financial Position 16 As at 31 December Notes Group 2014 £000 2013 £000 Company 2014 £000 2013 £000 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 Amounts due from Group undertakings Trade and other receivables Investment in joint venture Subordinated loan Deferred tax asset Goodwill Total assets Liabilities Customer accounts Creditors and accrued charges Amounts owed to Group undertakings Loan notes Pension liability Total liabilities Equity Called up share capital Profit and loss account Total equity Total liabilities and equity 14 15 16 17 18 19 19 20 19 19 11 19 21 22 19 23 24 25 6,123 47 18,775 89,338 326 605 - - 1,166 499 - 284 2,344 119,507 100,259 1,715 - 7,165 388 109,527 18,933 (8,953) 9,980 119,507 4,183 48 9,000 75,819 289 629 - - 1,014 - - 394 2,344 93,720 78,115 754 - 6,065 252 85,186 - - - - - - 12,072 350 62 - 3,900 - - 16,384 - 20 2,421 7,165 - 9,606 18,933 (10,399) 8,534 93,720 18,933 (12,155) 6,778 16,384 - - - - - - 12,072 76 130 - 2,000 - - 14,278 - 9 1,848 6,065 - 7,922 18,933 (12,577) 6,356 14,278 The financial statements were approved by the Board of Directors on 26 February 2015 and signed on its behalf by: Jim Mellon Executive Chairman Denham Eke Chief Executive Officer Douglas Grant Group Finance Director The notes on pages 19 to 46 form part of these financial statements. Manx Financial Group PLC Consolidated Statement of Cash Flows For the year ended 31 December RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS Profit before tax on continuing activities Unrealised loss on financial assets carried at fair value (Gain) / loss on disposal of property, plant and equipment Loss on joint venture Depreciation charge Realised gains on available for sale investments Actuarial loss on defined benefit pension scheme taken to equity Pension liability Share-based payment expense / (credit) (Increase) / decrease in trade and other receivables Increase / (decrease) in trade and other payables (Increase) / decrease in commission debtors Notes 18 24 24 25 Net cash inflow from trading activities Increase in loans and advances to customers Increase in deposit accounts 17 2013 £000 1,073 3 17 - 252 (18) (53) 52 (50) 238 (1,408) 23 129 (17,324) 14,384 2014 £000 1,728 1 (5) 2 228 (32) (173) 136 24 (152) 934 (37) 2,654 (13,519) 22,144 Cash inflow / (outflow) from operating activities 11,279 (2,811) CASH FLOW STATEMENT Cash flows from operating activities Cash inflow / (outflow) from operating activities Taxation paid 11,279 - (2,811) - Net cash inflow / (outflow) from operating activities 11,279 (2,811) Cash (outflow) / inflow from investing activities Purchase of property, plant and equipment (Purchase) / sale of available for sale financial instruments Sale of property, plant and equipment Investment in joint venture Payment of deferred consideration 18 16 19 (208) (9,737) 7 (501) - (156) 3,512 - - (335) Net cash (outflow) / inflow from investing activities (10,439) 3,021 Cash flows from financing activities Issue of loan notes Net cash inflow from financing activities Increase in cash and cash equivalents Included in cash flows are: Interest received – cash amounts Interest paid – cash amounts Significant non-cash flows in the year Conversion of loan notes to share capital The notes on pages 19 to 46 form part of these financial statements. 23 1,100 2,055 1,100 1,940 2,055 2,265 13,360 (2,802) 9,072 (2,101) - 500 Manx Financial Group PLC Consolidated and Company Statement of Changes in Equity 18 For the year ended 31 December Group Balance as at 1 January Profit for the year Other comprehensive income Transactions with owners: Shares issued Shares to be issued Share-based payment credit / (expense) (see note 25) Share Capital £000 18,933 - - - - - Retained Earnings £000 (10,399) 1,589 (167) - - 24 2014 £000 8,534 1,589 (167) - - 24 Balance as at 31 December 18,933 (8,953) 9,980 For the year ended 31 December Company Balance as at 1 January Profit for the year Transactions with owners: Shares issued Shares to be issued Share-based payment credit / (expense) (see note 25) Share Capital £000 18,933 - - - - Retained Earnings £000 (12,577) 398 - - 24 2014 £000 6,356 398 - - 24 Balance as at 31 December 18,933 (12,155) 6,778 The notes on pages 19 to 46 form part of these financial statements. 2013 £000 7,215 1,087 (43) 500 (175) (50) 8,534 2013 £000 5,649 432 500 (175) (50) 6,356 Manx Financial Group PLC Notes to the Consolidated Financial Statements 19 1. Reporting entity Manx Financial Group PLC is a company incorporated in the Isle of Man. The consolidated financial statements of Manx Financial Group PLC (the “Company”) for the year ended 31 December 2014 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 (“IFRS”) as adopted by the European Union (EU) and International Financial Reporting Interpretations Committee (IFRIC) interpretations applicable to companies reporting under IFRS, including International Accounting Standards (“IAS”). The Group has continued to apply the accounting policies used for the 2013 annual report, with the exception of those detailed below. The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2014. Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) - - Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) - - - Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36) Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39) IFRIC 21 Levies No significant changes followed the implementation of these standards and amendments. (b) Basis of measurement The financial statements are prepared on a historical cost basis except: (cid:1) (cid:1) 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 power over an investee, exposure or rights to variable returns from its involvement with the investee and the ability to use its power to affect those returns. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Intra-Group balances, income and expenses and unrealised losses or gains arising from intra-Group transactions, are eliminated in preparing the consolidated financial statements. Manx Financial Group PLC Notes to the Consolidated Financial Statements 20 3. Significant accounting policies (b) Accounting for business combinations Business combinations are accounting 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: (cid:1) The fair value of the consideration transferred; plus (cid:1) The recognised amount of any non-controlling interests in the acquiree; plus (cid:1) (cid:1) The net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. If the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less When the excess is negative, a bargain purchase gain is recognised immediately in the income statement. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in the income statement. (c) Property, plant and equipment 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 income statement after taking into account provision for impairment losses (see note 3(e)). Financial assets at fair value through profit or loss A financial asset is classified in this category if it is acquired principally for the purpose of selling in the short term or if so designated by management. The fair value of the financial asset at fair value through profit or loss is based on the quoted bid price at the reporting date. Manx Financial Group PLC 21 Significant accounting policies (continued) 3. (d) Financial assets (continued) Available for sale financial instruments Available for sale investments are non-derivative investments that are designated as available for sale or are not classified as another category of financial assets. Available for sale investments are carried at fair value. Dividend income is recognised in the income statement when the Group becomes entitled to the dividend. Other fair value changes are recognised in other comprehensive income until the investment is sold or impaired, whereupon the cumulative gains and losses previously recognised in other comprehensive income are recognised in the income statement. Investments in subsidiary undertakings Investments in subsidiary undertakings in the parent company statement of financial position are measured at cost less any provision for impairment. Fair value The fair value hierarchy is applied to all financial assets, refer to note 4(c) for further information. Impairment of financial assets (e) The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. This arises if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset, or group of financial assets, that can be reliably estimated. Impairment losses are recognised in the income statement for the year. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers. Loans and other receivables are reviewed for impairment where there are repayment arrears and doubt exists regarding recoverability. The impairment allowance is based on the level of arrears together with an assessment of the expected future cash flows, and the value of any underlying collateral (after taking into account any irrecoverable interest due). Amounts are written off when it is considered that there is no further prospect of recovery. Where past experience has indicated that, over time, a particular category of financial 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, loan notes 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 22 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 income statement. A charge equal to the expected increase in the present value of the plan liabilities, as a result of the plan liabilities being one year closer to settlement, and a credit reflecting the long-term expected return on assets based on the market value of the scheme assets at the beginning of the period, is included in the income statement. The statement of financial position records as an asset or liability as appropriate, the difference between the market value of the plan assets and the present value of the accrued plan liabilities. The difference between the expected return on assets and that actually achieved in the period, is recognised in the income statement in the year in which they arise. The defined benefit pension plan obligation is calculated by independent actuaries using the projected unit credit method and a discount rate based on the yield on 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 income statement represent the contributions payable during the year. Share-based compensation The Group maintains a share option programme which allows certain Group employees to acquire shares of the Group. The change in the fair value of options granted is recognised as an employee expense with a corresponding change in equity. The fair value of the options is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. At each statement of financial position date, the Group revises its estimate of the number of options that are expected to vest and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The share option programme was originally set up for Group employees to subscribe for shares in Conister Trust Limited (now Conister Bank Limited). Since the Scheme of Arrangement, the shareholders of Conister Bank Limited became shareholders of Manx Financial Group PLC. The share option programme is now operated by Manx Financial Group PLC. The fair value is estimated using a proprietary binomial probability model. The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised. Other obligations Provision is made for short-term benefits payable for salaries, holiday pay, social security costs and sick leave on a pro-rata basis and is included within creditors and accrued charges. (i) Leases i) Finance leases and Hire Purchase (“HP”) contracts A Group company is the lessor When assets are subject to a finance lease or HP contract, the present fair value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. HP and lease income is recognised over the term of the contract or lease reflecting a constant periodic rate of return on the net investment in the contract or lease. Initial direct costs, which may include commissions and legal fees directly attributable to negotiating and arranging the contract or lease, are included in the measurement of the net investment of the contract or lease at inception. Manx Financial Group PLC 23 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 income statement on a straight-line basis over the period of the lease. (j) Current and deferred taxation Current taxation relates to the estimated corporation tax payable in the current financial year. Deferred taxation is provided in full, using the liability method, on timing differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred taxation is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred tax is realised. Deferred taxation assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Interest income and expense (k) Interest income and expense are recognised in the income statement using the effective interest rate method. Effective interest rate The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts of the financial instrument to the net carrying amount of the financial asset or financial liability. The discount period is the expected life or, where appropriate, a shorter period. The calculation includes all amounts receivable or payable by the Group that are an integral part of the overall return, including origination fees, loan incentives, broker fees payable, estimated early repayment charges, balloon payments and all other premiums and discounts. It also includes direct incremental transaction costs related to the acquisition or issue of the financial instrument. The calculation does not consider future credit losses. Once a financial asset or a group of similar financial assets has been written down as a result of impairment, subsequent interest income continues to be recognised using the original effective interest rate applied to the reduced carrying value of the financial instrument. (l) Fees and commission income Fees and commission income other than that directly related to the loans is recognised over the period for which service has been provided or on completion of an act to which the fees relate. (m) Programme costs Programme costs are direct expenditure incurred in relation to prepaid card programmes. The costs are recognised over the period in which income is derived from operating the programmes. (n) Segmental reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Group’s primary format for segmental reporting is based on business segments. Manx Financial Group PLC Notes to the Consolidated Financial Statements 24 Significant accounting policies (continued) 3. (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) Defined Benefit Plans: Employee Contributions (Amendments to IAS 19) Annual Improvements to IFRSs 2010 – 2012 Cycle Annual Improvements to IFRSs 2011 – 2013 Cycle IFRS 14 Regulatory Deferral Accounts Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11) Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) Equity Method in Separate Financial Statements (Amendments to IAS 27) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) Annual Improvements to IFRSs 2012 – 2014 Cycle – various standards IFRS 15 Revenue from Contracts with Customers IFRS 9 Financial Instruments Effective date (accounting periods commencing on or after) 1 July 2014 1 July 2014 1 July 2014 1 January 2016 1 January 2016 1 January 2016 1 January 2016 1 January 2016 1 January 2016 1 January 2016 1 January 2017 1 January 2018 The Directors do not expect the adoption of the standards and interpretations to have a material impact on the Group’s financial statements in the period of initial application with the exception of IFRS 9 Financial Instruments. IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and de- recognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. The Group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 9. Given the nature of the Group’s operations, this standard is expected to have a pervasive impact on the Group’s financial statements. In particular, calculation of impairment of financial instruments on an expected credit loss basis is expected to result in an increase in the overall level of impairment allowances. (p) Key sources of estimation uncertainty Management believe that a key area of estimation and uncertainty is in respect of the impairment allowances on loans and advances to customers and goodwill. Loans and advances to customers are evaluated for impairment on a basis described in note 4a(i), credit risk. The Group has substantial historical data upon which to base collective estimates for impairment on HP contracts, finance leases and personal loans. The accuracy of the impairment allowances and provisions for counter claims and legal costs depend on how closely the estimated future cash flows mirror actual experience. An impairment review is performed annually for goodwill at different discount rates to allow for any uncertainty. (q) Fiduciary deposits Deposits received on behalf of clients by way of a fiduciary agreement are placed with external parties and are not recognised in the statement of financial position. Income in respect of fiduciary deposit taking is included within interest income and recognised on an accruals basis. (r) Prepaid card funds The Group 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. Manx Financial Group PLC 25 Significant accounting policies (continued) 3. (s) Foreign exchange Foreign currency assets and liabilities (applicable to the Conister Card Services division only) are translated at the rates of exchange ruling at the reporting date. Transactions during the year are recorded at rates of exchange in effect when the transaction occurs. The exchange movements are dealt with in the income statement. (t) Commission share schemes This represents the cost incurred in relation to certain loan books where commission is paid based on the overall profitability of the relevant book. Each such lending scheme has its own commercially agreed terms. (u) Joint ventures Investments in joint ventures are initially recognised at cost. Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Joint ventures are accounted for using the equity method. The consolidated financial statements include the Group’s share of the income and expenses of the equity accounted investees, after adjustments to align the accounting policies with those of the Group, from the date that joint control commences until it ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. Unrealised gains on transactions between the Company and its equity accounted investees are eliminated to the extent of the Company’s interest in the equity accounted investees. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Investments in joint ventures and associates are kept under review for impairment. Where, in the opinion of the Directors, the net realisable value of an investment falls below the carrying value, a provision is made against the investment and charged to the income statement. 4. Risk and capital management (a) Risk management Introduction and overview The Group has exposure to the following risks from its use of financial instruments: credit risk; (cid:1) (cid:1) liquidity risk; (cid:1) operational risk; and (cid:1) 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”). Manx Financial Group PLC Notes to the Consolidated Financial Statements 26 4. Risk and capital management (continued) (a) Risk management (continued) 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. Credit risk i) Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. 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 Hire Purchase and finance lease receivables, litigation funding loans, unsecured personal loans, secured commercial loans, block discounting and stock plan loans. It is also exposed to credit risk with regard to cash balances and trade and other receivables. Management of credit risk The Board of the Bank delegates responsibility for the management of credit risk to the Credit Committee (“CC”) for loans and ALCO for other assets. The following measures are taken in order to manage the exposure to credit risk: (cid:1) explicit credit policies, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements; (cid:1) 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; (cid:1) 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; (cid:1) limiting concentrations of exposure to counterparties, geographies and industries defining sector limits, lending caps and exposure to minimise interest rate risk; (cid:1) ensuring that appropriate records of all sanctioned facilities are maintained; (cid:1) ensuring regular account reviews are carried out for all accounts agreed by the CC; and (cid:1) 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: 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 2014 £000 89,338 - - 3,043 3,043 (1,754) 1,289 (51) 712 1,001 305 371 2,389 2013 £000 75,819 - - 4,305 4,305 (3,578) 727 (179) 24 123 48 1,404 1,599 Neither past due nor impaired 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. 73,672 85,711 Manx Financial Group PLC 27 4. Risk and capital management (continued) (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, finances leases, vehicle stocking plans, block discounting and secured commercial loan balances, which are sub-categories of loans and advances to customers. In addition, the commission share schemes have an element of capital indemnified. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. At the time of granting credit within the sub-categories listed above, the loan balances due are secured over the underlying assets held as collateral (see note 17 for further details). Concentration of credit risk Geographical Lending is restricted to individuals and entities with Isle of Man or United Kingdom addresses. Segmental The Group is exposed to credit risk with regard to customer loan accounts, comprising Hire Purchase 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 28 4. Risk and capital management (continued) (a) Risk management (continued) i) 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 2014 Customer accounts Other liabilities Sight- 8 days £000 1,865 1,725 >8 days - 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 2,429 29 2,646 1,028 4,282 346 35,498 489 >1 year - 3 years £000 36,904 4,173 >3 years - 5 years £000 21,791 1,990 Total liabilities 3,590 2,458 3,674 4,628 35,987 41,077 23,781 31 December 2013 Customer accounts Other liabilities Sight- 8 days £000 617 754 Total liabilities 1,371 1,817 - 1,817 >8 days - 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 1,270 - 5,359 51 28,766 1,600 >1 year - 3 years £000 30,517 5,790 >3 years - 5 years £000 13,690 - 1,270 5,410 30,366 36,307 13,690 >5 years £000 - 388 388 >5 years £000 - 252 252 Total £000 105,415 10,168 115,583 Total £000 82,036 8,447 90,483 Manx Financial Group PLC 29 4. Risk and capital management (continued) (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 2014 Assets Cash & cash equivalents Available for sale financial instruments Customer accounts receivable Commission debtors Other assets Total assets Liabilities Customer accounts Other liabilities Total liabilities 31 December 2013 Assets Cash & cash equivalents Available for sale financial instruments Customer accounts receivable Commission debtors Other assets Total assets Liabilities Customer accounts Other liabilities Total liabilities Sight- 8 days £000 >8 days - 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Total £000 6,123 - 166 29 47 6,365 1,861 1,715 3,576 - 2,000 2,681 80 - 4,761 2,427 - 2,427 - 10,789 6,519 217 - - 5,986 9,061 - - 17,525 15,047 2,639 960 3,599 4,250 250 4,500 - - 17,107 - - 17,107 34,936 300 35,236 - - 40,478 - - 40,478 34,851 3,750 38,601 - - 13,138 - - 13,138 19,295 1,905 21,200 - - 188 - 4,898 5,086 - 388 388 Sight- 8 days £000 >8 days - 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 4,183 7,000 1,043 16 48 12,290 609 754 1,363 - 2,000 3,222 151 - 5,373 1,815 - 1,815 - - 4,679 61 - 4,740 1,266 - 1,266 - - 6,505 61 - 6,566 5,291 50 5,341 - - 11,837 - - 11,837 28,250 1,460 29,710 - - 38,916 - - 38,916 - - 9,521 - - 9,521 28,792 4,555 12,092 - 33,347 12,092 - - 96 - 4,381 4,477 - 252 252 6,123 18,775 89,338 326 4,945 119,507 100,259 9,268 109,527 Total £000 4,183 9,000 75,819 289 4,429 93,720 78,115 7,071 85,186 Manx Financial Group PLC Notes to the Consolidated Financial Statements 30 4. Risk and capital management (continued) (a) Risk management (continued) ii) Operational risk Operational risk arises from the potential for inadequate systems including systems’ breakdown, errors, poor management, breaches in internal controls, fraud and external events to result in financial loss or reputational damage. Operational risk also occurs when lending through an outsourced partner. The Group manages the risk through appropriate risk controls and loss mitigation actions. These actions include a balance of policies, procedures, internal controls and business continuity arrangements. Operational risk across the Group is analysed and discussed at all Board meetings, with ongoing monitoring of actions arising to address the risks identified. iii) 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 2014 and 2013, 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 £47,000 at 31 December 2014 (2013: £48,000) the potential impact on the results of the Group is relatively small and no sensitivity analysis has been provided for the market price risk. Interest rate risk Interest rate risk exposure in the Bank arises from the difference between the maturity of capital and interest payable on customer deposit accounts, and the maturity of capital and interest receivable on loans and financing. The differing maturities on these products create interest rate risk exposures due to the imperfect matching of different financial assets and liabilities. The risk is managed on a continuous basis by management and reviewed by the Board of the Bank. The Bank monitors interest rate risk on a monthly basis via the ALCO. The matching of the maturity interest rates of assets and liabilities is fundamental to the management of the Bank. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Bank and its exposure to changes in interest rates. Interest rate re-pricing table The following tables present the interest rate mismatch position between assets and liabilities over the respective maturity dates. The maturity dates are presented on a worst case basis, with assets being recorded at their latest maturity and customer accounts at their earliest. 31 December 2014 Assets Cash & cash equivalents Available for sale financial instruments Customer accounts receivable Commission debtors Other assets Total assets Liabilities Customer accounts Other liabilities Total capital and reserves Total liabilities and equity Interest rate sensitivity gap Cumulative >1 month - 3 months £000 Sight- 1 month £000 >3 month - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Non- Interest Bearing £000 6,123 2,000 2,847 - - 10,970 1,861 - - 1,861 9,109 9,109 10,789 6,519 - - 17,308 2,427 - - 2,427 14,881 23,990 5,986 9,061 - - 15,047 2,639 960 - 3,599 11,448 35,438 - 17,107 - - 17,107 4,250 250 - 4,500 12,607 48,045 - 40,478 - - 40,478 34,936 300 - 35,236 5,242 53,287 - 13,138 - - 13,138 34,851 3,750 - - 188 - - 188 19,295 1,905 - - - 326 4,945 5,271 - 2,103 9,980 38,601 (25,463) 21,200 (21,012) 12,083 (6,812) 27,824 6,812 - Total £000 6,123 18,775 89,338 326 4,945 119,507 100,259 9,268 9,980 119,507 - - Manx Financial Group PLC 31 4. Risk and capital management (continued) (a) Risk management (continued) (iv) Market risk (continued) Interest risk re-pricing table (continued) 31 December 2013 Assets Cash & cash equivalents Available for sale financial instruments Customer accounts receivable Commission debtors Other assets Total assets Liabilities Customer accounts Other liabilities Total capital and reserves Total liabilities and equity Interest rate sensitivity gap Cumulative Sight- 1 month £000 >1 month - 3 months £000 >3 month - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 4,183 9,000 4,265 - - 17,448 2,424 754 - 3,178 14,270 14,270 - - - - - 4,679 - - 4,679 1,266 - - 1,266 3,413 - 6,505 - - 6,505 5,291 - - 5,291 1,214 - 11,837 - - 11,837 28,250 50 - 28,300 (16,463) 17,683 18,897 2,434 - 38,916 - - 38,916 28,792 1,460 - 30,252 8,664 11,098 - - 9,521 - - 9,521 12,092 4,555 - 16,647 (7,126) - - 96 - - 96 - - - - 96 3,972 4,068 Non- Interest Bearing £000 Total £000 - 4,183 - - 289 4,429 4,718 - 252 8,534 8,786 (4,068) - 9,000 75,819 289 4,429 93,720 78,115 7,071 8,534 93,720 - - 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 (2013: 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 2014 Interest rate sensitivity gap Weighting £000 31 December 2013 Interest rate sensitivity gap Weighting £000 Sight- 1 month £000 >1 month - 3 months £000 >3 month - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Non- Interest Bearing £000 9,109 0.000 - 14,881 0.003 45 11,448 0.007 80 12,607 0.014 5,242 0.027 (25,463) (21,012) 0.054 0.115 (6,812) 0.000 177 142 (1,375) (2,416) - (3,347) Sight- 1 month £000 >1 month - 3 months £000 >3 month - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 14,270 0.000 - 3,413 0.003 10 1,214 0.007 (16,463) 0.014 8 (230) 8,664 0.027 234 (7,126) 0.054 (385) 96 0.115 11 Non- Interest Bearing £000 (4,068) 0.000 Total £000 - - - (352) Total £000 - - Manx Financial Group PLC Notes to the Consolidated Financial Statements 32 4. Risk and capital management (continued) (b) Capital Management Regulatory capital The Group considers capital to comprise share capital, share premium, reserves and subordinated loans. Capital is deployed by the Board to meet the commercial objectives of the Group, whilst meeting regulatory requirements in the Bank. The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor, depositor and market confidence and to sustain future development of the business. In implementing current capital requirements the capital position in the Bank is also subject to prescribed minimum requirements by the FSC in respect of the ratio of total capital to total risk-weighted assets. The requirement applies to the Bank (a wholly owned subsidiary of Manx Financial Group PLC) as a component of Manx Financial Group PLC and has been adhered to throughout the year. (c) Fair value of financial instruments The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair values using other valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. Valuation models The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements: (cid:1) Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments; (cid:1) Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and (cid:1) Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Financial instruments measured at fair value – fair value hierarchy The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position. 31 December 2014 Investment securities Government bonds Equities Level 1 £000 Level 2 £000 Level 3 £000 18,775 47 18,822 - - - - - - Total £000 18,775 47 18,822 Manx Financial Group PLC 33 4. Risk and capital management (continued) (c) Fair value of financial instruments (continued) Financial instruments not measured at fair value The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised. 31 December 2014 Assets Cash and cash equivalents Loans and advances to customers Commissions receivable Trade and other receivables Liabilities Customer accounts Creditors and accrued charges Loan notes Level 1 £000 Level 2 £000 Level 3 £000 - - - - - - - - - 6,123 89,338 326 1,167 96,954 100,259 1,715 7,165 109,139 - - - - - - - - - Total fair values £000 6,123 89,338 326 1,167 96,954 100,259 1,715 7,165 109,139 Total carrying amount £000 6,123 89,338 326 1,167 96,954 100,259 1,715 7,165 109,139 Where available, the fair value of loans and advances is based on observable market transactions. Where observable market transactions are not available, fair value is estimated using valuation models, such as discounted cash flow techniques. Input into the valuation techniques includes expected lifetime credit losses, interest rates, prepayment rates and primary origination or secondary market spreads. For collateral-dependent impaired loans, the fair value is measured based on the value of the underlying collateral. Input into the models may include data from third party brokers based on over the counter trading activity, and information obtained from other market participants, which includes observed primary and secondary transactions. 5. Segmental analysis Segmental information is presented in respect of the Group’s business segments. The Directors consider that the Group currently operates in one geographic segment, the Isle of Man 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 2014 Asset and Personal Finance £000 Litigation Finance £000 Conister Card Services £000 Wealth Management £000 Investing Activities £000 Net interest income Operating income Profit/(loss) before tax (expense) / recovery Capital expenditure Total assets 10,825 8,492 1,733 183 118,515 - - 45 - - - (108) (150) - 106 - 1,255 146 25 824 Total £000 10,825 7,345 - - (46) 1,728 - 62 208 119,507 Manx Financial Group PLC Notes to the Consolidated Financial Statements 34 5. Segmental analysis (continued) For the year ended 31 December 2013 Net interest income Operating income Profit/(loss) before tax recovery Capital expenditure Total assets 6. Interest income Asset and Personal Finance £000 Litigation Finance £000 Conister Card Services £000 Wealth Management £000 Investing Activities £000 8,614 5,548 1,165 156 92,044 - - (214) - 677 - 14 14 - 220 - 1,375 276 - 649 Total £000 8,257 6,580 1,073 (357) (357) (168) - 156 130 93,720 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. 7. Other expenses Professional and legal fees Marketing costs IT costs Establishment costs Communication costs Travel costs Bank charges Insurance Irrecoverable VAT Other costs 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) / charge in respect of collective allowances for impairment comprises: Collective impairment allowances made Release of allowances previously made Total (credit) / charge for collective allowances for impairment Total charge for allowances for impairment 2014 £000 496 131 348 355 71 72 71 111 206 89 2013 £000 281 122 298 502 48 94 77 97 (41) 179 1,950 1,657 2014 £000 890 (212) 678 2014 £000 23 (151) (128) 550 2013 £000 1,249 (416) 833 2013 £000 17 - 17 850 Manx Financial Group PLC 35 2014 £000 11 2013 £000 100 9. Depositors’ Compensation Scheme Provision in respect of the Isle of Man Government Depositors’ Compensation Scheme On 27 May 2009, Kaupthing Singer & Friedlander (Isle of Man) Limited activated the Isle of Man Government Depositors’ Compensation Scheme (the Scheme) in connection with its liquidation. Three payments of £73,880 were made in to the Scheme. Repayments from the Financial Supervision Commission of £133,506 and £34,424 have been received and a further £53,710 is expected from the Scheme. 10. Profit before tax (payable) / recovery The profit before tax (payable) / recovery for the year is stated after charging: Interest expense payable to depositors Interest expense payable on loan notes (Profit) / loss on sale of fixed assets Share options expense / (credit) Directors’ remuneration Directors’ fees Directors’ pensions Directors’ bonuses Auditors’ remuneration: as Auditors current year non-audit services Pension cost defined contribution scheme Operating lease rentals for property 11. Tax expense Current tax expense Current year Deferred tax expense Origination and reversal of temporary differences Utilisation of previously recognised tax losses Changes to estimates for prior years Total tax expense / (recovery) 2014 £000 2,360 449 (5) 24 286 179 29 60 85 26 12 213 2014 £000 29 12 123 (25) 110 139 Reconciliation of effective tax rate Profit before tax on continuing operations Tax using the Banking division’s domestic tax rate Effect of tax rates in foreign jurisdictions Non-deductible expenses Tax exempt income Timing differences in current year Origination and reversal of temporary differences in deferred tax Changes to estimates for prior years 2014 £000 1,728 173 12 40 (58) (15) 12 (25) 10.0% - 40.1% (79.4)% (14.0)% (36.4)% (23.4)% 10.0% 0.9% 2.3% (3.3)% (0.9)% 0.6% (1.5)% Total tax expense 8.1% 139 (13.1)% 2013 £000 2,136 357 17 (50) 325 163 32 30 72 18 9 331 2013 £000 - (39) 50 (25) (14) (14) 2013 £000 1,073 107 - 43 (85) (15) (39) (25) (14) Manx Financial Group PLC Notes to the Consolidated Financial Statements 36 11. Tax expense (continued) The main rate of corporation tax in the Isle of Man is 0% (2013: 0%). However the profits of the Group’s Manx banking activities are taxed at 10% (2013: 10%). The profits of the Group’s subsidiaries that are subject to UK corporation tax are taxed at a rate of 21.5% (2013: 20%). The value of tax losses carried forward and timing differences reduced to £284,000 (2013: £394,000) and resulted in an expense of £110,000 (2013: £14,000 credit) to the income statement. 12. Earnings per share Profit for the year Weighted average number of ordinary shares in issue Basic earnings per share Diluted earnings per share Total comprehensive income for the period Weighted average number of ordinary shares in issue Basic earnings per share Diluted earnings per share 2014 2013 £1,589,000 £1,087,000 102,070,252 1.56p 0.98p 96,899,019 1.12p 0.78p £1,422,000 £1,044,000 102,070,252 1.39p 0.89p 96,899,019 1.08p 0.76p The basic earnings per share calculation is based upon the profit for the year after taxation and the weighted average of the number of shares in issue throughout the year. The diluted earnings per share calculation assumes that all convertible loan notes, warrants and share options have been converted/exercised at the beginning of the year where they are dilutive. 13. Company profit The profit on ordinary activities after taxation of the Company is £398,000 (2013: £432,000). 14. Cash and cash equivalents Cash at bank and in hand Short-term deposits Group Company 2014 £000 6,123 - 6,123 2013 £000 4,137 46 4,183 2014 £000 - - - Cash at bank includes an amount of £25,000 (2013: £241,699) representing receipts which are in the course of transmission. The remaining maturity of short-term deposits is as follows: Less than 8 days Group Company 2014 £000 - - 2013 £000 46 46 2014 £000 - - 2013 £000 - - - 2013 £000 - - 15. Financial assets at fair value through profit or loss The investment represents shares in 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. Dividend income of £350,000 has been received from this investment since it was made. Manx Financial Group PLC 37 16. Available for sale financial instruments UK Government Treasury Bills Group Company 2014 £000 18,775 18,775 2013 £000 9,000 9,000 2014 £000 - - 2013 £000 - - UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in equity. 17. Loans and advances to customers Group Hire Purchase balances Finance lease balances Litigation funding Unsecured personal loans Vehicle stocking plans Block discounting Secured commercial loans Secured personal loans Gross Amount £000 52,059 11,422 - 3,514 1,284 6,766 7,347 8,751 91,143 2014 Impairment Allowance £000 (881) (714) - (148) - - (62) - (1,805) Carrying Value £000 51,178 10,708 - 3,366 1,284 6,766 7,285 8,751 89,338 Gross Amount £000 46,222 8,882 2,164 3,815 1,476 5,192 6,991 4,834 79,576 2013 Impairment Allowance £000 (813) (707) (1,487) (306) - - (435) (9) (3,757) Carrying Value £000 45,409 8,175 677 3,509 1,476 5,192 6,556 4,825 75,819 Collateral is held, in the form of underlying assets, for Hire Purchase, finance leases, vehicles stocking plans, block discounting, secured commercial and personal loans. An estimate of the fair value of collateral on past due or impaired loans and advances is not disclosed as it would be impractical to do so. Specific allowance for impairment Balance at 1 January Specific allowance for impairment made Release of allowances previously 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 2014 £000 3,578 890 (212) (2,502) 1,754 2014 £000 179 23 (151) 51 1,805 2013 £000 4,150 460 - (1,032) 3,578 2013 £000 162 17 - 179 3,757 Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2014 £125,983 (2013: £93,187) had been lent on this basis. In the Group’s ordinary course of business, advances may be made to Shareholders but all such advances are made on normal commercial terms. Manx Financial Group PLC Notes to the Consolidated Financial Statements 38 17. Loans and advances to customers (continued) As detailed below, at the end of the current financial year two loan exposures exceeded 10% of the capital base of the Group (2013: two loan exposures). Exposure Block discounting facility Outstanding Balance 2014 £000 3,501 Outstanding Balance 2013 £000 2,229 Facility limit £000 5,500 Hire Purchase and finance lease receivables Loans and advances to customers include the following Hire Purchase and finance lease receivables: Less than one year Between one and five years Gross investment in Hire Purchase and finance lease receivables The investment in Hire Purchase and finance lease receivables net of unearned income comprises: Less than one year Between one and five years Net investment in Hire Purchase and finance lease receivables 18. Property, plant and equipment 2014 £000 30,615 50,456 81,071 2014 £000 22,514 40,967 63,481 Group Cost As at 1 January 2014 Additions Disposals As at 31 December 2014 Accumulated depreciation As at 1 January 2014 Charge for year Disposals As at 31 December 2014 Carrying value at 31 December 2014 Carrying value at 31 December 2013 Leasehold Improvements £000 IT Equipment £000 Furniture & Equipment £000 Motor Vehicles £000 182 - - 182 38 18 - 56 126 144 1,081 182 - 1,263 714 179 - 893 370 367 600 - - 600 488 22 - 510 90 112 84 26 (30) 80 78 9 (26) 61 19 6 2013 £000 25,495 42,754 68,249 2013 £000 19,540 35,564 55,104 Total £000 1,947 208 (30) 2,125 1,318 228 (28) 1,520 605 629 Manx Financial Group PLC Investment in Group undertakings 19. The Company has the following investments in subsidiaries incorporated in the Isle of Man: Carrying value of investments Nature of Business 31 December 2014 % Holding Date of Incorporation 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 05/12/1935 05/11/2007 15/05/2009 24/12/1996 39 Total 2013 £000 10,067 - - 2,005 12,072 Total 2014 £000 10,067 - - 2,005 12,072 Amounts owed to and from group undertakings are unsecured, interest-free and repayable on demand. Subordinated loans MFG has issued several subordinated loans as part of its equity funding into the Bank. Interest charged is at the discretion of the lender. Creation Maturity Interest rate Company 2014 £000 Company 2013 £000 22 July 2013 25 October 2013 11 February 2014 27 May 2014 9 July 2014 17 September 2014 Total subordinated loans Goodwill 22 July 2018 22 October 2020 11 February 2024 27 May 2024 9 July 2024 17 September 2026 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% Edgewater Associates Limited (“EWA”) ECF Asset Finance PLC (“ECF”) Three Spires Insurance Services Limited (“Three Spires”) Goodwill impairment 1,000 1,000 500 500 500 400 3,900 Group 2014 £000 1,849 454 41 2,344 1,000 1,000 - - - - 2,000 Group 2013 £000 1,849 454 41 2,344 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. 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. The sensitivity of the analysis was tested using additional discount factors of 15% and 20% on varying sales volumes. Manx Financial Group PLC Notes to the Consolidated Financial Statements 40 19. Investment in Group undertakings (continued) Goodwill impairment (continued) There has been no change in the detailed method of measurement for EWA and ECF when compared to 2013. The goodwill generated on the purchase of Three Spires has been reviewed at the current year end and is considered adequate given its income streams referred to EWA. On the basis of the above reviews no impairment to goodwill has been made in the current year. Investment in joint venture On 7 August 2014, a joint venture agreement was entered into between Manx Financial Limited, previously a subsidiary of the Group, and Andrew Flowers. Additional shares were issued such that 49.9% of the voting share capital was sold for £500,000, creating £1,000 share premium in the company. Control was lost on this day and consequently the assets and liabilities of the subsidiary were derecognised. There was no profit or loss incurred upon ceding control. Manx Financial Group PLC has invested £501,000 for 50.1% of the voting share capital and has provided a corporate guarantee to block funders in Manx Financial Limited. 20. Trade and other receivables Prepayments and other debtors Depositors Compensation Scheme Receivable VAT recoverable Group Company 2014 £000 646 54 466 2013 £000 471 77 466 1,166 1,014 2014 £000 62 - - 62 2013 £000 130 - 130 Included in trade and other receivables is an amount of £466,000 (2013: £466,000) relating to a reclaim of value added tax (“VAT”). Conister Bank Limited, as the Group VAT registered entity, has for some time considered the VAT recovery rate being obtained by the business was neither fair nor reasonable, specifically regarding the attribution of part of the residual input tax relating to the HP business not being considered as a taxable supply. Queries have been raised with the Isle of Man Government Customs & Excise Division (“C&E”), and several reviews of the mechanics of the recovery process were undertaken by the Company’s professional advisors. The decision of the First-Tier Tax Tribunal released 18 August 2011 in respect of Volkswagen Financial Services (UK) Limited (“VWFS”) v HM Revenue & Customs (TC01401) (“VWFS Decision”) added significant weight to the case put by the Bank and a request for a revised Partial Exemption Special Method was submitted in December 2011. The proposal put forward by the Bank was that the revised method would allocate 50% 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 was scheduled to be heard in October 2013. However, this was delayed by HMRC pending reference to a relevant European Court of judgement in the case of Banco Mais (C183/13). The judgement in this case was released on 10 July 2014 and ruled against the taxpayer; however the impact of the judgement on the VWFS case is unclear and the VWFS is still proceeding with the appeal to the Court of Appeal. The re-appeal is now scheduled for April 2015. 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 (from Q4 2012 the Bank reverted back to the previous method). On the basis of the discussions and correspondence which have taken place between the Bank and C&E, in addition to the VWFS appeal, the Directors are confident that the VAT claimed referred to above will be secured. Manx Financial Group PLC 2014 £000 98,420 1,839 100,259 Group Company 2014 £000 1,389 326 1,715 2013 £000 577 177 754 2014 £000 - 20 20 Group Company Notes JM BL SR CDC UP 2014 £000 1,750 1,200 460 500 3,910 3,255 7,165 2013 £000 1,750 1,200 460 500 3,910 2,155 6,065 2014 £000 1,750 1,200 460 500 3,910 3,255 7,165 41 2013 £000 75,989 2,126 78,115 2013 £000 - 9 9 2013 £000 1,750 1,200 460 500 3,910 2,155 6,065 21. Customer accounts Retail customers: term deposits Corporate customers: term deposits 22. Creditors and accrued charges Commission creditors Other creditors and accruals 23. Loan notes Related parties J Mellon Burnbrae Limited Southern Rock Insurance Company Limited Copper Development Corporation Unrelated parties JM – Two loans, one of £500,000 maturing on 31 July 2017 with interest payable of 7% per annum, and one of £1,250,000 maturing on 26 February 2015, paying interest of 9% per annum. Both loans are convertible at the rate of 4 pence and 9 pence respectively. JM is also entitled to 8.3 million warrants at an exercise price of 6 pence which lapse on 31 July 2017. See note 30 for an extension of this loan note subsequent to the year end. BL – One loan consisting of £1,200,000 maturing on 31 July 2017 with interest payable of 7% per annum. Jim Mellon is the beneficial owner of BL and Denham Eke is also a director. The loan is convertible at a rate of 4 pence. BL is also entitled to 20 million warrants at an exercise price of 6 pence which lapse on 31 July 2017. SR – One loan consisting of £460,000 maturing on 26 February 2015 with interest payable of 9% per annum. The loan is convertible at a rate of 9 pence. SR is also entitled to 8.3 million warrants at an exercise price of 6 pence which lapse on 24 October 2017. Arron Banks, a significant Shareholder, a non-executive Director, holds a major stake in SR. John Banks a non-executive Director is also a director of SR. See note 30 for an extension of this loan subsequent to the year end. CDC – One loan of £350,000 maturing on 5 September 2017 with interest payable of 5% per annum, and another loan of £150,000 maturing on 3 October 2017 paying interest of 5% per annum. Denham Eke is a director of CDC. UP – Fifteen loans consisting of an average £217,000, with an average interest payable of 5.33% per annum. The earliest maturity date is 28 April 2015 and the latest maturity is 14 July 2019. With respect to the convertible loans, the interest rate applied was deemed by the Directors to be equivalent to the market rate with no conversion option hence no equity component has been recognised with respect to any of these loans. Manx Financial Group PLC Notes to the Consolidated Financial Statements 42 24. Pension liability The Conister Trust Pension and Life Assurance Scheme (“Scheme”) operated by the Company is a funded defined benefit arrangement which provides retirement benefits based on final pensionable salary. The Scheme is closed to new entrants and the last active member of the Scheme left pensionable service in 2011. The Scheme is approved in the Isle of Man by the Assessor of Income Tax under the Income Tax (Retirement Benefit Schemes) Act 1978 and must comply with the relevant legislation. In addition, it is registered as an authorised scheme with the Insurance and Pensions Authority (“IPA”) in the Isle of Man under the Retirement Benefits Scheme Act 2000. The Scheme is subject to regulation by the IPA but there is no minimum funding regime in the Isle of Man. The Scheme is governed by two corporate trustees, Conister Bank Limited and Boal & Co (Pensions) Limited. The trustees are responsible for the Scheme’s investment policy and for the exercise of discretionary powers in respect of the Scheme’s benefits. The rules of the Scheme state: “Each Employer shall pay such sums in each Scheme Year as are estimated to be required to provide the benefits of the Scheme in respect of the Members in its employ”. Exposure to risk The Company is exposed to the risk that additional contributions will be required in order to fund the Scheme as a result of poor experience. Some of the key factors that could lead to shortfalls are: investment performance – the return achieved on the Scheme’s assets may be lower than expected; and (cid:1) (cid:1) mortality – members could live longer than foreseen. This would mean that benefits are paid for longer than expected, increasing the value of the related liabilities. In order to assess the sensitivity of the Scheme’s pension liability to these risks, sensitivity analyses have been carried out. Each sensitivity analysis is based on changing one of the assumptions used in the calculations, with no change in the other assumptions. The same method has been applied as was used to calculate the original pension liability and the results are presented in comparison to that liability. It should be noted that in practice it is unlikely that one assumption will change without a movement in the other assumptions; there may also be some correlation between some of these assumptions. It should also be noted that the value placed on the liabilities does not change on a straight line basis when one of the assumptions is changed. For example, a 2% change in an assumption will not necessarily produce twice the effect on the liabilities of a 1% change. No changes have been made to the method or to the assumptions stress-tested for these sensitivity analyses compared to the previous period. The investment strategy of the Scheme has been set with regard to the liability profile of the Scheme. However, there are no explicit asset-liability matching strategies in place. Restriction of assets No adjustments have been made to the balance sheet items as a result of the requirements of IFRIC 14 issued by IASB’s International Financial Reporting Interpretations Committee. Scheme amendments There have not been any past service costs or settlements in the financial year ending 31 December 2014 (2013: none). Funding policy The funding method employed to calculate the value of previously accrued benefits is the Projected Unit Method. Following the cessation of accrual of benefits when the last active member left service in 2011, regular future service contributions to the Scheme are no longer required. However, additional contributions will still be required to cover any shortfalls that might arise following each funding valuation. Manx Financial Group PLC 43 24. Pension liability (continued) The most recent full actuarial valuation was carried out at 1 April 2013, which showed that the market value of the Scheme’s assets was £1,283,000 representing 80.0% of the benefits that had accrued to members, after allowing for expected future increases in earnings. As required by IAS 19 this valuation has been updated by the actuary as at 31 December 2014. 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 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 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 Actuarial gain 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 Expense recognised in other comprehensive income Actuarial gain on plan assets Actuarial loss on defined benefit obligations 2014 £000 1,345 (1,733) (388) 2014 £000 1,497 (62) 70 228 1,733 2014 £000 1,245 58 49 55 (62) 1,345 2014 £000 70 (58) 12 113 2014 £000 55 (228) (173) 2013 £000 1,245 (1,497) (252) 2013 £000 1,427 (66) 68 68 1,497 2013 £000 1,227 59 10 15 (66) 1,245 2013 £000 68 (59) 9 74 2013 £000 15 (68) (53) Manx Financial Group PLC Notes to the Consolidated Financial Statements 44 24. Pension liability (continued) The actuarial assumptions used to calculate Scheme liabilities under IAS19 are as follows: 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 Rate of increase in deferred pensions Discount rate applied to scheme liabilities Inflation 2014 % - 2.70 2.00 5.00 3.80 2.80 2013 % - 3.10 2.10 5.00 4.80 3.20 2012 % - 2.30 1.80 5.00 4.90 2.25 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. 25. Called up share capital Authorised: Ordinary shares of no par value At 31 December 2013 & 2014 Issued and fully paid: Ordinary shares of no par value At 31 December 2013 & 2014 Number 150,000,000 Number 102,070,252 £000 18,933 There are a number of convertible loans at 31 December 2014 of £3.41 million (2013: £3.41 million) involving warrants of 28.3 million (31 December 2013: 28.3 million) (see note 23 for further details). The total number of warrants in issue at 31 December 2014 is 36.6 million (2013: 36.6 million) (see note 23 for further details). On 23 June 2014, 1.75 million share options were issued to Executive Directors and senior management within the Group at an exercise price of 14 pence. The options vest over three years with a charge based on the fair value of 8 pence per option at the date of grant. Share options Share option reserve As at 31 December 2013 Grant of options Lapses As at 31 December 2014 No of Shares 000 1,056 1,750 - 2,806 Value £000 118 24 - 142 Performance and service conditions attached to share options that have not fully vested are as follows: (a) The options granted on 25 June 2010 (1,056,000 options) will vest if the mid-market share price of £0.30 is achieved during the period of grant (10 years ending 25 June 2020). (b) The options granted on 25 June 2010 and 23 June 2014 require a minimum of three years continuous employment service in order to exercise upon the vesting date. Manx Financial Group PLC 45 25. 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 Risk-free interest rate (based on government bonds) Forfeiture rate 26. Analysis of changes in financing during the year Analysis of changes in financing during the year Balance at 1 January Issue of loan notes 25 June 2010 £0.03 £0.11 £0.11 47% 3 2.24% 0% 2014 £000 24,998 1,100 26,098 23 June 2014 £0.08 £0.14 £0.14 55% 3 0.50% 0% 2013 £000 22,943 2,055 24,998 The 2014 closing balance is represented by £18.933 million share capital (2013: £18.933 million) and £7.165 million of loan notes (2013: £6.065 million). 27. Regulator The Group is regulated by the Isle of Man Government Financial Supervision Commission licensed to undertake banking activities and conduct investment business. In addition the Group is regulated by the Financial Conduct Authority in the United Kingdom for credit and brokerage related activities. 28. Related party transactions Cash deposits During the year the Bank held cash on deposit on behalf of Jim Mellon (Executive Chairman of MFG) and companies related to Jim Mellon and Denham Eke (Chief Executive Officer of MFG). Total deposits amounted to £0.067 million (2013: £0.069 million), with normal commercial interest rates in accordance with the standard rates offered by the Bank are paid on these deposits. Funds held in a fiduciary capacity Fiduciary deposits The Bank acts as agent bank to a number of customers, for balances totalling £4.9 million (2013: £7.8 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. A number of funds were held and accounts maintained in connection with the fiduciary services that the Bank offers to companies connected with Jim Mellon and Denham Eke. As at 31 December 2014, total balances held were £4,803,972 (2013: £7,596,279). Staff and Commercial loans Details of staff loans are given in note 17 to the financial statements. Normal commercial loans are made to various companies connected to Jim Mellon and Denham Eke. As at 31 December 2014, £0.193 million of capital and interest was outstanding (2013: £0.343 million). Intercompany recharges Various intercompany recharges are made during the course of the year as a result of the Bank settling debts in other Group companies. In addition, MFG provided investment management and administration services for £0.439 million (2013: £0.600 million). Manx Financial Group PLC Notes to Consolidated Financial Statements 46 28. Related party transactions (continued) Investments The Bank’s only equity investment (note 15) is in a company whose largest shareholder is Jim Mellon and Denham Eke acts as a non-executive director. Subordinated loans Manx Financial Group PLC has advanced £1.9 million of subordinated loans in 2014 (2013: £2.0 million) with various maturity dates (see note 19). Loan notes See note 23 for a list of related party loan notes as at 31 December 2014 and 2013. Key management personal (including Executive Directors’) remuneration Short-term employee benefits 29. Operating leases Non-cancellable lease rentals are payable in respect of property and motor vehicles as follows: 2014 £000 397 Less than one year Between one and five years Over five years 30. Subsequent events 2014 2013 Leasehold Property £000 317 493 213 1,023 Other £000 - - - - Leasehold Property £000 297 825 336 1,458 2013 £000 371 Other £000 - - - - The two outstanding Convertible Loan Notes ("Notes") that were otherwise due for maturity on 26 February 2015 (see note 23) have been extended by five years. The Notes together total £1.71 million, of which Jim Mellon, the Group's Executive Chairman, holds £1.25 million and Rock Holdings Limited (subsequently assigned to Southern Rock Insurance Limited), a company connected with John Banks, a non-executive Director of the Group, holds £0.46 million. As a result, and having considered other methods of raising capital, the independent Directors have resolved, following negotiations with the lenders, to extend the two Notes for a further five years to 26 February 2020 at a reduced interest rate of 6.5%, down from the previous 9.0%. All other terms remain as those announced on 2 March 2010. Clarendon House Victoria Street Douglas Isle of Man IM1 2LN Tel: (01624) 694694 Fax: (01624) 624278 www.mfg.im 

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