Manx Financial Group
Annual Report 2021

Plain-text annual report

_________________________________ ANNUAL REPORT 2021 PLC Welcome to Manx Financial Group PLC Integrity through independence and service An independent banking group founded in 1935, domiciled in the Isle of Man Group Financial PLC Manx (“Company” or “MFG”) is an AIM-listed company (LSE: MFX.L) which has subsidiaries (together referred to as “Group”) engaged in a suite of financial services based in the Isle of Man and the UK. These companies offer financial services to both retail and commercial MFG's strategy is to grow organically and through strategic acquisition to further augment the range of services it offers. customers. Principal wholly owned subsidiaries:  Conister Bank Limited  Conister Finance & Leasing Ltd  Blue Star Business Solutions Limited  Edgewater Associates Limited  Manx FX Limited Blue Star Business Solutions Limited (“BBSL”) is a finance broker providing asset finance and commercial loans in the UK to the small and medium sized enterprises market. BBSL was acquired as part of the Group’s strategy its distribution in the UK broker market. increase to Conister Finance & Leasing Ltd (“CFL”) is a subsidiary of the Bank. It is a credit broker providing brokerage of hire purchase (“HP”) and leasing finance facilities in the UK. CFL is regulated by the FCA in the UK and registered as a designated business by the FSA in the Isle of Man. Conister Bank Limited (“Bank”) is a licensed independent bank, regulated by the Isle of Man Financial Services Authority (“FSA”), the UK’s Financial Conduct Authority (“FCA”) and is a full member of Isle of Man’s Association of Licensed Banks. the The Bank provides a variety of financial products and services, including savings accounts, asset financing, personal loans, loans to small and medium sized enterprises, block discounting and other specialist secured credit facilities to the Isle of Man and the UK consumer and business sectors. Edgewater Associates Limited (“EAL”) largest firm of Independent is the Financial Advisors (“IFA”) in the Isle of Man and is regulated by the FSA. EAL provides a bespoke and personal service to Isle of Man residents and to the Group’s business and personal customers and advises on assets in excess of £368 million (2020: £361 million). Manx FX Limited (“MFX”) provides foreign access exchange and international payment processing facilities. competitive to target customers MFX’s are corporates and private clients who have a foreign exchange and international payment requirement via foreign exchange providers. their UK Chairman’s Statement Business Model and Strategy Environmental, Social and Governance Report Risk Management Corporate Governance Report Directors, Officers and Advisers Audit, Risk and Compliance Committee Directors’ Remuneration Report Directors’ Report Annual Financial Statements’ Contents Statement of Directors’ Responsibilities Independent Auditor’s Report Consolidated Statement of Profit or Loss and Other Comprehensive Income Company Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Company Statement of Financial Position Consolidated and Company Statements of Changes in Equity Consolidated Statement of Cash Flows Company Statement of Cash Flows Notes to the Consolidated Financial Statements 4 7 9 10 15 19 22 23 27 28 29 30 36 38 39 40 41 42 43 44 CHAIRMAN’S STATEMENT Dear Shareholders Introduction The current uncertainties in global markets, fuelled firstly by the effects of the COVID pandemic, and now the Ukraine crisis, look to dominate the economic environment for the foreseeable future as our previous world order is challenged. It seems clear that inflationary pressures will continue for some considerable time. Interest rates will increase as central banks attempt to address these issues in their efforts to stabilise money supply and maintain the availability of credit. The United Kingdom, however, is better placed than some as it does not suffer from certain of the structural weaknesses of its competitors. Notwithstanding, there is no doubt that the operating expense of doing business, especially wage inflation, will increase, driven by the mounting cost of living, coupled with a very tight labour market. With uncertainty comes opportunity and, whilst the pandemic has undoubtedly had a negative impact on our income statement, we have managed to strengthen our balance sheet during the last two years. In this time, our lending has increased by £50 million from £179 million to £229 million; our total assets by £56 million from £253 million to £309 million; and funds available to shareholders by £3 million from £22 million to £25 million. All this positions us well for the future. Our enhanced balance sheet has allowed the Group to start paying dividends again after a 16-year hiatus. The Board’s commitment is to return 10% of the Group’s profit available to shareholders each year in the form of cash or shares. This year, for shareholder approval will be 0.2443 pence per share (2020: 0.1724 pence per share) - a 42% uplift, as we continue to reward our loyal shareholders the development of the Group. total dividend recommended in a manner that will not impede the Financial Performance The year’s financial performance is pleasing despite two further lockdowns and continued economic uncertainty. Profit before tax payable increased by £1.0 million to £3.0 million (2020: £2.0 million), a growth of 50%. Of particular note is Conister Bank’s record lending of £212.6 million (2020: £167.2 million). This, along with our strategy of reducing onerous commission payments, has led to net trading income growing by £3.6 million to £19.0 million (2020: £15.4 million) and operating income by £3.6 million to £20.0 million (2020: £16.4 million). Operating expenses, excluding provisions and recovered VAT, increased by £1.2 million to £11.7 million (2020: £10.5 million) with £0.3 million of this relating to headcount as we bolster our UK establishment, both organically and through our acquisitions. The balance, £0.8 million, relates to higher IT, operational, and legal costs as we continued to improve our technology and grow our loan book. Total costs, excluding the one-off VAT credits, increased by £1.8 million to £17.1 million (2020: £15.3 million), with additional provisions of £0.4 million to £4.4 million (2020: £4.0 million), together with depreciation and amortisation of intangibles increasing by £0.2 million to £1.1 million (2020: £0.9 million). Our operating income ratio, measured as operating income less impairment provisions on loans and advances to customers as a percentage of interest income, improved by 7.8% to 68.0% (2020: 60.2%), reflecting the development of a more efficient operating environment. Turning to the balance sheet, our total assets showed a £40.8 million improvement to £308.8 million (2020: £268.0 million), driven mainly by a loan book increase of £36.1 million. Our loyal Isle of Man depositor base continued to support our growth with deposits increasing by £35.2 million to £253.5 million (2020: £218.3 million). Over the year, our loan to deposit ratio improved by 1.9% to 90.4% (2020: 88.5%) – a key measure of operational efficiency. Total liabilities increased by £38.5 million to £284.0 million (2020: £245.5 million), leading to an increase in total equity of £2.6 million to £25.0 million (2020: £22.4 million). Key Objectives In this uncertain economic environment, our fundamental focus continued to be the protection of shareholder value. Thus, our strategic concentration remained as previously reported, namely to:  Provide the highest quality of service throughout our operations to all customers, ensuring that their treatment is both fair and appropriate;  Adopt a pro-active strategy to managing risk within a structured and compliant regime;  Concentrate on developing our core business by considered acquisitions, increasing prudential lending, and augmenting the range of financial services we offer;  Maintain the implementation of an enhanced and scalable IT infrastructure to better service the operational requirements of a growing Group without the requirement for a disproportionate increase in headcount and other associated operational costs;  Continue to develop our Treasury management to improve the return on the liabilities side of our balance sheet; and  Manage our balance sheet to exceed the regulatory requirements for capital adequacy. Environmental, Social and Corporate Governance We recognise the value and contribution that businesses such as the Group can make to society, in protecting the environment, being responsible and ensuring good practice through the services and support it provides. We have witnessed a rapid growth in the international focus on sustainability, tackling dangerous climate change and, in particular, the part that the finance sector is being asked to play in meeting these challenges. We now integrate ESG across our business, in our decision making and in what we do. Through our stewardship and engagement with those whom we work, we encourage and finance others to be more sustainable. We do this by understanding and responding to the ESG issues that are material to both us and to our stakeholders. We have incorporated this philosophy in our strategy, risk management and governance as described in greater detail later in this Report. Page | 4 CHAIRMAN’S STATEMENT Conister Bank Limited The Bank continued to progress a prudent lending strategy with the loan book increasing by £41.0 million to £234.4 million (2020: £193.4 million). We recorded growth in both of our markets, namely, our home market, the Isle of Man, and in the UK. The Isle of Man market demand for loan finance has virtually returned to its pre-pandemic levels and the Bank has improved its market share through flexible online offerings and being accredited to the Isle of Man Government’s Business Support Schemes. On Island, the Bank lent a record £42.9 million (2020: £34.9 million) to consumers and Small and Medium Sized Enterprises (“SMEs”) with over 60% of this originating from our online portal. through to support SMEs In the UK, the Bank lent £40.9 million in conjunction with the British Business Bank its accreditation to the UK Government Loan Schemes. These schemes indemnified the Bank for between 80% to 100% of any loss. Since the year-end, the Bank has been accredited to provide a further £20.0 million of liquidity through the new Recovery Loan Scheme (“RLS”) which came into effect on 1 January 2022. With the tapering of Government guarantee support, the RLS will provide the Bank with a guaranteed 70% of any loss incurred. These guarantee schemes are important to the Bank as the government support, whether from the Isle of Man or the UK, provide a considerable level of insulation against loss. These are a safer form of lending during these difficult times and allow the Bank the opportunity to re-build its pipeline as businesses adapt the new economic environment. to The Bank continues to seek acquisitions that provide access to niche lending markets in the UK. By owning the customer, the Bank continued its strategy to reduce its reliance on other introducers and their expensive commissions. In the last five years, I am pleased to say, commissions have decreased by 58%, or £4.9 million, from £8.4 million in 2017 to a more normalised commission level of £3.5 million in 2021 (2020: £3.6 million). Over the same five-year period, interest income has increased by £1.3 million to £22.0 million (2020: £20.7 million). The Bank’s Isle of Man depositor base remains very loyal with a retention rate in excess of 70%. Whilst we continue to consider new products for this market, it remains our intention to reduce our on-Island reliance. I expect to announce more on this topic in the coming months. During the year, the Bank continued to attract deposits at historically low rates to fund lending with cash and cash equivalents and debt securities totalling £58.5 million (2020: £57.4 million). We continued to apply our liquidity in our preferred markets: the Isle of Man; the UK Government backed schemes; the UK Structured Finance markets; and the UK credit broker market. We have been building our Structured Finance team over the last three years, and this year the Bank lent £114.1 million (2020: £96.9 million) through this distribution channel. Structured Finance is an area we expect to grow our presence further in the coming years. Turning to the overheads, personnel expenses increased by £0.3 million reflecting the additional staff cost associated with our UK growth strategy with overheads overall increasing to £8.3 million (2020: £7.4 million). We continued to focus on favourable customer outcomes and with the pandemic this has necessitated a level of forbearance which runs in tandem with lending through the Government support schemes. The Bank’s forbearance agreements reduced by 43% during the year. This, along with loan book growth of £41.0 million, allowed our provisioning to only increase by £0.3 million to £4.3 million (2020: £4.0 million), reflecting the continued prudent approach we have taken during the pandemic. Depreciation and amortisation remained constant at £0.6 million. In total, the Bank’s cost base increased by £1.1 million to £13.2 million (2020: £12.1 million) but, driven by the increase in turnover, the Bank’s profit before tax margin increased by 1.8% to 5.0% (2020: 3.2%). Total assets increased by £36.6 million to £296.8 million (2020: £260.2 million), a growth of 14%. Shareholder funds increased by £1.1 million to £31.2 million (2020: £30.1 million). The balance sheet has strengthened over the two years of the pandemic by 24% or £6.2 million, to £31.2 million from £25.0 million in 2020. Edgewater Associates Limited We have re-focused and resourced this business to meet the demands of legislation relating to the provision of regulated financial advice on the Isle of Man. In addition, through a project to improve our technology, our customer segmentation will allow an improved customer focused journey which will also deliver operational efficiencies. Despite progressing the above projects and the negative impact of two extensive Isle of Man lockdowns preventing client meetings, the business achieved income growth of 9.5% to £2.3 million (2020: £2.1 million), with recurring income increasing by 9.1% to £1.2 million (2020: £1.1 million). Encouragingly, with the markets improving, the assets under advice grew by £7 million to £368 million (2020: £361 million). Operations incurred one-off costs mainly relating to the above projects and professional fees, which after adjustment, generated an implied underlying profit of £0.2 million (2020 adjusted: nil). We expect, assuming no further Covid related lockdowns, a further improved financial performance in 2022. Manx FX Limited Our foreign exchange advisory continued to perform positively and recorded a record profit for the year of £1.2 million (2020: £1.1 million), with a marginal increase in the cost to income ratio to 19.0% (2020: 17.3%) as we build resilience. This is a highly cash generative business which contributed £1.0 million (2020: £0.6 million) to the Group’s treasury. We were successful in seeking ways to increase market share, and showed a growth of 26% in 2021, further reducing any reliance on certain market sectors. The expansion strategy will require the business to be re-branded as MFX Limited in the coming months. to Blue Star Business Solutions Limited With two UK lockdowns in the year, the business’s traditional markets were badly impacted. However, through the Bank’s accreditation loan schemes, the business was able to grow its brokered lending to £14.3 million (2020: £7.5 million). Of the total advanced, the Bank wrote £8.8 million (2020: £3.7 million) with the balance being passed to other funders – providing the business with a second income stream. the UK Government guaranteed Page | 5 CHAIRMAN’S STATEMENT The business was profitable in its own right and contributed £0.5 million (2020: £0.4 million) to the Group’s income this year. We acquired this business in April 2019 and we will incur our final contractual deferred consideration payment in April 2022. So far this has been a very successful acquisition. Ninkasi Rentals & Finance Limited The business changed its name from Beer Swaps Limited to Ninkasi Rentals & Finance Limited on 16 November 2021 to more accurately reflect its core business. The business continued to be the largest tank lessor in the UK brewing market with a fleet size 261 (2020: 185) providing 1.2 million litres of brewing capacity (2020: 0.7 million litres). A key measure of performance is the deployment of its fleet which, despite the 41% increase in fleet size and the resulting 72% increase in brewing capacity, is currently 89% (2020: 88%). The business, in addition to being profitable in its own right, generated £1.4 million (2020: £0.6 million) to the Group’s income this year. The Business Lending Exchange Limited On 11 October 2021, we announced the purchase of the remaining shareholding in this business by exercising the option we negotiated in October 2016. The enterprise value of the business at acquisition was £2.2 million for which we paid £1.3 million including a significant deferred element. This business specialises in prudent lending through their experienced management team to the profitable sub-prime SME market, a sector in which the Bank lacked meaningful access. In addition to being profitable in its own right, the business generated £0.4 million (2020: £nil) to the Group’s income. Outlook Against a backdrop of inflation, increasing interest rates and the tapering of government support schemes, 2022 will be a challenging year but it will also bring opportunity. On the Isle of Man, the lending market is buoyant and the Bank has new products in development which will allow it to increase market share, particularly for those markets currently untapped. In the UK, the Bank does not operate in the mainstream clearing bank markets but in niche, resilient sectors and, as such, we expect the competitive environment to remain similar to this year. Further, it already has a healthy pipeline for its Structured Finance products which, along with its accreditation to government support schemes, will form the backbone to our loan book growth next year. Uncertainty, whilst historically challenging for our Isle of Man IFA business, should not impact Edgewater Associates Limited to the same extent as the constraints forced upon the operation during the pandemic. Conversely, our FX business has thrived on currency swings, and the current global concerns should allow its profitability. this business to maintain Our existing investments in Blue Star Business Solutions Limited (financing technology); Ninkasi Leasing & Rental Limited (leasing fermentation tanks) and The Business Lending Exchange Limited (lending to sub-prime SMEs) are all performing well and we seek to replicate this success with similar acquisitions. In summary, our diversity will continue to be a strength during this period of uncertainty. Board changes In November, I announced changes to the Board composition. Denham Eke, our previous CEO, has moved to the newly created position of Executive Vice-Chairman. I would like to put on record my thanks to Denham for his capable leadership during his tenure. Douglas Grant, previously our CFO, has accepted the position of CEO in Denham’s stead. James Smeed, previously our Group Financial Controller, has, in turn, accepted the position of CFO and joined the Board together with Greg Jones as an Independent Non-Executive Director. Greg also joins the Board of the Bank as a Non-Executive Director and as a member of the Audit, Risk and Compliance Committee. Greg will be an invaluable addition to the Group, particularly in providing assistance in matters both legal and tax, and also by broadening the already significant skill range of our Independent Directors. I believe these appointments further strengthen our Board and I look forward to working with my colleagues to meet the challenges and opportunities our industry will provide in the coming years. Changes to our Memorandum and Articles of Association As we continue with our expansion, it has become apparent to the Board that we will have to modify our Memorandum and Articles of Association if we are to meet the regulatory licence application requirements for additional jurisdictions. Thus, at the forthcoming General Meeting, shareholders will be presented with a number of amendments to adopt. Whilst initially these changes may appear complex, their sole intention is to provide an enhanced layer of protection for our current banking licence and any additional licences we may seek to secure in the future. This requirement will be explained more thoroughly in a Circular which will accompany the Notice for the General Meeting. Thank you The last two years have proved difficult for our staff, both personally and professionally, but they have been a great credit to the Group. I would like to take this opportunity to thank them all for their dedication to both our customers and to our business during these difficult times. But it is not only our staff I need to thank, but also all our other stakeholders for the support provided to the Group over the year. Jim Mellon Executive Chairman 9 March 2022 Page | 6 STRATEGIC REPORT BUSINESS MODEL AND STRATEGY MFG has subsidiaries engaged in a suite of financial services 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 organically and through strategic acquisition to further augment the range of services it offers. A summary of the strategic objectives for each principal subsidiary is set out below. alternatives to be confident that it can raise the necessary deposits when required. The Bank’s acquisition strategy is to gain market share in markets it already operates within or to gain access to a desirable market through an existing reputable, profitable operator. Conister Bank Limited (“Bank”) The Bank’s Board of Directors (“Bank’s Board”) has set strategic objectives, aligned to its strategic plan. These objectives provide the framework for setting risk appetite statements and tolerances for all material risks. The strategic objectives set are:  Maintain capital adequacy;  Deliver stable earnings growth;  Secure stable and efficient access to funding and liquidity;  Maintain stakeholder confidence; and  Progress its Environmental Social and Governance (“ESG”) strategy. These strategic objectives provide the link between the Bank’s strategic planning and its risk management framework, using risk appetite statements, measures and tolerances to manage risk on a day-to-day basis and are reviewed annually and approved by the Bank’s Board. Key in considering the Bank’s judgement of appetites is its assessment of its regulatory environment (both in the Isle of Man (“IOM”) and the United Kingdom (“UK”); the IOM deposit market; access to regulatory capital; the IOM and UK credit markets; the suitability of its product range; concentrations of advances and historic arrears. The aim is to deliver controlled growth, by providing adequate returns with strong credit profiles. Having considered the above in light of the COVID-19 pandemic and Brexit, drawing on both internal and external resources, the Bank continues to believe the credit markets in which it operates will deliver growth with liquidity sourced from both its Balance Sheet and the IOM’s substantial deposit base. This growth will be achieved through the expansion of existing products organically, including participating in IOM and UK government business support schemes and through acquisition. This strategy can be analysed by the two geographical areas the Bank operates within, namely the IOM and the UK. The Bank is proud of its heritage and remains heavily centric in the IOM but recognised that as its UK loan book grows it would need to create a UK presence to manage and grow this aspect of its business. Sourcing reliable funding underpins the Bank’s growth objectives. The Bank’s strategy in this area is to secure a diversified, low cost suite of liquidity alternatives to draw upon in order to support its lending strategy. The IOM deposit market remains a key source of liquidity which the Bank accesses through its fixed-term deposit and notice account products. The Bank recognises that it has an opportunity to increase its market share as a result of the reduction in competition experienced in this market and/or by increasing interest rates. As such, the Bank believes that it has sufficient reliable Regarding the former, the Bank continues to enjoy a positive lending experience within the Structured Finance and UK credit broker market and currently has circa £172 million of net loans outstanding. The Bank’s decision to incorporate ESG response within its strategic objectives for 2021 has seen great progress made in the year. In the next 12 months the Bank will publish a summary of its first Sustainability Report setting out its material ESG issues and objectives, work done and ESG performance. The Bank’s programme of ESG integration and its ESG stewardship in its external relationships has seen the Bank:  Adopt and champion five United Nations Sustainable Development Goals: o Good Health & Well Being; o Affordable & Clean Energy; o Decent Work and Economic Growth; o Sustainable Cities & Communities; and o Climate Action.  Adopt a green finance strategy in the provision of its services;  Recognise the UN principles for Responsible Banking;  Become a supporter of the Task Force on Climate Related Financial Disclosures;  Undertake and continue with annual carbon footprint  and greenhouse gas emissions assessments; and Implement an ESG integration plan and programme of work across regular the Bank engagement with staff, customers and other stakeholders on ESG. including Edgewater Associates Limited (“EAL”) EAL is the largest IFA firm in the IOM and is regulated by the Isle of Man Financial Services Authority (“FSA”). Its strategic objectives are to:  Grow and service its client base;  Increase assets under advice; and  Grow and develop its staff complement. EAL is a generalist IFA practice with a diverse mix of clients requiring a broad range of products and services covering: First time buyers - mortgages;   Newly qualified professionals - protection, savings, school fees;  Established clients - wealth management, retirement planning; and  General insurance clients - home, travel, commercial and specialist. Page | 7 STRATEGIC REPORT BUSINESS MODEL AND STRATEGY After four acquisitions and an active data cleansing review, EAL now has an active client base of approximately 7,000 with associated assets under advice of £368 million (2020: £361 million). Whilst EAL will continue to grow and develop its standard business model, it will always be open to new opportunities. It remains nimble and ready to move with economic and regulatory changes as they arise; its team remains up-to-date against industry standards and trends. It retains an appetite for growth either through additional acquisition opportunities that may arise, or via organic growth from its existing clients and business partners with whom it has built strong relationships. Diversification opportunities are also encouraged and pursued, as per its successful programme to grow or build Employee Benefit Group Schemes. This incorporates staff pensions (including pension freedom), protection, private medical cover, and death in service. To keep pace with its development it will continue to train talented people to progress to rounded, professional advisers who are able to fit into succession planning. To supplement this, it also takes the opportunity to recruit quality experienced advisers and para-planners who can further enhance its team. Manx FX Limited (“MFX”) The strategic objectives of MFX are:    To be the first choice for international payments and foreign exchange of corporations in the IOM; To maintain, develop and strengthen existing relationships; To increase the number of referrals to their foreign exchange business partners with a view of onboarding new accounts. MFX target customers are corporates and private clients who have a international payment requirement via its UK foreign exchange providers. foreign exchange and The IOM offers a diversified range of industries and sectors. For the next 12 months MFX will concentrate its efforts in developing new business opportunities both on IOM and in other jurisdictions. MFX has the ability to negotiate upfront agreed foreign exchange margins and applies price transparency which underpins the professional relationship it provides. The international payment fees offer competitive value, at reduced rates compared with local high street banks. Blue Star Business Solutions Limited (“BBSL”) The strategic objectives of BBSL are to continue to grow its direct model to niche suppliers through the distribution of government guaranteed schemes whilst growing its traditional pipeline to allow it to migrate to its ordinary course of business when these schemes conclude. Further, BBSL will continue to expand its panel of funders apart from the Bank with whom to place loans to maximise its sources of revenue. Finally, BBSL will continue to develop its sales force to allow greater market penetration. Ninkasi Rentals & Finance Limited (“Ninkasi”) This business remains well positioned to gain more market share through its unique leasing options and that will remain its core objective for the next 12 months. In addition, Ninkasi will consider expanding its market to Europe by either a direct distribution strategy or in partnership with a complementary business. If progressed, this expansion will be in a limited and controlled manner utilising existing assets and finance products to minimise downside risk. Further, Ninkasi will manage its utilisation rate to a more normal level through the acquisition of additional fermentation tanks. The Business Lending Exchange Limited (“BLX”) BLX will continue to grow the loan book prudently in existing markets through the UK credit broker network and use existing market attractive products in a customer focused way to ensure the best possible customer outcome. Page | 8 STRATEGIC REPORT ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”) The Group’s Material ESG Issues The Group and its subsidiaries have a long history of supporting the people and businesses in the communities it serves. With a wide range of ESG issues in the spotlight we identify those that are the most material and make the largest impact on the Group and those that are most important to our stakeholders and where we can make the greatest contribution in what we do. In 2021 the Group undertook its first ESG materiality assessment through a process of workshops and interviews. Community Investment – Continue to invest and support the people and businesses in the communities it serves. Conduct & Compliance – Exemplar of good business conduct and compliance. Equality, Diversity & Inclusion – Providing equal opportunity to its diverse group of employees who feel valued and safe in being able to contribute to the business. Access to Finance & Financial Services – Providing access to finance and services to those who may be disadvantaged or excluded from other sources of finance. Talent Attraction & Retention - The Group is seen as a place where people would like to work. It remains able to attract and retain the best talent for its business. Training & Education – Ensuring the Group’s employees have access to continuous and focused training and education. Continuing to share its knowledge with its stakeholders. Data Privacy and Security - Protect and manage responsibly the data of those the Group engages with in accordance with its regulatory obligations, consents and notices. Financial Resilience & Performance – In the Group’s strategies, risk management and governance, continue to provide strong financial resilience and outstanding performance across its businesses. Systemic Risk Management - Through the Group’s governance and control mechanisms continue to provide and mitigate against systemic risks across the business. Customer and Client Experience – Continuously improving its customer & client experience in the provision of its services. Regulatory Change – Keeping pace or ahead of and responding purposefully to regulatory change. Digital Access - Providing leading digital access to its services and information for its customers and stakeholders. ESG Integration into Financial Analysis – Incorporating ESG in the Group’s assessments, decision making and the choices it makes. Financing the Transition - To finance the transition to a more sustainable world including tackling climate change, resource depletion and biodiversity loss. Page | 9 RISK AND GOVERNANCE RISK MANAGEMENT Risk management overview Effective risk management is crucial to MFG’s sustainability. The MFG’s Board of Directors (“Board”) is ultimately accountable for the effective governance of risk management. The Board maintains its oversight and responsibilities in terms of the three lines of defence risk governance model set out below. Determining the Group’s risk tolerance and appetite through enterprise risk management is a key element of MFG’s corporate governance framework. It is primarily designed to assist the Group in enhancing its corporate governance framework and intended to reinforce the key elements of widely accepted and long-established Quoted Companies Alliance (“QCA”) corporate governance principles. A fundamental principle contained in the code, is for effective risk management: MFG has in place a Risk Management Framework (“RMF”) to support the implementation of some of the principles of the MFG Governance Framework at subsidiary level. The RMF supports the Board and senior management in fulfilling their respective duties in relation to the sustainable operation of the business. This includes the integration of ESG its stewardship. The risk management system is supported by policies, processes and activities relating to the taking, management and reporting of risk. the business and through in Management and accountability The Audit, Risk and Compliance Committee (“ARCC”) is operated at a Group level and currently comprises of three experienced Non-executive Directors who are qualified accountants. Only members of the ARCC have the right to attend ARCC meetings to allow for independence. However, other individuals representing Executive Management, Risk, Compliance and Internal and External Audit are invited by the Chairman of the ARCC to attend all or part of any meeting as and when appropriate. The main objectives of the ARCC are to review operations and ensure that they are conducted to the highest possible standards. This is accomplished by providing an independent objective assurance function specifically for, but not limited to: Internal Controls and Risk Management Systems; Whistleblowing and Fraud; Risk and Compliance; Internal Audit and External Audit. It provides oversight of compliance with all legislation, regulation and applicable codes of practice in the jurisdictions that MFG conducts business; and reviews policies, procedures and processes to effectively identify, quantify and manage all material risks and to advise on best practice. RMF The following overview of the key governance components that make up the MFG system of governance illustrates the crucial role of the RMF: RMF - Culture The risk culture, which forms part of MFG’s overall culture, encompasses the tone at the top of the organisation and a set of shared attitudes, values, behaviours and practices that characterise how individuals at MFG consider risk in their day- to-day business activities. Learnings are taken from previous incidents and ongoing assessment to ensure continuous improvement in the management of risk. All individuals are trained to understand the importance of effective risk management and ensure that risks associated with their role are appropriately understood, managed and reported. Individuals at all levels communicate risk related insights in a timely, transparent and honest manner. This culture is driven from the top by the Board and Executive Management through how they communicate, make decisions and motivate the business. Managers and leaders ensure that in all their actions and behaviours they continually reinforce the culture that the effective management of risk is critical to MFG’s success and that every individual plays a role in the management of risk. RMF - Appetite Risk appetites are currently only set at subsidiary level and set out the maximum amount of risk that it is prepared to accept in the pursuit of delivering on business objectives. The risk appetite considers all the risks detailed under “Principal risks” on page 12 and is reviewed annually, and as the operating environment changes, it is constantly measured against stated appetite to take appropriate action. RMF - Risk identification, measurement and control Having a robust understanding of the risks to which the business is exposed is crucial to ensure that all material risks are appropriately monitored, managed and reported on. Each individual within the Group in conjunction with their manager is responsible for understanding the risks associated with their role. An understanding of risk is developed through the identification, appropriate, measurement of risks to which the business is exposed. and, where assessment These processes are performed as part of strategy setting, strategy execution and day-to-day operations and are referred to as risk and control assessments. The Risk team provides tools to aid managers and individuals in developing an understanding of risk within their respective business responsibilities. The risk and control assessment process of understanding risk and reviewing the adequacy and effectiveness of related controls and risk mitigation approaches is generally performed on a regular basis, at least annually, and is reported to and governed by:  A high level risk assessment to identify the top risks enabling work to progress in a risk focused manner on completing risk and control assessments, in order to build a key controls monitoring programme;  Management Committees, including a review of roles and responsibilities to ensure that all material risks are captured and formally considered prior to presentation to the ARCC and the Board;  Policies within the policy framework to ensure that the relevant Management Committee is accountable for the policies that support their risk, and to reduce the workload for the ARCC and the Board, enabling them to focus on overseeing and challenging the RMF; and Page | 10 RISK AND GOVERNANCE RISK MANAGEMENT  Board approved risk appetite statements, and the design of an underlying risk appetite measures framework, to be owned and monitored by the relevant Management Committee. RMF - Three lines of defence and key assurance functions As part of its overall RMF, MFG has adopted best practice monitoring and control mechanisms by implementing the three lines of defence governance and combined assurance model. This means that responsibility for governance and oversight is allocated throughout the organisation according to the three lines of defence principles. The three lines of defence governance model is regarded as international best practice for ensuring good governance (including governance within risk and capital management) across an organisation. The emphasis is placed on ownership, responsibility, independence, assurance, communication, oversight and transparency across MFG’s governance. The term ‘key assurance function’ refers to a properly authorised function, whether in the form of a person, unit or department, serving as a control or ‘checks and balances’ function from a governance perspective, and which carries out such activities. These functions typically are second and third line of defence functions. First line of defence The first line of defence e.g. business management is primarily accountable risk origination and management in accordance with risk policy and strategy. This includes implementing responses. identifying, assessing risks and the day-to-day for Second line of defence The second line of defence is responsible for the development and maintenance of the frameworks and policies. The second line provides oversight of, and challenge to, the first line of defence and drives the implementation of the frameworks and policies. Third line of defence The third line of defence is the independent assurance function providing overall assurance the Board on governance, risk management, and internal controls. The third line of defence comprises of internal audit, external audit and other independent assurance providers. The third line of defence is completely independent from the management of the day-to-day business activities. to RMF - MFG assurance functions MFG has effective systems of risk management and internal control. The tasks, processes and obligations of the key assurance functions are transparent and clearly defined, with regular exchange of information between the functions. Each of the functions is structured to ensure that the function has the necessary authority, independence, resources, expertise and access to the Board and all relevant employees and information to exercise its authority. The minimum assurance functions within MFG include:  Risk management function;  Compliance function; and  Internal Audit function. The departmental head of each of these key functions possesses the necessary skills, experience and knowledge required for the specific positions they exercise, and meet all suitability and ‘fit and proper’ requirements. Written guidelines for these functions are in place, and compliance with them is assured on a regular basis. All of the key functions within MFG have a direct reporting line to the ARCC and the Board. MFG has developed a combined assurance model to effectively manage the organisation’s significant risks and material matters through a combination of the assurance service providers and functions described above. RMF - Internal Capital Adequacy Assessment Process (“ICAAP”) Overview ICAAP is a key strategic and risk management tool for the Bank. It is a key component of the Bank’s planning process during the short and medium-term. The Bank’s lead regulator, the FSA, requires the Bank to establish and maintain an ongoing internal adequacy assessment process which is appropriate to the nature and scale of its business and review that process annually and evidence that review. Methodology The Bank’s ICAAP process is as follows: Formulation of the Bank’s strategy and budget Strategic plans are prepared annually for the forthcoming year, which will consider the Bank’s risk appetite, key market sectors to target, products to leverage/introduce, headcount, operational and capital investment required. Risk assessment The Executive Team will liaise with the Risk and Compliance department to determine the material risks in the Bank based on incidents and breaches, Internal Audit reports, Risk and Compliance report findings and issues raised at the Board and Committee meetings. Stress testing and reverse stress testing The Finance department uses Bank of England market assumptions for stress testing and stress the five-year forecasts to identify any capital deficiencies. Reverse stress testing is also used based on the assumption that the Bank ceases to trade, coupled with a run-off scenario to determine the capital distribution. Reverse stress testing is used to explore the vulnerabilities of the Bank’s strategy and plans to extreme adverse events that would cause the business to fail in order to facilitate contingency planning. Calculation of capital requirement and buffers Following the setting of strategy, risk assessment and stress tests, the Bank will then calculate its capital requirements by considering the following areas:  Pillar I – The calculation is based on the minimum regulatory requirement under Pillar I of 10.0% of risk weighted assets for material risks;  Pillar II – Assessment of any additional business risks not covered by the minimum Pillar I requirement, plus Page | 11 RISK AND GOVERNANCE RISK MANAGEMENT an assessment of Pillar II risks based upon the current material risk assessment and stress tests, to determine whether any additional capital buffers are deemed appropriate;  Pillar III – Pillar III establishes measures to make better use of market discipline. Pillar III applies only at the top consolidated level of a banking group and is therefore generally not considered to be applicable to IOM incorporated banks as per FSA ICAAP guidance; and  Buffers – The Bank assesses its position to industry standard for regulatory buffers and calculates its position based on its overall exposures to different jurisdictions. Review, challenge and adoption of the ICAAP The ICAAP is prepared by the Finance department in conjunction with the Risk and Compliance department, and reviewed by the Bank’s Executive Team, Risk Management Committee, the ARCC, Internal Audit and the External Auditor prior to approval by the Bank’s Board. It is used to measure and benchmark the Bank’s risk appetite and to forecast capital usage under both stressed and normal conditions. The ICAAP is challenged at all stages of the review process and presented to the Bank’s Board by the ARCC for approval prior to being submitted to the FSA. The ICAAP is regularly reviewed and updated throughout the year by management and referred to the ARCC and the Bank’s Board. ICAAP Results The Bank has completed its ICAAP testing for 2021 in compliance with regulatory requirements. Despite the severity of the risk scenarios modelled, the Bank satisfied the capital and leverage requirements for the purpose of the stress test. Principal risks As a result of the RMF, identified on pages 11 to 12, the Group has exposure to the following key risks:  Strategic;  Credit risk including counterparty credit;  Operational risk including regulatory;  Conduct;  Liquidity;  Interest rate;  Regulatory; and  Reputation. The Group has considered the above key risks that it faces and the mitigating controls against those risks: Strategic risk Strategic risk is the risk to the Group’s revenue as set within the budget and the medium-term plans arising through sub- optimal implementation of the strategic plan due to either internal or external factors faced by its subsidiaries. Controls and mitigation The Group controls and mitigates this risk via a number of measures:  Subsidiaries generally commence formal planning process in September for the forthcoming year, to inform the budget submitted to the boards their throughout the Group for approval. In reality, the planning process is continuous and responsive to change in the internal and external environment;  Barriers to delivering the strategic plan, and changes to planned activity are captured in the various subsidiary ‘Managing Directors’ Reports’ which are submitted to their respective boards and then ultimately reported to the Group Board at each Board meeting. The reports will take account of input from the Group Executive Directors and current financial performance versus budget and seek to highlight strategic responses for the related subsidiary;  Key strategic projects are managed under formal project governance with progress of key projects tracked, and communicated and discussed at regular project meetings; and  The impact of limited capital, liquidity, operational capacity and regulator restriction on the achievement of strategy is captured by the planning process, with exceptional items dealt with under the relevant risk category, where the impact on risk appetite and mitigating actions will be formally recorded. Credit risk including counterparty credit risk Credit risk is defined as the risk that counterparties fail to fulfil their contractual obligations. A material decline in credit quality, or the failure of a counterparty could result in higher levels of arrears and ultimately in increased provisions and write-offs, which impacts upon profitability, potentially eroding the capital position for the Group’s subsidiaries. Controls and mitigation individual  Delegated authorities: The Group operates to a schedule of delegated authorisation limits linked to an and experience. This is bolstered by validations of all significant credit exposures over set limits and ongoing monitoring of credit positions of key suppliers and intermediary networks; underwriter’s knowledge  Distribution strategy: The Group actively monitors and controls the credit risk of all business written to ensure that it is treating customers fairly and as a safeguard against the failure of any business relationship. Mitigation of counterparty credit risk is undertaken the maintenance, where appropriate, of cash reserves and loss pools to fund indemnity. Comprehensive due any buy-back diligence processes are also undertaken; through  Monitoring of credit quality exposure: The Group monitors its credit risk exposures via an internal credit risk grading methodology that assigns each individual exposure with one of three credit grades based upon the probability of default at product and distribution channel level. This allows for better monitoring of credit quality and impairment of its current book as well as forecast and stress testing on a more accurate basis;  Concentration unintentional risk: To protect against build-up the exposures where of Page | 12 RISK AND GOVERNANCE RISK MANAGEMENT impact deterioration the could materially sustainability and profitability, the Group seeks to maintain a diverse portfolio of products across a variety of geographical regions, customers, sectors and asset classes. This diversity protects the Group against any deterioration in a particular geographical the economic environment, commercial region, sector etc; and  Accounting standards: Finally, the introduction of Instruments, provides an – Financial IFRS 9 additional credit risk buffer. Operational risk including regulatory risks Operational risk is the risk of loss resulting from human error, inadequate or failed internal processes or controls, system failure, improper conduct, fraud or external events. The principal operational risks for the Group arise from the following areas:  Resilience of the IT environment: The IT environment is under constant review to identify and implement efficiencies to enable increased customer service through the provision of additional services and products and to automate manual tasks wherever possible to minimise the potential for human error. The Group’s IT Steering Committee reviews and monitors current service standards, highlights any deficiencies and mitigates accordingly. There are a number of exception reports and scheduled tasks on a daily basis to ensure that any controls within systems are being reported on adequately; and  Third Party administration services: The key operational controls ensure that partners are fulfilling their legal and regulatory obligations in accordance with their service-level agreement with the Group. The Group has an outsourcing policy to ensure obligations are monitored and met. Internal reviews and audits are conducted on counterparties to ensure terms agreed are being adhered to. Controls and mitigation  Adherence to internal limits and approval processes through: o Delegated authorities: The Group operates to a schedule of delegated credit authorisation limits and payment approval limits, linked to an individual’s knowledge and experience; o Segregation of duties: There is appropriate segregation between those authorising transactions and those executing them, with four eyes principles in place where required; o Exception reporting reporting: Daily ensures that any regulatory and internal limits are the reviewed appropriate Management team; and regularly by o New Business approval policy: All material new business is approved in line with a formally approved policy, with ultimate decision making resting with the applicable Executive Committee.  Change control: The Group ensures that both, changes to existing products and services and new products and services, are delivered in a controlled manner with the appropriate checks and controls in place;  Onboarding: A comprehensive on-boarding process in place for new outsourced partners in the UK;  Due diligence checks: The operational risk from the Group’s third party administrators is mitigated by a comprehensive due diligence process which includes a take-on due diligence and a full review of the partner’s policies, procedures and financial stability;  Key Operational Controls: Key controls are monitored through a combination of management oversight, Risk and Compliance monitoring and Internal Audit reviews;  New Business Policy and Process: New business and material business change is outlined in a formal policy, which that a sequence of assessment and approval is followed. This will ensure that all relevant input is included and material risks considered; and requires  Exception reports: Exception reporting allows the Group to identify weaknesses in processes and controls which in turn allows for adequate training and the bolstering of systems and processes. Conduct risk The Group is exposed to conduct risk through its operations and interactions with consumers, either directly or through third parties (brokers, or counter-parties). The risk exposure is regulatory in nature for the Group’s UK based operations and consideration of any local jurisdiction guidance on good practice. Controls and mitigation The Group has an outsourcing policy to ensure that adherence to conduct and regulatory standards is contracted, and compliance with standards is appropriately monitored through the collection and assessment of relevant data, partner attestation, and onsite audits where appropriate. General conduct and particularly Treating Customers Fairly (“TCF”) principles are applied across the Group’s activities. Liquidity risk Financial institutions are subject to liquidity risk as an inherent part of their business. Liquidity risk is the risk that the Group may not hold sufficient liquid funds meaning it would be unable to meet its contractual liabilities as they fall due. Liquidity risk arises where the Group, through its subsidiaries, has contractual credit obligations that can be placed under stress during times of illiquidity. The Group generally accesses wholesale funding markets or builds a core portfolio of liquid assets or buffers as additional sources of liquidity that can be utilised during such times. Page | 13 RISK AND GOVERNANCE RISK MANAGEMENT Controls and mitigation Overall, the Group’s liquidity profile is resistant to stress as the Group:  Has a positively matched funding profile and does not engage in maturity transformation which means that on a cumulative mismatch position the Group is forecast to be able to meet all liabilities as they fall due; Regulatory risk Regulatory risk is the risk of material breach of regulation. The Group holds a Class 1 (1) Banking Licence in the IOM and is accordingly regulated by the Financial Services Authority (“FSA”). The Group also holds permissions with the UK’s Financial Conduct Authority (“FCA”) pertaining to regulated credit activities, and other specified regulated products and services in the UK.  Maintains an adequate liquidity buffer; and  Has no exposure to the interbank lending market. The risk of regulatory breach arises through a failure to identify, assess and apply applicable regulation; or a failure to adhere to the applicable regulation as applied. The Group’s liquidity position is monitored on a daily basis against internal and external agreed limits. The Group also has a Liquidity Contingency Policy and Liquidity Contingency Committee should a liquidity crisis or potential liquidity disruption event occur. Monitoring and complying with the requirements of existing regulation across numerous regulatory bodies, along with the rapid pace and volume of regulatory change is a key risk. The risk is compounded due to the size of the Group, and the need to maintain a manageable cost of compliance. Interest rate risk Interest rate risk refers to the current or prospective risk to the Bank's capital and earnings arising from adverse movements in interest rates that affect the Bank's banking book positions. The principal potential interest rate risk that the Group is exposed to is the risk that the fixed interest rate and term profile of its deposit base differs materially from the fixed interest rate and term profile of its asset base, or basis and term structure risk. Controls and mitigation     Funding profile: Interest rate risk for the Group is not deemed to be material currently due to the Group’s positively matched funding profile. In a rising interest rate environment, due to the nature of the Group’s products and its matched funded profile, it should theoretically be able to change its lending rate to match any corresponding change in its cost of funds; The Group attempts to efficiently match its deposit taking to its funding requirements; The maturity profile of the Group’s loan book through staged repayments means interest risk is difficult to hedge effectively so the Group does not currently hedge against this risk, and is therefore not exposed to any additional market interest rate risk in this respect; and Funding cost: The Group would be exposed to potential risk if its cost of funds, which is linked to the cost of retail deposits, and ultimately the UK banks’ base rate, was to increase and it was unable, due to a competitive lending environment, to raise its lending rate correspondingly. The Group’s three year plan allows for an increase in its cost of funds, but the Group accepts that these assumptions may not reflect the timing of any interest rate rise or the quantum of any increase. Controls and mitigation The Group remains well placed to meet the regulatory challenges that bring change to the macro environment. Regulatory risks continue to be mitigated by themed and ad- hoc compliance monitoring reviews which are driven using a risk-based approach to ensure resource is directed to areas of potential material risk. The monitoring plan is approved annually by the ARCC. Monitoring reviews are supplemented by ongoing staff training and guidance. Wherever possible, legislative and regulatory requirements are built into relevant administration systems, with appropriate monitoring and exception reporting processes in place to monitor compliance. The Group maintains a watching brief on the regulatory environment and, as active members of a number of IOM and UK trade bodies, it receives additional regulatory updates and guidance on proposed legislative and regulatory issues. Upstream regulatory changes are tracked and assessed for impact by the Compliance Department and material items reported to the ARCC. Reputation risk Reputation risk is the risk of loss resulting from damages to the Group’s reputation, in lost revenue or increased costs; or destruction of Shareholder value. Controls and mitigation The Group mitigates this risk by ensuring that its key risks are identified and managed, with an impact assessment of any potential or actual issues considering the impact to the Group’s reputation. The Group actively seeks to minimise the occurrence of events or issues which could give rise to loss or negative feedback, and actively manages the impact should issues occur. Page | 14 RISK AND GOVERNANCE CORPORATE GOVERNANCE REPORT Corporate governance report The Board is committed to best practice in corporate governance. Directors have agreed to comply with the provisions of the Quoted Companies Alliance (“QCA”) Corporate Governance Code for Small and Mid-Size Quoted Companies to the extent which is appropriate to its nature and scale of operations. This report illustrates how the Group complies with those principles. QCA Principle 1: Establish a strategy and business model which promote long-term value for Shareholders The immediate strategy and business operations of the Group are set out in the Strategic Report. The Group’s strategy and business model and amendments thereto, are developed by the Chief Executive Officer (“CEO”) and his senior management team, and approved by the Board. The management team, led by the CEO, is responsible for implementing the strategy and managing the business at an operational level. The Group’s overall strategic objective is to capitalise on its unique position as owning the only independent Bank within the British Crown Dependencies by developing core businesses within financial services sector, both organically and by considered acquisitions. the The Group has a balanced portfolio of regulated and unregulated operations, all of which are managed on a risk- based and prudential approach. The principal activities include: deposit taking; lending to consumer and commercial markets in the IOM and the UK; the provision of dedicated financial advice, especially in the areas of pensions and general foreign currency and payment services. insurance; and The Group’s investor relations activities encompass dialogue with both institutional and private investors. From time to time, MFG attends private investor events, providing an opportunity for those investors to meet with representatives from the Group in a more informal setting. QCA Principle 3: Take into account wider stakeholder and social responsibilities and their implications for long-term success The Group is aware of its corporate social responsibilities and the need to maintain effective working relationships across a range of stakeholder groups. These include not only the Group’s regulatory partners, authorities, but also customers, be they depositors, borrowers or seeking financial advice. The Group’s operations and working methodologies take account of the requirement to balance the needs of all of these stakeholder groups while maintaining focus on the Board’s primary responsibility to promote the success of the Group for the benefit of its members as a whole. employees, suppliers,  Shareholders – where appropriate Shareholder feedback is discussed at the Board, with any actions agreed being tracked to completion by the Company Secretary. Shareholders have an opportunity to raise questions to the Board, in person or via a nominee, at the Annual General Meeting. In addition, the CEO meets with and addresses Shareholder concerns where appropriate;  Employees – the Group collates employee feedback on an annual basis, engages employees via workshops, with all outputs analysed and visibly addressed by the Executives of the operational subsidiaries that form the Group; with the aim being to build an engaged, committed and enthusiastic workforce; The Group has adopted a portfolio approach to its strategic assets and is not dependent on one particular platform technology. The Directors believe that this approach helps to mitigate any concentration risk.  Partners and suppliers – the Executive and Management regularly meet with our partners and suppliers to ensure the needs of all parties are understood in order to achieve continued excellent working relations; The Group largely operates in an inherently heavily regulated sector and this is reflected in the emphasis on compliance and the provision of excellent customer service. In executing the Group’s strategy and operational plans, management will typically confront a range of day-to-day challenges associated with risks and uncertainties, and will seek to deploy the identified mitigation steps to manage these risks as they manifest themselves. QCA Principle 2: Seek to understand and meet Shareholder needs and expectations The Group, via the CEO, seeks to maintain a regular dialogue with both existing and potential new Shareholders in order to communicate the Group’s strategy and to understand the needs and expectations of Shareholders. Beyond the Annual General Meeting, the CEO and, where appropriate, other members of the senior management team will meet with investors and analysts to provide them with updates on the Group’s business and to obtain feedback regarding the market’s expectations of the Group.  Customers – are at the heart of all we do, the Group operates with a shared vision and set of values. The values instil a sense of how all staff form a part of the customer journey. Feedback is encouraged at all points of contact, it is proactively enacted upon as it aids the identification of process and system enhancements; and  Environment - The Group recognises the 2020 QCA integration of ESG and the recommendations on framework across reporting alignment with a organisations. This is a fast-moving agenda with the consolidation of voluntary frameworks and growth of international statutory reporting frameworks since those recommendations were published and we continue to monitor this evolution and what it means for the Group with interest. Notwithstanding this, integration of ESG across the Group and in its stewardship is on-going as we identify the material ESG issues that are important to us and our stakeholders and respond to them. The Bank is now into its third year of responding to ESG integration and provides the model that other Group subsidiaries are also following. Page | 15 RISK AND GOVERNANCE CORPORATE GOVERNANCE REPORT QCA Principle 4: Embed effective risk management, considering both opportunities and threats, throughout the organisation The Board is responsible for the systems of risk management and internal control and for reviewing their effectiveness by a series of committees, overseen by the ARCC, and reviewed by Internal Audit. The internal controls are designed to manage rather than eliminate risk and provide reasonable but not absolute assurance against material misstatement or loss. Through the activities of the ARCC, which meets at least six times per year, the effectiveness of these internal controls is formally reviewed four times per year. A comprehensive budgeting process is completed once a year and is reviewed and approved by the Board. The Group’s results, compared with the budget, are reported to the Board on a monthly basis. The Group maintains appropriate insurance cover in respect of actions taken against the Directors because of their roles, as well as against material loss or claims against the Group. The insured values and type of cover are comprehensively reviewed on at least an annual basis. The senior management team meets weekly to consider new risks and opportunities presented to the Group, making recommendations to the Board and / or the ARCC as appropriate. The Directors consider they provide all necessary information to assess the Company’s position, performance, business model and strategy. QCA Principle 5: Maintain the board as a well-functioning, balanced team led by the chair The Board currently comprises five Non-executive Directors and four Executive Directors. All of the Directors are subject to election by Shareholders at the first Annual General Meeting after their appointment to the Board and will continue to seek re-election at least once every three years. Directors’ biographies are set out on pages 19 and 20. The Board is responsible to the Shareholders for the proper management of the Group and meets at least four times a year to set the overall direction and strategy of the Group, to review operational and financial performance, and to advise on management appointments. All key operational and investment decisions are subject to Board approval. The Board considers itself to be sufficiently independent. The QCA Code suggests that a board should have at least two independent non-executive directors. The Board considers that four Non-executive Directors, namely Alan Clarke (Chairman of the ARCC), David Gibson, Gregory Jones and John Spellman, are regarded as independent under the QCA Code’s guidance for determining such independence. Non-executive Directors receive their fees in the form of a basic cash emolument. The CEO is the only Director who holds options over the Group’s shares. The number and terms are found on page 27. The option grant concerned is not deemed to be significant, either for the individual Executive Director or in aggregate. The current remuneration structure for the Board’s Non-executive Directors is deemed to be proportionate. QCA Principle 6: Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities The Board considers that all of the Non-executive Directors are of sufficient competence and calibre to add strength and objectivity to its activities, and bring considerable experience in regulatory, financial and operational development within the financial service sector in both the IOM and the UK. The Directors’ biographies are set out on pages 19 and 20. The Board regularly reviews the composition of the Board to ensure that it has the necessary breadth and depth of skills to support the ongoing development of the Group. The Chairman, in conjunction with the Company Secretary, ensures that the Directors’ knowledge is kept up-to-date on key issues and developments pertaining to the Group, its operational environment and to the Directors’ responsibilities as members of the Board. During the course of the year, Directors receive updates from the Company Secretary and various external advisers on a number of corporate governance matters. Directors’ service contracts or appointment letters make provision for a Director to seek personal advice in furtherance of his or her duties and responsibilities, normally via the Company Secretary. QCA Principle 7: Evaluate board performance based on clear and relevant objectives, seeking continuous improvement The Board has an internal process for evaluation of its own performance, that of its committees and individual Directors, including the Chairman. This process is conducted annually and last took place in July 2021, with no substantive issues arising. The Board may utilise the results of the evaluation process when considering the adequacy of the composition of the Board and for succession planning. QCA Principle 8: Promote a corporate culture that is based on ethical values and behaviours The Board seeks to maintain the highest standards of integrity and probity in the conduct of the Group’s operations. These values are enshrined in the written policies and working practices adopted by all employees in the Group. An open culture the Group, with regular communications to staff regarding progress and staff feedback regularly sought. The senior management team regularly monitors the Group’s cultural environment and seeks to address any concerns that may arise, escalating these to Board level as necessary. is encouraged within The Group is committed to providing a safe environment for its staff and all other parties for which the Group has a legal or moral responsibility in this area. This is enshrined in the Group’s health and safety policy. Page | 16 RISK AND GOVERNANCE CORPORATE GOVERNANCE REPORT QCA Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision- making by the board The role of the Board The Board is collectively responsible for the long-term success of the organisation. Its principal function is to determine the strategy and policies of the Group within an effective control framework which enables risk to be assessed and managed. The Governance Framework is reviewed to ensure it remains fit for purpose on an annual basis and is approved by the Board. 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 ARCC, the Remuneration Committee and the Nomination Committee. The Terms of Reference for each of these Committees are published on the Group’s website www.mfg.im. There is a clear separation of the roles of CEO and Executive Chairman. Chairman 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 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. In doing so, this fosters a positive corporate governance culture throughout the Group. CEO The CEO is responsible for managing the Group’s business and operations within the parameters set by the Board. Non-executive Directors The Non-executive Directors are responsible for bringing independent judgement to the discussions held by the Board, using their breadth of experience and understanding of 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. The Board has established an ARCC, a Remuneration Committee and a Nomination Committee with formally delegated duties and responsibilities. Group Audit, Risk and Compliance Committee (“ARCC”) The ARCC meets at least six times each year and comprises of four Non-executive Directors, currently Alan Clarke (Chairman), David Gibson, Gregory Jones and John Spellman. Representatives from Compliance and Risk, the Internal and External Auditor and executive management attend by invitation. Its role is to be 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, 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 ARCC reviews and monitors the External Auditor’s objectivity, competence, effectiveness and independence, ensuring that if it or its associates are invited to undertake non-audit work it will not compromise auditor objectivity and independence. to monitor and review Group Remuneration Committee (“REMCO”) The REMCO meets at least twice a year and comprises of two Non-executive Directors, currently Alan Clarke (Chairman) and David Gibson, with the Executive Directors, Head of Human Resources and external advisers attending by invitation where appropriate. It is responsible, amongst other matters, for determining the remuneration of the Executive Directors, the Company Secretary and other members of the management. Committee members do not take part in discussions concerning remuneration. The Chairman and CEO determine Non-executive Director fees. their own The Directors believe that the above disclosures constitute sufficient disclosure to meet the QCA Code’s requirement for a Remuneration Committee Report. Group Nomination Committee (“NOMCO”) The NOMCO is comprised of the whole Board. It is chaired by the Chairman of the Board 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 re-election of existing Directors. Appointments to the Board The principal purpose of the Nomination Committee is to undertake the assessment of the balance of skills, experience, independence and knowledge on the Board and subsidiary boards 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. 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 Group Director appointments must be approved by the Company’s Nominated Adviser, as required under the AIM Rules, before they are appointed to the Group Board. Page | 17 RISK AND GOVERNANCE CORPORATE GOVERNANCE REPORT Prior to appointment, Non-executive Directors are required to demonstrate that they are able to allocate sufficient time to undertake their duties. Re-election 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 to refresh the Board, irrespective of performance. The Corporate Governance Manual also contains a schedule of matters specifically reserved for Board decision or approval and sets out the Company’s share dealing code and its public interest disclosure (“whistle-blowing”) policy and procedures. Board and committee attendance The number of formal scheduled Board and Committee meetings held and attended by Directors during the year was as follows: Jim Mellon Denham Eke Douglas Grant James Smeed ^ Gregory Bailey Alan Clarke David Gibson Gregory Jones * John Spellman Board ARCC REMCO NOMCO -/1 1/1 1/1 - 1/1 1/1 1/1 - 1/1 - - - - - 19/19 19/19 - - - - - - - 9/9 9/9 1/1 9/9 5/6 6/6 5/6 1/1 5/6 6/6 6/6 1/1 6/6 ^ James Smeed appointed on 3 November 2021 * Gregory Jones appointed on 3 November 2021 QCA Principle 10: Communicate how the company is governed and is performing by maintaining a dialogue with Shareholders and other relevant stakeholders The Group places a high priority on regular communications with its various stakeholder groups and aims to ensure that all communications concerning the Group’s activities are clear, fair and accurate. The Group’s website is regularly updated and users can register to be alerted when announcements or details of presentations and events are posted onto the website. Notices of General Meetings of the Company can be found on: https://www.mfg.im/investor-centre/regulatory-news. The results of voting on all resolutions in future general meetings will be posted to the Group’s website, including any actions to be taken as a result of resolutions for which votes against have been received from at least 20 per cent of independent Shareholders. Approval This report was approved by the Board on 9 March 2022 and signed on its behalf by: Jim Mellon Executive Chairman 9 March 2022 Page | 18 RISK AND GOVERNANCE DIRECTORS, OFFICERS AND ADVISERS Executive Directors Denham Eke (70) ‡ Executive Vice Chairman Denham Eke is the Managing Director of Burnbrae international asset Group Limited, a private management company. He began his career in stockbroking with Sheppards & Chase before moving into corporate planning for Hogg Robinson plc, a major multinational insurance broker. He is a director of many years standing of both public and financial private companies services, property, mining, and manufacturing sectors. involved the in Appointment Appointed to the Board on 2 November 2007 and Executive Vice Chairman on 3 November 2021. Jim Mellon (65)‡ Executive Chairman Jim Mellon is a well-known and successful entrepreneur, author and economic commentator, starting his career in fund management and now including biopharma, property, mining and information technology amongst his many investments. He holds directorships in a number of companies, both quoted and unquoted, including the chairmanship of Juvenescence Limited and being an executive director of Agronomics Limited. He, together with Burnbrae Group Limited, of which he the beneficial owner, hold a 18.83% shareholding of Manx Financial Group PLC. He is the founder, principal shareholder and chairman of the Endurance RP Limited, quoted on the Hong Kong Stock Exchange. is Appointment Appointed to the Board on 2 November 2007 and Executive Chairman on 12 February 2009. James Smeed (37) ‡ Group Finance Director James Smeed has over 15 years’ financial services experience, having started his career with KPMG in audit and assisting in transaction services. He joined the Group in August 2012 as Group Head of Finance and was appointed to the Bank’s Board as Finance Director in 2017. He is both a Chartered Accountant and a Chartered Tax Adviser and Treasurer of the Isle of Man Bankers Association. Appointment Appointed to the Board as Group Finance Director on 3 November 2021. Douglas Grant (57) ‡ Chief Executive Officer Douglas Grant has over 30 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 finance director of various UK and Isle of Man private sector companies and has extensive capital markets experience. He is a professionally qualified banker with an executive MBA. Appointment Appointed to the Board on 14 January 2010 and Chief Executive Officer on 3 November 2021. Page | 19 RISK AND GOVERNANCE DIRECTORS, OFFICERS AND ADVISERS Non-executive Directors Alan Clarke (71)‡†* ≠ Non-executive Director Alan Clarke is a chartered accountant and former senior partner of Ernst & Young during which time he worked closely with HSBC offshore operations in both the Channel Islands and the Isle of Man. Currently, he specialises in corporate finance and strategic consultancy, advising a variety of both listed and private companies. He holds several non- executive directorships and is a past President of ICAEW Manchester. Appointment Appointed to the Board on 2 November 2007. He is Chairman of the Audit, Risk and Compliance Committee and Chairman of the Remuneration Committee. David Gibson (74) ‡†* ≠ Non-executive Director 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. He is also deputy chairman of two property investment companies. Appointment Appointed to the Board on 12 February 2009. He is Chairman of Conister Bank Limited. Gregory Bailey (66) ‡ Non-executive Director of NYSE Gregory Bailey, founded Palantir Group Inc which made successful investments in bio-tech company start-ups and financings, and is currently CEO of Juvenescence Ltd, chairman of Portage Biotech Inc, a CSE-traded drug development company and non-executive director Biohaven Pharmaceuticals Holding Company. He is also founder and chairman of Chelsea Avondale, a property and insurance and causualty reinsurance group. Along with comprehensive experience in finance and healthcare, he has served on many public company boards and brings to the Group an extensive involvement in corporate governance. traded Appointment Appointed to the Board on 7 February 2018. Legend * Member of the Audit, Risk and Compliance Committee † Member of the Remuneration Committee ‡ Member of the Nominations Committee ≠ Independent Non-executive Director Gregory Jones (63) ‡* ≠ Non-executive Director Gregory Jones was called to the UK Bar in 1982 and subsequently joined KPMG Isle of Man where he spent 29 years before retiring in October 2019 as Head of Tax. He currently provides tax advice for a leading Isle of Man based firm of advocates and is a director of a local Corporate Service Provider. He is a member of the Chartered Institute of Taxation. Appointment Appointed to the Board 3 November 2021. John Spellman (55) ‡* ≠ Non-executive Director John Spellman is both a qualified accountant and banker. He spent his early years in banking, fund management and accountancy, specialising in the various parts of the offshore industry before being appointed managing director of Clerical Medical Offshore. He transferred to the UK as chief operating officer within Clerical Medical Financial Services before being appointed managing director of HBoS Financial Services. He has worked with and created a number of successful businesses and has wide experience liaising with government regulators. He has held approved status with the Isle of Man FSA in various roles and has acted as strategic advisor to the Isle of Man government, specialising in finance and foreign direct investment for over 11 years. Appointment Appointed to the Board on 4 May 2020. He is Chairman of Edgewater Associates Limited. Page | 20 RISK AND GOVERNANCE DIRECTORS, OFFICERS AND ADVISERS Company Secretary Lesley Crossley (54) Company Secretary Lesley Crossley is a Fellow of The Chartered Institute of Secretaries and Administrators and an Associate of the Chartered Insurance Institute. She has over 30 years of wide-ranging experience in the financial services industry both in the UK and the Isle of Man and has held the position of Company Secretary with a number of Isle of Man and international companies. Appointment Re-appointed as the Company Secretary on 2 September 2019 after re-joining the Group. She also held the position from September 2009 to June 2018. Advisers 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 As to Isle of Man law Long & Humphrey The Old Courthouse Athol Street Douglas Isle of Man IM1 1LD As to English law Hill Dickinson LLP The Broadgate Tower 20 Primrose Street London EC21 2EW Independent Auditor KPMG Audit LLC Heritage Court 41 Athol Street Douglas Isle of Man IM1 1LA Principal Banker National Westminster Bank plc 250 Bishopsgate London EC2M 4AA Consulting Actuaries Boal & Co Ltd Marquis House Isle of Man Business Park Douglas Isle of Man IM2 2QZ Nominated Advisor and Broker Beaumont Cornish Building 3 Chiswick Park 566 Chiswick High Road London W4 5YA Registrar Computershare Investor Services (Jersey) Limited 13 Castle Street St Helier Jersey JE1 1ES Presentation of Annual Report and Accounts Presented here are 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 its website. The address of the website is investor www.mfg.im which relations information and contact details. included on includes Page | 21 RISK AND GOVERNANCE AUDIT, RISK AND COMPLIANCE COMMITTEE Dear Shareholders I am pleased to set out below an account of the ARCC’s role and activities during 2021 and up to the date of publication of this Annual Report. Due to its adoption of the QCA Corporate Governance standard, the Committee reassessed the adequacy of its terms of reference and its function bearing in mind the requirements of this standard. the Nomination Committee, Membership Members of the ARCC are appointed by the Board, on the recommendation of in consultation with the Chairman of the Committee. The Committee shall be made up of at least 2 members. All members of the Committee shall be Non-executive Directors and at least one of whom shall have recent and relevant financial experience with a professional qualification from one of the professional accountancy bodies. The Chairman of the Board shall not be a member of the Committee. Appointments to the Committee shall be for a period of up to 3-years, which may be extended by the Board for a further 3- year period (or, in exceptional circumstances, two further 3 year periods), provided the Director remains independent. The Board may approve annual extensions to any Director who has served 3 consecutive terms. The Board shall appoint the Chairman of the Committee who shall be a Non-executive Director. In the absence of the Chairman of the Committee and / or an appointed deputy, the remaining members present shall elect one of themselves to chair the meeting. The Committee shall meet at least six times a year. Of these, two will be held to review the annual and interim financial statements. Outside of the formal meeting programme, the Chairman of the Committee will maintain a dialogue with key individuals involved in the Company’s governance. Members Appointed Alan Clarke (Chairman) 2 February 2007 David Gibson Gregory Jones John Spellman 13 February 2009 3 November 2021 4 May 2020 Number of meetings attended 9/9 9/9 1/1 9/9 Only members of the Committee have the right to attend Committee meetings. However other individuals may be invited by the Chairman of the Committee to attend all or part of any meeting as and when appropriate. The ARCC holds separate meetings with the Head of Internal Audit, Head of Risk and Compliance and our External Auditor, KPMG Audit LLC. The Chairman of the Board, the Executive Directors and executive management are invitees to meetings of the ARCC but are excluded from the separate meetings held between the ARCC and the External Auditor. Execution of functions The ARCC has executed its duties and responsibilities during the year in accordance with its terms of reference as it relates to auditor independence, assisting the Board in its evaluation of its control environment and internal controls including information systems and accounting practices. During the year under review, the Committee considered among other matters, the following: Financial reporting and annual financial statements:  Considered the annual financial statements with the External Auditor, Executive Directors and management and reviewed the appropriateness of significant judgements, estimates and accounting policies;  Reviewed and recommended to the Board for approval: o Unaudited condensed interim results for the period-ended 30 June 2021; o Audited MFG PLC Group and subsidiary annual financial statements for the year- ended 31 December 2021; and  Discussed any significant and unusual accounting matters including key audit matters identified by the External Auditor. External audit:  Monitored and assessed the independence of the External Auditor based on reports received and inquiries made into work performed;  Determined the nature and extent of non-audit services performed by the External Auditor;  Reviewed and assessed the significance of non- audit fees compared to audit fees;  Reviewed and agreed the external audit plan in advance for the year-end audit which set out the scope of audit, significant risks, areas of audit focus and audit timetable;  Received a presentation from the External Auditor on the findings from their execution of the audit plan; and  Satisfied itself as to the expertise experience and independence of the engagement partner. Internal audit:  Reviewed and approved the Internal Audit plan;  Reviewed Internal Audit’s findings including the design and operating effectiveness of the internal control environment and control activities; and  Reviewed Internal Audit’s findings on the adequacy and reliability of management information. Risk and compliance:  Assessed the effectiveness of the Group Risk and Compliance function;  Reviewed the Group Risk and Compliance department findings on the effectiveness of the Group’s regulatory controls;  Recommended a revision of the Risk and Compliance policies for Board approval; and  Recommended a revision of the Internal Capital Adequacy Assessment Process for Board approval. Page | 22 RISK AND GOVERNANCE AUDIT, RISK AND COMPLIANCE COMMITTEE External Auditor’s independence KPMG Audit LLC has been the Group’s external auditor since 2007. Consideration was given to the non-audit work performed by the External Auditor. The ratio of non-audit fees to audit fees for the year was 0.01 to 1 (2020: 0.06 to 1). Non-audit services related to transaction services and tax advisory services. Services were performed by a separate team to the audit team to safeguard against the self-review threat to independence. The ARCC obtained assurance from the External Auditor that internal governance processes within KPMG Audit LLC support and demonstrate its claim of independence. This assurance was provided through the receipt of an ISA (UK) 260 letter. The ARCC is satisfied with the independence of KPMG Audit LLC. Key accounting matter Loan impairment – wholesale funding and individual finance agreements The entity is required by the financial reporting framework to calculate impairment using the expected credit loss model. Impairment is measured on an instrument by instrument basis except where instruments are grouped, for impairment to be measured on a collective basis under the expected credit loss model. Loan impairment provisions reflect estimates of the amount and timing of future recoveries which require an assessment of matters such as future economic conditions and the value of collateral. Estimates, by their nature, give rise to a higher risk of material misstatement due to error or fraud. The effect of these matters is that, as part of the External Auditor’s risk assessment, they determined that the impairment provision has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than their materiality for the financial statements as a whole, and possibly many times that amount. Impairment of goodwill and intangible assets Goodwill and intangible assets are significant and the estimated recoverable amount of these balances is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows for the goodwill impairment test and in performing a review for indicators of impairment for intangible assets. The effect of these matters is that, as part of the External Auditor’s risk assessment, they have determined that the value in use of goodwill has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than their materiality for the financial statements as a whole. External Auditor’s reappointment The ARCC is responsible for recommending to the Board the reappointment of the Group’s External Auditor which, in turn, will make a recommendation to its Shareholders. It is noted that with good corporate governance, an audit tender process should regularly be conducted. With this in mind, the ARCC commenced an audit tender process for the year-ended 31 December 2022. This will allow sufficient time to run a comprehensive and considered tender process subject to any delays related to COVID-19. Firms outside the Big 4 have been invited to take part in this process so long as they have sufficient resources and expertise to merit their inclusion. There are no anticipated conflicts of interest noted at this time and should any arise, they will be mitigated appropriately. Key accounting matters The ARCC considered key accounting matters in relation to the Group’s financial statements and disclosures. The primary areas in relation to 2021 and how they were addressed are detailed below: ARCC response The ARCC satisfied itself that the internal control environment and control activities are appropriately designed and implemented. This was supported by review of Internal and External Audit reports and findings. The ARCC reviewed reports from executive management on the continued implementation of IFRS 9 and key changes to internal processes and controls. The ARCC reviewed the key assumptions used by management such as Loss Given Default, Loss Rates, Probability of Default on a quarterly basis. The ARCC satisfied itself that the internal control environment and control activities are appropriately designed and implemented. This was supported by review of Internal and External Audit reports and findings. The ARCC reviewed management’s assessment of Goodwill and Intangible Asset impairment and concluded that the recoverable amount is appropriate. Page | 23 RISK AND GOVERNANCE AUDIT, RISK AND COMPLIANCE COMMITTEE ARCC response The ARCC is satisfied that the going concern assessment over the Group provides sufficient assurance over the recoverability of the Company’s subordinated loans and investment in subsidiaries. Key accounting matter Carrying value of Company’s subordinated investment in subsidiaries The carrying value of the Company’s subordinated loans to and investment in subsidiaries represents 97% (2020: 94%) of the Parent Company’s total assets. loans and The assessment of carrying value is not at a high risk of significant misstatement or subject to significant judgement as the carrying value is supported by the audited net asset value of the subsidiaries. However, due to its materiality in the context of the MFG financial statements, the External Auditor considered this to be the area that had the greatest effect on their audit of the Company. The ARCC has complied with and discharged its responsibilities as set out in its Terms of Reference. Alan Clarke Chairman 9 March 2022 Page | 24 RISK AND GOVERNANCE DIRECTORS’ REMUNERATION REPORT Dear Shareholders On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2021. Membership Members of the Remuneration Committee (“REMCO”) are appointed by the Board, on the recommendation of the Nomination Committee in consultation with the Chairman of the Committee. The Committee shall be made up of at least 2 members. All members of the Committee shall be Non- executive Directors. The Chairman of the Board shall not be a member of the Committee. Appointments to the Committee shall be for a period of up to 3-years, which may be extended by the Board for a further 3- year period (or, in exceptional circumstances, two further 3 year periods), provided the Director remains independent. The Board may approve annual extensions to any Director who has served 3 consecutive terms. The Board shall appoint the Chairman of the Committee who shall be a Non-executive Director. In the absence of the Chairman of the Committee and/or an appointed deputy, the remaining members present shall elect one of themselves to chair the meeting. The Committee shall meet at least twice a year and at such other times as the Chairman of the Committee shall require. Membership Appointed Alan Clarke (Chairman) 13 February 2009 David Gibson 12 December 2010 Number of meetings attended 19/19 19/19 Only members of the Committee have the right to attend Committee meetings. However, other individuals may be invited by the Chairman of the Committee to attend all or part of any meeting as and when appropriate. Areas of focus for 2021 During the year, the Committee considered the following:  Reviewed the overall pay of Executive Directors;  Reviewed non-discretionary overall the performance related pay scheme for Group staff; annual  Reviewed and approved all new Group staff appointments with annual packages over £50,000; and  Reviewed and approved all changes to terms and conditions of staff where annual packages exceeded £50,000. Remuneration policy 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 IOM 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; it reflects the Group’s culture and values; and 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 and are not contracted. 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 excessive 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. to Performance assessments are conducted annually determine the performance rating of each employee’s achievements against a mix of 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 payment 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. EAL’s 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 Financial Advisor’s client base and their historical performance. Each Financial Advisor is set objectives at the beginning of the year including a 100% pass in all compliance requirements. 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. Page | 25 RISK AND GOVERNANCE DIRECTORS’ REMUNERATION REPORT Where the Group operates contractually guaranteed performance related pay, the contractual conditions must be approved by the REMCO. Executive Directors’ contractual terms In keeping with current recommended practice, the standard term for Executive Director appointments, which have a contractual notice period, is 6 months. 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 to Non-executive Directors is assessed using benchmarks from a group of comparable financial organisations. Directors’ emoluments Remuneration/ Fees £ Performance Related Pay £ Executives Jim Mellon Denham Eke Douglas Grant James Smeed* Non-executives Gregory Bailey Alan Clarke David Gibson Gregory Jones * John Spellman Aggregate emoluments 50,000 50,000 217,162 123,174 440,336 - 45,000 85,000 5,949 40,000 175,949 - - 42,500 8,500 51,000 - - - - - - The procedure for determining Director remuneration The REMCO, comprising two Non-executive Directors, is responsible for setting the remuneration of the Executive Directors. Committee members do not take part in discussions concerning their own remuneration. The basic Non-executive Director fee is set by the Group Chairman and CEO. The Chairman of the Committee reports at the Board meeting following a Committee meeting. Implementation report It is the view of the Committee that Directors’ remuneration awarded across the Group 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 Group report. An analysis of Directors’ emoluments is as follows: Pension £ - - 21,716 12,317 34,034 - - - - - - 2021 Total £ 50,000 50,000 281,378 143,992 525,370 - 45,000 85,000 5,949 40,000 175,949 2020 Total £ 43,750 43,750 282,428 - 369,928 - 45,000 85,000 - 26,667 162,917 616,285 51,000 34,034 701,319 532,845 * James Smeed and Gregory Jones were appointed to the Board on 3 November 2021. Approval This report was approved by the Board of Directors on 9 March 2022 and signed on its behalf by: Alan Clarke Chairman of the Remuneration Committee 9 March 2022 Page | 26 RISK AND GOVERNANCE DIRECTORS’ REPORT The Directors present their annual report and the audited financial statements for the year ended 31 December 2021. Directors and Directors’ share interests Details of current Directors are set out on pages 19 to 20. Principal regulated activities The principal activities of the Group are the provision of asset and personal finance, investing activities, foreign exchange brokerage services and wealth management. The Bank, a wholly owned subsidiary of the Company, holds a Class 1(1) deposit taking licence issued under Part 2 of the Isle of Man Financial Services Act 2008. Deposits made with the Bank are covered by the Isle of Man Depositors’ Compensation Scheme contained in the Banking Business (Compensation of Depositors) Regulations 1991. CFL is authorised by the FCA to conduct brokerage services. EAL is authorised by the FSA 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 Group profit before tax for the year was £3,043,000 (2020: £2,021,000). On 7 July 2021, a Dividend was declared for £196,800 which could either be taken up in cash or Shares. 161,562 new Shares were elected to be taken as Shares and were admitted to the Alternative Investment Market (“AIM”) for 7.0575 pence per Share, being a total cost of £11,402, on 10 August 2021. The proposed transfers to and from reserves are as set out in the Statement of Changes in Equity on page 41. Going Concern The Group has recognised a profit for the year after taxation of £2,853,000 (2020: £1,968,000). As at the year ended 31 December 2021, the Bank had a total capital ratio of 19.1% (2020: 19.1%) which exceeded the regulatory minimum requirement of 14.0% (2020: 15.0%). Based on these factors, management has a reasonable expectation that the Group has and will have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements. Share capital Particulars of the authorised and issued share capital of the Company are set out in note 28 to the financial statements. Significant shareholdings The number of shares held and the percentage of the issued shares which that number represented as at 02 February 2022 are: The number of shares held by the current Directors is as follows: Jim Mellon2 Gregory Bailey3 David Gibson4 Douglas Grant Alan Clarke Number 02/02/22 21,522,650 17,835,750 1,721,433 518,177 53,422 Number 31/12/21 21,522,650 17,835,750 1,721,433 518,177 53,422 Number 31/12/20 21,492,232 17,835,750 1,721,433 505,821 52,149 1 Lynchwood Nominees Limited holds 17,039,623 Ordinary Shares in trust for Aeternitas Imperium Privatstiftung. 2 Burnbrae Limited holds 19,194,668 Ordinary Shares. Burnbrae Limited is 100% beneficially owned by Jim Mellon. Denham Eke, Executive Vice-Chairman of MFG is also a director of Burnbrae Limited. Vidacos Nominees Limited also holds 2,327,982 Ordinary Shares in trust for Jim Mellon. 3 Vidacos Nominees Limited holds 17,835,750 Ordinary Shares in trust for Gregory Bailey. 4 Comprises 1,721,433 Ordinary Shares held by Interactive Investor Services Limited for the benefit of David Gibson. The number of share options held by the current Directors is as follows: Douglas Grant* Number 02/02/22 700,000 Number 31/12/21 700,000 Number 31/12/20 700,000 Directors’ liability insurance The Group maintains insurance cover for Directors’ potential liability. Fixed and intangible assets The movement in fixed and intangible assets during the year are set out in notes 22 and 23 respectively to the financial statements. Staff At 31 December 2021, there were 132 members of staff (2020: 120), of whom 12 were part-time (2020: 11). Investment in subsidiaries Investments in the Company’s subsidiaries are disclosed in note 30 to the financial statements. Auditor KPMG Audit LLC, being eligible, has expressed its willingness to continue in office. Number % of issued capital On behalf of the Board Lynchwood Nominees Limited1 Jim Mellon2 Gregory Bailey3 Island Farms Limited Rock (Nominees) Limited Rulegale Nominees Limited Chase Nominees Limited 23,353,583 21,522,650 17,835,750 4,222,319 4,198,917 4,163,923 3,935,612 20.43 18.83 15.61 3.69 3.67 3.67 3.44 J Mellon Executive Chairman 9 March 2022 Page | 27 ANNUAL FINANCIAL STATEMENTS CONTENTS Page Page Assurance Statement of Directors’ Responsibilities Independent Auditor’s Report Consolidated and company financial statements Consolidated Statement of Profit or Loss and Other Comprehensive Income Company Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Company Statement of Financial Position Consolidated and Company Statement of Changes in Equity Consolidated Statement of Cash Flows Company Statement of Cash Flows 29 30 36 38 39 40 41 42 43 Notes to the consolidated and company financial statements Basis of preparation 1. 2. 3. 4. Reporting entity Basis of accounting Functional and presentation currency Use of judgements and estimates Financial risk review and fair value 5. Financial instruments – Classification 6. 7. Financial instruments – Fair values Financial risk review Operating segments Net interest income Net fee and commission income Personnel expenses Performance for the year 8. 9. 10. 11. 12. Other expenses Impairment on 13. customers loans and advances to 14. Profit before tax payable 15. Income tax expense 16. Earnings per share Assets 17. Cash and cash equivalents 18. Debt securities 19. Financial assets 20. Loans and advances to customers 21. Trade and other receivables 22. Property, plant and equipment and right-of- use assets Intangible assets 23. Liabilities and equity 24. Deposits from customers 25. Creditors and accrued charges 26. Loan notes 27. Pension liability 28. Called up share capital Group composition 29. List of associates 30. List of subsidiaries 31. Acquisition of subsidiary 32. Acquisition of non-controlling interest 33 34. Goodwill 35. Investment in Group undertakings Acquisition of financial instrument Other information 36. Related parties transactions 37. Leases 38. Regulators 39. Contingent liabilities 40. Subsequent events 41. Financial risk management Accounting policies 42. Basis of measurement 43. Significant accounting policies 44 44 44 44 44 45 47 53 54 54 55 55 55 55 56 56 57 57 58 58 59 60 61 61 61 61 62 64 65 66 66 68 68 68 69 69 70 71 71 71 72 74 75 Page | 28 ANNUAL FINANCIAL STATEMENTS STATEMENT OF DIRECTORS’ RESPONSIBILITIES responsible The Directors are for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Isle of Man Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and 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. Legislation in the Isle of Man governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations. The Directors are required to prepare Group and Parent Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with in accordance with UK-adopted international accounting standards (“UK-adopted IFRS” or “IFRSs”) as applicable to an Isle of Man Company and applicable law and have elected to prepare the Parent Company financial statements on the same basis. international accounting standards The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company the Directors are required to: financial statements,  select suitable accounting policies and then apply them consistently;  make judgements and estimates that are reasonable, relevant and reliable;    state whether they have been prepared in accordance with IFRSs; assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations or have no realistic alternative but to do so. Page | 29 ANNUAL FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL GROUP PLC Our opinion is unmodified We have audited the consolidated financial statements of Manx Financial Group PLC (the “Company”) and its subsidiaries (together, the "Group"), for the year ended 31 December 2021 which comprise the Consolidated and Parent Company Statements of Profit or Loss and Other Comprehensive Income, the Consolidated and Parent Company Statements of Financial Position, the Consolidated and Parent Company Statements of Cash Flows and the Consolidated and Parent Company Statements of Changes in Equity, and the related notes, including the accounting policies in note 43. In our opinion, the accompanying consolidated financial statements:    give a true and fair view of the state of the Group's and of the Company's affairs as at 31 December 2021 and of the Group's and of the Company's profit for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards; and have been properly prepared in accordance with the requirements of the Isle of Man Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Company and Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Key audit matters: our assessment of the risks of material misstatement Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the consolidated financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters were as follows. (These are unchanged from 2020). and advances Key audit matter Loan customers – wholesale funding Loans to customers £33,587,000 (2020: £32,509,000) advances and to Impairment Provision £nil (2020: £1,226,000) Expense for the year £365,000 (2020: £508,000) Refer to the Audit, Risk and Compliance Committee (“ARCC”) Report, note 4 (Use of Judgements and Estimates - Assumptions and Estimation Uncertainties), note 7(A) (Credit Risk), note 13 (Impairment on Loans to Customers), note 20 (Loans and Advances to Customers), note Risk 41 Management – Credit risk) and (Accounting note Policy of for Financial Instruments). and Advances Impairment (Financial 43(G)(vii) (B) to calculate The risk Subjective estimate The entity is required by the financial reporting framework the expected credit loss model. Impairment is measured on an instrument by instrument basis except where instruments are grouped, for impairment to be measured on a collective basis under the expected credit loss model. impairment using Wholesale Funding comprises Block Finance, Wholesale Funding Agreements and Stocking Plans. These books comprise individually significant loan balances and are in the nature of a secured business loan. The security is principally an underlying pool of loans. Loan impairment provisions reflect estimates of the amount and timing of future recoveries which require an assessment of matters such as future economic conditions and the value of collateral. Estimates, by their nature, give rise to a higher risk of material misstatement due to error or fraud. The effect of these matters is that, as part of our risk assessment, we determined that the impairment provision has a high degree of estimation uncertainty, including increased uncertainty from the impact of COVID19 on the economy with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. Our response Our audit procedures included: Internal Controls: Understanding the design and implementation of controls in respect of the origination of wholesale funding loans, including borrower due diligence. Understanding the design and implementation of controls in respect of the Group’s loan impairment process such as the timely recognition of impairment provisions, the completeness and accuracy of reports used in the loan impairment process and management review processes over the calculation of collective and specific provisions. Test of details: We agreed the specific provisions included in the to Group’s provisioning financial statements schedule and vouched that this schedule was correctly extracted from the loans and advances system, including the arrears information. We tested all specific provisions. This included challenging Group’s assessment of the specific provision, taking account of such factors as: amount of arrears; compliance with covenant requirements, financial standing of the business – by inspecting latest available accounts and status of underlying security – by inspecting a sample of security documentation. Historical comparison: in collective the We challenged impairment models by comparison to default and recovery experience across each of the loan finance categories. inputs used Page | 30 ANNUAL FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL GROUP PLC Key audit matter The risk and advances Loan to customers – individual finance agreements to Loans customers £195,250,000 (2020: £160,634,000) advances and Impairment Provision £7,562,000 (2020: £5,895,000) Expense for the year £4,012,000 (2020: £5,144,000) Refer to the ARCC Report, note 4 (Use of Judgements and Estimates - Assumptions and Estimation Uncertainties), note 7(A) (Credit Risk), note 13 (Impairment on Loans and Advances to Customers), note 20 (Loans and Advances to Customers), (B) (Financial Risk Management – Credit risk) and note 43(G)(vii) for (Accounting Impairment Financial Instruments). Policy note 41 of to calculate Subjective estimate The entity is required by the financial reporting framework the expected credit loss model. Impairment is measured on an instrument by instrument basis except where instruments are grouped, for impairment to be measured on a collective basis under the expected credit loss model. impairment using Individual finance agreements include hire purchase finance leases and unsecured loans to individuals and companies. Any security is typically the specific assets financed. Loan impairment provisions reflect estimates of the amount and timing of future recoveries which require an assessment of matters such as future economic conditions and the value of collateral. Estimates, by their nature, give rise to a higher risk of material misstatement due to error or fraud. The effect of these matters is that, as part of our risk assessment, we determined that the impairment provision has a high degree of estimation uncertainty, including increased uncertainty from the impact of COVID19 on the economy with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. Impairment of goodwill and intangible assets Goodwill £6,049,000 (2020: £4,412,000) and Intangibles Assets p £2,321,000 (2020: 2,286,000). Refer to the ARCC Report, note 4 (Use of Judgements and Estimates - Assumptions and Forecast based valuation Goodwill and intangible assets are significant and the estimated recoverable amount of these balances is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows for the goodwill impairment test and in performing a review for indicators of impairment for intangible assets. Goodwill and intangible assets have arisen on the Group’s acquisition of businesses including lenders, Our response Assessing disclosures: Assessing the adequacy of the Group’s disclosures about the degree of estimation uncertainty involved at arriving at the provisions in accordance with the relevant financial reporting framework and specific circumstances of the Group. Our audit procedures included: Internal Controls: Understanding the design and implementation of controls in respect of the origination of individual finance loans, including borrower due diligence. Understanding the design and implementation of controls in respect of the Group’s loan impairment process such as the timely recognition of impairment provisions, the completeness and accuracy of reports used in the loan impairment process and management review processes over the calculation of collective and specific provisions. Use of KPMG Specialists: We involved KPMG specialists to examine the methodology of the Group’s expected credit loss model and its compliance with the requirements of accounting standards. Test of details: We agreed the specific provisions included in the financial statements to management’s provisioning schedule and vouched that this schedule was correctly extracted from the loans and advances system, including the arrears information. those against loans. This We tested a sample of specific provisions, weighted individually significant towards impaired challenging included management’s assessment of the specific provision, taking into account such factors as: the number of repayments in arrears; the known whereabouts of the hirer/lessee and of the assets under finance; and the amounts received under agreed repayment plans, where scheduled repayments under the original agreement are no longer being met. Historical comparison: We challenged in collective the impairment models and considered whether those inputs reflected default and recovery experience across each of the loan finance categories. inputs used Assessing disclosures: Assessing the adequacy of the Group’s disclosures about the degree of estimation uncertainty involved at arriving at the provisions. Our audit procedures included: Internal Controls: Understanding the controls in respect of the Group’s goodwill and intangibles assets impairment review process such as the timely recognition of impairment provisions and the completeness and accuracy of reports used in the impairment review process. Page | 31 ANNUAL FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL GROUP PLC in Key audit matter Estimation Uncertainties), note 23 (Intangible Assets), note 33 (Investment Group Undertakings), 43(A) (Basis for Consolidation of Subsidiaries Financial and the Parent Statements of Company), 43(K) (Intangible Assets and Goodwill) and note 43(L) (Impairment of Non-Financial Assets) Separate note of Recoverability Parent Company’s subordinated loans to in subsidiaries investment and in Investment £22,597,000 £22,597,000) and amounts due undertakings (2020: £9,663,000). subsidiaries (2020: loans and from Group £13,832,000 (Investment Refer to the ARCC report, note in Group 35 Undertakings) note and (Separate Financial 43(A)(vi) Statements of the Company). The risk independent financial advisers and finance brokers, each of which is identified by the Group as a Cash Generating Unit. uncertainty, The effect of these matters is that, as part of our risk assessment, we determined that the value in use of the Cash Generating Units containing goodwill and/or intangible assets has a high degree of estimation increased uncertainty from the impact of COVID19 on the economy with a potential range of reasonable outcomes greater the financial statements as a whole. The financial statements the sensitivity estimated by the Group. than our materiality for (note 34) disclose including Low risk, high value The carrying value of the Parent Company’s investment in subsidiaries and loans and amounts due from Group undertakings represents 97% (2020: 94%) of the Parent Company’s total assets. The assessment of carrying value is not at a high risk of significant misstatement or subject to significant judgement as the carrying value is supported by the audited net asset value of the subsidiaries. However, due to its materiality in the context of the Parent Company financial statements, this is considered to be the area that had the greatest effect on our overall Parent Company audit. Our response Evaluating experts engaged by management: We have evaluated the competence, capabilities and objectivity of the management’s expert; obtained an understanding of the work of that expert and evaluated the appropriateness of that expert’s work as audit evidence for the valuation of goodwill. Use of KPMG Specialists: We involved our own valuation specialists who have in tested reasonableness of particular those relating to each cash generating unit’s forecast revenue growth, profit margins and the valuation method used. the assumptions Benchmarking assumptions: Comparing the Group’s assumptions to externally derived data in relation to key inputs such as projected economic growth, competition, cost inflation and discount rates Indictors of impairment for intangible assets: Analysing latest financial data for the business related to the relevant intangible asset to assess whether there are any indicators of impairment, such as losses being made or a downturn in sales. Sensitivity analysis: Performing headroom analysis on the assumptions noted above. Assessing disclosures: Assessing the adequacy of the Group’s disclosures about the the sensitivity of impairment assessment in key assumptions reflected in the risks inherent in the valuation of goodwill and intangible assets. Our audit procedures included: the outcome of to changes the relevant Test of details: Comparing the carrying amount of 100% of the Parent Company’s investments in subsidiaries and loans and amounts due from Group undertakings with subsidiaries’ and Group undertaking’s statement of financial position to identify whether their financial position supported the the Parent Company’s carrying amount of investments in those subsidiaries and loans and amounts due from Group undertakings, assessing whether those subsidiaries and Group undertakings have historically been profit-making and evaluating budgeted forecasts in line with our knowledge of the respective subsidiaries and the current economic conditions in which those subsidiaries operate. Our application of materiality and an overview of the scope of our audit Materiality for the consolidated financial statements as a whole was set at £120,000 (2020: £82,000), determined with reference to a benchmark of Group profit before tax (forecasted) of £2,400,000, of which it represents approximately 5% (2020: 4%). Page | 32 ANNUAL FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL GROUP PLC Our application of materiality and an overview of the scope of our audit (continued) Materiality for the Parent Company financial statements as a whole was set at £120,000 (2020: £82,000), determined with reference to a benchmark of Parent Company total assets, but reduced to align with materiality for the Group financial statements. In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a lower threshold, performance materiality, so as to reduce to an acceptable level the risk that individually immaterial misstatements in individual account balances add up to a material amount across the financial statements as a whole. Performance materiality for the Group was set at 75% (2020: 75%) of materiality for the financial statements as a whole, which equates to £90,000 (2020: £61,000). We applied this percentage in our determination of performance materiality because we did not identify any factors indicating an elevated level of risk. We reported to the Audit, Risk and Compliance Committee any corrected or uncorrected identified misstatements exceeding £6,000 (2020: £,4,000), in addition to other identified misstatements that warranted reporting on qualitative grounds. Our audit of the Group was undertaken to the materiality level specified above, which has informed our identification of significant risks of material misstatement and the associated audit procedures performed in those areas as detailed above. The Group audit team audits all components of the group except Ninkasi Rentals & Finance Limited (formerly Beer Swaps Limited) (“NRFL”) which represents 2% of the Group’s total assets. Group reporting is received for NRFL, subject to a materiality level set by the Group audit team. Detailed audit instructions were sent to the auditor of NRFL. These instructions covered the significant audit areas that should be covered by this audit (which included the relevant risks of material misstatement detailed above) and set out the information required to be reported back to the group audit team. Going concern The Directors have prepared the consolidated financial statements on the going concern basis as they do not intend to liquidate the Group or the Company or to cease their operations, and as they have concluded that the Group and the Company's financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the consolidated financial statements (the “going concern period"). In our evaluation of the Directors' conclusions, we considered the inherent risks to the Group and the Company's business model and analysed how those risks might affect the Group and the Company's financial resources or ability to continue operations over the going concern period. The risk that we considered most likely to affect the Group and the Company's financial resources or ability to continue operations over this period was the recoverability of financial assets subject to credit risk as a result of economic downturn due to outbreak of COVID19. We considered whether this risk could plausibly affect the liquidity in the going concern period by comparing severe, but plausible downside scenarios that could arise from this risk against the level of available financial resources indicated by the Company’s financial forecasts. We considered whether the going concern disclosure in the Directors’ Report gives a full and accurate description of the Directors' assessment of going concern. Our conclusions based on this work:  we consider that the Directors' use of the going concern basis of accounting in the preparation of the consolidated financial statements is appropriate;  we have not identified, and concur with the Directors' assessment that there is not, a material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the Group and the Company's ability to continue as a going concern for the going concern period; and  we found the going concern disclosure in the notes to the consolidated financial statements to be acceptable. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the above conclusions are not a guarantee that the Group and the Company will continue in operation. Fraud and breaches of laws and regulations – ability to detect Identifying and responding to risks of material misstatement due to fraud To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included:    enquiring of management as to the Group’s policies and procedures to prevent and detect fraud as well as enquiring whether management have knowledge of any actual, suspected or alleged fraud; reading minutes of meetings of those charged with governance; and using analytical procedures to identify any unusual or unexpected relationships. Page | 33 ANNUAL FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL GROUP PLC Fraud and breaches of laws and regulations – ability to detect (continued) As required by auditing standards, we perform procedures to address the risk of management override of controls, in particular the risk that management may be in a position to make inappropriate accounting entries. On this audit we do not believe there is a fraud risk related to revenue recognition because the Group’s revenue streams are simple in nature with respect to accounting policy choice, and are easily verifiable to external data sources or agreements with little or no requirement for estimation from management. We did not identify any additional fraud risks. We performed procedures including:   identifying journal entries and other adjustments to test based on risk criteria and comparing any identified entries to supporting documentation; and incorporating an element of unpredictability in our audit procedures. Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations We identified areas of laws and regulations that could reasonably be expected to have a material effect on the consolidated financial statements from our sector experience and through discussion with management (as required by auditing standards), and from inspection of the Group’s regulatory and legal correspondence, if any, and discussed with management the policies and procedures regarding compliance with laws and regulations. As the Group is regulated, our assessment of risks involved gaining an understanding of the control environment including the entity’s procedures for complying with regulatory requirements. The Group is subject to laws and regulations that directly affect the consolidated financial statements including financial reporting legislation and taxation legislation and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items. The Group is subject to other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the consolidated financial statements, for instance through the imposition of fines or litigation or impacts on the Group and the Company’s ability to operate. We identified financial services regulation as being the area most likely to have such an effect, recognising the regulated nature of the Group’s activities and its legal form. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of management and inspection of regulatory and legal correspondence, if any. Therefore, if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach. Context of the ability of the audit to detect fraud or breaches of law or regulation Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the consolidated financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations is from the events and transactions reflected in the consolidated financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remains a higher risk of non-detection of fraud, as this may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material misstatement. We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non-compliance with all laws and regulations. Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report but does not include the consolidated financial statements and our auditor's report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Respective responsibilities Directors' responsibilities As explained more fully in their statement set out on page 29, the Directors are responsible for: the preparation of the consolidated financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so. Page | 34 ANNUAL FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL GROUP PLC Respective responsibilities (continued) Auditor's responsibilities Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. The purpose of this report and restrictions on its use by persons other than the Company's members, as a body This report is made solely to the Company’s members, as a body, in accordance with section 80(C) of the Companies Act 2006. 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 auditor’s 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. KPMG Audit LLC Chartered Accountants Heritage Court 41 Athol Street Douglas Isle of Man IM1 1LA 9 March 2022 Page | 35 ANNUAL FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 December Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Depreciation on leasing assets Net trading income Other operating income Gain on financial instruments Realised (loss) / gain on debt securities Revaluation on acquisition of subsidiary Operating income Personnel expenses Other expenses Impairment on loans and advances to customers Depreciation Amortisation and impairment of intangibles Share of profit of equity accounted investees, net of tax VAT recovery Profit before tax payable Income tax expense Profit for the year Notes 9 10 10 22 19 18 31(F) 11 12 13 22 23 29 21 14 15 2021 £000 22,947 (4,967) 2020 £000 20,692 (5,222) 17,980 15,470 4,621 (3,339) (269) 3,865 (3,481) (406) 18,993 15,448 365 30 (1) 660 200 259 261 237 20,047 16,405 (7,156) (4,500) (4,360) (675) (458) 32 113 3,043 (234) 2,809 (6,823) (3,707) (3,950) (490) (374) 54 906 2,021 (53) 1,968 Page | 36 ANNUAL FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (CONTINUED) For the year ended 31 December Notes Profit for the year Other comprehensive income: Items that will be reclassified to profit or loss Unrealised loss on debt securities Revaluation gain on property, plant and equipment Recognition of deferred tax credit on defined benefit pension Items that will never be reclassified to profit or loss Actuarial gain / (loss) on defined benefit pension scheme taken to equity 2021 £000 2,809 2020 £000 1,968 18 22 27 (18) 15 67 (51) - - 172 (241) Total comprehensive income for the period attributable to owners 3,045 1,676 Profit attributable to: Owners of the Company Non-controlling interests Total comprehensive income attributable to: Owners of the Company Non-controlling interests Earnings per share – Profit for the year Basic earnings per share (pence) Diluted earnings per share (pence) Earnings per share – Total comprehensive income for the year Basic earnings per share (pence) Diluted earnings per share (pence) The notes on pages 44 to 86 form part of these financial statements. The Directors believe that all results derive from continuing activities. 2,793 16 2,809 3,029 16 3,045 2.46 1.97 2.66 2.13 1,935 33 1,968 1,643 33 1,676 1.65 1.37 1.41 1.19 16 16 16 16 Page | 37 ANNUAL FINANCIAL STATEMENTS COMPANY STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 December Notes Dividend income Interest income Other income Operating income Personnel expenses Administration expenses Depreciation expense Amortisation expense Impairment of intercompany receivable Profit before tax payable Tax payable Profit for the year Total comprehensive income for the year The notes on pages 44 to 86 form part of these financial statements. The Directors believe that all results derive from continuing activities. 14 2021 £000 1,259 518 78 1,855 (129) (59) (91) (2) (545) 1,029 - 1,029 1,029 2020 £000 572 522 - 1,094 (74) (122) (101) - - 797 - 797 797 Page | 38 ANNUAL FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December Assets Cash and cash equivalents Debt securities Financial asset Loans and advances to customers Trade and other receivables Property, plant and equipment Intangible assets Investment in associates Goodwill Total assets Liabilities Deposits from customers Creditors and accrued charges Contingent consideration Loan notes Pension liability Deferred tax liability Total liabilities Equity Called up share capital Profit and loss account Revaluation reserve Non-controlling interest Total equity Total liabilities and equity Notes 2021 £000 2020 £000 17 18 33 20 21 22 23 29 34 24 25 6(ii), 31 26 27 15 28 22 20,279 40,987 68 229,251 1,947 7,257 2,508 136 6,320 34,053 25,532 4 193,143 2,170 6,045 2,286 316 4,412 308,753 267,961 253,459 4,745 1,023 23,672 687 182 218,285 3,206 672 22,222 944 197 283,768 245,526 19,133 5,781 15 56 24,985 19,121 3,230 - 84 22,435 308,753 267,961 The financial statements were approved by the Board of Directors on 9 March 2022 and signed on its behalf by: Jim Mellon Executive Chairman Denham Eke Executive Vice-Chairman Chief Executive Officer Douglas Grant The notes on pages 44 to 86 form part of these financial statements. Page | 39 ANNUAL FINANCIAL STATEMENTS COMPANY STATEMENT OF FINANCIAL POSITION As at 31 December Assets Cash and cash equivalents Trade and other receivables Amounts due from Group undertakings Property, plant and equipment Intangible assets Investment in subsidiaries Subordinated loans Total assets Liabilities Creditors and accrued charges Amounts due to Group undertakings Loan notes Total liabilities Equity Called up share capital Profit and loss account Total equity Total liabilities and equity The notes on pages 44 to 86 form part of these financial statements. Notes 17 21 35 22 30 35 25 35 26 28 2021 £000 430 472 6,104 263 20 22,597 7,728 37,614 501 3,309 23,672 27,482 19,133 (9,001) 10,132 37,614 2020 £000 1,378 309 1,935 354 7 22,597 7,728 34,308 501 2,297 22,222 25,020 19,121 (9,833) 9,288 34,308 Page | 40 ANNUAL FINANCIAL STATEMENTS CONSOLIDATED AND COMPANY STATEMENTS OF CHANGES IN EQUITY Group Balance as at 1 January 2020 Profit for the year Other comprehensive income Transactions with owners Changes in ownership interests Acquisition of subsidiary with non- controlling interest Balance as at 31 December 2020 Profit for the year Other comprehensive income Transactions with owners Dividend declared (see note 28) Acquisition of subsidiary with non- controlling interest Attributable to owners of the Company Share capital £000 20,732 Profit and loss account £000 1,587 - - 1,935 (292) (1,611) - 19,121 - - 12 - - - 3,230 2,793 221 (197) (266) Revaluation reserve £000 - - - - - - - 15 - - Non- controlling interests £000 - 33 - - 51 84 16 - Total equity £000 22,319 1,968 (292) (1,611) 51 22,435 2,809 236 - (44) (185) (310) Total £000 22,319 1,935 (292) (1,611) - 22,351 2,793 236 (185) (266) Balance as at 31 December 2021 19,133 5,781 15 24,929 56 24,985 Company Balance as at 1 January 2020 Profit for the year Transactions with owners Changes in ownership interests Balance as at 31 December 2020 Profit for the year Transactions with owners Dividend declared (see note 28) Balance as at 31 December 2021 The notes on pages 44 to 86 form part of these financial statements. Share capital £000 Profit and loss account £000 Total equity £000 20,732 (10,630) 10,102 - 797 797 (1,611) 19,121 - 12 19,133 - (9,833) 1,029 (197) (9,001) (1,611) 9,288 1,029 (185) 10,132 Page | 41 ANNUAL FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS Profit before tax Adjustments for: Depreciation Amortisation and impairment of intangibles Share of profit of equity accounted investees Contingent consideration interest expense Pension charge included in personnel expenses Gain on financial instruments Revaluation on acquisition of subsidiary Changes in: Financial asset Trade and other receivables Creditors and accrued charges Net cash flow from trading activities Changes in: Loans and advances to customers Deposits from customers Pension contribution Cash inflow / (outflow) from operating activities CASH FLOW STATEMENT Cash from operating activities Cash inflow / (outflow) from operating activities Income taxes paid Net cash inflow / (outflow) from operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangible assets Sale of tangible fixed assets Acquisition of subsidiary or associate, net of cash acquired (Purchase) / sale of debt securities Contingent consideration Net cash (outflow) / inflow from investing activities Cash flows from financing activities Receipt of loan notes Payment of lease liabilities (capital) Dividend paid Net cash inflow from financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Included in cash flows are: Interest received – cash amounts Interest paid – cash amounts The notes on pages 44 to 86 form part of these financial statements. Notes 2021 £000 2020 £000 3,043 2,021 22 23 29 6(ii) 27 19 31 27 22 23 22 31,32 18 6(ii),31 26 37 28 944 458 (32) 114 13 (30) (660) 3,850 4 223 (109) 3,968 896 374 (54) 122 15 (253) (237) 2,884 15 415 315 3,629 (36,128) 35,174 (98) 2,916 (16,023) 8,352 - (4,042) 2,916 (10) 2,906 (2,109) (481) 961 (555) (15,473) (120) (17,777) 1,450 (201) (152) 1,097 (13,774) 34,053 20,279 22,624 4,936 (4,042) (172) (4,214) (1,187) (231) 127 (648) 21,209 (59) 19,211 4,640 (204) - 4,436 19,433 14,620 34,053 20,274 (5,053) Page | 42 ANNUAL FINANCIAL STATEMENTS COMPANY STATEMENT OF CASH FLOWS For the year ended 31 December RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS Profit before tax Adjustments for: Depreciation Amortisation Dividend income Changes in: Amounts due from group undertakings Trade and other receivables Creditors and accrued charges Amounts due from Group undertakings Cash (outflow) / inflow from operating activities CASH FLOW STATEMENT Cash from operating activities Cash (outflow) / inflow from operating activities Income taxes paid Net cash (outflow) / inflow from operating activities Cash flows from investing activities Investment in subsidiaries Purchase of property, plant and equipment Purchase of intangible assets Net cash outflow from investing activities Cash flows from financing activities Receipt of loan notes Receipt of subordinated loan Payment of finance lease liability Dividend paid Net cash inflow from financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December The notes on pages 44 to 86 form part of these financial statements. Notes 2021 £000 2020 £000 1,029 797 22 30 26 91 2 (1,259) (137) (2,910) (163) 66 1,012 (2,132) (2,132) - (2,132) - - (15) (15) 1,450 - (99) (152) 1,199 (948) 1,378 430 101 - (572) 326 (347) (78) 17 1,522 1,440 1,440 - 1,440 (4,775) (5) - (4,780) 4,640 50 (91) - 4,599 1,259 119 1,378 Page | 43 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 1. Reporting entity Manx Financial Group PLC (“Company”) is a company incorporated in the Isle of Man. The consolidated financial statements of the Company for the year ended 31 December 2021 comprise the Company and its subsidiaries (“Group”) including Conister Bank Limited (the “Bank”). The Group is primarily involved in the provision of financial services. 2. Basis of accounting The consolidated and the separate financial statements of the Company have been prepared in accordance with international accounting standards in accordance with UK-adopted international accounting standards (“UK-adopted IFRS” or “IFRSs”), on a going concern basis as disclosed in the Directors’ Report. 3. Functional and presentation currency These financial statements are presented in pounds sterling, which is the Group’s functional currency. All amounts have been rounded to the nearest thousand, unless otherwise indicated. All subsidiaries of the Group have pounds sterling as their functional currency. 4. Use of judgements and estimates 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. The extent to which COVID-19 impacts the Group’s business will depend on the effectiveness of government containment actions and the effectiveness of government and central bank stimulus measures. As the economic environment remains uncertain, actual results may differ from the estimates below. 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. Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties at year-end that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year is included in the following notes:  Note 27 – measurement of defined benefit obligations: key actuarial assumptions;  Note 23 and 34 – impairment test of intangible assets and goodwill: key assumptions underlying recoverable amounts;  Note 43(G)(vii) – measurement of Expected Credit Loss (“ECL”) allowance for loans and advances to customers and assessment of impairment allowances where loans are in default or arrears: key assumptions in determining the weighted- average loss rate; and  Note 6 – measurement of contingent consideration. 5. Financial instruments - Classification For description of how the Group classifies financial assets and liabilities, see note 43(G)(ii). The following table provides reconciliation between line items in the statement of financial position and categories of financial instruments. 31 December 2021 Cash and cash equivalents Debt securities Financial asset Loans and advances to customers Trade and other receivables Total financial assets Deposits from customers Creditor and accrued charges Contingent consideration Loan notes Total financial liabilities Mandatorily at FVTPL £000 Designated as at FVTPL £000 FVOCI – debt instruments £000 FVOCI – equity instruments £000 - - - - - - - - - - - - - 68 - - 68 - - 1,023 - 1,023 - 40,987 - - - 40,987 - - - - - - - - - - - - - - - - Amortised cost £000 20,279 - - 229,251 1,947 251,477 253,459 4,745 - 23,672 Total carrying amount £000 20,279 40,987 68 229,251 1,947 292,532 253,459 4,745 1,023 23,672 281,876 282,899 Page | 44 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 5. Financial instruments - Classification (continued) 31 December 2020 Cash and cash equivalents Debt securities Trading assets Loans and advances to customers Trade and other receivables Total financial assets Deposits from customers Creditor and accrued charges Loan notes Total financial liabilities Mandatorily at FVTPL £000 Designated as at FVTPL £000 FVOCI – debt instruments £000 FVOCI – equity instruments £000 - - 4 - - 4 - - - - - - - - - - - - - - - 25,532 - - - 25,532 - - - - - - - - - - - - - - Amortised cost £000 34,053 - - 193,143 2,170 229,366 218,285 3,206 22,222 Total carrying amount £000 34,053 25,532 4 193,143 2,170 254,902 218,285 3,206 22,222 243,713 243,713 6. Financial instruments – Fair values For description of the Group’s fair value measurement accounting policy, see note 43(G)(vi). The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. 31 December 2021 Financial assets measured at fair value Debt securities Financial asset Financial assets not measured at fair value Cash and cash equivalents Loans and advances to customers Trade and other receivables Financial liabilities measured at fair value Contingent consideration Financial liabilities not measured at fair value Deposits from customers Creditors and accrued charges Loan notes Carrying amount Total £000 40,987 68 41,055 20,279 229,251 1,947 251,477 1,023 1,023 253,459 4,745 23,672 281,876 Fair value Level 1 £000 Level 2 £000 Level 3 £000 Total £000 - - - - - - - - - - - - - 40,987 - 40,987 - - - - - - - - - - - 68 68 - - - - 40,987 68 41,055 - - - - 1,023 1,023 1,023 1,023 - - - - - - - - Page | 45 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 6. Financial instruments – Fair values (continued) 31 December 2020 Financial assets measured at fair value Debt securities Trading assets Financial assets not measured at fair value Cash and cash equivalents Loans and advances to customers Trade and other receivables Financial liabilities measured at fair value Contingent consideration Financial liabilities not measured at fair value Deposits from customers Creditors and accrued charges Loan notes Measurement of fair values i. Valuation techniques and significant unobservable inputs Type Valuation technique Debt securities Contingent consideration Market comparison/discounted cash flow: The fair value is estimated considering a net present value calculated using discount rates derived from quoted yields of securities with similar maturity and credit rating that are traded in active markets. Discounted cash flows: The valuation model considers the present value of the expected future payments, discounted using a risk-adjusted discount rate. Carrying amount Total £000 Fair value Level 1 £000 Level 2 £000 Level 3 £000 Total £000 25,532 4 25,536 25,532 4 25,536 34,053 193,143 2,170 229,366 672 672 218,285 3,206 22,222 243,713 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 25,532 4 25,536 - - - - 672 672 672 672 - - - - - - - - Significant inputs unobservable Not applicable. between Inter-relationship significant unobservable inputs and fair value measurement Not applicable. Expected flows £1,133,820 (2020: £790,869). cash Risk-adjusted discount 14% (2020: 14%). rate The estimated fair value would increase (decrease) if: -the expected cash flows were higher (lower); or -the risk-adjusted discount rate were lower (higher). Page | 46 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 6. Financial instruments – Fair values (continued) ii. Level 3 recurring fair values Reconciliation of Level 3 fair values The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values. Balance at 1 January Assumed in a business combination (Note 31) Finance costs Net change in fair value (unrealised) Payment Balance at 31 December 2021 £000 672 387 114 (30) 84 (120) 1,023 2020 £000 863 - 122 (253) (131) (60) 672 Sensitivity analysis For the fair value of contingent consideration, reasonably possible changes at the reporting date to one of the significant unobservable inputs, holding other inputs constant would have the following effects. 31 December 2021 Expected cash flows (10% movement) Risk-adjusted discount rate (1% movement) Profit or loss Increase Decrease 113 (12) 66 (8) 7. Financial risk review Risk management This note presents information about the Group’s exposure to financial risks and the Group’s management of capital. For information on the Group’s financial risk management framework, see note 37. A. Credit risk For definition of credit risk and information on how credit risk is mitigated by the Group, see note 41. i. Credit quality analysis Loans and advances to customers Explanation of the terms ‘Stage 1’, ‘Stage 2’ and ‘Stage 3’ is included in note 43(G)(vii). An analysis of the credit risk on loans and advances to customers is as follows: 2021 2020 Stage 1 £000 Stage 2 £000 Stage 3 £000 Total £000 Stage 1 £000 Stage 2 £000 Stage 3 £000 Total £000 Grade A Grade B Grade C Gross value 213,103 - 342 213,445 - 5,735 541 6,276 - 5,594 12,656 18,250 213,103 11,329 13,539 237,971 173,673 - 335 174,008 - 5,728 9 5,737 - 7,751 12,771 20,522 173,673 13,479 13,115 200,267 Allowance for impairment Carrying value (503) 212,942 (124) 6,152 (8,093) 10,157 (8,720) 229,251 (423) 173,585 (18) 5,719 (6,683) 13,839 (7,124) 193,143 Loans are graded A to C depending on the level of risk. Grade A relates to agreements with the lowest risk, Grade B with medium risk and Grade C relates to agreements with the highest of risk. Page | 47 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 7. Financial risk review (continued) Risk management (continued) A. Credit risk (continued) i. Credit quality analysis (continued) Loans and advances to customers (continued) The following table sets out information about the overdue status of loans and advances to customers in Stage 1, 2 and 3: 31 December Current Overdue < 30 days Overdue > 30 days 2021 2020 Stage 1 £000 Stage 2 £000 Stage 3 £000 Total £000 Stage 1 £000 Stage 2 £000 Stage 3 £000 Total £000 210,491 2,954 - 213,445 - - 6,276 6,276 - - 18,250 18,250 210,491 2,954 24,526 237,971 170,436 3,572 - 174,008 - - 5,737 5,737 - - 20,522 20,522 170,436 3,572 26,259 200,267 For Stage 3 loans and advances that are overdue for more than 30 days, the Bank holds collateral with a value of £11,625,250 (2020: £13,362,468) representing security cover of 64% (2020: 65%). Debt securities, cash and cash equivalents The following table sets out the credit quality of liquid assets: Government bonds and treasury bills Rated A to A+ Floating rate notes Rated A to A+ Cash and cash equivalents Rated A to A+ 2021 £000 2020 £000 40,987 24,431 - 1,101 20,279 61,266 34,053 59,585 The analysis has been based on Standard & Poor’s ratings. ii. Collateral and other credit enhancements The Group holds collateral in the form of the underlying assets (typically private and commercial vehicles, plant and machinery) to loan arrangements as security for HP, finances leases, vehicle stocking plans, block discounting, wholesale funding arrangements, integrated wholesale funding arrangements and secured commercial loan balances, which are sub-categories of loans and advances to customers. In addition, the commission share schemes have an element of capital indemnified. During 2021, 76% of loans and advances had an element of capital indemnification (2020: 34.0%). 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. Collateral is valued at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. iii. Amounts arising from ECL See accounting policy in note 43(G)(vii). IFRS 9 significantly overhauled the requirements and methodology used to assess credit impairments by transitioning to a forward- looking approach based on an expected credit loss model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments. Under IFRS 9, credit losses are recognised earlier than under IAS 39 – Financial Instruments: Recognition and Measurement. After a detailed review, the Group devised and implemented an impairment methodology in light of the IFRS 9 requirements outlined above noting the following:  A Significant Increase in Credit Risk (“SICR”) is always deemed to occur when the borrower is 30 days past due on its contractual payments. If the Group becomes aware ahead of this time of non-compliance or financial difficulties of the borrower, such as loss of employment, avoiding contact with the Group then a SICR has also deemed to occur.  The Group has granted payment holidays to customers with no prior arrears based on individual circumstances. These customers are not able to incur further arrears as no payments are being called whilst they are on the payment holiday. These customers have not been deemed to have a SICR unless the customer is under exceptional financial hardship due to COVID-19. Page | 48 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 7. Financial risk review (continued) Risk management (continued) A. Credit risk (continued) iii. Amounts arising from ECL (continued)  A receivable is always deemed to be in default and credit-impaired when the borrower is 90 days past due on its contractual payments or earlier if the Group becomes aware of severe financial difficulties such as bankruptcy, individual voluntary arrangements, abscond or disappearance, fraudulent activity or other similar events.  The ECL was derived by reviewing the Group’s loss rate and loss-given-default over the past 9 years by product and geographical segment.  The Group has assumed that the future economic conditions will broadly mirror the current environment and therefore the forecasted loss levels in the next 3 years will match the Group’s experience in recent years.  For portfolios where the Group has never had a default in its history or has robust credit enhancements such as credit insurance or default indemnities for the entire portfolio, then no IFRS 9 provision is made.  If the Group holds objective evidence through specifically assessing a credit-impaired receivable and believes it will go on to completely recover the debt due to the collateral held and cooperation with the borrower, then no IFRS 9 provision is made. There have been no significant changes to ECL assumptions from the prior year. iv. Concentration of credit risk Geographical Lending is restricted to individuals and entities with Isle of Man, UK or Channel Islands addresses. Segmental The Bank is exposed to credit risk with regard to customer loan accounts, comprising HP and finance lease balances, unsecured personal loans, secured commercial loans, block discounting, vehicle stocking plan loans and wholesale funding agreements. In addition, the Bank lends via significant introducers into the UK. There was no introducer that accounted for more than 20% of the Bank’s total lending portfolio at the end of 31 December 2021 (2020: none). B. Liquidity risk For the definition of liquidity risk and information on how liquidity risk is manged by the Group, see note 41. i. Exposure to liquidity risk The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers and short- term funding. For this purpose, net liquid assets includes cash and cash equivalents and investment-grade debt securities for which there is an active and liquid market. Details of the reported Group ratio of net liquid assets to deposits from customers at the reporting date and during the reporting year were as follows: At 31 December Average for the year Maximum for the year Minimum for the year 2021 24% 25% 28% 20% 2020 27% 28% 32% 25% Page | 49 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 7. Financial risk review (continued) Risk management (continued) B. Liquidity risk (continued) ii. Maturity analysis for financial liabilities and financial assets The table below shows the Group’s financial liabilities classified by their earliest possible contractual maturity, on an undiscounted basis including interest due at the end of the deposit term. Based on historical data, the Group’s expected actual cash flow from these items vary from this analysis due to the expected re-investment of maturing customer deposits. Residual contractual maturities of financial liabilities as at the reporting date (undiscounted): 31 December 2021 £000 Sight- 8 days >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 88,036 9,091 97,127 >3 years - 5 years £000 16,738 9,053 25,791 Deposits Other liabilities Total liabilities 31 December 2020 Deposits Other liabilities Total liabilities 6,864 291 7,155 Sight- 8 days £000 3,106 27 3,133 4,743 83 4,826 18,359 1,210 19,569 63,733 1,253 64,986 61,891 10,995 72,886 >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 3,194 88 3,282 19,775 668 20,443 53,380 819 54,199 59,023 3,630 62,653 61,491 16,401 25,221 7,851 77,892 33,072 Maturity of assets and liabilities at the reporting date: 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 31 December 2021 Assets Cash Debt securities Loans and advances Other assets Total assets Liabilities Deposits Other liabilities Total liabilities 20,279 - 9,271 68 29,618 6,864 238 7,102 - 5,001 8,372 - 13,373 4,285 - 4,285 - 20,994 12,378 - 33,372 17,565 1,000 18,565 - 14,992 25,458 - 40,450 62,831 946 63,777 - - 30,835 3,186 34,021 60,790 10,512 71,302 - - 94,395 - 94,395 85,350 7,967 93,317 - - 44,081 6,018 >5 years £000 - 869 869 >5 years £000 - 1,141 1,141 >5 years £000 - - 4,462 8,964 Total £000 260,364 32,845 293,209 Total £000 225,190 30,625 255,815 Total £000 20,279 40,987 229,252 18,236 50,099 13,426 308,754 15,774 8,777 24,551 - 869 869 253,459 30,309 283,768 Page | 50 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 7. Financial risk review (continued) Risk management (continued) B. Liquidity risk (continued) ii. Maturity analysis for financial liabilities and financial assets (continued) Maturity of assets and liabilities at the reporting date (continued): 31 December 2020 Assets Cash Debt securities Loans and advances Other assets Total assets Liabilities Deposits 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 34,053 - 6,270 4 40,327 3,106 - 3,106 - 5,301 7,750 - 13,051 2,736 - 2,736 - 14,000 21,565 - 35,565 18,981 450 19,431 - - 17,822 - 17,822 52,478 496 52,974 - 6,231 27,490 2,578 36,299 57,922 2,983 60,905 - - 84,111 - 84,111 58,805 14,874 73,679 - - 25,756 5,637 31,393 24,257 7,297 31,554 >5 years £000 - - 2,379 7,014 9,393 - 1,141 1,141 iii. Liquidity reserves The following table sets out the components of the Group’s liquidity reserves: Balances with other banks Unencumbered debt securities Total liquidity reserves 2021 Carrying amount £000 20,279 40,987 61,266 2021 Fair value £000 20,279 40,987 61,266 2020 Carrying amount £000 34,053 25,532 59,585 Total £000 34,053 25,532 193,143 15,233 267,961 218,285 27,241 245,526 2020 Fair value £000 34,053 25,532 59,585 C. Market risk For the definition of market risk and information on how the Group manages the market risks of trading and non-trading portfolios, see note 41. The following table sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios: 31 December 2021 Assets subject to market risk Debt securities Financial asset Total 31 December 2020 Assets subject to market risk Debt securities Financial asset Total Carrying amount £000 40,987 68 41,055 Market risk measure Trading portfolios £000 Non-trading portfolios £000 - - - 40,987 68 41,055 Market risk measure Carrying amount £000 Trading portfolios £000 25,532 4 25,536 - 4 4 Non- trading portfolios £000 25,532 - 25,532 Page | 51 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 7. Financial risk review (continued) Risk management (continued) C. Market risk (continued) i. Exposure to interest rate risk 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 deposits from customers at their earliest. 31 December 2021 Sight- 1 month £000 >1month - 3months £000 >3months - 6months £000 >6months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Non- Interest Bearing £000 Total £000 Assets 20,279 Cash & cash equivalents 5,001 Debt securities Loans and advances to customers 17,642 - Other assets - 20,994 12,378 - - 14,992 25,458 - - - 30,835 - - - 94,395 - - - 44,081 - - - 4,462 - - - - 18,236 20,279 40,987 229,251 18,236 Total assets 42,922 33,372 40,450 30,835 94,395 44,081 4,462 18,236 308,753 Liabilities and equity Deposits from customers Other liabilities Total equity 11,149 238 - 17,565 1,000 - 62,831 946 - 60,790 7,050 - 85,350 7,967 - 15,774 8,777 - Total liabilities and equity 11,387 18,565 63,777 67,840 93,317 24,551 - 687 - 687 - 3,644 24,985 28,629 253,459 30,309 24,985 308,753 Interest rate sensitivity gap 31,535 14,807 (23,327) (37,005) 1,078 19,530 3,775 (10,393) Cumulative 31,535 46,312 23,015 (13,990) (12,912) 6,618 10,393 - 31 December 2020 Sight- 1 month £000 >1month - 3months £000 >3months - 6months £000 >6months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Non- Interest Bearing £000 - - Total £000 Assets 34,053 Cash & cash equivalents Debt securities 5,301 Loans and advances to customers 14,020 - Other assets - 14,000 21,565 - - - 17,822 - - 6,231 27,490 - - - 84,111 - - - 25,756 - - - 2,379 - - - - 15,233 34,053 25,532 193,143 15,233 Total assets 53,374 35,565 17,822 33,721 84,111 25,756 2,379 15,233 267,961 Liabilities and equity Deposits from customers Other liabilities Total equity Total liabilities and equity 5,842 - - 5,842 18,981 450 - 52,478 496 - 57,922 280 - 58,805 14,874 - 24,257 7,297 - 19,431 52,974 58,202 73,679 31,554 - 944 - 944 - 2,900 22,435 25,335 218,285 27,241 22,535 267,961 Interest rate sensitivity gap 47,532 16,134 (35,152) (24,481) 10,432 (5,798) 1,435 (10,102) Cumulative 47,532 63,666 28,514 4,033 14,465 8,667 10,102 - - - The Bank monitors the impact of changes in interest rates on interest rate mismatch positions using a method consistent with the FSA required reporting standard. The methodology applies weightings to the net interest rate sensitivity gap in order to quantify the impact of an adverse change in interest rates of 2.0% per annum (2020: 2.0%). The following tables set out the estimated total impact of such a change based on the mismatch at the reporting date: 31 December 2021 Sight- 1 month >1month -3months >3months - 6months >6months - 1 year >1 year - 3 years >3 years - 5 years >5 years Interest rate sensitivity gap £000 31,535 14,807 (23,327) (37,005) Weighting £000 0 - 0.003 44 0.007 (163) 0.014 (518) 1,078 0.027 29 19,530 0.054 1,055 3,775 0.115 434 Non- Interest Bearing (10,393) 0 - Total - 0 881 Page | 52 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 7. Financial risk review (continued) Risk management (continued) C. Market risk (continued) i. Exposure to interest rate risk (continued) 31 December 2020 Sight- 1 month >1month -3months >3months - 6months >6months - 1 year >1 year - 3 years >3 years - 5 years >5 years Interest rate sensitivity gap £000 47,532 16,134 (35,152) (24,481) 10,432 (5,798) Weighting £000 - - 0.003 48 0.007 (246) 0.014 (343) 0.027 0.054 282 (313) 165 Non- Interest Bearing (10,102) - - Total - - (407) 1,435 0.115 D. Capital Management i. Regulatory capital The lead regulator of the Group’s wholly owned subsidiary, the Bank, is the FSA. The FSA sets and monitors capital requirements for the Bank. The Bank’s regulatory capital consists of the following elements.  Common Equity Tier 1 (“CET1”) capital, which includes ordinary share capital, retained earnings and reserves after adjustment for deductions for goodwill, intangible assets and intercompany receivable. Tier 2 capital, which includes qualifying subordinated liabilities and any excess of impairment over expected losses.  The FSA’s approach to the measurement of capital adequacy is primarily based on monitoring the relationship of the capital resources requirement to available capital resources. The FSA sets individual capital guidance (“ICG”) for the Bank in excess of the minimum capital resources requirement. A key input to the ICG setting process is the Bank’s internal capital adequacy assessment process (“ICAAP”). The Bank is also regulated by the FCA in the UK for credit and brokerage related activities. ii. Capital allocation Management uses regulatory capital ratios to monitor its capital base. The allocation of capital between specific operations and activities is, to a large extent, driven by optimisation of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily on regulatory capital requirements. 8. Operating segments Segmental information is presented in respect of the Group’s business segments. The Directors consider that the Group currently operates in one geographic segment comprising of the Isle of Man, UK and Channel Islands. The primary format, business segments, is based on the Group’s management and internal reporting structure. The Directors consider that the Group operates in three (2020: four) product orientated segments in addition to its investing activities: Asset and Personal Finance (including provision of HP contracts, finance leases, personal loans, commercial loans, block discounting, vehicle stocking plans and wholesale funding agreements); Edgewater Associates Limited (provision of financial advice); and Manx FX Limited (provision of foreign currency transaction services). For the year ended 31 December 2021 Net interest income Fee and commission income Operating income Profit / (loss) before tax payable Capital expenditure Total assets Total liabilities Asset and Personal Finance £000 17,980 811 16,251 2,528 3,083 292,721 265,751 Edgewater Associates £000 Manx FX £000 Investing Activities £000 - 2,282 2,282 114 13 2,330 638 - 1,528 1,514 1,227 1 802 61 Total £000 17,980 4,621 20,047 3,043 3,102 - - - (826) 5 12,900 17,318 308,753 283,768 Page | 53 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 8. Operating segments (continued) For the year ended 31 December 2020 Net interest income Fee and commission income Operating income Profit / (loss) before tax payable Capital expenditure Total assets Total liabilities 9. Net interest income Asset and Personal Finance £000 Edgewater Associates £000 Manx FX £000 Investing Activities £000 15,470 430 13,206 1,316 1,138 260,155 230,001 - 2,103 2,103 (94) 46 2,638 660 - 1,332 1,096 1,096 2 536 12 Interest income Loans and advances to customers Total interest income calculated using the effective interest method Operating lease income Total interest income Interest expense Deposits from customers Loan note interest Lease liability Contingent consideration: interest expense Total interest expense Net interest income Total £000 15,470 3,865 16,405 - - - (297) 2,021 1 1,187 4,632 14,853 267,961 245,526 2021 £000 21,010 21,010 1,937 22,947 (3,512) (1,299) (42) (114) (4,967) 2020 £000 19,484 19,484 1,208 20,692 (4,044) (1,016) (40) (122) (5,222) 17,980 15,470 10. Net fee and commission income In the following table, fee and commission income from contracts with customers in the scope of IFRS 15 – Revenue from Contracts with Customers is disaggregated by major type of services. The table includes a reconciliation of the disaggregated fee and commission income with the Group’s reportable segments. See note 43D regarding revenue recognition. Major service lines EAL: Independent financial advice income MFX: Foreign exchange trading income Asset and personal finance: Brokerage services income MCL: Debt collection Fee and commission income Fee and commission expense Net fee and commission income 2021 £000 2,282 1,528 510 301 4,621 2020 £000 2,103 1,332 430 - 3,865 (3,339) (3,481) 1,282 384 Page | 54 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 11. Personnel expenses Staff gross salaries Executive Directors’ remuneration Non-executive Directors’ fees Executive Directors’ pensions Executive Directors’ performance related pay Staff pension costs National insurance and payroll taxes Staff training and recruitment costs 12. Other expenses Professional and legal fees Marketing costs IT costs Establishment costs Communication costs Travel costs Bank charges Insurance Irrecoverable VAT Other costs 2021 £000 (5,416) (440) (176) (34) (51) (330) (623) (86) (7,156) 2021 £000 (1,367) (264) (1,001) (317) (129) (104) (124) (344) (268) (582) (4,500) 2020 £000 (5,331) (299) (163) (21) (50) (297) (606) (56) (6,823) 2020 £000 (1,063) (177) (822) (270) (105) (95) (151) (300) (436) (288) (3,707) 13. Impairment on loans and advances to customers The charge in respect of allowances for impairment comprises, excluding loss allowances on financial assets managed on a collective basis. Impairment allowances made Reversal of allowances previously made Total charge for provision for impairment 2021 £000 (5,457) 1,055 (4,402) The charge in respect of allowances for impairment on financial assets managed on a collective basis comprises: Collective impairment allowances made Release of allowances previously made Total credit / (charge) for allowances for impairment on financial assets managed on a collective basis 2021 £000 (77) 119 42 2020 £000 (6,833) 3,039 (3,794) 2020 £000 (421) 265 (156) Total charge for allowances for impairment (4,360) (3,950) 14. Profit before tax payable The profit before tax payable for the year is stated after charging: Auditor’s remuneration: as Auditor current year non-audit services Pension cost defined benefit scheme Operating lease rentals for property Group Company 2021 £000 (232) (2) (13) (64) 2020 £000 (167) (10) (16) (97) 2021 £000 - - - - 2020 £000 - - - - Page | 55 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 15. Income tax expense Current tax expense Current year Changes to estimates for prior years Deferred tax expense Origination and reversal of temporary differences Tax expense Reconciliation of effective tax rate Profit before tax Tax using the Bank’s domestic tax rate Effect of tax rates in foreign jurisdictions Tax exempt income Timing difference in current year Changes to estimates for prior years Origination and reversal of temporary differences in deferred tax R&D claim Tax expense 2021 £000 (132) (50) (182) (52) (234) % (10.0) 1.4 0.0 3.2 2.8 0.0 (2.6) 2020 £000 3 - 3 (56) (53) 2020 £000 2,021 (202) 28 - 65 56 - (53) % (10.0) (1.45) 5.19 0.0 1.64 (1.71) (1.38) (11.41) 2021 £000 3,043 (304) (44) 158 - 50 (52) (42) (234) The main rate of corporation tax in the Isle of Man is 0.0% (2020: 0.0%). However, the profits of the Group’s Isle of Man banking activities are taxed at 10.0% (2020: 10.0%). The profits of the Group’s subsidiaries that are subject to UK corporation tax are taxed at a rate of 19.0% (2020: 19.0%). The value of tax losses carried forward reduced to nil and there is now a timing difference related to accelerated capital allowances resulting in a £182,000 liability (2020: £197,000 liability). This resulted in an expense of £52,000 (2020: £56,000) to the Consolidated Income Statement offset by a deferred tax credit on the defined benefit pension through the OCI of £67,000 (2020: £nil). 16. Earnings per share Profit for the year Weighted average number of Ordinary Shares in issue (basic) Basic earnings per share (pence) Diluted earnings per share (pence) Total comprehensive income for the year Weighted average number of Ordinary Shares in issue (basic) Basic earnings per share (pence) Diluted earnings per share (pence) 2021 2020 £2,809,000 £1,968,000 114,291,639 2.46 1.97 118,964,270 1.65 1.37 £3,045,000 £1,676,000 114,291,639 2.66 2.13 118,964,270 1.41 1.19 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. Page | 56 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 16. Earnings per share (continued) As at: Reconciliation of weighted average number of Ordinary Shares in issue between basic and diluted 2021 2020 Weighted average number of Ordinary Shares (basic) Number of shares issued if all convertible loan notes were exchanged for equity Dilutive element of share options if exercised 114,291,639 36,555,556 - 118,964,270 36,555,556 - Weighted average number of Ordinary Shares (diluted) 150,847,195 155,519,826 Reconciliation of profit for the year between basic and diluted Profit for the year (basic) Interest expense saved if all convertible loan notes were exchanged for equity Profit for the year (diluted) £2,809,000 £166,250 £1,968,000 £166,250 £2,975,250 £2,134,250 The diluted earnings per share calculation assumes that all convertible loan notes and share options have been converted / exercised at the beginning of the year where they are dilutive. As at: 2021 2020 Reconciliation of total comprehensive income for the year between basic and diluted Total comprehensive income for the year (basic) Interest expense saved if all convertible loan notes were exchanged for equity Total comprehensive income for the year (diluted) 17. Cash and cash equivalents Cash at bank and in hand Notice account balance (less than 90 days) Fixed deposit (less than 90 days) £3,045,000 £166,250 £1,676,000 £166,250 £3,211,250 £1,842,250 Group Company 2021 £000 18,278 2,001 - 20,279 2020 £000 11,728 21,025 1,300 34,053 2021 £000 430 - - 430 2020 £000 1,378 - - 1,378 2020 £000 - - - Cash at bank includes an amount of £56,000 (2020: £120,000) representing receipts which are in the course of transmission. 18. Debt securities Financial assets at FVOCI: UK Government Treasury Bills Floating Rate Notes Group Company 2021 £000 40,987 - 40,987 2020 £000 24,431 1,101 25,532 2021 £000 - - - UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in other comprehensive income. There were realised losses of £1,000 (2020: gains of £261,000) and unrealised losses of £18,000 (2020: unrealised losses of £51,000) during the year. Page | 57 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 19. Financial assets Financial assets at FVOCI: Gain on Contingent consideration (see note 6(ii)) Gain on equity instrument Group Company 2021 £000 30 - 30 2020 £000 253 6 259 2021 £000 - - - 2020 £000 - - - The equity instrument representing an investment in a UK quoted company was disposed of during the period at the carrying amount. No gain / loss has thus been recognised due to the disposal. The Bank acquired a new equity instrument during the financial year. (See Note 33) 20. Loans and advances to customers Group HP balances Finance lease balances Unsecured personal loans Vehicle stocking plans Wholesale funding arrangements Block discounting Secured commercial loans Secured personal loans Government backed loans Gross Amount £000 71,789 28,131 31,267 1,675 15,447 16,465 11,099 1,739 60,358 237,970 2021 Impairment Allowance £000 (4,107) (3,317) (537) - - - (519) - (239) (8,719) Carrying Value £000 67,682 24,814 30,730 1,675 15,447 16,465 10,580 1,739 60,119 229,251 Gross Amount £000 72,930 34,373 27,762 1,807 18,080 13,848 9,602 2,152 19,710 200,264 2020 Impairment Allowance £000 (1,779) (3,241) (364) - (808) (418) (511) - - (7,121) Carrying Value £000 71,151 31,132 27,398 1,807 17,272 13,430 9,091 2,152 19,710 193,143 Collateral is held in the form of underlying assets for HP, finance leases, vehicles stocking plans, block discounting, secured commercial and personal loans and wholesale funding arrangements. Allowance for impairment Balance at 1 January 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 2021 £000 6,824 5,457 (1,055) (2,762) 8,464 2021 £000 297 77 (119) 255 8,719 2020 £000 4,632 5,231 (1,519) (1,520) 6,824 2020 £000 141 421 (265) 297 7,121 Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2021 £945,625 (2020: £629,345) 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 (see note 33). Page | 58 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 20. Loans and advances to customers (continued) At the end of the current financial year 5 loan exposures (2020: 6) exceeded 10.0% of the capital base of the Bank: Exposure Block discounting facility Wholesale funding agreement Outstanding Balance 2021 £000 16,465 25,645 Outstanding Balance 2020 £000 5,878 16,315 HP and finance lease receivables Loans and advances to customers include the following HP and finance lease receivables: Less than one year Between one and five years Gross investment in HP and finance lease receivables The investment in HP and finance lease receivables net of unearned income comprises: Facility Limit £000 46,529 37,042 2020 £000 52,028 71,348 123,376 2020 £000 45,250 62,053 107,303 2021 £000 34,833 58,949 93,782 2021 £000 32,495 54,994 87,489 Less than one year Between one and five years Net investment in HP and finance lease receivables 21. Trade and other receivables Prepayments VAT claim Other debtors Group Company 2021 £000 498 - 1,449 1,947 2020 £000 482 586 1,102 2,170 2021 £000 100 371 1 472 2020 £000 53 256 - 309 After consultation with its professional advisors, the Bank made a notice of error correction (“NEC”) to the Isle of Man Government Customs & Exercise Division in respect of a repayment for overpaid VAT to the amount of £534,000 exclusive of statutory interest. The NEC relates to bad debt relief that was not claimed during the period from 1 April 1989 to 18 March 1997. The Bank recognised a receivable and income of £534,000 during 2020. The VAT claim was settled in full and the Bank received £699,000 during the period. An additional recovery of £113,000 over and above the carrying amount recognised at year end has been recognised in profit and loss. Page | 59 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 22. Property, plant and equipment and right-of-use assets Group Cost As at 1 January 2021 Revaluation Additions Disposals As at 31 December 2021 Accumulated depreciation As at 1 January 2021 Charge for year Disposals As at 31 December 2021 Carrying value at 31 December 2021 Carrying value at 31 December 2020 Buildings and Leasehold Improvements £000 IT Equipment £000 Furniture and Equipment £000 Motor Vehicles1 £000 Right-of- use assets £000 Total £000 698 15 25 (57) 681 384 55 (12) 427 254 314 462 - 62 (87) 437 343 61 (91) 313 124 119 4,332 - 2,019 (422) 5,929 801 389 (381) 809 5,120 3,531 2,477 - 3 (1,769) 711 804 277 (890) 191 520 1,673 737 8,706 - 993 (285) 1,445 329 162 (285) 206 1,239 408 15 3,102 (2,620) 9,203 2,661 944 (1,659) 1,946 7,257 6,045 1Included in motor vehicles are operating leases with the Group as lessor. Depreciation on leasing assets was £269,000 (2020: £406,000). Buildings with an original cost of £160,000 were revalued by independent valuers Vospers Limited to £175,000 on the basis of market value as at 15 September 2021. The valuation conforms to International Valuation Standards and was based on recent market transactions on arm's length terms for similar properties. The Directors consider the valuation of the Buildings as at 31 December 2021 remains £175,000. Company Cost As at 1 January 2021 Additions Disposals As at 31 December 2021 Accumulated depreciation As at 1 January 2021 Charge for year Disposals As at 31 December 2021 Carrying value at 31 December 2021 Carrying value at 31 December 2020 Leasehold Improvements £000 IT Equipment £000 Furniture and Equipment £000 Right-of use-assets £000 234 - - 234 207 27 - 234 - 27 18 - - 18 5 1 - 6 12 13 17 - - 17 7 2 - 9 8 10 424 - - 424 120 61 - 181 243 304 Total £000 693 - - 693 339 91 - 430 263 354 Page | 60 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 23. Intangible assets Group Cost As at 1 January 2021 Acquisition of subsidiary (see note 31) Additions Disposals As at 31 December 2021 Accumulated amortisation As at 1 January 2021 Charge for year Disposals As at 31 December 2021 Carrying value at 31 December 2021 Carrying value at 31 December 2020 24. Deposits from customers Retail customers: term deposits Corporate customers: term deposits 25. Creditors and accrued charges Commission creditors Other creditors and accruals Lease liability Taxation creditors 26. Loan notes Related parties J Mellon Burnbrae Limited Southern Rock Insurance Company Limited Unrelated parties Customer Contracts £000 Intellectual Property Rights £000 IT Software and Website Development £000 749 - - - 749 523 - - 523 226 226 2,320 - 221 - 2,541 1,772 279 - 2,051 490 548 Total £000 4,989 199 481 278 5,947 2,703 458 278 3,439 2,508 2,286 2021 £000 242,788 10,671 253,459 2020 £000 209,235 9,050 218,285 2021 £000 1,520 1,380 1,295 550 4,745 2021 £000 1,750 3,200 2,097 7,047 16,625 23,672 Group Company 2020 £000 1,748 822 503 133 3,206 2021 £000 - 182 319 - 501 Group Company 2020 £000 1,750 3,200 2,097 7,047 15,175 22,222 2021 £000 1,750 3,200 2,097 7,047 16,625 23,672 2020 £000 - 83 418 - 501 2020 £000 1,750 3,200 2,097 7,047 15,175 22,222 1,920 199 260 278 2,657 408 179 278 865 1,792 1,512 Notes JM BL SR UP JM – Two loans, one of £1,250,000 maturing on 26 February 2025, paying interest of 5.4% per annum, and one of £500,000 maturing on 31 July 2022 paying interest of 5.0% per annum. Both loans are convertible at the rate of 7.5 pence and 9 pence respectively. Page | 61 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 26. Loan notes (continued) BL – Three loans, one of £1,200,000 maturing on 31 July 2022, paying interest of 5.0% per annum, one of £1,000,000 maturing 25 February 2025, paying interest of 5.4% per annum, and one of £1,000,000 maturing 28 February 2025 paying interest of 6% per annum. Jim Mellon is the beneficial owner of BL and Denham Eke is also a director. The £1,200,000 loan is convertible at a rate of 7.5 pence. SR – One loan consisting of £2,097,085 maturing on 14 April 2025, paying interest of 6.5% per annum. UP – Forty-two loans (2020: Thirty-three) consisting of an average £461,806 (2020: £459,848) with an average interest payable of 5.7% (2020: 5.8%) per annum. The earliest maturity date is 3 January 2022 and the latest maturity is 3 November 2026. With respect to the convertible loans, the interest rate applied was deemed by the Directors to be equivalent to the market rate at the time with no conversion option. 27. Pension liability The Conister Trust Pension and Life Assurance Scheme (“Scheme”) operated by the Bank is a funded defined benefit arrangement which provides retirement benefits based on final pensionable salary. The Scheme is closed to new entrants and the last active member of the Scheme left pensionable service in 2011. The Scheme is approved in the Isle of Man by the Assessor of Income Tax under the Income Tax (Retirement Benefit Schemes) Act 1978 and must comply with the relevant legislation. In addition, it is registered as an authorised scheme with the FSA in the Isle of Man under the Retirement Benefits Scheme Act 2000. The Scheme is subject to regulation by the FSA but there is no minimum funding regime in the Isle of Man. The Scheme is governed by two corporate trustees, Conister Bank Limited and Boal & Co (Pensions) Limited. The trustees are responsible for the Scheme’s investment policy and for the exercise of discretionary powers in respect of the Scheme’s benefits. The rules of the Scheme state: “Each Employer shall pay such sums in each Scheme Year as are estimated to be required to provide the benefits of the Scheme in respect of the Members in its employ”. Exposure to risk The Company is exposed to the risk that additional contributions will be required in order to fund the Scheme as a result of poor experience. Some of the key factors that could lead to shortfalls are: investment performance – the return achieved on the Scheme’s assets may be lower than expected; and   mortality – members could live longer than foreseen. This would mean that benefits are paid for longer than expected, increasing the value of the related liabilities. In order to assess the sensitivity of the Scheme’s pension liability to these risks, sensitivity analyses have been carried out. Each sensitivity analysis is based on changing one of the assumptions used in the calculations, with no change in the other assumptions. The same method has been applied as was used to calculate the original pension liability and the results are presented in comparison to that liability. It should be noted that in practice it is unlikely that one assumption will change without a movement in the other assumptions; there may also be some correlation between some of these assumptions. It should also be noted that the value placed on the liabilities does not change on a straight line basis when one of the assumptions is changed. For example, a 2.0% change in an assumption will not necessarily produce twice the effect on the liabilities of a 1.0% change. No changes have been made to the method or to the assumptions stress-tested for these sensitivity analyses compared to the previous period. The investment strategy of the Scheme has been set with regard to the liability profile of the Scheme. However, there are no explicit asset-liability matching strategies in place. Restriction of assets No adjustments have been made to the statement of financial position items as a result of the requirements of IFRIC 14 – IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, 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 2021 (2020: none). Page | 62 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 27. Pension liability (continued) Funding policy The funding method employed to calculate the value of previously accrued benefits is the Projected Unit Method. Following the cessation of accrual of benefits when the last active member left service in 2011, regular future service contributions to the Scheme are no longer required. However, additional contributions will still be required to cover any shortfalls that might arise following each funding valuation. The most recent triennial full actuarial valuation was carried out at 31 March 2020, which showed that the market value of the Scheme’s assets was £1,432,000 representing 65.2% of the benefits that had accrued to members, after allowing for expected future increases in earnings. As required by IAS 19: Employee Benefits, this valuation has been updated by the actuary as at 31 December 2021. 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 (gain) / 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 / (loss) Benefits paid Closing fair value of plan assets at 31 December Expense recognised in income statement Interest on obligation Expected return on plan assets Total included in personnel costs Actual return on plan assets Actuarial gain / (loss) recognised in other comprehensive income Actuarial gain / (loss) on plan assets Actuarial gain / (loss) on defined benefit obligations 2021 £000 1,543 (2,230) (687) 2021 £000 2,350 (74) 32 (78) 2,230 2021 £000 1,406 19 98 94 (74) 1,543 2021 £000 32 (19) 13 113 2021 £000 94 78 172 2020 £000 1,406 (2,350) (944) 2020 £000 2,159 (76) 45 222 2,350 2020 £000 1,471 30 - (19) (76) 1,406 2020 £000 45 (30) 15 11 2020 £000 (19) (222) (241) Page | 63 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 27. Pension liability (continued) Plan assets consist of the following Equity securities Corporate bonds Government bonds Cash Other 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 2021 % 52 26 17 2 3 100 2020 % 47 19 29 2 3 100 2021 % 2020 % 2019 % - 3.4 2.2 5.0 1.7 3.5 - 2.9 2.1 5.0 1.8 3.0 - 3.0 2.1 5.0 2.9 3.1 The assumptions used by the actuary are best estimates chosen from a range of possible assumptions, which due to the timescale covered, may not necessarily be borne out in practice. 28. Called up share capital Ordinary shares of no par value available for issue At 31 December 2021 At 31 December 2020 Issued and fully paid: Ordinary shares of no par value At 31 December 2021 At 31 December 2020 Number 200,200,000 200,200,000 £000 19,133 19,121 Number 114,291,639 114,130,077 On 7 July 2021, a Dividend was declared for £196,800 which could either be taken up in cash or Shares. 161,562 new Shares were elected to be taken as Shares and were admitted to the Alternative Investment Market (“AIM”) for 7.0575 pence per Share, being a total cost of £11,402, on 10 August 2021. On 9 April 2020, the Company and Southern Rock Insurance Company Limited (“SR”) entered into a share buyback agreement (“SBA”), pursuant to which SR agreed to sell 16,966,158 Ordinary Shares for a consideration of £1,611,785. The consideration was left outstanding as a loan agreement (see note 26). The Ordinary Shares acquired were cancelled, and the Company’s issued share capital reduced to 114,130,077 Ordinary Shares effective 14 April 2020. Prior to the SBA, SR had a loan of £460,000, made to the Company, which was due to be repaid or converted into Ordinary Shares on or before 26 April 2020. Upon completion of the SBA, the Company and SR entered into an agreement varying the terms of the convertible loan such that they became subject to the terms of the SBA which contains no ability to convert the amounts outstanding into Ordinary Shares. The principal amount outstanding in respect of the convertible loan was increased by £25,300 to account for the reduction of the interest rate in transition to the SBA. There are three convertible loans totalling £2,950,000 (2020: £2,950,000). On 23 June 2014, 1,750,000 share options were issued to Executive Directors and senior management within the Group at an exercise price of 14 pence. The options vest over three years with a charge based on the fair value of 8 pence per option at the date of grant. The period of grant is for 10 years less 1 day ending 22 June 2024. Of the 1,750,000 share options issued, 1,050,000 (2020: 1,050,000) remain outstanding. Page | 64 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 28. Called up share capital (continued) Performance and service conditions attached to share options that have not fully vested are as follows: The options granted on 23 June 2014 require a minimum of three years’ continuous employment service in order to exercise upon the vesting date. The fair value of services received in return for share options granted is based on the fair value of share options granted, measured using a binomial probability model with the following inputs for each award: Fair value at date of grant Share price at date of grant Exercise price Expected volatility Option life Risk-free interest rate (based on government bonds) Forfeiture rate The charge for the year for share options granted was £nil (2020: £nil). Analysis of changes in financing during the year Balance at 1 January Issue of loan notes Issue of lease liability Issue of shares via scrip dividend Payment of lease liabilities Balance at 31 December 23 June 2014 £0.08 £0.14 £0.14 55.0% 3 0.5% 33.3% 2021 £000 41,846 1,450 993 12 (201) 44,100 2020 £000 37,410 4,640 - - (204) 41,846 The 2021 closing balance is represented by £19,133,000 share capital (2020: £19,121,000), £23,672,000 of loan notes (2020: £22,222,000) and £1,295,000 lease liability (2020: £503,000). 29. List of associates Set out below is a list of associates of the Group: The Business Lending Exchange (“BLX”) Payitmonthly Ltd (“PIML”) Group 2021 £000 - 136 136 Group 2020 £000 190 126 316 In December 2017, 40.0% of the share capital of BLX was acquired for nil consideration. During the year, the Group obtained control of the subsidiary (see note 31). Prior to obtaining control, the share of the associate’s total comprehensive income during the year was £22,000 (2020: 23,000). In August 2018, 30% of the share capital of PIML was acquired for £90,000 consideration. The Group’s resulting share of the associate’s total comprehensive income during the year was £10,000 (2020: £31,000). In April 2018, 20% of the share capital of BSL was acquired for nil consideration. During 2020, the Group obtained control of the subsidiary. Prior to obtaining control, the share of the associate’s total comprehensive income during the year was £nil (2020: 10,000). Page | 65 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 30. List of subsidiaries Set out below is a list of subsidiaries of the Group: Carrying value of investments Conister Bank Limited Edgewater Associates Limited TranSend Holdings Limited Manx Ventures Limited (MVL) Nature of Business 31 December 2021 % Holding Date of Incorporation Asset and Personal Finance Wealth Management Holding Company Holding Company 100 100 100 100 05/12/1935 24/12/1996 05/11/2007 15/05/2009 All subsidiaries are incorporated in the Isle of Man. 31. Acquisition of subsidiary The Business Lending Exchange (“BLX”) 2021 £000 20,592 2,005 - - 22,597 2020 £000 20,592 2,005 - - 22,597 On 11 October 2021, the Group (through MVL) announced that it entered into an agreement to acquire 60% of the shares and voting interests in BLX. As a result, the Group’s equity interest in BLX increased from 40% to 100%, thereby obtaining control of BLX. Regulated by the FCA under Consumer Credit Authorisations, BLX primarily lends to start-up companies and small businesses which require asset backed finance. This acquisition strengthens the Group’s strategy of developing a network of niche loan brokers within the UK. For the 3 months ended 31 December 2021, BLX contributed revenue of £438,864 and profit of £193,395 to the Group’s results. If the acquisition had occurred on 1 January 2021, management estimates that the impact on consolidated fee income would have been £1,444,137 and the impact on consolidated profit for the period would have been £642,648. A. BLX - Consideration transferred The following table summarises the acquisition date fair value of each major class of consideration transferred: Cash Contingent consideration Settlement of pre-existing relationship £000 921 387 5,216 6,524 Up to £483,663 consideration is payable to the sellers in addition to the cash consideration of £920,503. The total amount payable is contingent on the recovery of certain loans and advances found to be in default at acquisition. B. BLX - Settlement of pre-existing relationship The Bank and BLX were parties to a wholesale loan agreement and a Coronavirus Business Interruption Loan with the Bank as lender and BLX as borrower. This pre-existing relationship was effectively terminated when the Bank acquired BLX. C. BLX - Acquisition-related costs The Group incurred acquisition-related costs of £25,000 relating to external legal fees and due diligence costs. These costs have been included in ‘other costs’ in the consolidated statement of profit or loss and other comprehensive income. D. BLX - Identifiable assets acquired, and liabilities assumed The following table summarises the recognised amounts of assets acquired, and liabilities assumed at the date of acquisition: Intangible assets – customer related Cash and cash equivalents Trade and other receivables Creditors and accrued charges Total identifiable net assets acquired £000 199 676 5,196 (583) 5,488 Page | 66 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 31. Acquisition of subsidiary (continued) E. BLX – Measurement of fair values The valuation techniques use for measuring the fair value of material assets acquired were as follows: Assets acquired Intangible assets Valuation technique Multi-period excess earnings method: The multi-period excess earnings method considers the present value of net cash flows expected to be generated by the customer relationships. The trade and other receivables comprise gross contractual amounts due of £6,237,576, of which £1,042,095 was expected to be uncollectable at the date of acquisition. F. BLX - Goodwill The goodwill arising from the acquisition has been recognised as follows: Total consideration transferred Fair value of existing interest in BLX Fair value of identifiable net assets Goodwill £’000 6,524 872 (5,488) 1,908 The remeasurement to fair value of the Bank’s existing 20% interest in BLX resulted in a gain of £660,000 (£872,000 less the £212,000 carrying amount of the equity accounted investee at the date of acquisition). This amount has been included separately in the statement of profit or loss and other comprehensive income. Ninkasi Rentals & Finance Limited (“NRFL”) (formerly Beer Swaps Limited (“BSL”)) On 28 February 2020, the Group (through the Bank) announced that it entered into an agreement to acquire 55% of the shares and voting interests in BSL. As a result, the Group’s equity interest in BSL increased from 20% to 75%, thereby obtaining control of BSL. BSL provides equipment finance and rental products to UK based craft and micro-breweries. This acquisition strengthens the Group’s strategy of developing a network of niche loan brokers within the UK. The consideration transferred was £2,957,000 and transaction costs of £30,000 were incurred. The net fair value of identifiable assets acquired and liabilities assumed was £2,587,000. Goodwill of £678,000 was recognised. The remeasurement to fair value of the Bank’s existing 20% interest in BSL resulted in a gain of £237,000 (£257,000 less the £20,000 carrying amount of the equity accounted investee at the date of acquisition). This amount has been included separately in the statement of profit or loss and other comprehensive income. Blue Star Business Solutions Limited (“BBSL”) On 16 April 2019, the Group (through BBL) acquired 100% of the shares and voting interest in BBSL, obtaining control of BBSL. The Group agreed to pay the selling shareholders:   50% of net profits in BBSL for 3 years post completion; and 50% of the incremental net profit that the Group benefits from as a result of taking up BBSL loan proposals post completion up until the third anniversary. This is to be paid on each anniversary with a final payment in year 4 for the unrealised lending profit. The total consideration is to have a cap of £4,000,000 in total. The contingent consideration is calculated by forecasting 3 years of net profits discounted using an interest rate of 14.0% per annum. The range of contingent consideration payable is £nil to £2,500,000. See note 6 for the fair value of the Contingent Consideration at 31 December 2021. Page | 67 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 32. Acquisition of non-controlling interest On 14 June 2021, the Group increased its shareholding in NRFL to 90% (30 June and 31 December 2020: 75%) for a cash consideration of £310,000. The carrying value of non-controlling interest acquired at the date of acquisition was £44,000. The consideration in excess of the carrying amount of £266,000 has been charged directly to the profit and loss account. 33. Acquisition of financial instrument On 9 June 2021 the Group acquired 10% of the issued share capital of RFG for nil consideration. The receipt of the issued share capital is considered to be a commitment fee receivable by the Group in order to originate loan facilities in aggregate not exceeding £6,250,000 to RFG. The commitment fee is an integral part of the effective interest rate of the associated loan facilities issued to RFG. The Group is not considered to have a significant influence over RFG as it holds less than a 20% shareholding and is not considered to participate in the policy making decisions of the entity. The 10% shareholding has thus been classified as a financial instrument. The Group continues to obtain information necessary to measure the fair value of the shares obtained. The fair value of the financial instrument received has been determined as £68,000 at initial recognition based on the proportionate share of the net asset value of RFG. There has been no change to fair value at year-end. As part of the transaction, the Group has been granted two warrants to acquire further shares. The first warrant is for 5% of the share capital and the second warrant is for a further 5% of the share capital. The two warrants are exercisable dependent upon the Group’s banking subsidiary, the Bank, contracting with RFG, for a larger facility. The fair value of the two warrants has been determined to be nil due to the significant uncertainty that exists at acquisition date and the period end in issuing a further debt facility. 34. Goodwill Cash generating unit EAL BLX BBSL NRFL Manx Collections Limited (“MCL”) Three Spires Insurance Services Limited (“Three Spires”) Group 2021 £000 1,849 1,908 1,390 678 454 41 6,320 Group 2020 £000 1,849 - 1,390 678 454 41 4,412 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 key assumptions used in the estimation of the recoverable amount are set out in this note. The recoverable amount of the CGUs discussed in this note were each based on value in use. The values assigned to key assumptions represents management’s assessment of future trends in the relevant industries and have been based on historical data from both external and internal sources. The estimated recoverable amount in relation to the EAL CGU (including also goodwill generated on acquisition of EAL) is based on the forecasted 3 year cash flow projections, extrapolated to 10 years using a 2.0% annual increment, and then discounted using a 11.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on stable profit levels. The estimated recoverable amount in relation to the goodwill generated on the purchase of BLX is based on forecasted 3 year interest income calculated at an average yield of 8%, with a terminal value calculated using a 3.0% growth rate of net income and then discounted using a 14.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0% on varying interest income growth rates. The estimated recoverable amount in relation to the goodwill generated on the purchase of BBSL is based on forecasted 3 year interest income calculated at an average yield of 8%, with a terminal value calculated using a 3.0% growth rate of net income and then discounted using a 14.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0% on varying interest income growth rates. The estimated recoverable amount in relation to the goodwill generated on the purchase of NRFL is based on a 4 year sales forecast, extrapolated to 14 years using a 1.5% annual increment, and then discounted using a 12% discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0% on varying sales volumes. On the basis of the above reviews no impairment to goodwill has been made in the current year. Page | 68 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 34. Goodwill (continued) The estimated recoverable amount in relation to the goodwill generated on the purchase of MCL is based on forecasted 3-year sales interest income calculated at 5.0% margin, extrapolated to 10 years using a 2.0% annual increment, and then discounted using a 11.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on varying sales volumes. 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 EAL. Based on the above reviews no impairment to goodwill has been made in the current year. 35. Investment in Group undertakings Amounts owed to Group undertakings Amounts owed to Group undertakings are unsecured, interest-free and repayable on demand. Subordinated loans MFG has issued several subordinated loans as part of its equity funding into the Bank and EAL. Creation Maturity Interest rate % p.a. Conister Bank Limited 11 February 2014 27 May 2014 9 July 2014 17 September 2014 22 July 2013 25 October 2013 23 September 2016 14 June 2017 12 June 2018 11 February 2024 27 May 2024 9 July 2024 17 September 2026 22 July 2033 22 October 2033 23 September 2036 14 June 2037 12 June 2038 Edgewater Associates Limited 21 February 2017 14 May 2017 21 February 2027 14 May 2027 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 2021 £000 500 500 500 400 1,000 1,000 1,100 450 2,000 150 128 7,728 2020 £000 500 500 500 400 1,000 1,000 1,100 450 2,000 150 128 7,728 36. Related party transactions Cash deposits During the year, the Bank held cash on deposit on behalf of Jim Mellon (Executive Chairman of MFG). At 31 December total deposits amounted to £507,908 (2020: £432,213), at normal commercial interest rates in accordance with the standard rates offered by the Bank. At 31 December, the Bank held cash on deposit on behalf of David Gibson (Non-executive Director of the Bank and MFG) of £nil (2020: £50,282). Staff and commercial loans Details of staff loans are given in note 20. Commercial loans have been made to various companies connected to Jim Mellon and Denham Eke on normal commercial terms. As at 31 December 2021, £nil of capital and interest was outstanding (2020: £23,742). 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. EAL provides services to the Group in arranging its insurance and defined contribution pension arrangements. Page | 69 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 36. Related party transactions (continued) Loan advance to EAL On 14 December 2016, a loan advance was made to EAL by the Bank in order to provide the finance required to acquire MBL. The advance was for £700,000 at an interest rate of 8% per annum repayable over 6 years. A negative pledge was given by EAL to not encumber any property or assets or enter into an arrangement to borrow any further monies. The balance as at 31 December 2021 was £140,950 (2020: £273,568). Loan advance to PIML On 24 May 2018, a £500,000 loan facility was made available to PIML by the Bank in order to provide the finance required to expand its operations. The facility is for 12 months. Interest is charged at commercial rates. During the year, the facility was increased to £1,219,000. At 31 December 2021, £1,219,000 (2020: £685,000) had been advanced to PIML. Subordinated loans The Company has advanced £7,450,000 (2020: £7,450,000) of subordinated loans to the Bank and £278,000 (2020: £278,000) to EAL as at 31 December 2021. See note 33 for more details. Loan notes See note 26 for a list of related party loan notes as at 31 December 2021 and 2020. Key management remuneration including Executive Directors Short-term employee benefits 2021 £000 1,098 2020 £000 1,120 37. Leases A. Leases as lessee The Group leases the head office building in the Isle of Man. The leases typically run for a period of 10 years with an option to renew the lease after that date. Lease payments are renegotiated every 10 years to reflect market rentals. The Group leases an office unit in the United Kingdom and IT equipment with contract terms of 2 to 3 years. These leases are short- term and/or leases of low-value items. The Group has elected not to recognise right-of-use assets and lease liabilities for these leases. Information about leases for which the Group is a lessee is presented below. i. Right-of-use assets Right-of-use assets related to leased properties that do not meet the definition of investment property are presented as property, plant and equipment. Group Cost As at 1 January 2021 Additions Disposals As at 31 December 2021 Accumulated depreciation As at 1 January 2021 Charge for the year Eliminated on disposals As at 31 December 2021 Carrying value at 31 December 2021 Carrying value at 31 December 2020 Land and Buildings £000 737 993 (285) 1,445 329 162 (285) 206 1,239 408 Total £000 737 993 (285) 1,445 329 162 (285) 206 1,239 408 Page | 70 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 37. Leases (continued) ii. Amounts recognised in profit or loss Interest on lease liabilities Depreciation expense Expenses relating to short-term leases and low-value assets iii. Amounts recognised in statement of cash flows Total cash outflow for leases iv. Non-cancellable operating lease rentals are payable in respect of property as follows: Less than one year Between one and five years Over five years Total operating lease rentals payable 2021 £000 42 162 64 2021 £000 243 2021 £000 64 128 - 192 2020 £000 40 164 97 2020 £000 244 2020 £000 84 - - 84 38. Regulators Certain Group subsidiaries are regulated by the FSA and the FCA as detailed below. The Bank and EAL are regulated by the FSA under a Class 1(1) - Deposit Taking licence and Class 2 - Investment Business licence respectively. The Bank and CFL are regulated by the FCA to provide regulated products and services. 39. Contingent liabilities The Bank is required to be a member of the Isle of Man Government Depositors’ Compensation Scheme which was introduced by the Isle of Man Government under the Banking Business (Compensation of Depositors) Regulations 1991 and creates a liability on the Bank to participate in the compensation of depositors should it be activated. 40. Subsequent events There were no subsequent events occurring after 31 December 2021. Page | 71 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 41. Financial risk management A. Introduction and overview The Group has exposure to the following risks from financial instruments:  credit risk;  liquidity risk;  market risk; and  operational risk. Risk management framework The Board has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board has established the ARCC, which is responsible for approving and monitoring Group risk management policies. The ARCC is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the ARCC. 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. The risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, though its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. B. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s loans and advances to customers and investment debt securities. Credit risk includes counterparty, concentration, underwriting and credit mitigation risks. Management of credit risk The Bank’s Board of Directors created the Credit Committee which is responsible for managing credit risk, including the following:  Formulating credit policies in consultation with business units, covering collateral requirements, credit assessments, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements;  Establishing the authorisation structure for the approval and renewal of credit facilities. Authorisation limits are allocated to in line with credit policy;  Reviewing and assessing credit risk: The Credit Committee assesses all credit exposures in excess of designated limits, before facilities are committed to customers. Renewals and reviews of facilities are subject to the same review process. Limiting concentrations of exposures to counterparties, geographies and industries, by issuer, credit rating band, market liquidity and country (for debt securities);   Developing and maintaining risk gradings to categorise exposures according to the degree of risk of default. The current risk grading consists of 3 grades reflecting varying degrees of risk of default;  Developing and maintaining the Group’s process for measuring ECL: This includes processes for: o o o initial approval, regular validation and back-testing of the models used; determining and monitoring significant increase in credit risk; and incorporation of forward-looking information; and  Reviewing compliance with agreed exposure limits. Regular reports on the credit quality of portfolios are provided to the Credit Committee which may require corrective action to be taken. C. Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises from mismatches in the timing and amounts of cash flows, which is inherent to the Group’s operations and investments. Management of liquidity risk The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have enough liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The key elements of the Group’s liquidity strategy are as follows:   Funding base: offering six-months to five-year fixed term deposit structure with no early redemption option. This means the Bank is not subject to optionality risk where customers redeem fixed rate products where there may be a better rate available within the market; Funding profile: the Bank has a matched funding profile and does not engage in maturity transformation which means that on a cumulative mismatch position the Bank is forecast to be able to meet all liabilities as they fall due; Page | 72 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 41. Financial risk management (continued) C. Liquidity risk (continued) Management of liquidity risk (continued)   Monitoring maturity mismatches, behavioural characteristics of the Group’s financial assets and financial liabilities, and the extent to which the Group’s assets are encumbered and so not available as potential collateral for obtaining funding; Liquidity buffer: the Bank maintains a liquidity buffer of 10.0% of its deposit liabilities, with strict short-term mismatch limits of 0.0% for sight to three months and -5.0% for sight to six months. This ensures that the Bank is able to withstand any short- term liquidity shock; and Interbank market: the Bank has no exposure to the interbank lending market. The Bank has no reliance on liquidity via the wholesale markets. In turn, if market conditions meant access to the wholesale funding was constrained as per the 2008 credit crisis, this would have no foreseeable effect on the Bank.  The Bank’s liquidity position is monitored daily against internal and external limits agreed with the FSA and according to the Bank’s Liquidity Policy. The Bank also has a Liquidity Contingency Policy and Liquidity Contingency Committee in the event of a liquidity crisis or potential liquidity disruption event occurring. The Treasury department receives information from other business units regarding the liquidity profile of their financial assets and financial liabilities and details of other projected cash flows arising from projected future business. Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter- bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole. Regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. The scenarios are developed considering both Group-specific events and market-related events (e.g. prolonged market illiquidity). D. Market risk Market risk is the risk that changes in market prices; e.g. interest rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing), will affect the Group’s income or value of its holdings of financial instruments. The objective of the Group’s market risk management is to manage and control market risk exposures within acceptable parameters to ensure the Group’s solvency while optimising the return on risk. Management of market risks Overall authority for market risk is vested in the Assets and Liabilities Committee (“ALCO”) which sets up limits for each type of risk. Group finance is responsible for the development of risk management policies (subject to review and approval by the ALCO) and for the day-to-day review of their implementation. Foreign exchange risk The Bank is not subject to foreign exchange risks and its business is conducted in pounds sterling. Equity risk The Group has investment in associates which are carried at cost adjusted for the Group’s share of net asset value. The Bank has access to these accounts. The Bank’s exposure to market risk is not considered significant given the low carrying amount of the investment. The Group’s does not hold any investments in listed equities. Interest rate risk The principal potential interest rate risk that the Bank is exposed to is the risk that the fixed interest rate and term profile of its deposit base differs materially from the fixed interest rate and term profile of its asset base, or basis and term structure risk. Additional interest rate risk may arise for banks where (a) customers are able to react to market sensitivity and redeem fixed rate products and (b) where a bank has taken out interest rate derivate hedges especially against longer-term interest rate risk, where the hedge moves against the bank. However, neither of these risks apply to the Bank. Interest rate risk for the Bank is not deemed to be currently material due to the Bank’s matched funding profile. Any interest rate risk assumed by the Bank will arise from a reduction in interest rates, in a rising environment due to the nature of the Bank’s products and its matched funded profile. The Bank should be able to increase its lending rate to match any corresponding rise in its cost of funds, notwithstanding its inability to vary rates on its existing loan book. The Bank attempts to efficiently match its deposit taking to its funding requirements. Page | 73 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 41. Financial risk management (continued) E. Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks – e.g. those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group’s operations. Management of operational risk The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group’s reputation with overall cost effectiveness and innovation. In all cases, Group policy requires compliance with all applicable legal and regulatory requirements. The Group has developed standards for the management of operational risk in the following areas:  Business continuity planning;  Requirements for appropriate segregation of duties, including the independent authorisation of transactions;  Requirements for the reconciliation and monitoring of transactions;  Compliance with regulatory and other legal requirements;  Documentation of controls and procedures;  Periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;  Requirements for the reporting of operational losses and proposed remedial action;  Development of contingency plans;   Ethical and business standards;   Risk mitigation, including insurance where this is cost-effective. Information technology and cyber risks; and Training and professional development; Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are reported to the ARCC. 42. Basis of measurement The financial statements are prepared on a historical cost basis, except for the following material items: Items Measurement basis FVTPL – Trading asset FVOCI – Debt securities Net defined benefit liability Fair value Fair value Fair value of plan assets less the present value of the defined benefit obligation Page | 74 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies A number of new standards have been effective from 1 January 2021 but they do not have a material effect on the Group’s financial statements. The Group has consistently applied the following accounting policies to all periods presented in these financial statements. Set out below is an index of the significant accounting policies, the details of which are available on the pages that follow: Ref. Note description A. B. C. D. E. F. G. H. I. J. K. L. M. N. O. P. Q. Basis of consolidation of subsidiaries and separate financial statements of the Company Interest in equity accounted investees Interest Fee and commission income Leases Income tax Financial assets and financial liabilities Cash and cash equivalents Loans and advances Property, plant and equipment Intangibles assets and goodwill Impairment of non-financial assets Deposits, debt securities issued and subordinated liabilities Employee benefits Share capital and reserves Earnings per share (“EPS”) Segmental reporting No. 76 76 76 77 77 78 79 83 83 83 83 84 85 85 85 85 86 Page | 75 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies (continued) A. Basis of consolidation of subsidiaries and separate financial statements of the Company i. Business combinations The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if they are related to issue of debt or equity securities. ii. Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity if it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its control over the entity. The Group reassesses whether it has control if there are changes to one or more of the elements of control. This includes circumstances in which protective rights held (e.g. those resulting from a lending relationship) become substantive and lead to the Group having power over an investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. iii. Non-controlling interests (“NCI”) NCI are measured initially at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. iv. Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. v. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. vi. Separate financial statements of the Company In the separate financial statements of the Company, interests in subsidiaries, associates and joint ventures are accounted for at cost. B. Interests in equity accounted investees The Group’s interests in equity accounted investees may comprise interests in associates and joint ventures. Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities. Interests in associates and joint ventures are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group’s share of the profit or loss and OCI of equity accounted investees, until the date on which significant influence or joint control ceases. C. Interest Interest income and expense are recognised in profit or loss using the effective interest rate method. i. 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 gross carrying amount of the financial asset or amortised cost of the financial liability. When calculating the effective interest rate for financial assets, the Group estimates future cash flows considering all contractual terms of the financial instruments, 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. ii. Amortised cost and gross carrying amount The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance. Page | 76 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies (continued) C. Interest (continued) ii. Amortised cost and gross carrying amount (continued) The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any expected credit loss allowance. iii. Calculation of interest income and expense In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit-impaired) or to the amortised cost of the liability. However, for financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortised cost of the financial asset. If the asset is no longer credit-impaired, then the calculation of interest income reverts to the gross basis. D. Fee and commission income The Group generates fee and commission income through provision of independent financial advice, insurance brokerage agency, introducer of foreign exchange services and commissions from brokering business finance for small and medium sized enterprises. Independent financial advice and insurance brokerage agency Income represents commission arising on services and premiums relating to policies and other investment products committed during the year, as well as renewal commissions having arisen on services and premiums relating to policies and other investment products committed during the year and previous years and effective at the balance sheet date. Income is recognised on the date that policies are submitted to product providers with an appropriate discount being applied for policies not completed. As a way to estimate what is due at the year-end, a “not proceeded with” rate of 10.0% for pipeline life insurance products and 0.0% for non-life insurance pipeline is assumed. Renewal commissions are estimated by taking the historical amount written pro-rata to 3 months. Other 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 fee relates. E. Leases At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract coveys the right to control the use of an identified asset for a period of time in exchange for consideration. i. As a lessee At commencement or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of its relative stand-alone prices. However, for the leases of property the Group has elected not to separate non-lease components and as a result, accounts for the lease and non-lease components as a single lease component. The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Group by the end of the lease term or the cost of the right-of-use asset reflects that the Group will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The Group determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and the type of the asset leased. Page | 77 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies (continued) E. Leases (continued) i. As a lessee (continued) Lease payments included in the measurement of the lease liability comprise the following: Fixed payments, including in-substance fixed payments;   Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;  Amounts expected to be payable under a residual value guarantee; and  The exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The Group presents right-of-use assets that do not meet the definition of investment property in ‘property, plant and equipment’ and lease liabilities in ‘loans and borrowings’ in the statement of financial position. Short-term leases and leases of low-value assets The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases, including IT equipment. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. ii. As a lessor At inception or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices. When the Group acts as a lessor, it determines at lease inception whether each lease is a finance or an operating lease. To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset. Finance leases and HP contracts When assets are subject to a finance lease or HP contract, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. HP and lease income is recognised over the term of the contract or lease reflecting a constant periodic rate of return on the net investment in the contract or lease. Initial direct costs, which may include commissions and legal fees directly attributable to negotiating and arranging the contract or lease, are included in the measurement of the net investment of the contract or lease at inception. 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 profit or loss and other comprehensive income on a straight-line basis over the period of the lease. F. Income tax 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 tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill and temporary differences related to investments in subsidiaries and associates to the extent that the Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future. 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. Page | 78 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies (continued) G. Financial assets and financial liabilities i. Recognition and initial measurement The Group initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities on the date on which they are originated. All other financial instruments including regular-way purchases and sales of financial assets are recognised on the trade date, which is the date on which the Group becomes party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. ii. Classification Financial assets On initial recognition, a financial asset is classified as measured at amortised cost, FVOCI or FVTPL. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:   The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (“SPPI”). A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as FVTPL:   The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and The contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI. On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis. All other financial assets are classified as measured at FVTPL. In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Business model assessment The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information provided to management. Assessment of whether contractual cash flows are solely payments of principal and interest For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin. In assessing whether the contractual cash flows are SPPI, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. Reclassifications Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets. Financial liabilities The Group classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost. iii. Derecognition Financial assets The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. Page | 79 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies (continued) G. Financial assets and financial liabilities (continued) iii. Derecognition (continued) Financial assets (continued) On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss. Financial liabilities The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. iv. Modifications of financial assets and financial liabilities Financial assets If the terms of a financial asset are modified, then the Group evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value plus any eligible transaction costs. If the cash flows are modified when the borrower is in financial difficulties, then the objective of the modification is usually to maximise recovery of the original contractual terms rather than to originate a new asset with substantially different terms. If the Group plans to modify a financial asset in a way that would result in forgiveness of cash flows, then it first considers whether a portion of the asset should be written off before the modification takes place. This approach impacts the result of the quantitative evaluation and means that the derecognition criteria are not usually met in such cases. If the modification of a financial asset measured at amortised cost or FVOCI does not result in derecognition of the financial asset, then the Group first recalculates the gross carrying amount of the financial asset using the original effective interest rate of the asset and recognises the resulting adjustment as a modification gain or loss in profit or loss. Any costs or fees incurred and fees received as part of the modification adjust the gross carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset. If such modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income calculated using the effective interest rate method. Financial liabilities The Group derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability derecognised and consideration paid is recognised in profit or loss. Consideration paid includes non-financial assets transferred, if any, and the assumption of liabilities, including the new modified financial liability. If the modification of a financial liability is not accounted for as derecognition, then the amortised cost of the liability is recalculated by discounting the modified cash flows at the original effective interest rate and the resulting gain or losses recognised in profit or loss. Any costs and fee incurred are recognised as an adjustment of the carrying amount of the liability and amortised over the remaining term of the modified financial liability by re-computing the effective interest rate on the instrument. v. Offsetting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity. vi. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at the date. The fair value of a liability reflects its non-performance risk. The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. Page | 80 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies (continued) G. Financial assets and financial liabilities (continued) vi. Fair value measurement (continued) The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements:  Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments;  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  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. 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. vii. Impairment A financial instrument that is not credit-impaired on initial recognition is classified in ‘Stage 1’ and has its credit risk continuously monitored by the Group. If a SICR since initial recognition is identified, the financial instrument is moved to ‘Stage 2’ but is not yet deemed to be credit-impaired.  An SICR is always deemed to occur when the borrower is 30 days past due on its contractual payments. If the Group becomes aware ahead of this time of non-compliance or financial difficulties of the borrower, such as loss of employment, avoiding contact with the Group then an SICR has also deemed to occur; and  A receivable is always deemed to be in default and credit-impaired when the borrower is 90 days past due on its contractual payments or earlier if the Group becomes aware of severe financial difficulties such as bankruptcy, individual voluntary arragement, abscond or disappearance, fraudulent activity and other similar events. If the financial instrument is credit-impaired, the financial instrument is then moved to ‘Stage 3’. Financial instruments in Stage 3 have their ECL measured based on expected credit losses on an undiscounted lifetime basis. The Group measures loss allowances at an amount equal to lifetime ECL, except for debt investment securities that are determined to have low credit risk at the reporting date for which they are measured as a 12-month ECL. Loss allowances for lease receivables are always measured at an amount equal to lifetime ECL. 12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Financial instruments for which a 12-month ECL is recognised are referred to as ‘Stage 1 financial instruments’. Lifetime ECL are the ECL that result from all possible default events over the expected life of a financial instrument. Financial instruments for which a lifetime ECL is recognised but which are not credit-impaired are referred to as ‘Stage 2 financial instruments’. Page | 81 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies (continued) G. Financial assets and financial liabilities (continued) vii. Impairment (continued) Measurement of ECL After a detailed review, the Group devised and implemented an impairment methodology in light of the IFRS 9 requirements outlined above noting the following:     The ECL was derived by reviewing the Group’s loss rate and loss given default over the past 9 years by product and geographical segment; The Group has assumed that the future economic conditions will broadly mirror the current environment and therefore the forecasted loss levels in the next 3 years will match the Group’s experience in recent years; For portfolios where the Group has never had a default in its history or has robust credit enhancements such as credit insurance or default indemnities for the entire portfolio, then no IFRS 9 provision is made. At 2021 year-end, 28.8% had such credit enhancements (2020: 36.6%); and If the Group holds objective evidence through specifically assessing a credit-impaired receivable and believes it will go on to completely recover the debt due to the collateral held and cooperation with the borrower, then no IFRS 9 provision is made. ECL are probability-weighted estimates of credit losses. They are measured as follows:   Financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive); Financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; and  Undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive. Credit-impaired financial assets At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI, and finance lease receivables are credit-impaired (referred to as ‘Stage 3 financial assets’). A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired includes the following observable date:  Significant financial difficulty of the borrower or issuer;  A breach of contract such as a default or past due event;    The restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise; It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or The disappearance of an active market for a security because of financial difficulties. A loan that has been renegotiated due to a deterioration in the borrower’s condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a retail loan that is overdue for 90 days or more is considered credit-impaired even when the regulatory definition of default is different. In making an assessment of whether an investment in sovereign debt is credit impaired, the Group considers the following factors:      The market’s assessment of creditworthiness as reflected in the bond yields; The rating agencies’ assessments of creditworthiness; The country’s ability to access the capital markets for new debt issuance; The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness; and The international support mechanisms in place to provide the necessary support as ‘lender of last resort’ to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria. Presentation of allowance for ECL in the statement of financial position Loss allowances for ECL are presented in the statement of financial position as follows: Financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets; Loan commitments: generally, as a provision; and    Debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in the fair value reserve. Page | 82 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies (continued) G. Financial assets and financial liabilities (continued) vii. Impairment (continued) Write-off Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level. Recoveries of amounts previously written off are included in ‘impairment losses on financial instruments’ in the statement of profit or loss and OCI. Financial assets that are written off could still be subject to enforcement activities in order to comply with the Group’s procedures for recovery of amounts due. H. 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. I. Loans and advances Loans and advances’ captions in the statement of financial position include:   Loans and advances measured at amortised cost (see note 43 (I)). They are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortised cost using the effective interest method; and Finance lease receivables (see note 43 (G)). J. 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 and amortisation Assets are depreciated or amortised on a straight-line basis, so as to write off the book value over their estimated useful lives. The estimated useful lives of property, plant and equipment and intangibles are as follows: Property, plant and equipment Leasehold improvements IT equipment Motor vehicles Furniture and equipment Plant and machinery to expiration of the lease 4 - 5 years 2 - 5 years 4 -10 years 5 – 20 years K. Intangible assets and goodwill i. Goodwill Goodwill that arises on the acquisition of subsidiaries is measured at cost less accumulated impairment losses. Page | 83 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies (continued) K. Intangible assets and goodwill (continued) ii. Software Software acquired by the Group is measured at cost less accumulated amortisation and any accumulated impairment losses. Expenditure on internally developed software is recognised as an asset when the Group is able to demonstrate: that the product is technically feasible, its intention and ability to complete the development and use the software in a manner that will generate future economic benefits, and that it can reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs directly attributable to developing the software and capitalised borrowing costs, and are amortised over its useful life. Internally developed software is stated at capitalised cost less accumulated amortisation and any accumulated impairment losses. Software is amortised on a straight-line basis in profit or loss over its estimated useful life, from the date on which it is available for use. Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. iii. Other Intangible assets that are acquired by an entity and having finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses. Intangible assets acquired as part of a business combination, with an indefinite useful live are measured at fair value. Intangible assets with indefinite useful lives are not amortised but instead are subject to impairment testing at least annually. The useful lives of intangibles are as follows: Customer contracts and lists Business intellectual property rights Website development costs Software to expiration of the agreement 4 years - indefinite indefinite 5 years L. Impairment of non-financial assets At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or Cash Generating Units (“CGUs”). Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less cost to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount. The Group’s corporate assets do not generate separate cash inflows and are used by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGUs to which the corporate assets are located. Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Page | 84 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies (continued) M. Deposits, debt securities issued and subordinated liabilities Deposits, debt securities issued and subordinated liabilities are the Group’s sources of debt funding. The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. Deposits, debt securities issued and subordinated liabilities are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. N. Employee benefits i. Long-term employee benefits Pension obligations The Group has pension obligations arising from both defined benefit and defined contribution pension plans. A defined contribution pension plan is one under which the Group pays fixed contributions into a separate fund and has no legal or constructive obligations to pay further contributions. Defined benefit pension plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and remuneration. Under the defined benefit pension plan, in accordance with IAS 19 Employee benefits, the full-service cost for the period, adjusted for any changes to the plan, is charged to the income statement. A charge equal to the expected increase in the present value of the plan liabilities, as a result of the plan liabilities being one year closer to settlement, and a credit reflecting the long-term expected return on assets based on the market value of the scheme assets at the beginning of the period, is included in the income statement. The statement of financial position records as an asset or liability as appropriate, the difference between the market value of the plan assets and the present value of the accrued plan liabilities. The difference between the expected return on assets and that achieved in the period, is recognised in the income statement in the year in which they arise. The defined benefit pension plan obligation is calculated by independent actuaries using the projected unit credit method and a discount rate based on the yield on high quality rated corporate bonds. The Group’s defined contribution pension obligations arise from contributions paid to a Group personal pension plan, an ex gratia pension plan, employee personal pension plans and employee co-operative insurance plans. For these pension plans, the amounts charged to the income statement represent the contributions payable during the year. ii. Share-based compensation The Group maintains a share option programme which allows certain Group employees to acquire shares of the Group. The change in the fair value of options granted is recognised as an employee expense with a corresponding change in equity. The fair value of the options is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. At each reporting date, the Group revises its estimate of the number of options that are expected to vest and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The 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. O. Share capital and reserves Share issue costs Incremental costs that are directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments. P. Earnings per share (“EPS”) The Group presents basic and diluted EPS data for its Ordinary Shares. Basic EPS is calculated by dividing the profit or loss that is attributable to ordinary Shareholders of MFG by the weighted-average number of Ordinary Shares outstanding during the period. Diluted EPS is determined by adjusting profit or loss that is attributable to Ordinary Shareholders and the weighted-average number of Ordinary Shares outstanding for the effects of all dilutive potential Ordinary Shares, which comprise share options granted to employees. Page | 85 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2021 43. Significant accounting policies (continued) Q. 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. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with any of the Group’s other components, whose operating results are regularly reviewed by the CEO who is the chief operating decision maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results reported to the CEO include items that are directly attributable to a segment as well as those that can be allocated on a reasonable basis. Page | 86 ANNUAL FINANCIAL STATEMENTS SHAREHOLDER NOTES Page | 87 Appendix – Glossary of terms ALCO ARCC BBSL BL BLX Bank Bank’s Board BSL CEO CET1 CFL CGU CODM Company EAL ECF ECL ESG EPS FCA Fraud risks FSA FVOCI FVTPL Group HP IAS ICAAP ICG IFA IFRIC IFRS Interim financial statements IOM ISA JM LSE MBL MCL MFG MFX MFX.L MVL NEC NOMCO NRFL OCI PIML QCA REMCO RFG RMF SBA Scheme SICR SPPI SR Subsidiaries TCF Three Spires UK UP Assets and Liabilities Committee Audit, Risk and Compliance Committee Blue Star Business Solutions Limited Burnbrae Limited The Business Lending Exchange Limited Conister Bank Limited The Bank’s Board of Directors Beer Swaps Limited Chief Executive Officer Common Equity Tier 1 Conister Finance & Leasing Ltd Cash Generating Unit Chief Operating Decision Maker Manx Financial Group PLC Edgewater Associates Limited ECF Asset finance PLC Expected Credit Loss Environmental, Social and Governance Earnings Per Share UK Financial Conduct Authority Risk of Material Misstatement Due to Fraud Isle of Man Financial Services Authority Fair Value Through Other Comprehensive Income Fair Value Through Profit or Loss Comprise the Company and its subsidiaries Hire Purchase International Accounting Standard Internal Capital Adequacy Assessment Process Individual Capital Guidance Independent Financial Advisors International Financial Reporting Interpretations Committee International Financial Reporting Standards Condensed consolidated interim financial statements Isle of Man International Standards of Auditing Jim Mellon London Stock Exchange MBL Financial Limited Manx Collections Limited Manx Financial Group PLC Manx FX Limited Manx Financial Group PLC ticker symbol on the LSE Manx Ventures Limited (previously Bradburn Limited) Notice of Error Correction Nomination Committee Ninkasi Rentals & Finance Limited (previously Beer Swaps Limited) Other Comprehensive Income Payitmonthly Limited Quoted Companies Alliance Remuneration Committee Rivers Finance Group Plc Risk Management Framework Share Buyback Agreement The Conister Trust Pension and Life Assurance Scheme Significant Increase in Credit Risk Solely Payments of Principal and Interest Southern Rock Insurance Company Limited MFG’s subsidiaries being Bank, BBSL, BLX, CFL, ECF, EAL, MFX, MVL, NRFL Treating Customers Fairly Three Spires Insurance Services Limited United Kingdom Unrelated parties Clarendon House Victoria Street Douglas Isle of Man IM1 2LN Tel: (01624) 694694 Fax: (01624) 624278 www.mfg.im 

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