More annual reports from Manx Financial Group:
2023 ReportConsolidated Annual Financial Statements 2023 M a n x F i n a n c i a l G r o u p P L C | A n n u a l F i n a n c i a l S t a t e m e n t s 2 0 2 3 Putting people first Integrity through independence and service Contents Strategic report 4 Chairman’s Statement 8 11 Business Model and Strategy Environmental, Social and Governance Report 16 Risk Management Corporate Governance 23 28 31 34 37 Corporate Governance Report Directors, Officers and Advisers Audit, Risk and Compliance Committee Directors’ Remuneration Report Directors’ Report Financial Statements 40 41 50 52 53 54 55 56 58 59 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 and Company Financial Statements 2023: The year at a glance 1 Remaining focused on investing in resilient profitable sectors with high potential for growth MFG PLC reported a record performance in 2023, while making significant strides on its strategic journey, including obtaining a UK deposit taking licence. Financial highlights Profit before tax +35.2% Balance sheet growth +26.7% Advances +52.3% 2023 2022 £7.0m 2023 £480.7m 2023 £352.5m £5.2m 2022 £379.3m 2022 £231.4m Basic EPS (pence) +21.8% Cost income ratio (11.6)% Return on equity +1.9% 2023 2022 4.59p 2023 43.3% 2023 20.6% 3.77p 2022 54.9% 2022 18.7% Non-financial highlights Professional Pathway Programme Acquisition of UK deposit-taking licence Migration on IT infrastructure to Azure The Professional Pathway programme demonstrates our commitment to diversity and professional growth, fostering an inclusive environment. This two- year program offers an immersive experience in critical business projects, professional studies, and mentorship by senior management. Through this programme, we affirm our commitment to not just career advancement but to creating a more inclusive environment where every talent is recognised and celebrated. The authorisation from the Prudential Regulation Authority (PRA) for Conister Bank’s UK branch to accept deposits underscores both a major achievement in our strategic development and the trust placed in us by our main regulatory body and UK authorities. This milestone in our Group’s journey not only validates our expansion strategy but also enhances Conister’s liquidity through access to UK deposits. The Group has migrated its infrastructure to a Microsoft Azure environment as part of its first step towards implementing its Digital Transformation plan. Not only does this provide the Group with better connectivity options with third party solutions and application programming interfaces, it also enhances the Group’s security environment and allows for greater scale and flexibility for computing resources as the Group expands in the years ahead. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 2 Who we are An independent banking and financial services group founded in 1935, domiciled in the Isle of Man. Manx Financial Group PLC (“Company” or “MFG”) is an AIM-listed company (LSE: MFX.L) which has subsidiaries (together referred to as “Group”) offering a suite of financial services to retail and commercial customers, both in the Isle of Man and the UK. MFG’s strategy is to combine organic growth with strategic acquisition to further augment the range of services it offers and to gain greater market share in its preferred markets. The Group’s main subsidiaries are: • Conister Bank Limited • Conister Finance & Leasing Ltd • MFX Limited • Payment Assist Limited • Blue Star Business Solutions Limited • Edgewater Associates Limited • Ninkasi Rentals & Finance Limited • The Business Lending Exchange Limited Our Main Operating Subsidiaries Conister Bank Limited (“Bank”) is a licenced independent bank, regulated by the Isle of Man Financial Services Authority (“FSA”) and the UK’s Prudential Regulatory Authority (“PRA”) and the UK’s Financial Conduct Authority (“FCA”). 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. Conister Finance & Leasing Ltd (“CFL”) is a subsidiary of the Bank. It is a credit broker providing 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. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Who we are continued 3 MFX Limited (“MFX”) provides access to competitive foreign exchange and international payment processing facilities. MFX’s target customers are corporates and private clients who have a foreign exchange and international payment requirement via their UK foreign exchange providers. 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 to increase its distribution in the UK broker credit market. Edgewater Associates Limited (“EAL”) is the largest firm of Independent 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 £328 million (2022: £319 million). Payment Assist Limited (“PAL”) is the UK’s leading automotive repair point-of-sale finance provider and offers diversified lending including insured products and retail. PAL was acquired as part of the Group’s strategy to increase its access to underserved UK credit markets. Ninkasi Rentals & Finance Limited (“NRFL”) was acquired as part of the Group’s strategy to increase its access to underserved UK credit markets. NRFL provides equipment finance and rental products to UK based craft and micro- breweries. The Business Lending Exchange Limited (“BLX”) was acquired as part of the Group’s strategy to increase its access to underserved UK credit markets. BLX is regulated by the FCA in the UK and primarily lends to start-up companies and small businesses which require asset backed finance. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Chairman’s Statement 4 Despite this negative backdrop, thus far the Group has not experienced a corresponding increase in arrears. This reflects positively on the integrity of our underwriting, the products we offer, and the markets we continue to serve. Our financial performance for the year also reflects this resilience and I am pleased to report another set of record results with a 35.0% increase in Profit Before Tax to £7.0 million (2022: £5.2 million), with our basic Earnings Per Share increasing to 4.59p (2022: 3.77p) – an improvement of 21.8%. At the Profit After Tax payable level of £6.1 million (2022: £4.7 million), £5.3 million (2022: £4.3 million) was due to the Group’s shareholders, and £0.9 million (2022: £0.3 million) was due to minority interests. This improvement was due to a number of factors including operating income growth – augmented with a full year’s impact from Payment Assist Limited, a gain in debt securities and a lower charge for provisioning and impairments. Our financial performance also strengthened our balance sheet with total assets increasing by £101.4 million to £480.7 million (2022: £379.3 million), and our shareholder equity increased by £6.2 million to £36.0 million (2022: £29.8 million). This outcome allows the Board to recommend continuing our policy of returning 10% of the Group’s profit available to shareholders in the form of cash and/or shares. This year the total dividend available for payment is £0.53 million (2022: £0.43 million). Thus, the amount recommended for shareholder approval at our Annual General Meeting will be 0.4551 pence per share (2022: 0.3764 pence per share) - a 20.9% uplift. On a separate note, I appreciate there has been a lot of media comment surrounding the FCA announcement that they are reviewing whether customers have lost out as a result of variable commission arrangements on lending to the motor finance sector. The outcome and potential impact of the FCA’s review will not be known until they report their findings, expected to be sometime later this year. Despite having some exposure in this area, our initial review suggests that any liability will be minimal with no present need for any provision. Notwithstanding, the Board recognises the requirement to plan for a range of possible outcomes but currently it does not expect the issue to materially impact the Group’s results, if at all. Financial Performance This year’s financial performance is again a record despite the previously mentioned economic headwinds impacting on both of our trading locations. “I am pleased to report another set of record results with a 35.0% increase in Profit Before Tax to £7.0 million” Jim Mellon Executive Chairman Dear Shareholders Introduction With the continuing conflicts in Ukraine and Palestine, together with rising energy costs and the disruption in the Red Sea to world supply chains, the global economy remained inflationary and fragile. Our home markets in the Isle of Man and UK were not immune to these factors. Indeed, the Bank of England continued to grapple with stubbornly high inflation throughout the year and, as a consequence, approved five interest rate increases as part of their strategy to bring inflation back into their target range of less than 2%. The higher than targeted inflation rate was not offset by a corresponding increase in wages which has put many families and businesses under a real cost of living crisis. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Chairman’s Statement continued 5 For the third year running, Conister Bank Limited (“Conister”) set a new lending record of £352.5 million (2022: £231.4 million), an increase of 52.3%. With increases in the cost of deposits reflecting the five increases in the UK interest rate, our cost of funds was negatively impacted with yield compression of 12.7% to 71.3% (2022: 84.0%) in the year. Nevertheless, our net interest income increased substantially by £8.0 million to £32.4 million (2022: £24.4 million). With other operating subsidiaries again making a positive contribution, notably Conister Finance & Leasing Ltd, Payment Assist Limited and MFX Limited, this resulted in operating income increasing by £5.4 million to £31.5 million (2022: 26.1 million). Operating income has now increased by 57.0% over the last two years. Operating expenses, excluding provisions, increased by £3.4 million to £20.3 million (2022: £16.9 million), reflecting the full cost of consolidating Payment Assist Limited into the Group along with an incremental increase in overheads relating to obtaining our UK Branch deposit taking licence. Provisions increased by £0.1 million to £4.1 million (2022: £4.0 million). Turning to the Group’s balance sheet, total assets increased by £101.1 million to £480.7 million (2022: £379.3 million). This was driven by a £71.2 million increase in the net loan book and a £35.5 million increase in Treasury Bills to support regulatory liquidity requirements. Isle of Man deposits grew by £86.2 million to £390.4 million (2022: £304.2 million). Total liabilities stood at £444.7 million (2022: 349.5 million), leading to an increase in equity of £6.2 million to £36.0 million (2022: £29.8 million). The debt to asset ratio, measured as being total debt as a percentage of total tangible assets, remains robust at 95.5% (2022: 95.5%) meaning liabilities are covered by assets 1.1 times (2022: 1.1 times). Key Objectives After a period of economic uncertainty, I am cautiously optimistic that over the next 24 months we will move to a more normalised interest and inflation rate environment. Until we get to that position, our key objective will continue to be to increase shareholder value as prudently as possible. Thus, our strategic focus remains unchanged, namely to: • • Provide the highest quality of service throughout our operations to all customers, ensuring that their treatment is both fair and appropriate Continue adopting a pro-active strategy to managing risk, including climate risk, within a structured and compliant manner • • • • Concentrate on developing our core business by considered acquisitions, increasing prudential lending, and augmenting the range of financial services we offer Prudently progress 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 liability side of our balance sheet; and Manage our balance sheet to exceed the regulatory requirements for capital adequacy To continue to grow shareholder value, we will need to grow the balance sheet as our scale is still sub- optimal. With organic growth this year partially dependent upon an improved economic environment, we need to re-focus our non-dilutive acquisition strategy. Further details are included under “Business Model and Strategy” on page 8. Environmental, Social and Corporate Governance The Group takes social responsibility seriously and remains committed to reducing its impact on the environment, and to making a positive contribution to the communities in which we live and work. Our Environmental, Social, and Governance (“ESG”) initiatives, are integral to our commitment to sustainable development and corporate responsibility. This year, more than ever, we have witnessed the importance of resilience and adaptability, and our ESG policy has been at the heart of our strategy to navigate these challenges. We have made significant strides in embedding our ESG principles across all levels of operations. Our commitment to a whole business approach, focusing on what matters, applying best practices, using our influence responsibly, and ensuring accountability, has driven meaningful progress towards our sustainability goals. In particular, our efforts towards better understanding our carbon footprint, enhancing product development for sustainability, and embedding diversity, equity, and inclusion into our corporate culture have been noteworthy. We are also proud of the progress made in upskilling our workforce on ESG matters and integrating these principles. The financial results for this period reflect not only our economic resilience but also our commitment to social and environmental Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Chairman’s Statement continued 6 responsibility. Our financial performance, while robust, is just one aspect of our success. The true measure of our achievements lies in our positive impact on society and the environment, as guided by our comprehensive ESG policy. Looking ahead, we remain dedicated to advancing our ESG commitments, aware that our journey towards sustainability is continuous. We will keep pushing the boundaries of what is possible and fostering a culture of responsibility and inclusiveness. Our ESG progress is available on page 11 and our Corporate Governance Report outlining our adherence to the Quoted Companies Alliance Code is detailed on page 23. Operating Unit Review Our principal operating subsidiaries continued with their strategy of growth through gaining market share in recession-proof markets as demand for our products remained buoyant which resulted in record advances in the year. Conister Bank Limited and Conister Finance & Leasing Ltd Conister, together with its wholly owned subsidiary, Conister Finance & Leasing Ltd, remained the driver of the Group’s financial performance recording a Profit After Tax of £2.2 million (2022: £1.8 million). In its home market, Conister continues to grow its loan book, lending £56.3 million (2022: £50.5 million) during the year. The net loan book stands at £78.1 million (2022: £68.4 million). This book continues to have exceptionally low arrears, 1.89% (2022: 1.95%). In the UK, growth has been driven by our Structured Finance products with lending increasing by £93.1 million to £246.2 million (2022: £153.1 million). The structuring of these facilities continues to minimise the risk of default and is proving a successful mechanism for growth in this difficult environment. The Isle of Man deposit base has again proved very loyal with an 77% retention rate (2022: 78%). This, along with new deposits of £156.0 million (2022: £106.3 million), provided ample liquidity to allow Conister to achieve its record growth and to provide support for the future. In October 2023, Conister obtained its UK Branch Deposit Taking permissions which, as well as providing an alternative source of liquidity, will allow the Bank to access new lending and liquidity opportunities. We anticipate taking UK deposits in the second half of 2024, principally via a user-friendly online process. Overheads, excluding provisions, increased by £1.5 million to £11.9 million (2022: £10.4 million) as the business geared up to become operationally ready to take deposits in the UK. Prudently, it has bolstered its Credit and Collections teams to continue to protect Conister during these challenging times. Provisions reduced by £0.3 million to £9.3 million (2022: £9.6 million) and now represent 2.6% of the net loan book (2022: 3.3%). This reduction provides a positive reflection on the quality of the loan book. The Bank’s total assets have increased by £97.8 million to £451.8 million (2022: £354.0 million), driven by loan book growth of £68.0 million. Liabilities have increased by £90.8 million, with deposits increasing by £86.2 million to £390.4 million. As a result, Conister’s equity has increased by £7.0 million to £41.5 million (2022: £34.5 million). Following the award of the UK Banking Licence, Conister Finance & Leasing Ltd will be restructured during 2024, with the regulated activities merged into Conister. The Basingstoke office will continue as the Conister’s UK branch for deposit taking and regulated lending. MFX Limited Our foreign exchange brokerage continued with an impressive performance considering these turbulent times and earned a profit of £0.7 million (2022: £1.4 million). Dividends paid to the Group in the year were £0.8 million (2022: £1.8 million). Payment Assist Limited This is the first full financial year that this business’s result has been consolidated into the Group’s annual accounts. The business operates mostly in the short- term lending market and exceeded our financial expectations in the year by delivering £4.0 million to the Group in terms of interest income to Conister and recharges for Group services. Turnover was £10.8 million (2022: £10.1 million), Operating Profit was £2.7 million (£2022: £1.8 million) leading to a Profit After Tax of £2.1 million (2022: £0.8 million). As previously reported, the Group owns 50.1% of Payment Assist Limited, with the opportunity to acquire the remaining percentage from the beginning of 2027. Edgewater Associates Limited We restructured the company at the end of 2023 and, as a result, there are signs of a more sustained profitability for the future. Edgewater Associates Limited contributed £0.4 million (2022: £nil) in dividends to the Group. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 7 Chairman’s Statement continued Other operating subsidiaries All other operating subsidiaries contributed positively to the Group’s results. Outlook I believe that the high interest rate environment will persist during 2024 and this will continue to dampen our net interest margin, but it should not reduce the demand for our products. Shorter term lending in particular - loans less than 12 months - will continue to be much in demand for small businesses and consumers alike. Whilst I remain cautious about overall organic growth this year, accretive acquisition opportunities are available. We will remain prudent in our approach to these opportunities, and we will only progress such acquisitions if they can be delivered without any shareholder dilution. Looking further ahead, the unwinding of the pressure on our net interest margin will naturally drive organic growth. This, along with any accretive acquisitions we make in the meantime, will create an even more robust, diversified financial services Group which will support our ongoing objective of continuously enhancing shareholder value. Conclusion I would like to take this opportunity to thank our staff and Board of Directors for their support in making this result possible and for setting the Group on the right footing for the opportunities and challenges that lie ahead. I would also like to thank the Executives for gaining the new UK Branch deposit taking licence in less than 12 months – a magnificent achievement and well done to all involved. Finally, I would like to thank my fellow shareholders for their continued support. Jim Mellon Executive Chair 25 March 2024 Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Business Model and Strategy 8 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 and gain market share in sectors in which it has proven experience. A summary of the strategic objectives for each principal subsidiary is set out below. 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; Treat customers fairly with the highest service standard possible • 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 control risk on a day-to-day basis and are reviewed at-least 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 UK; the IOM and UK deposit markets; 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 difficult economic conditions in the UK, and less so in the IOM plus the wars in Europe and the Middle East, 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 its Balance Sheet; its IOM deposit base and the UK retail deposit market. This growth will be achieved through the organic expansion of existing products through acquisition. This strategy can be analysed by the geographical area the Bank operates within, namely the IOM and the UK. The Bank is proud of its heritage and remains heavily IOM centric but recognises that, as its UK loan book grows, it will need to create a more substantial UK presence to manage and grow this aspect of its business. Contributing to this UK growth was the application for, and approval to, take retail deposits in the UK. This licence was granted in October 2023. 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’s recently obtained UK deposit taking licence will play a significant part in the Bank’s growth strategy. The Bank recognises that it has an opportunity to increase its market share because 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 alternatives to be confident that it can raise the necessary deposits when required. The Bank’s acquisition strategy is to increase market share in sectors within which it already operates or to gain access to a desirable market through an existing reputable, profitable operator. 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 £280 million (2022: £220 million) of net loans outstanding. The Bank’s decision in 2022 to include Environmental, Social, and Corporate Governance (“ESG”) within its strategic objectives has seen great progress made. The Bank’s Sustainability Report setting out its material ESG issues and objectives, work completed and ESG performance can be found on the Bank’s website, www.conisterbank.co.im. The Group now has a clear plan to expand its ESG reporting to cover all of its operating subsidiaries. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Business Model and Strategy continued 9 During the year, the Group engaged with its external consultants who assisted the Group with formulating its ESG goals. The Group’s external consultants were instrumental in rebasing its 2030 target to realistic measures and expressed in clearly defined amounts. See the ESG report for more details. MFX Limited (“MFX”) The strategic objectives of MFX are: Blue Star Business Solutions Limited (“BBSL”) The strategic objectives of BBSL are to continue to grow its direct model to niche suppliers whilst growing its traditional pipeline to allow it to migrate to its ordinary course of business as these schemes conclude. BBSL will expand its panel of alternative funders, apart from the Bank, to place loans to further maximise its sources of revenue. To be the first choice for international payments and foreign exchange of corporations in the IOM; Finally, BBSL will continue to develop its sales force to allow greater market penetration. • • • 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 foreign exchange and international payment requirement via its UK foreign exchange providers. 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 can negotiate upfront agreed foreign exchange margins and ensure price transparency, underpinning the professional relationship it provides. The international payment fees offer competitive value compared with local high street banks. Payment Assist Limited (“PAL”) PAL provides the option for customers to spread the cost of ad-hoc expenses over monthly instalments through a range of fee free, interest-free or interest- bearing products. The Group acquired an initial 50.1% of PAL in May 2022. The strategy is to build and develop the business by continuing to be the largest finance provider in the UK automotive after-market, whilst diversifying into alternative markets offering both short term and longer-term finance. This expansion will be executed on a selective basis with business partners who share our values for the highest level of customer service. Edgewater Associates Limited (“EAL”) EAL is regulated by the Isle of Man Financial Services Authority (“FSA”). Its strategic objectives are to: • • • Provide superior service to its client base; Increase assets under advice; and Grow and develop its staff skill set. EAL is a full-service IFA practice with a diverse mix of clients requiring a broad range of products and solutions covering: • • • Newly qualified professionals - protection, savings, school fees; Established clients - wealth management, retirement planning; and General insurance clients - home, travel, commercial and specialist. EAL has an active client base of approximately 7,000 (2022: 7,000) with associated assets under advice of £328 million (2022: £319 million). Whilst EAL continues to grow and develop its standard business model, it is always open to new opportunities. It remains nimble and ready to move in line with economic and regulatory changes as they arise. Its team remains current with industry standards and trends. It retains an appetite for growth, either through additional acquisition opportunities that may arise, or via organic growth from existing clients and business partners with whom it has built strong relationships. Diversification opportunities are encouraged and pursued, including the successful programme to develop bespoke Employee Benefit Group Schemes. These incorporate staff pensions (including pension freedom), protection, private medical, and death in service cover. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 10 Business Model and Strategy continued EAL trains talented people to progress into rounded, professionally qualified advisers who can fit within succession planning opportunities. To supplement this, it also recruits quality experienced advisers and para- planners who can further enhance its team. Ninkasi Rentals & Finance Limited (“Ninkasi”) This business remains well positioned to gain additional market share through its unique equipment leasing options for the brewing industry. In addition, Ninkasi is considering expanding its coverage to include Europe, either by a direct distribution strategy, or in partnership with a complementary business. Further, Ninkasi will manage its utilisation demand through the acquisition of additional fermentation tanks. The Business Lending Exchange Limited (“BLX”) BLX will continue to grow their loan book prudently in existing markets through the UK credit broker network, utilising existing market to offer attractive asset- backed products in a customer focused way to ensure the best possible customer outcome. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 11 Environmental, Social and Governance Report The following report provides an overview of MFG’s operational carbon footprint in 2023 and supporting information including: • Calculation methodology and reporting boundaries; • the Group’s carbon footprint report 2023; • Carbon footprint report 2022 (base year) v5 2023; • Carbon reduction target (2030); and • 2024 focus areas Methodology The Group’s carbon footprint is assessed in accordance with the Greenhouse Gas Protocol methodology, following the principles of relevance, completeness, consistency, transparency and accuracy. Scope 3 emissions are calculated based on the “The Corporate Value Chain (Scope 3) Accounting & Reporting Standard” methodology. Unless otherwise stated all scope 1-3 carbon emissions have calculated data using Defra’s 2023 Conversion factors for company reporting of greenhouse gas emissions. Over 90.0% of carbon footprint has been calculated based on primary activity and spend data extracted from its business management system. Where data MFG (2023) EMISSIONS REPORTING BOUNDARY SCOPE 1 – DIRECT EMISSIONS Fuel (mains gas) combustion has not been available we have made reasonable estimations using (for example) published energy benchmarks and annual extrapolation. Data from third parties have been validated for completeness and accuracy. Flight distances have been have verified (using the great circle method); flight emissions include radiative forcing (RF) in line with UK government recommendations and the GHG protocol. MFG organisational reporting boundary The Group’s operational carbon footprint organisational boundary includes the following wholly- owned MFG subsidiaries: • Conister Bank Limited (Douglas, IOM) • Edgewater Associates Limited (Douglas, IOM) • MFX Limited (Douglas, IOM) • • Conister Finance Ltd & Leasing Ltd (Basingstoke, England) Blue Star Business Solutions Limited (Basingstoke, England) • Manx Collections Limited (Manchester, England) • The Business Lending Exchange Limited (Peterborough, England) CURRENTLY OUT OF SCOPE SCOPE 3 Cat 1: Purchased Goods & Services Fugitive emissions (refrigerant leaks from office air-conditioning systems) Cat 2: Capital goods SCOPE 2 – INDIRECT EMISSIONS Purchased electricity SCOPE 3 – INDIRECT EMISSIONS Category 3 - Fuel- and energy-related activities Category 5 - Waste generated in operations Category 6 - Business travel • Flights • Hotels • Mileage (private cars) • Trains • Taxis & car hire • Boats Category 7 - Working from home Cat 4: Upstream transportation & distribution Cat 8: Upstream leased assets Cat 9: Downstream transportation & distribution Cat 10: Processing of sold products Cat 11: Use of sold products Cat 12: End-of-life treatment of sold products Cat 13: Downstream leased assets Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Environmental, Social and Governance Report continued 12 Notes on the emissions reporting boundary • Scope 1 mains gas and office air-conditioning refrigerant leakage are the only scope 1 sources currently applicable to the Group as it has no company vehicles. • Scope 2 purchased electricity is assessed and reported using location-based power generation activity data. • • • The scope 3 carbon emissions sources reported are those for which MFG currently has the most accurate and complete datasets and/or practical control and influence over. MFG aims to include scope 3 category 1 Purchased Goods & Services within the 2024 carbon footprint assessments. As a financial services Group MFG is aware that Category 15 (Investment) emissions represent the substantial majority of its de facto scope 3 emissions and climate change impact. The Group is reviewing the Partnership for Carbon Accounting Financials (PCAF) methodology to understand the approach to measuring emissions relevant to the asset classes and financial services it provides. The Group’s carbon footprint The 2023 operational carbon footprint expressed in defined amounts is 141.3 tonnes CO2 equivalent. Emissions source Scope 1, 2 & 3 Scope 1 and 2 (location) Scope 1 Fuels (natural gas) Fugitive emissions (air-conditioning) Scope 2 (location-based) Purchased electricity Scope 3 - operations Category 3 - Fuel- and energy-related activities Electricity transmission & distribution (T&D) losses Business travel Well-to-Tank (WTT) emissions Category 5 - Waste generated in operations Category 6 - Business travel Flights Hotels Mileage (private vehicles) Taxis and car hire Trains Boats Category 7 - Working from home Emissions intensity ratio Scope 1 and 2 tCO2e per FTE Scope 1-3 tCO2e per FTE Energy usage (MWh) Electricity Gas tCO2e 2023 141.28 54.17 9.22 5.28 3.94 44.95 87.11 13.80 3.89 9.91 1.18 66.03 54.20 3.35 6.59 1.15 0.67 0.07 6.12 0.44 1.15 217 29 Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 13 Environmental, Social and Governance Report continued MFG scope 1, 2 & 3 carbon emissions 2023 Scope 1 9.22 Scope 2 - location Scope 3 44.95 87.11 0.00 20.00 40.00 60.00 80.00 100.00 Tonnes CO2 equivalent MFG’s scope 3 emissions 2023 by source (%) MFG’s scope 1 & 2 emissions 2023 by source (%) Fuel- and energy-related activities 15.80% Waste 1.30% WFH 7.00% Category 6 - Business travel 75.80% Scope 1 Gas / heating fuel 3.70% Scope 1 Refrigerants (Air-conditioning) 2.80% Scope 2 (location-based) Purchased electricity 31.80% MFG’s scope 1, 2 & 3 emissions in 2023 per business entity e 2 O C t 100.00 80.00 60.00 40.00 20.00 0.00 Conister Bank Edgewater Manx FX Conister Finance & Leasing Bluestar Manx Collections BLX MFG Scope 1 Scope 2 - location Scope 3 Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 14 Environmental, Social and Governance Report continued Carbon footprint 2022-2023 variance In compliance with The GHG Protocol, re-calculation of the carbon footprint is required due to significant changes in operational and/or organisational boundaries, for example: • • Changes in the calculation methodology or improvements in the accuracy of emission factors or activity data that result in a significant impact on the base year emissions data; and Discovery of significant errors, or the accumulation of a significant number of minor errors that, in aggregate, have relevant consequences on the level of emissions. Significant changes in the calculation of the Group’s 2023 footprint include the following: • • Improved or granular categorisation of activity and cost data within our business management system – primarily for mileage, taxis or car hire. Calculating annual energy consumption and costs using primary activity data rather than as a proportion of annual service charges (as in the 2022 calculation) for two of the Group’s UK mainland offices. More robust and accurate monitoring and recording of days worked remotely or at home across the business. Obtaining more granular waste management data from the building manager (IOM offices). • • Further significant changes in emissions between 2022 and 2023 include: • 75.0% reduction in mileage some of which is clearly a result of data re-categorisation, the majority (>60.0%) of which is a result of: – Less frequent and more efficient use of private vehicle for business trips; and – Better or more frequent use of IT services for business meetings. • Significant increase in emissions from business flights primarily due to an uplift in international travel. The table below shows the changes in the Group’s carbon footprint between 2022 and 2023. MFG’s operational carbon footprint 2022 (base year) and 2023 Emissions source Scope 1, 2 & 3 Scope 1 and 2 (location) Scope 1 Fuels (natural gas) Fugitive emissions (air-conditioning) Scope 2 (location-based) Purchased electricity Scope 3 - operations Category 3 - Fuel- and energy-related activities Electricity transmission & distribution (T&D) losses Business travel Well-to-Tank (WTT) emissions Category 5 - Waste generated in operations Category 6 - Business travel Flights Hotels Mileage (private vehicles) Taxis and car hire* Trains Boats Category 7 - Working from home Emissions intensity ratio Scope 1 and 2 tCO2e per FTE Scope 1-3 tCO2e per FTE Energy usage (MWh) Electricity Gas * Taxis and car hire emissions were included in ‘mileage’ in 2022. tCO2e 2022 120.38 47.32 6.65 3.20 3.45 40.67 73.04 12.93 3.72 9.21 8.08 50.32 20.61 3.27 24.87 - 1.20 0.37 1.71 0.37 0.95 210 18 tCO2e 2023 Variance 141.28 54.18 9.23 5.28 3.95 44.95 87.13 13.80 3.89 9.91 1.18 66.03 54.20 3.35 6.59 1.15 0.67 0.07 6.12 0.44 1.15 217 29 +17.4% +14.5% +38.5% +65.0% +14.4% +10.5% +19.3% +6.7% +4.5% +7.6% -85.4% +31.2% +163.0% +2.3% -73.5% -44.4% -82.1% +258.1% +18.2% +21.2% +3.2% +62.5% Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 15 Environmental, Social and Governance Report continued Carbon reduction target (2030) The Group has used the Science Based Target Initiative (SBTi) tool and methodology (cross-sector pathway decarbonisation) to develop decarbonisation targets for scope 1, 2 and 3 emissions as currently measured. The SBT approach uses three broad climate-warming scenarios; MFG’s targets align with the most stringent (1.5C warming) scenario. The table below summarises the Group’s 2022 and 2023 emissions against the 2030 target; the scope 3 categories included are: • Category 3 - Fuel- and energy-related activities • Category 5 - Waste generated in operations • Category 6 - Business travel • Category 7 - Working from home The Group notes a rise in flight and fuel increases, which is explained by a normalisation of travel post-Covid lockdown restrictions and the establishment of the UK Branch. The Group expects these to reduce in future periods as it progresses towards its 2030 target. MFG decarbonisation target Emissions source Scope 1 + 2 emissions Scope 3 emissions Total 2022 (base year) tCO2e 2023 tCO2e 2030 target tCO2e Variance 2022-2030 47.3 73.1 120.4 54.2 87.1 141.3 27.5 42.4 69.9 -41.9% -42.0% -42.0% The Group aims to submit its scope 1 and 2 targets to SBTi for validation by 2025. 2024 focus areas Widening the footprint boundary • Emissions sources to include in ongoing assessments: – Scope 3 Category 1 – Purchased Goods & Services – using spend-based emission factors (such as CEDA/VitalMetrics database) and (where possible) product LCA data. – Scope 3 Category 7 - Employee commuting – implementing a non-intrusive survey to record employee commutes. Scope 3 – Cat 15 • Using The Partnership for PCAF methodology to understand or develop a realistic and relevant approach to measuring emissions related to the financial services we provide. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 16 Risk Management Risk management overview RMF Effective risk management is crucial to MFG’s sustainability. The MFG 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 as 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 and intended to reinforce the key elements of Quoted Companies Alliance (“QCA Code”) corporate governance principles, adopted by the Group. 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 the 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 in the business. The risk management system is supported by policies, processes and activities relating to the taking, management and reporting of risk. Management and accountability The Audit, Risk and Compliance Committee (“ARCC”) is operated at a Group and Bank level and currently comprises of three experienced Independent Non‑executive Directors, two of which 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. 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. Analysis of previous incidents and ongoing assessment 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 determine the maximum amount of risk that it is prepared to accept in the pursuit of delivering business objectives. The risk appetite considers all the risks detailed under “Principal risks”‑ on page 18 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. An understanding of risk is developed through the identification, assessment and, where appropriate, measurement of risks to which the business is exposed. 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. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Risk Management continued 17 The risk and control assessment process of understanding risk and reviewing the adequacy and effectiveness of related controls and risk mitigation approaches is performed on a regular basis, as a minimum annually, and is reported to and governed by: • • • • A high‑level assessment to identify the principal risks enabling work to progress in a focused manner in completing risk and control assessments, to build a key control monitoring programme; Management Committees, including a review of roles and responsibilities, ensure that all material risks are captured and formally considered prior to presentation to the ARCC and the Board; Procedures within the framework 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 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. Thus the responsibility for governance and oversight is allocated throughout the organisation according to the three lines of defence principles. This 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 for the day‑to‑day risk origination and management in accordance with risk policy and strategy. This includes identifying, assessing risks, and implementing responses. 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 to 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. 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 it 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 departments 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 independent functions within MFG have a direct reporting line to the ARCC and the Board. 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 reviews that process annually and evidences that review. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Risk Management continued 18 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 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 to extreme adverse events in the Bank’s strategy and plans that might 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 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 against industry standards 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, ARCC, Internal Audit and the External Auditor. 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 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 2022 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 page 16, 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 and operational costs 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 their formal planning process in September for the forthcoming year, to inform the budget submitted to the boards Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Risk Management continued • • • 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 take account of input from the Group Executive Directors and current financial performance versus budget and seek to highlight strategic responses for the relevant 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 mitigations applied • • Delegated authorities: The Group operates to a schedule of delegated lending authorisation limits linked to an individual underwriter’s knowledge 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; Distribution strategy: The Group actively monitors and controls the credit risk of all business undertaken 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 supported through the maintenance, where appropriate, of cash reserves and loss pools to fund any buy‑back indemnity. Comprehensive due diligence processes are also performed; 19 • • 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 forecasting and stress testing on a more accurate basis; Concentration risk: To protect against the unintentional build‑up of exposures where deterioration could materially impact the Group’s 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 region, the economic environment, commercial sector etc; 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 ensure operational continuity. The Group’s IT Steering Committee (“ITSCO”) identifies and implements efficiencies to enable enhanced customer service through the provision of additional facilities and products, and to automate manual tasks wherever possible to minimise the potential for human error. ITSCO also reviews and monitors current service standards, highlighting 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 the IT 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. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Risk Management continued 20 Controls and mitigation • Adherence to internal limits and approval processes through: – – – – 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; Segregation of duties: There is appropriate segregation between those authorising transactions and those executing them, with four eyes principles in place where required; Exception reporting: Daily reporting ensures that any regulatory and internal limits are reviewed regularly by the appropriate Management team; and 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 is in place for new outsourced partners in the IOM and 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 comprehensive take‑on appraisal 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 requires that a sequence of assessment and approval is followed. This ensures that all relevant input is included, and material risks considered; and 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 other counterparties). Controls and mitigation The Group has policies to ensure adherence to conduct related regulatory standards and to promote continual focus on good customer outcomes. Appropriate policies also govern where good conduct is contracted to third parties, either directly or through distribution chains. In all cases, compliance with standards is appropriately monitored through the collection and assessment of relevant data, partner attestation, and onsite audits where appropriate. General conduct principles including Consumer Policy and Treating Customers Fairly (TCF) principles, are well embedded 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. Should this ever occur, the Group would access the capital markets. In addition, it has built a core portfolio of liquid assets or buffers as additional sources of liquidity that can be utilised during such times. 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. This means that on a cumulative mismatch position, the Group is forecast to be able to meet all liabilities as they fall due; Maintains an adequate liquidity buffer; and Has no exposure to the interbank lending market. The Group’s liquidity position is monitored daily 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 ever occur. 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. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 The Bank matches its deposit taking to its funding requirements to the greatest extent possible; The Group remains well placed to meet the regulatory challenges that bring change to the macro environment. 21 Other regulated entities in the Group are PAL, BLX and MCL principally for Consumer Credit and Debt Collection. 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. 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. Controls and mitigation 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. • • • • Risk Management continued The principal potential interest rate risk that the Group is exposed to is the risk that the Bank’s fixed interest rate and term profile of its deposit base differs materially from the fixed interest rate and term profile of its asset base. Controls and mitigation Funding profile: Interest rate risk for the Group is not deemed to be material currently due to the Bank’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 the Bank’s lending rate to match any corresponding change in its cost of funds; The maturity profile of the Bank’s loan book through staged repayments means interest risk is difficult to hedge effectively so the Bank does not currently hedge against this risk, and is not exposed to any additional market interest rate risk in this respect; and Funding cost: The Group would be exposed to potential risk if the Bank’s 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. Regulatory risk Regulatory risk is the risk of material breach of regulation. 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 holds, via the Bank, a Class 1 (1) Banking Licence in the IOM and is accordingly regulated by the Financial Services Authority (“FSA”) and a UK deposit taking licence with the Prudential Regulatory Authority (“PRA”). The Bank 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. The Bank is in the process of applying for a UK deposit taking licence with the Prudential Regulatory Authority. The Group also holds, via EWA, an IOM Class 2 licence to conduct investment business and is licenced as a general insurance intermediary, both regulated by the FSA. Strategic report | Manx Financial Group PLC | Annual Financial Statements 2023 Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 22 22 Corporate Governance In this section 23 28 31 34 37 Corporate Governance Report Directors, Officers and Advisers Audit, Risk and Compliance Committee Directors’ Remuneration Report Directors’ Report Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 Corporate Governance Report 23 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 Corporate Governance Code for Small and mid‑size Quoted Companies (“QCA Code”) 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”) with 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 grow organically and through strategic acquisitions to further augment the range of services it offers and gain market share in markets in which it has proven experience. 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 insurance; and foreign currency and payment services. 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. The Group operates in some heavily regulated sectors, 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 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. 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 employees, partners, suppliers, regulatory authorities, but also customers, be they depositors, borrowers or those seeking financial advice. The Group’s operations and working methodologies take account of the requirement to balance the needs of all 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. • • Customers – are at the heart of the business, and the Group operates with a shared vision and set of values. These 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; 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, at the Annual General Meeting. In addition, the CEO meets with and addresses Shareholder concerns where appropriate; Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 24 The senior executives meet weekly to consider new risks and opportunities for presentation to the Group, making recommendations to ARCC and or the Board as appropriate. The Directors consider they are provided with 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 four Non‑executive Directors and four Executive Directors. Each 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 page 28. 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 three Non‑executive Directors, namely Alan Clarke (Chairman of the ARCC), Gregory Jones and John Spellman, are 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 and Finance Director are the only Directors who hold Restricted Stock Units (“RSUs”) or options over the Group’s shares. The number and terms are found on page 36. The RSUs or option grant concerned are 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. Corporate Governance Report continued • • • 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; Partners and suppliers – the Executive and Management regularly meet with our partners and suppliers to ensure the needs of all parties are understood to achieve continued excellent working relations; and Environment ‑ The Group recognises the QCA Code recommendations on the integration of ESG and alignment with a reporting framework across organisations. This is a fast‑moving agenda with the consolidation of voluntary frameworks and growth of international statutory reporting frameworks, and the Group continues to monitor this evolution and what it means with interest. Notwithstanding, integration of ESG across the Group is on‑going as material ESG issues are identified. The Bank is now into its fourth year of responding to ESG integration and provides the model that other Group subsidiaries are following. 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, and comparison to budget, are reported to the Board monthly. 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. Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 25 to address any concerns that may arise, escalating these to Board level as necessary. 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. 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. Corporate Governance Report continued QCA Principle 6: Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities The Board considers that all 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 page 28. 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 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 October 2023, 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 is encouraged within the Group, with regular communications to staff regarding progress and staff feedback sought. The senior management team seeks Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 26 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. Group Remuneration Committee (“REMCO”) The REMCO meets at least twice a year and currently comprises of two Independent Non‑executive Directors, currently Alan Clarke (Chairman), and Gregory Jones, 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 management. Committee members do not take part in discussions concerning their own remuneration. The Chairman and CEO determine Non‑executive Director fees. 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. Corporate Governance Report continued 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 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. 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. Prior to appointment, Non‑executive Directors are required to demonstrate that they are able to allocate sufficient time to undertake their duties. 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 three Independent Non‑executive Directors, currently Alan Clarke (Chairman), 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, to monitor and review the effectiveness of the Internal Audit function and to consider and recommend to the Board (for approval by the members) the appointment or re‑appointment of Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 Corporate Governance Report continued 27 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. 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 because 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 25 March 2024 and signed on its behalf by: 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 Executive Chairman 25 March 2024 Jim Mellon Denham Eke Douglas Grant James Smeed Gregory Bailey Alan Clarke Gregory Jones John Spellman Board ARCC REMCO NOMCO 5/8 8/8 8/8 7/8 5/8 6/8 6/8 8/8 ‑ ‑ ‑ ‑ ‑ 8/8 5/8 8/8 ‑ ‑ ‑ ‑ ‑ 11/11 11/11 ‑ 3/3 3/3 3/3 3/3 1/3 2/3 2/3 3/3 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. Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 28 Directors, Officers and Advisers Executive Directors Jim Mellon (67)‡ Executive Chairman Denham Eke (72)‡ Executive Vice Chairman Douglas Grant (59)‡ Chief Executive Officer James Smeed (39)‡ Group Finance Director Denham Eke is the Managing Director of Burnbrae Group Limited, a private international asset 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 private companies involved in the financial services, property, mining, and manufacturing sectors. Douglas Grant has over 40 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. 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. Jim Mellon is a well‑known and successful entrepreneur, author and economic commentator, starting his career in fund management and now includes 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 is 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. Appointment Appointed to the Board on 2 November 2007 and Executive Chairman on 12 February 2009. Appointment Appointed to the Board on 2 November 2007 and Executive Vice Chairman on 3 November 2021. Appointment Appointed to the Board on 14 January 2010 and Chief Executive Officer on 3 November 2021. Appointment Appointed to the Board as Group Finance Director on 3 November 2021. Legend * Member of the Audit, Risk and Compliance Committee † Member of the Remuneration Committee ‡ Member of the Nominations Committee Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 29 Directors, Officers and Advisers continued Non-executive Directors Alan Clarke (73)‡†* Independent 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. Gregory Bailey (68)‡ Non-executive Director John Spellman (57)‡* Independent Non-executive Director Gregory Jones (65)‡†* Independent 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. Gregory Bailey, founded Palantir Group Inc which made successful investments in bio‑tech company start‑ups and financings, and is co‑founder and currently executive chairman of Juvenescence Ltd, non‑executive director of Portage Biotech Inc, a NASDAQ‑traded drug development company and non‑executive director of NYSE traded Biohaven Ltd. He is also founder and chairman of Chelsea Avondale, a property and casualty insurance and founder and chairman of Culminant Reinsurance. 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. 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 7 February 2018. Appointment Appointed to the Board on 4 May 2020. He is Chairman of Conister Bank Limited. Appointment Appointed to the Board 3 November 2021. Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 30 Directors, Officers and Advisers continued Company Secretary Advisers Registered Office Registered Agent Legal Advisers Clarendon House Victoria Street, Douglas, Isle of Man IM1 2LN CW Corporate Services Limited Bank Chambers, 15-19 Athol Street Douglas, Isle of Man IM1 1LB As to Isle of Man law Long & Co Limited Eyreton, Quarterbridge Road Douglas, IM2 3RF As to English law Hill Dickinson LLP The Broadgate Tower, 20 Primrose Street London EC21 2EW Independent Auditor Principal Banker Consulting Actuaries Nominated Advisor and Broker KPMG Audit LLC Heritage Court, 41 Athol Street Douglas, Isle of Man IM1 1LA National Westminster Bank plc 250 Bishopsgate London EC2M 4AA Boal & Co Ltd Marquis House Isle of Man Business Park Douglas Isle of Man IM2 2QZ 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 included on its website. The address of the website is www.mfg.im which includes investor relations information and contact details. Lesley Crossley (56) Company Secretary Lesley Crossley is a Fellow of The Chartered Governance Institute (UK & Ireland) and an Associate of the Chartered Insurance Institute. Lesley has over 35 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, UK 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 2008 to June 2018. Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 31 Audit, Risk and Compliance Committee Dear Shareholders Execution of functions I am pleased to set out below an account of the ARCC’s role and activities during 2023 and up to the date of publication of this Annual Report. Membership Members of the ARCC 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 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 2008 Gregory Jones John Spellman 3 November 2021 4 May 2020 Number of meetings attended 8/8 5/8 8/8 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 Internal Audit, Risk and Compliance and our External Auditor, KPMG Audit LLC. The Chairman of the Board, the Executive Directors and management may be invited to meetings of the ARCC but are excluded from the separate meetings held between the ARCC and the External Auditor. 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. 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. 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 adoption: – Unaudited condensed interim results for the period‑ended 30 June 2023; – The Bank’s ICAAP for 2022; – Audited MFG PLC Group and subsidiary annual financial statements for the year‑ended 31 December 2023; 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; • Tendering process as part of the external audit process; Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 Audit, Risk and Compliance Committee continued 32 • • Received a presentation from the External Auditor on the findings from their execution of the audit plan; and • • Satisfied itself as to the experience and independence of the engagement partner. 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. 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; 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 0.05 to 1 (2022: 0.03 to 1). Non‑audit services related to 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 and is recommending that KPMG Audit LLC be reappointed as the Group’s auditor at the 2024 Annual General Meeting. 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 2023 and how they were addressed are detailed below: Key accounting matter ARCC response Loan impairment – wholesale funding and individual finance agreements 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 management on the application of IFRS 9 requirements 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 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. Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 33 Audit, Risk and Compliance Committee continued Key accounting matter ARCC response 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. 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. (See note 34). Recoverability of Parent Company’s subordinated loans to and investment in subsidiaries The carrying value of the Parent Company’s investment in subsidiaries and loans and amounts due from Group undertakings represents 97.0% (2022: 94.0%) of the Parent Company’s total assets. 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. 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 25 March 2024 Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 Directors’ Remuneration Report 34 Dear Shareholders Areas of focus for 2023 On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2023. 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 Greg Jones 8 November 2021 Number of meetings attended 11/11 11/11 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. During the year, the Committee considered the following: • • • • • Reviewed the overall pay of Executive Directors; Reviewed the non‑contractual discretionary annual performance related pay scheme for Group staff; Reviewed and approved the provision of RSUs to Group staff; Reviewed and approved all new Group staff appointments where gross basic salary exceeded £75,000 (increased from £50,000 in May 2022); and Reviewed and approved all changes to terms and conditions of staff where gross basic salary exceeded £75,000 (increased from £50,000 in May 2022). 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. Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 Directors’ Remuneration Report continued 35 Executive Directors’ Emoluments The remuneration for Executive Directors reflects their responsibilities. It comprises basic salary, performance related bonus when this is considered appropriate, and various benefits detailed below. 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. Performance assessments are conducted annually to 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 RSUs and / or options. 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 typically 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. 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. 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: Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 Directors’ Remuneration Report continued Directors’ emoluments Executives Jim Mellon Denham Eke Douglas Grant James Smeed Non-executives Gregory Bailey Alan Clarke Gregory Jones John Spellman Remuneration/ Fees £ Performance Related Pay £ 53,725 64,470 282,208 168,468 568,871 59,496 54,708 53,600 91,400 259,204 – – 75,000 23,500 98,500 – – – – – Pension £ – – 28,221 16,771 44,992 – – – – – 2023 Total £ 53,725 64,470 385,429 208,739 712,363 59,496 54,708 53,600 91,400 259,204 36 2022 Total £ 50,000 60,000 327,393 187,813 625,206 25,000 45,000 25,000 76,675 171,675 Aggregate emoluments 828,075 98,500 44,992 971,567 796,881 Approval This report was approved by the Board of Directors on 25 March 2024 and signed on its behalf by: Alan Clarke Chairman of the Remuneration Committee 25 March 2024 Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 37 its future capital and liquidity requirements. Based on these factors, management has a reasonable expectation that the Group has and will continue to have adequate resources to continue in operational existence for a period of at least 12 months from approval of the financial statements. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements. Share capital The authorised and issued share capital of the Company are set out in note 29 to the financial statements. Significant shareholdings The number of shares held and the percentage of the issued shares which that number represented as of 6 March 2024 are: Lynchwood Nominees Limited1 Jim Mellon2 Gregory Bailey3 Vidacos Nominees Limited Interactive Investor Services Nominees Limited Island Farms Limited Rock Nominees Limited Number 23,316,734 21,748,214 18,022,674 7,082,252 4,589,894 4,425,644 3,965,003 % of issued capital 20.07 18.72 15.51 6.10 3.95 3.81 3.41 Directors and Directors’ share interests The number of shares held by the current Directors is as follows: Number 06/03/24 Number 31/12/23 Number 31/12/22 Jim Mellon2 21,748,214 21,748,214 21,669,314 Gregory Bailey 18,022,674 18,022,674 17,957,290 Douglas Grant 1,243,129 1,243,129 Alan Clarke 55,994 55,994 533,951 55,048 1 2 Lynchwood Nominees Limited holds 17,039,623 Ordinary Shares in trust for Aeternitas Imperium Privatstiftung. Burnbrae Limited holds 19,420,232 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 18,022,674 Ordinary Shares in trust for Gregory Bailey. Directors’ Report The Directors present their annual report and the audited financial statements for the year ended 31 December 2023. 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 an IOM Class 1(1) deposit taking licence and UK deposit taking licence. 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 and the UK FSCS. The Bank and CFL are 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 £7,043,000 (2022: £5,211,000). On 30 May 2023, MFG declared a dividend of £433,000 (2022: £279,200) which could either be taken up in cash or new ordinary shares. 418,948 new shares (2022: 781,349 new shares) were admitted to the Alternative Investment Market (“AIM”) at 21,8974 pence per share (2022: 8.0205 pence per share), at a total cost of £91,000 (2022: £62,000). On 30 November 2023, Douglas Grant, Chief Executive Officer, exercised options over 700,000 ordinary shares of no par value (“New Ordinary Shares”) in the Company (the “Options”), at an exercise price of 14 pence per New Ordinary Share, for an aggregate consideration of £98,000 (2022: £nil). The proposed transfers to and from reserves are as set out in the Statement of Changes in Equity on page 55. Going Concern The Group has recognised a profit for the year after taxation of £6,140,000 (2022: £4,674,000). As at the year ended 31 December 2023, the Bank had a total capital ratio of 15.90% (2022: 15.10%) which exceeded the regulatory minimum requirement of 15.29% (2022: 14.0%). The Group has also considered its Internal Capital Adequacy Assessment Process (ICAAP) to assess Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 38 Directors’ Report continued The number of share options or RSUs held by the current Directors is as follows: Number 06/03/24 Number 31/12/23 Number 31/12/22 Douglas Grant 1,925,000 1,925,000 1,075,000 James Smeed 475,000 475,000 175,000 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 2023, there were 193 members of staff (2022: 168), of whom 16 were part‑time (2022: 13). Investment in subsidiaries Investments in the Company’s subsidiaries are disclosed in note 31 to the financial statements. Auditor KPMG Audit LLC, being eligible, has expressed its willingness to continue in office. On behalf of the Board J Mellon Executive Chairman 25 March 2024 Corporate Governance | Manx Financial Group PLC | Annual Financial Statements 2023 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 39 Financial Statements In this section 40 41 50 52 53 54 55 56 58 59 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 and Company Financial Statements Statement of Directors’ Responsibilities 40 The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations. • 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. Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with UK-adopted international accounting standards and applicable law and they have elected to prepare the Parent Company financial statements on the same basis. Under company law 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 the Group’s profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to: The Directors are responsible 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. • • • • select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable, relevant and relevant and reliable; Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. state whether they have been prepared in accordance with UK-adopted international accounting standards; assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 41 Independent Auditor’s Report, to the Members of Manx Financial Group plc Our opinion is unmodified Basis for opinion We have audited the consolidated financial statements and company financial statements of Manx Financial Group PLC (the “Company”) and its subsidiaries (together, the “Group”), which comprise the consolidated and company statement of financial position as at 31 December 2023, the consolidated and company statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising material accounting policies and other explanatory information. In our opinion, the accompanying consolidated financial statements and company 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 2023 and of the Group’s and of the Company’s profit for the year then ended; have been properly prepared in accordance with UK-adopted international accounting standards; and have been properly prepared in accordance with the requirements of the Companies Act 2006. 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 company 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 and company 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: Key audit matter The risk Our response Impairment of loans and advances to customers - wholesale funding Loans and advances to customers - being wholesale funding arrangements, block discounting facilities and vehicle stocking plan agreements included in note 20 for loans and advances to customers. £70,996,000; (2022: £79,116,000) Impairment provision £nil; (2022: £nil) Expense for the year £nil; (2022: £nil) Refer to page 32 of the Audit, Risk and Compliance Committee Report (“ARCC”), 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), note 42(B) (Financial Risk Management - Credit Risk) and note 44(G)(vi) (Accounting Policy for Impairment of Financial Instruments). Basis: 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. 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. Our audit procedures included: Internal Controls: Understood the design and implementation of controls in respect of the origination and monitoring of wholesale funding loans, including borrower due diligence. Understood 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 42 Independent Auditor’s Report, to the Members of Manx Financial Group plc continued Key audit matter The risk Our response Risk: 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 residual economic impacts of COVID19 as well as the increased financially volatile environment caused by inflation and interest rate pressure, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. Use of KPMG Specialists: We involved KPMG specialists to examine the methodology and assumptions of the Group’s expected credit loss model and its compliance with the requirements of accounting standards. This included examining the macro-economic variables and scenarios used in the determination of the expected credit loss provisions. Challenging managements’ assumptions and inputs: We agreed the specific provisions included in the financial statements to the Group’s provisioning 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, evaluating collateral, financial standing of the business – by inspecting latest available accounts and status and value of underlying security – by inspecting a sample of security documentation. Assessing observable inputs: We challenged the inputs used in collective impairment models by comparison to default and recovery experience across each of the loan finance categories. Assessing disclosures: We assessed 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 43 Independent Auditor’s Report, to the Members of Manx Financial Group plc continued Key audit matter The risk Our response Impairment of loans and advances to customers - individual finance agreements Loans and advances to customers - being loan facilities other for wholesale funding included in note 20 for loans and advances to customers. £291,657,000; (2022: £210,191,000) Impairment provision £19,615,000; (2022: £16,177,000) Expense for the year £4,135,000; (2022: 3,990,000) Refer to page 32 of 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), note 42(B) (Financial Risk Management - Credit Risk) and note 44(G)(vi) (Accounting Policy for Impairment of Financial Instruments). Basis: 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. 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. Risk: 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 residual economic impacts of COVID19 as well as the increased financially volatile environment caused by inflation and interest rate pressure, 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 audit procedures included: Internal Controls: Understood the design and implementation of controls in respect of the origination and approval of loans, including borrower due diligence. Understood 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 and assumptions of the Group’s expected credit loss model and its compliance with the requirements of accounting standards. This included examining the macro-economic variables and scenarios used in the determination of the expected credit loss provisions. Challenging managements’ assumptions and inputs: We agreed the specific provisions included in the financial statements to Group’s provisioning schedule and vouched that this schedule was correctly extracted from the loans and advances system, including the arrears information. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 44 Independent Auditor’s Report, to the Members of Manx Financial Group plc continued Key audit matter The risk Our response We tested a sample of specific provisions. This included challenging management’s assessment of the specific provision, taking into account such factors as: the number of repayments in arrears; the known whereabouts of the borrower 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. Assessing observable inputs: We challenged the inputs used in collective impairment models by comparison to default and recovery experience across each of the loan finance categories. Assessing disclosures: We assessed 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 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 45 Independent Auditor’s Report, to the Members of Manx Financial Group plc continued Key audit matter The risk Our response Impairment of goodwill and intangible assets Goodwill £10,576,000; (2022: £10,576,000) Intangible assets £4,268,000; (2022: £2,703,000) Impairment loss on goodwill £nil; (2022: £200,000) Refer to page 33 of the ARCC Report, note 4 (Use of Judgements and Estimates - Assumptions and Estimation Uncertainties), note 23 (Intangible Assets), note 34 (Goodwill), 44(A) (Basis for Consolidation of Subsidiaries and Separate Financial Statements of the Parent Company), note 44(K) (Intangible Assets and Goodwill) and note 44(L) (Impairment of Non-Financial Assets). Basis: 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, independent financial advisers and finance brokers, each of which is identified by the Group as a Cash Generating Unit. Risk: 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 uncertainty, including increased uncertainty from the residual economic impacts of COVID19 as well as the increased financially volatile environment caused by inflation and interest rate pressure, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. The financial statements (note 34) disclose the sensitivity estimated by the Group. Our audit procedures included: Use of KPMG Specialists: We involved our own valuation specialists who have tested the reasonableness of the significant assumptions used in particular those relating to the discount rates applied and the valuation method used. Challenging managements’ assumptions and inputs: Compared the Group’s assumptions to externally derived data in relation to key inputs such as projected economic growth and cost inflation. Indicators of impairment for intangible assets Analysed latest financial data for the cash generating unit related to the relevant goodwill and intangible asset to assess whether there are any indicators of impairment, such as losses being made or a downturn in sales. Sensitivity analysis Performed stress testing of the assumptions noted above to determine the sensitivity of the recoverable amount. Assessing disclosures: Assessed the adequacy of the Group’s disclosures about the sensitivity of the outcome of the impairment assessment to changes in the key assumptions used in the valuation of goodwill and intangible assets. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 46 Independent Auditor’s Report, to the Members of Manx Financial Group plc continued Key audit matter The risk Our response Recoverability of Parent Company’s subordinated loans to and investment in subsidiaries Investment in subsidiaries £28,097,000; (2022: £23,597,000) Loans and amounts due from Group undertakings £24,922,000; (2022: £17,635,000) Refer to page 33 of the ARCC report, note 35 (Loans and amounts due from group undertakings) and note 44(A) (v) (Separate Financial Statements of the Company). Basis: The carrying value of the Parent Company’s investment in subsidiaries and loans and amounts due from Group undertakings represents 97% (2022: 94%) of the Parent Company’s total assets. Risk: 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 audit procedures included: Tests of detail Compared the carrying amount of 100% of the Parent Company’s investments in subsidiaries and loans and amounts due from Group undertakings with the relevant subsidiaries’ and Group undertaking’s audited statement of financial position to identify whether their financial position supported the carrying amount of the Parent Company’s 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 £351,000 (2022: £206,000), determined with reference to a benchmark of group profit before tax of £7,043,000 (2022: £4,120,000), of which it represents approximately 5.0% (2022: 5.0%). Materiality for the company financial statements as a whole was set at £211,000 (2022: £123,000), determined with reference to a benchmark of the company total assets, of which it represents approximate 0.4% (2022: 0.3%). 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 consolidated financial statements as a whole. Performance materiality for the group was set at 75% (2022: 75%) of materiality for the consolidated financial statements as a whole, which equates to £263,000 (2022: £154,000) for the Group and £158,000 (2022: £92,000) for the Company. 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 Committee any corrected or uncorrected identified misstatements exceeding £17,500 (2022: £10,000) for the Group and £10,550 (2022: £6,150) for the Company, 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. An audit for group reporting purposes was performed by a component auditor at one reporting component in the United Kingdom, Ninkasi Rentals & Finance Limited (“NFRL”), which represents 1% (2022: 2%) of the Group’s assets. The audit undertaken for group reporting purposes at the reporting component was performed to materiality levels set by, or agreed with, the group audit team. Detailed audit instructions were sent to the auditor of NFRL. These instructions covered the significant audit areas that should be covered by these audits (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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Independent Auditor’s Report, to the Members of Manx Financial Group plc continued 47 Going concern The directors have prepared the consolidated financial statements and company 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 and company 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 risks that we considered most likely to affect the Group and the Company’s financial resources or ability to continue operations over this period were: • • the availability of capital to meet operating costs and other financial commitments; and the recoverability of financial assets subject to credit risks as a result of economic downturn due to the residual impacts of COVID-19 and the financially volatile environment caused by inflation and interest rate pressures. We considered whether these risks could plausibly affect the liquidity in the going concern period by comparing severe, but plausible downside scenarios that could arise from these risks individually and collectively 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 and company 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 and company 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. 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Independent Auditor’s Report, to the Members of Manx Financial Group plc continued 48 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 and company 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 and company 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 and company 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 and company 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 and company 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 company financial statements and our auditor’s report thereon. Our opinion on the consolidated financial statements and company 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 and company 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 and company 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. We have nothing to report on other matters on which we are required to report by exception Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 40, the directors are responsible for: the preparation of the consolidated financial statements and company 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 and company 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Independent Auditor’s Report, to the Members of Manx Financial Group plc continued 49 Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the consolidated financial statements and company 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 and company 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 26 March 2024 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 31 December Notes Interest revenue calculated using the effective interest method Other 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 / (loss) on financial instruments Realised gain on debt securities Operating income Personnel expenses Other expenses Provision for impairment on loans and advances to customers Depreciation Amortisation and impairment of intangibles Share of profit of equity accounted investees, net of tax Profit before tax payable Income tax expense Profit for the year 9 10 10 22 19 18 11 12 13 22 23 30 14 15 2023 £000 45,356 1,535 (14,530) 32,361 3,997 (7,327) - 29,031 364 195 1,893 31,483 (12,170) (6,627) (4,135) (825) (683) - 7,043 (903) 6,140 50 2022 £000 28,978 1,765 (6,391) 24,352 4,719 (3,569) (16) 25,486 314 (19) 292 26,073 (9,764) (5,806) (3,990) (738) (582) 18 5,211 (537) 4,674 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Consolidated Statement of Profit or Loss and other Comprehensive Income continued For the year ended 31 December Profit for the year Other comprehensive income: Items that will be reclassified to profit or loss Unrealised gain on debt securities Related tax Items that will never be reclassified to profit or loss Actuarial gain on defined benefit pension scheme taken to equity Related tax Other comprehensive income, net of tax Total comprehensive income for the period attributable to owners 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) Notes 18 28 32 32 16 16 16 16 The notes on pages 59 to 111 form part of these financial statements. The Directors believe that all results derive from continuing activities. 2023 £000 6,140 324 (32) 29 (3) 318 6,458 5,288 852 6,140 5,606 852 6,458 4.59 3.51 4.86 3.71 51 2022 £000 4,674 131 - 407 – 538 5,212 4,331 343 4,674 4,869 343 5,212 3.77 2.93 4.24 3.28 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Company Statement of Profit or Loss and Other Comprehensive Income 52 For the year ended 31 December Notes Interest income calculated using the effective interest method Dividend income Other income Operating income Personnel expenses Administration expenses Depreciation expense Amortisation expense Profit before tax payable Tax payable Profit for the year 11 22 23 Total comprehensive income for the year The notes on pages 59 to 111 form part of these financial statements. The Directors believe that all results derive from continuing activities. 2023 £000 862 1,200 584 2,646 (62) (61) (63) (57) 2,403 - 2,403 2,403 2022 £000 522 1,575 69 2,166 (127) - (65) (2) 1,972 - 1,972 1,972 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Consolidated Statement of Financial Position 53 As at 31 December Assets Cash and cash equivalents Debt securities Equity held at Fair Value Through Profit or Loss 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 Deferred 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 Notes 17 18 33 20 21 22 23 30 34 24 25 26 27 28 15 29 22 32 2023 £000 12,107 76,129 138 362,653 8,227 6,410 4,268 197 10,576 480,705 390,421 14,409 20 39,317 162 392 444,721 19,384 15,544 15 1,041 35,984 2022 £000 22,630 40,675 122 291,475 4,211 6,714 2,703 155 10,576 379,261 304,199 13,108 262 31,332 237 353 349,491 19,195 10,371 15 189 29,770 Total liabilities and equity 480,705 379,261 The financial statements were approved by the Board of Directors on 25 March 2024 and signed on its behalf by: Jim Mellon Executive Chairman Denham Eke Executive Vice-Chairman Douglas Grant Chief Executive Officer The notes on pages 59 to 111 form part of these financial statements. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 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 Notes 17 21 35 22 23 31 35 25 35 27 29 2023 £000 373 123 10,694 139 861 28,097 14,228 54,515 544 608 39,317 40,469 19,384 (5,338) 14,046 54 2022 £000 1,761 562 9,907 201 25 23,597 7,728 43,781 440 122 31,332 31,894 19,195 (7,308) 11,887 Total liabilities and equity 54,515 43,781 The notes on pages 59 to 111 form part of these financial statements. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Consolidated and Company Statements of Changes in Equity Group Balance as at 1 January 2022 Profit for the year Other comprehensive income Transactions with owners Dividends declared Acquisition of subsidiary with non-controlling interest Share capital £000 19,133 - - 62 - Balance as at 31 December 2022 19,195 Profit for the year Other comprehensive income Transactions with owners Dividend declared (see note 29) Share issue (see note 29) - - 91 98 Attributable to owners of the Company Profit and loss account £000 Revaluation reserve £000 5,781 4,331 538 (279) - 10,371 5,288 318 (433) - 15 - - - - 15 - - - - Non- controlling interests £000 56 343 - - (210) 189 852 - - - Total £000 24,929 4,331 538 (217) - 29,581 5,288 318 (342) 98 55 Total equity £000 24,985 4,674 538 (217) (210) 29,770 6,140 318 (342) 98 Balance as at 31 December 2023 19,384 15,544 15 34,943 1,041 35,984 Company Balance as at 1 January 2022 Profit for the year Transactions with owners Dividends declared (see note 29) Balance as at 31 December 2022 Profit for the year Transactions with owners Dividend declared (see note 29) Share issue (see note 29) Balance as at 31 December 2023 The notes on pages 59 to 111 form part of these financial statements. Share capital £000 19,133 - 62 19,195 – 91 98 Profit and loss account £000 (9,001) 1,972 (279) (7,308) 2,403 (433) - Total equity £000 10,132 1,972 (217) 11,887 2,403 (342) 98 19,384 (5,338) 14,046 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Consolidated Statement of Cash Flows For the year ended 31 December Notes Reconciliation of profit before taxation to operating cash flows Profit before tax Adjustments for: Depreciation Amortisation of intangibles Impairment of loans and advances to customers Net interest income Realised gains on debt securities Share of profit of equity accounted investees Contingent consideration interest expense Pension charge included in personnel expenses (Loss) / gain on financial instruments Changes in: 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 used in operating activities 22 23 30 6(ii) 28 19 28 2023 £000 7,043 825 683 4,135 (34,726) (1,893) - 4 11 (195) (24,113) (4,016) 1,953 (26,176) (75,590) 88,116 (57) (13,707) 56 2022 £000 5,211 754 582 3,990 (26,064) (292) (18) 102 14 19 (15,702) (2,228) 1,436 (16,494) (56,313) 46,061 (57) (26,803) Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Consolidated Statement of Cash Flows continued For the year ended 31 December CASH FLOW STATEMENT Cash from operating activities Cash used in operating activities Interest received Interest paid Income taxes paid Net cash from / (used in) operating activities Cash flows from investing activities Acquisition of property, plant and equipment, excluding right-of-use assets Acquisition of intangible assets Proceeds from sale of property, plant and equipment Acquisition of subsidiary or associate, net of cash acquired (Purchase) / Sale of debt securities 22 23 22 34 Deferred consideration on acquisition of subsidiary 6(ii),26 Net cash used in investing activities Cash flows from financing activities Receipt of loan notes Payment of lease liabilities (capital) Dividend paid Share issue Net cash 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 27 37 29 29 57 Notes 2023 £000 2022 £000 (13,707) 47,168 (14,059) (1,337) 18,065 (1,280) (2,248) 759 - (33,237) (67) (36,073) 7,985 (256) (342) 98 7,485 (10,523) 22,630 12,107 (26,803) 30,136 (6,184) (157) (3,008) (1,473) (504) 2,083 (1,785) 734 (937) (1,882) 7,660 (202) (217) - 7,241 2,351 20,279 22,630 There are £42,000 of non-cash investing activities with respect to the Group’s acquisition of 10.0% shareholding in Lesley Stephen & Co Limited. (see note 30). The notes on pages 59 to 111 form part of these financial statements. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 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 Interest income Dividend income Changes in: Amounts due from group undertakings Trade and other receivables Creditors and accrued charges Amounts due to Group undertakings Cash from / (used in) operating activities CASH FLOW STATEMENT Cash from operating activities Cash from / (used) in operating activities Interest received Dividends received Net cash from / (used in) operating activities Cash flows from investing activities Acquisition of property, plant and equipment Acquisition of intangible assets Issue of subordinated loans Increase in investment in group undertakings Net cash used in investing activities Cash flows from financing activities Proceeds from issue of loan notes Payment of finance lease liabilities Proceeds from issue of shares Dividend paid Net cash from financing activities Notes 22 23 27 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 59 to 111 form part of these financial statements. 2023 £000 2,403 63 57 (862) (1,200) 461 (787) 439 312 486 911 911 1,200 862 2,973 (1) (893) (6,500) (4,500) (11,894) 7,985 (117) 98 (433) 7,533 (1,388) 1,761 373 58 2022 £000 1,972 63 2 (522) (1,575) (60) (3,803) (90) 100 (4,187) (8,040) (8,040) 522 1,575 (5,943) - (8) - - (8) 7,660 (99) - (279) 7,282 1,331 430 1,761 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 59 Notes to the Consolidated and Company Financial Statements For the year ended 31 December 2023 1. Reporting entity Manx Financial Group PLC (“Company”) is a company incorporated in the Isle of Man. The Company’s registered office is at Clarendon House, Victoria Street, Douglas, Isle of Man, IM1 2LN. The consolidated financial statements of the Company for the year ended 31 December 2023 comprise the Company and its subsidiaries (“Group”) including Conister Bank Limited (the “Bank”). The Group is primarily involved in the provision of financial services. The Company’s financial statements are the separate financial statements of the Company. 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 Company’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. 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 23 and 34 – impairment test of intangible assets and goodwill: key assumptions underlying recoverable amounts; and Note 44(G)(vi) and Note 7(A) – key assumptions of Expected Credit Loss (“ECL”) allowance for loans and advances to customers and assessment of impairment allowances where loans are in default or arrears. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 60 Total carrying amount £000 12,107 76,129 138 Notes to the Consolidated and Company Financial Statements continued 5. Financial instruments – Classification For description of how the Group classifies financial assets and liabilities, see note 44(G)(ii). The following table provides reconciliation between line items in the statement of financial position and categories of financial instruments. Mandatorily at FVTPL £000 Designated as at FVTPL £000 FVOCI – debt instruments £000 FVOCI – equity instruments £000 Amortised cost £000 Group 31 December 2023 Cash and cash equivalents Debt securities Equity held at Fair Value Through Profit or Loss Loans and advances to customers Trade and other receivables Total financial assets Deposits from customers Creditor and accrued charges Deferred consideration Loan notes Total financial liabilities Group 31 December 2022 Cash and cash equivalents Debt securities Equity held at Fair Value Through Profit or Loss Loans and advances to customers Trade and other receivables Total financial assets Deposits from customers Creditor and accrued charges Deferred consideration Loan notes Total financial liabilities – – – – – – – – – – – – – 138 – – 138 – – 20 – 20 – 76,129 – – – 76,129 – – – – – – – – – – – – – – – – Mandatorily at FVTPL £000 Designated as at FVTPL £000 FVOCI – debt instruments £000 FVOCI – equity instruments £000 – – – – – – – – – – – – – 122 – – 122 – – 262 – 262 – 40,675 – – – 40,675 – – – – – – – – – – – – – – – – 12,107 – – 362,653 362,653 8,227 8,227 382,987 390,421 14,409 – 39,317 444,147 Amortised cost £000 22,630 – – 459,254 390,421 14,409 20 39,317 444,167 Total carrying amount £000 22,630 40,675 122 291,475 291,475 4,211 318,316 304,199 13,108 – 31,332 348,639 4,211 359,113 304,199 13,108 262 31,332 348,901 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 61 Company 31 December 2023 Cash and cash equivalents Trade and other receivables Amounts due from Group undertakings Subordinated loans Total financial assets Creditor and accrued charges Amounts due to Group undertakings Loan notes Total financial liabilities Company 31 December 2022 Cash and cash equivalents Trade and other receivables Amounts due from Group undertakings Subordinated loans Total financial assets Creditor and accrued charges Amounts due to Group undertakings Loan notes Total financial liabilities Mandatorily at FVTPL £000 Designated as at FVTPL £000 FVOCI – debt instruments £000 FVOCI – equity instruments £000 Amortised cost £000 Total carrying amount £000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 373 123 9,613 14,228 24,337 453 608 39,317 40,378 373 123 9,613 14,228 24,337 453 608 39,317 40,378 Mandatorily at FVTPL £000 Designated as at FVTPL £000 FVOCI – debt instruments £000 FVOCI – equity instruments £000 Amortised cost £000 Total carrying amount £000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,761 562 9,907 7,728 19,958 440 122 31,332 31,894 1,761 562 9,907 7,728 19,958 440 122 31,332 31,894 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 62 6. Financial instruments – Fair values For description of the Group’s fair value measurement accounting policy, see note 44(G)(v). The following table shows the carrying amounts and fair values of Group 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 2023 Financial assets measured at fair value Debt securities Equity held at Fair Value Through Profit or Loss 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 Deferred consideration Financial liabilities not measured at fair value Deposits from customers Creditors and accrued charges Loan notes 31 December 2022 Financial assets measured at fair value Debt securities Equity held at Fair Value Through Profit or Loss 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 Deferred consideration Financial liabilities not measured at fair value Deposits from customers Creditors and accrued charges Loan notes Carrying amount Total £000 76,129 138 76,267 12,107 362,653 8,227 382,987 20 20 390,421 14,409 39,317 444,147 Carrying amount Total £000 40,675 122 40,797 22,630 291,475 4,211 318,316 262 262 304,199 13,108 31,332 348,639 Fair value Level 1 £000 Level 2 £000 Level 3 £000 – – – – – – – – – – – – – 76,129 – 76,129 – – – – – – – – – – – 138 138 – – – – 20 20 – – – – Fair value Level 1 £000 Level 2 £000 Level 3 £000 – – – – – – – – – – – – – 40,675 – 40,675 – – – – – – – – – – – 122 122 – – – – 262 262 – – – – Total £000 76,129 138 76,267 – – – – 20 20 – – – – Total £000 40,675 122 40,797 – – – – 262 262 – – – – All Company financial assets and liabilities carrying amounts are deemed to be reasonable approximation of fair value. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 63 Measurement of fair values i. Valuation techniques and significant unobservable inputs Type Debt securities Valuation technique 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. Equities at Fair Value Through Profit or Loss Net asset value Deferred consideration Discounted cash flows: The valuation model considers the present value of the expected future payments, discounted using a risk- adjusted discount rate. Significant unobservable inputs Inter-relationship between significant unobservable inputs and fair value measurement Not applicable. Not applicable. Expected net cash flows derived from the entity The estimated fair value would increase (decrease) if the expected cash flows were higher (lower). Expected cash flows £20,000 (2022: £291,340). The estimated fair value would increase (decrease) if: Risk-adjusted discount rate 14.0% (2022: 14.0%). -the expected cash flows were higher (lower); or -the risk-adjusted discount rate was lower (higher). 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 Finance costs Net change in fair value (unrealised) Payment (note 26) Balance at 31 December Sensitivity analysis 2023 £000 262 4 (179) (175) (67) 20 2022 £000 1,023 102 74 176 (937) 262 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 2023 Expected cash flows (10.0% movement) Risk-adjusted discount rate (1.0% movement) 31 December 2022 Expected cash flows (10.0% movement) Risk-adjusted discount rate (1.0% movement) Profit or loss Increase £000 Decrease £000 2 – (2) – Profit or loss Increase £000 Decrease £000 29 5 (29) (3) Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 64 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 and Company’s financial risk management framework, see note 42. A. Group Credit risk For definition of credit risk and information on how credit risk is mitigated by the Group, see note 42. i. Credit quality analysis Loans and advances to customers Explanation of the terms ‘Stage 1’, ‘Stage 2’ and ‘Stage 3’ is included in note 44(G)(vi). An analysis of the credit risk on loans and advances to customers is as follows: 2023 2022* Group Grade A Grade B Grade C Stage 1 £000 341,953 – – Gross value 341,953 Stage 2 £000 Stage 3 £000 Total £000 Stage 1 £000 Stage 2 £000 Stage 3 £000 Total £000 – 7,822 2 7,824 – 341,953 273,332 3,700 28,791 32,491 11,522 28,793 – 391 382,268 273,723 – 5,006 – 5,006 – 273,332 9,347 19,576 28,923 14,353 19,967 307,652 Allowance for impairment (184) (6) (19,425) (19,615) (303) (3) (15,871) (16,177) Carrying value 341,769 7,818 13,066 362,653 273,420 5,003 13,052 291,475 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. The following table sets out information about the overdue status of loans and advances to customers in Stage 1, 2 and 3: Group 31 December Current Overdue < 30 days Overdue > 30 days Stage 1 £000 333,740 8,213 2023 2022* Stage 2 £000 Stage 3 £000 Total £000 Stage 1 £000 Stage 2 £000 Stage 3 £000 – – – – 333,740 269,130 8,213 4,593 – 604 – – Total £000 269,130 5,197 – 7,825 32,490 40,315 – 4,402 28,923 33,325 341,953 7,825 32,490 382,268 273,723 5,006 28,923 307,652 For Stage 3 loans and advances, the Bank holds collateral with a value of £13,410,000 (2022: £12,927,000) representing security cover of 35.0% (2022: 48.0%). * Please refer to Note 20. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued Debt securities, cash and cash equivalents The following table sets out the credit quality of liquid assets: Group Government bonds and treasury bills Rated A to A+ Cash and cash equivalents Rated A to A+ Trade and other receivables Unrated 65 2023 £000 2022 £000 76,129 40,675 12,107 22,630 8,227 96,463 4,211 67,516 The analysis has been based on Standard & Poor’s ratings. The above debt securities, cash and cash equivalents are considered to be Stage 1 as there is no evidence of significant deterioration in credit quality and hence no material expected credit loss allowance is observed. 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 Group will take debentures, mortgages, personal and corporate guarantees, fixed and floating charges on specific assets such as cash and shares. The terms of enforcing such security can only occur on default, and when realised can only be used to settle the amount of debt and related collection fees. On occasion the Bank may realise a surplus if the defaulting party loses title to the underlying security as part of enforcement. In addition, the commission share schemes have an element of capital indemnified. As at 31 December 2023, 13.0% of loans and advances had an element of capital indemnification (2022: 4.0%). 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. At the time of granting credit within the sub-categories listed above, the loan balances due are secured over the underlying assets held as collateral (see note 20 for further details). Collateral is valued at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. 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 2023 year-end, 28.0% had such credit enhancements (2022: 29.0%). Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 66 The following table sets out the principal types of collateral held against different types of financial assets. 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 Property secured 2023 % 100 100 - 100 100 100 100 100 2022 % Principal type of collateral held 100 100 Property and equipment Property and equipment - None 100 Motor vehicles 100 100 100 100 Floating charges over corporate assets Floating charges over corporate assets Floating charges over corporate assets Property 70 – 100 100 70 – 100 Government guarantee 100 Property There have been no significant changes in the quality of collateral as a result of a deterioration or changes to the Group’s collateral policies during the reporting period. iii. Amounts arising from ECL Inputs, assumptions and techniques used for estimating impairment See accounting policy in note 44(G)(vi). Significant increase in credit risk When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s historical experience and expert credit assessment and including forward looking information. • • 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. 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. Credit risk grades The Group allocates each exposure to a credit risk grade based on a variety of data that is determined to be predictive of the risk of default and applying experienced credit judgement. Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower. Credit risk grades are defined and calibrated such that the risk of default occurring increases exponentially as the credit risk grade deteriorates. 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 67 Each exposure is allocated to a credit risk grade on initial recognition based on available information about the borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade. The monitoring typically involves the use of the following data: Corporate exposures Retail exposures All exposures Information obtained during periodic review of customer files – e.g. audited financial statements, management accounts, budgets and projections. Examples of areas of particular focus are: gross profit margins, financial leverage ratios, debt service coverage, compliance with covenants Internally collected data on customer behaviour – e.g. repayment behaviour Payment record – this includes overdue status as well as a range of variables about payment ratios Data from credit reference agencies Affordability matrix Requests for and granting of forbearance External data from credit reference agencies, including industry-standard credit scores Existing forecast changes in business, financial and economic conditions Definition of default The Group considers a financial asset to be in default when: • • • the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); the borrower is more than 90 days past due on any material credit obligation to the Group; or it is becoming probable that the borrower will restructure the asset as a result of bankruptcy due to the borrower’s inability to pay its credit obligations. In assessing whether a borrower is in default, the Group considers indicators that are: • qualitative: e.g. breaches of covenant; • quantitative: e.g. overdue status and non-payment on another obligation of the same issuer to the Group; and • based on data developed internally and obtained from external sources. Inputs into the assessment of whether a financial instrument is in default and their significant may vary over time to reflect changes in circumstances. The definition of default largely aligns with that applied by the Group for regulatory capital purposes. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 68 Incorporation of forward-looking information The Group incorporates forward looking information into the measurement of ECL. The Group has identified and documented key drivers of credit risk and credit losses its financial instruments and using an analysis of historical data, has estimated the relationship between macroeconomic variables and credit risk and credit losses. The key drivers for credit risk for corporate, retail and wholesale portfolios include gross domestic product (GDP) growth, unemployment rates and consumer price index (CPI) inflation. The Group estimates each key driver for credit risk over the active forecast period of three years. The table below lists the UK macroeconomic assumption used in the base scenarios over the five year forecast period: 31 December 2023 GDP growth rate CPI inflation Unemployment rate 31 December 2022 GDP growth rate CPI inflation Unemployment rate 2024 0.5 4.2 4.8 2023 0.0 1.8 n/a 2025 1.0 2.4 4.9 2024 0.4 0.8 n/a 2026 1.3 1.8 4.9 2025 n/a n/a n/a 2027 1.5 2.0 4.9 2026 n/a n/a n/a 2028 1.7 2.0 5.0 2027 n/a n/a n/a Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analysing historical data over the past 8 years. Changes to ECL assumptions from the prior year As of 31 December 2023, the Group has updated its economic projections utilised in the expected credit loss calculation, shifting from the 2022 figures. This adjustment is prompted by a higher than anticipated inflation and GDP growth rate. Additionally, the forecast duration has been prolonged from two to five years, and an additional key indicator, unemployment rate, has been incorporated. 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 one introducer that accounted for more than 20.0% of the Bank’s total lending portfolio at the end of 31 December 2023 (2022: none). B. Group Liquidity risk For the definition of liquidity risk and information on how liquidity risk is managed by the Group, see note 42. 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 2023 23.0% 19.0% 23.0% 15.0% 2022 20.0% 22.0% 25.0% 19.0% Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 69 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 2023 Deposits Other liabilities Total liabilities 31 December 2022 Deposits Other liabilities Total liabilities Sight- 8 days £000 17,261 55 >8 days - 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Total £000 13,767 257 29,718 1,407 31,125 77,801 6,395 122,719 18,997 125,205 24,076 – 410,547 18,188 13,108 37,184 554 58,961 554 469,508 17,316 14,024 84,196 141,716 143,393 Sight- 8 days £000 10,878 691 >8 days - 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 6,838 27,346 65,153 104,662 116 1,796 3,717 13,196 >1 year - 3 years £000 81,670 22,354 >3 years - 5 years £000 14,557 6,697 11,569 6,954 29,142 68,870 117,858 104,024 21,254 >5 years £000 – 590 590 Total £000 311,104 49,157 360,261 The table below shows the carrying amount of the Group’s assets and liabilities by their expected maturities. Expected maturity of assets and liabilities at the reporting date: 31 December 2023 Assets Cash Debt securities Loans and advances Other assets Total assets Liabilities Deposits Other liabilities Total liabilities 31 December 2022 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 >5 years £000 Total £000 12,107 3,499 17,720 180 – 7,976 23,854 – – 28,275 41,805 – – 36,379 42,293 – – – – – – – – 12,107 76,129 54,800 131,666 49,445 1,070 362,653 – 9,580 – 5,057 14,999 29,816 33,506 31,830 70,080 78,672 64,380 131,666 54,502 16,069 480,705 16,884 12,750 27,084 – 100 1,000 74,397 5,800 118,029 118,434 18,421 16,160 16,884 12,850 28,084 80,197 136,450 134,594 22,843 12,265 35,108 – 390,421 554 554 54,300 444,721 Sight- 8 days £000 >8 days - 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Total £000 22,630 3,986 8,038 122 – 7,987 10,952 – – 20,785 27,913 – – 7,917 40,730 – – – – – 47,813 5,786 106,755 – 34,776 18,939 48,698 48,647 53,599 106,755 10,878 650 11,528 6,380 26,552 – 1,500 64,251 3,286 103,561 12,399 6,380 28,052 67,537 115,960 78,984 20,627 99,611 – – 46,176 5,140 51,316 13,593 6,240 19,833 – – 3,098 13,433 16,531 22,630 40,675 291,475 24,481 379,261 – 304,199 590 590 45,292 349,491 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 70 Company All the Company’s assets (excluding Investment in subsidiaries, Property, plant and equipment, Intangible assets, Investment in subsidiaries and Subordinated loans) are due within one year. The Subordinated loans are due in more than five years. All the Company’s creditors (excluding Loan notes) are due within one year. The maturity profile £12.3 million of loan notes are due within one year, £14.8 million within 3 years and £12.3 million within five years. 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 2023 Carrying amount £000 12,107 76,129 88,236 2023 Fair value £000 12,107 76,129 88,236 2022 Carrying amount £000 22,630 40,675 63,305 2022 Fair value £000 22,630 40,675 63,305 C. Group 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 42. The following table sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios: 31 December 2023 Assets subject to market risk Debt securities Equity held at Fair Value Through Profit or Loss Total 31 December 2022 Assets subject to market risk Debt securities Equity held at Fair Value Through Profit or Loss Total Market risk measure Trading portfolios £000 Non-trading portfolios £000 – – – 76,129 138 76,267 Market risk measure Trading portfolios £000 Non-trading portfolios £000 – – – 40,675 122 40,797 Carrying amount £000 76,129 138 76,267 Carrying amount £000 40,675 122 40,797 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 71 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. Sight- 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Debt securities 11,475 28,275 36,379 12,107 – – – – – – – – – – 41,574 41,805 42,293 54,800 131,666 49,445 1,070 – – – – – – – 29,816 29,816 65,156 70,080 78,672 54,800 131,666 49,445 1,070 29,816 480,705 29,634 27,084 74,397 118,029 118,434 22,843 100 – 1,000 5,800 5,370 16,160 12,265 – – – – – 29,734 28,084 80,197 123,399 134,594 35,108 – 162 – 162 – 390,421 13,443 35,984 54,300 35,984 49,427 480,705 35,422 41,996 (1,525) (68,599) (2,928) 14,337 908 (19,611) 35,422 77,418 75,893 7,294 4,366 18,703 19,611 – Sight- 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 22,630 – – Debt securities 11,973 20,785 7,917 – – – – – – – – 18,990 27,913 40,730 47,813 106,755 46,176 3,098 – – – – – – – 53,593 48,698 48,647 47,813 106,755 46,176 3,098 Non- Interest Bearing £000 Total £000 – – – 12,107 76,129 362,653 – – Total £000 22,630 40,675 291,475 24,481 379,261 Non- Interest Bearing £000 – – – 24,481 24,481 31 December 2023 Assets Cash & cash equivalents Loans and advances to customers Other assets Total assets Liabilities and equity Deposits from customers Other liabilities Total equity Total liabilities and equity Interest rate sensitivity gap Cumulative 31 December 2022 Assets Cash & cash equivalents Loans and advances to customers Other assets Total assets Liabilities and equity Deposits from customers Other liabilities Total equity Total liabilities and equity Interest rate sensitivity gap Cumulative 17,258 26,552 64,251 103,561 78,984 13,593 650 – 1,500 – 3,286 – 905 – 20,627 6,240 – – 17,908 28,052 67,537 104,466 99,611 19,833 – 237 – 237 – 304,199 11,847 29,770 45,292 29,770 41,617 379,261 35,685 20,646 (18,890) (56,653) 7,144 26,343 2,861 (17,136) 35,685 56,331 37,441 (19,212) (12,068) 14,275 17,136 – – – Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Non- Interest Bearing £000 (19,611) – – Non- Interest Bearing £000 Total £000 – – (46) Total £000 – – 1,082 Notes to the Consolidated and Company Financial Statements continued 72 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 (2022: 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 2023 Interest rate sensitivity gap Weighting Sight- 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 35,422 41,996 (1,525) (68,599) (2,928) 14,337 0.000 – 0.003 126 0.007 0.014 0.027 (11) (960) (79) 0.054 774 908 0.115 104 31 December 2022 Interest rate sensitivity gap Sight- 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 35,685 20,646 (18,890) (56,653) 7,144 26,343 2,861 (17,136) Weighting 0.000 0.003 0.007 – 62 (132) 0.014 (793) 0.027 193 0.054 1,423 0.115 329 – – D. Group Capital Management i. Regulatory capital MFG and its subsidiaries maintain sufficient capital stock to cover risks inherent in their principal operating activities. 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 maintains a capital base to meet the capital adequacy requirements of the FSA. There have been no changes to its approach to capital management from the prior year. 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 Bank’s Tier 1 and Total Capital regulatory ratios stood at 11.52% (2022: 12.20%) and 15.90% (2022: 15.10%) respectively as at 31 December 2023. The Bank complied with all capital requirements externally imposed on it in the year with minimum Tier 1 and Overall Capital ratio of 8.73% (2022: 8.50%) and 15.29% (2022: 14.00%) respectively. 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. Further details of the Bank’s management of capital are described in the Risk Management Report on page 16. 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 73 E. Company Financial Risk Review i. Credit risk The Company is exposed to credit risk primarily from deposits with banks and from its financing activities of Group entities. These balances include Trade and other receivables, Amounts due from Group undertakings, Investment in subsidiaries and Subordinated loans. Cash balances are held with institutions with a credit rating of A to A+. The Group’s primary credit exposure is to the Bank. The Investment in subsidiary and subordinated loan balance counterparties are disclosed in Notes 31 and 35 respectively. Amounts due from Group undertakings relate to balances advanced to the Group’s subsidiary (MVL) for the acquisition of other subsidiaries including PAL, BBSL, BLX and NRF. The Group manages its credit risk by ensuring that sufficient resources are allocated to credit management and capital allocation and using reputable financial institutions to hold its cash balances. ii. Liquidity risk The value and term of short term assets are monitored against those of the Company’s liabilities. The Company maintains sufficient liquid assets to meet liabilities as they fall due either by retaining Interest income from the Subordinated loan, Dividend income from subsidiary companies or raising funds through the issue of Loan notes. Amounts due to / from Group undertakings are unsecured, interest-free and repayable on demand. The capital on subordinated loan notes is repayable to the Company in more than 5 years. £12.3m (2022: £6.1m) of loan notes are repayable within one year. iii. Market risk The Company does not have exposure to foreign exchange risk as transactions are made in and balances held in Sterling. The Company has both interest-bearing assets and liabilities. In order to manage interest rate risk, the Companies Subordinated loans and Loan notes are charged exclusively at fixed rates. 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 (2022: three) 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 MFX Limited (provision of foreign currency transaction services). For the year ended 31 December 2023 Interest revenue calculated using the effective interest method Other interest income Interest expense Net interest income Components of Net Trading Income Net trading income Components of Operating Income Operating Income Depreciation Amortisation and impairment of intangibles Share of profit of equity accounted investees, net of tax All other expenses Profit / (loss) before tax payable Capital expenditure Total assets Total liabilities Asset and Personal Finance £000 45,356 1,535 (14,538) 32,353 (6,410) 25,943 2,450 28,393 (739) (545) – (20,294) 6,815 2,627 438,916 418,794 Edgewater Associates £000 MFX Limited £000 Investing Activities £000 – – – – 2,032 2,032 2 2,034 (22) (76) – (1,972) (36) 6 1,578 279 – – – – 1,048 1,048 – 1,048 (1) (5) – (364) 678 – 267 10 – – 8 8 – 8 – 8 (63) (57) – (302) (414) 895 39,944 25,638 Total £000 45,356 1,535 (14,530) 32,361 (3,330) 29,031 2,452 31,483 (825) (683) – (22,932) 7,043 3,528 480,705 444,721 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued For the year ended 31 December 2022 Interest revenue calculated using the effective interest method Other interest income Interest expense Net interest income Components of Net Trading Income Net trading income Components of Operating Income Operating Income Depreciation Amortisation and impairment of intangibles Share of profit of equity accounted investees, net of tax All other expenses Profit / (loss) before tax payable Capital expenditure Total assets Total liabilities Asset and Personal Finance £000 28,978 1,765 (6,391) 24,352 (2,696) 21,656 587 22,243 (640) (494) – (17,226) 3,883 1,794 332,689 316,921 Edgewater Associates £000 MFX Limited £000 Investing Activities £000 – – – – 2,096 2,096 – 2,096 (31) (81) – (1,943) 41 55 2,248 513 – – – – 1,734 1,734 – 1,734 (2) (5) – (314) 1,413 3 543 163 – – – – – – – (65) (2) 18 (77) (126) 1 43,781 31,894 74 Total £000 28,978 1,765 (6,391) 24,352 1,134 25,486 587 26,073 (738) (582) 18 (19,560) 5,211 1,853 379,261 349,491 Included in other expenses above is Goodwill impairment of £0.2 million relating to the Edgewater Associates segment (see note 34). All revenues are earned from the entity’s one geographic segment. All non-current assets are located in the entity’s one geographic segment. 9. Net interest income 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 2023 £000 45,356 45,356 1,535 46,891 (12,072) (2,361) (93) (4) (14,530) 32,361 2022 £000 28,978 28,978 1,765 30,743 (4,601) (1,610) (78) (102) (6,391) 24,352 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 75 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 44D regarding revenue recognition. Major service lines Independent financial advice income Foreign exchange trading income Asset and personal finance: Brokerage services income Debt collection Fee and commission income Fee and commission expense Net fee and commission income 2023 £000 2,032 1,049 421 495 3,997 (7,327) (3,330) 2022 £000 2,096 1,743 590 290 4,719 (3,569) 1,150 Fee and commission expense relates to commission paid to Brokerages which introduce new business to the Bank. 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 Equity Settled Restricted Stock Units – key management personnel Equity Settled Restricted Stock Units – employees Group 2023 £000 (9,060) (569) (259) (45) (99) (537) (1,134) (354) (67) (46) 2022 £000 (7,403) (507) (207) (41) (68) (397) (818) (305) (9) (9) Company 2023 £000 – – (62) – – – – – – 2022 £000 – – (127) – – – – – – The Company’s personnel expenses consist exclusively of Directors remuneration and fees for services rendered to the Company. (12,170) (9,764) (62) (127) Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 12. Other expenses Professional and legal fees Marketing costs IT costs Establishment costs Communication costs Travel costs Bank charges Insurance Irrecoverable VAT Other costs Impairment loss on goodwill (See Note 34) 76 2022 £000 (1,427) (363) (1,210) (366) (152) (297) (314) (333) (362) (782) (200) 2023 £000 (1,586) (452) (1,534) (635) (177) (319) (936) (338) (383) (267) – 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. (6,627) (5,806) Impairment allowances made Release of allowances previously made 2023 £000 (6,998) 2,837 (4,161) 2022 £000 (7,642) 3,612 (4,030) The credit 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 for allowances for impairment on financial assets managed on a collective basis 2023 £000 (656) 682 26 2022 £000 (244) 284 40 Total charge for allowances for impairment (4,135) (3,990) 14. Profit before tax payable The profit before tax payable for the year is stated after charging: Fees payable to the Company’s auditor for the audit of the Group’s financial statements Other fees payable to the Company’s auditor: Audit of the Company’s subsidiary undertakings Other assurance service fees Other services – tax compliance Pension cost defined benefit scheme Expenses relating to short-term leases and low value assets Group Company 2023 £000 (85) (4) (221) (10) (4) (11) (81) 2022 £000 (78) (11) (197) (6) (4) (14) (92) 2023 £000 (58) – – – – – – 2022 £000 (54) – – – – – – Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 15. Income tax expense Group Current tax expense Current year Deferred tax expense Origination and reversal of temporary differences Tax expense Group 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 Non deductible expenses Tax expense % (10.0) (5.9) 3.1 – (12.8) 2023 £000 7,043 (704) (416) 217 – (903) 77 2022 £000 (366) (366) (171) (537) 2022 £000 5,211 (521) 111 – (127) (537) 2023 £000 (899) (899) (4) (903) % (10.0) 2.1 – (2.4) (10.3) The main rate of corporation tax in the Isle of Man is 0.0% (2022: 0.0%). However, the profits of the Group’s Isle of Man banking activities are taxed at 10.0% (2022: 10.0%). The profits of the Group’s subsidiaries that are subject to UK corporation tax are taxed at a rate of 25.0% (2022: 19.0%). The Company is subject to 0.0% tax. The value of tax losses carried forward reduced to nil and there is now a temporary difference related to accelerated capital allowances resulting in a £392,000 liability (2022: £353,000 liability). This resulted in an expense of £171,000 (2022: £171,000) to the Consolidated Income Statement. 16. Earnings per share Profit for the year attributable to owners of the Company Weighted average number of Ordinary Shares in issue (basic) Basic earnings per share (pence) Diluted earnings per share (pence) 2023 2022 £5,288,000 115,330,589 4.59 3.51 £4,331,000 114,763,883 3.77 2.93 Total comprehensive income for the year attributable to owners of the Company £5,606,000 £4,869,000 Weighted average number of Ordinary Shares in issue (basic) 115,330,589 114,763,883 Basic earnings per share (pence) Diluted earnings per share (pence) 4.86 3.71 4.24 3.28 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 78 As at: 2023 2022 Reconciliation of weighted average number of Ordinary Shares in issue between basic and diluted 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 Weighted average number of Ordinary Shares (diluted) 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) 115,330,589 37,916,667 2,460,929 114,763,883 38,225,772 830,035 155,708,185 153,819,690 £5,288,000 £171,415 £4,331,000 £171,415 £5,459,415 £4,502,415 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: 2023 2022 Reconciliation of total comprehensive income for the year between basic and diluted Total comprehensive income for the year (basic) £5,606,000 £4,869,000 Interest expense saved if all convertible loan notes were exchanged for equity £171,415 £171,415 Total comprehensive income for the year (diluted) £5,777,415 £5,040,415 The weighted average number of ordinary shares and earnings per share have been adjusted retrospectively. 17. Cash and cash equivalents Cash at bank and in hand Fixed deposit (less than 90 days) Group Company 2023 £000 12,107 – 12,107 2022 £000 20,651 1,979 22,630 2023 £000 373 – 373 2022 £000 1,761 – 1,761 Cash at bank includes an amount of £1,653,000 (2022: £24,000) representing receipts which are in the course of transmission. 18. Debt securities Financial assets at fair value through other comprehensive income: UK Government treasury bills Group 2023 £000 76,129 76,129 2022 £000 40,675 40,675 Company 2023 £000 – – 2022 £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 gains of £1,893,000 (2022: £292,000) and unrealised gains of £324,000 (2022: £131,000) during the year. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 19. Financial assets Financial assets at FVOCI: (Loss) / gain on Deferred consideration (See note 6(ii)) Gain on equity instrument Group 2023 £000 179 16 195 2022 £000 (74) 55 (19) Company 2023 £000 – – – 79 2022 £000 – – – The Bank acquired a new equity instrument in the previous 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 Property secured 2023 2022 Gross Amount £000 Impairment Allowance £000 Carrying Value £000 Gross Amount £000 Impairment Allowance £000 Carrying Value £000 119,533 24,878 88,647 1,973 21,503 47,520 25,788 1,075 41,283 10,068 (4,143) (3,050) (10,833) – – – (516) – (1,073) – 115,390 21,828 77,814 1,973 21,503 47,520 25,272 1,075 40,210 10,068 87,142 21,513 49,689 1,918 30,904 46,294 12,753 1,867 55,572 – (4,093) (3,782) (7,236) – – – (595) (90) (381) – 83,049 17,731 42,453 1,918 30,904 46,294 12,158 1,777 55,191 – 382,268 (19,615) 362,653 307,652 (16,177) 291,475 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 Acquisition 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 2023 £000 15,962 – 6,998 (2,837) (697) 19,426 2023 £000 215 656 (682) 189 19,615 2022* £000 8,464 5,030 7,642 (3,612) (1,562) 15,962 2022 £000 255 244 (284) 215 16,177 * The gross value and impairment allowance as at 31 December 2022 has each been adjusted from £305,698k and £14,223k by £1,954,000 to appropriately reflect the gross value and impairment allowances of the loans and advances to customers. The adjustment did not have any impact on the carrying value of the loans and advances to customers nor of the statement of profit or loss or cash flows. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 80 The following table provides an explanation of how significant changes in the gross carrying amount of financial instruments during the period contributed to changes in loss allowance: Loans and advances to customers Acquisition of subsidiary Unsecured personal loans originated during the period 2023 £000 – 5,551 2022 £000 4,620 – The contractual amount outstanding on financial assets that were written off during the reporting period and are still subject to enforcement activity are £nil (2022: £nil). Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2023 £1,699,794 (2022: £1,228,334) 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 36). At the end of the current financial year 8 loan exposures (2022: 13) exceeded 10.0% of the capital base of the Bank: Exposure Block discounting facility Wholesale funding agreement HP and finance lease receivables Outstanding Balance 2023 £000 47,520 21,503 Outstanding Balance 2022 £000 68,209 34,975 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: Less than one year Between one and five years Net investment in HP and finance lease receivables 21. Trade and other receivables Other debtors Prepayments Group Company 2023 £000 7,730 497 8,227 2022 £000 3,380 831 4,211 2023 £000 – 123 123 2023 £000 72,372 72,039 144,411 2023 £000 68,767 68,451 137,218 Facility Limit 2023 £000 78,088 26,005 2022 £000 51,368 57,287 108,655 2022 £000 47,646 53,134 100,780 2022 £000 494 68 562 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 22. Property, plant and equipment and right-of-use assets Group Cost As at 1 January 2023 Additions Disposals As at 31 December 2023 Accumulated depreciation As at 1 January 2023 Charge for year Disposals As at 31 December 2023 Carrying value at 31 December 2023 Carrying value at 31 December 2022 Buildings and Leasehold Improvements £000 IT Equipment £000 Furniture and Equipment £000 Motor Vehicles1 £000 Right-of-use assets £000 745 93 – 838 443 40 – 483 355 302 603 127 – 730 456 97 – 553 177 147 5,739 941 (787) 5,893 1,160 427 (98) 1,489 4,404 4,579 196 119 (98) 217 85 39 (28) 96 121 111 1,960 – – 1,960 385 222 – 607 1,353 1,575 81 Total £000 9,243 1,280 (885) 9,638 2,529 825 (126) 3,228 6,410 6,714 1 Included in motor vehicles are operating leases with the Group as lessor. Depreciation on leasing assets was £nil (2022: £16,000). 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 2023 remains £175,000. The carrying amount that would have been recognised had the building been carried under the cost model would be £150,400 (2022: 153,600). Company Cost As at 1 January 2023 Additions As at 31 December 2023 Accumulated depreciation As at 1 January 2023 Charge for year As at 31 December 2023 Carrying value at 31 December 2023 Carrying value at 31 December 2022 Leasehold Improvements £000 IT Equipment £000 Furniture and Equipment £000 Right-of-use assets £000 234 – 234 234 – 234 – – 20 1 21 6 1 7 14 14 18 – 18 11 2 13 5 7 424 – 424 244 60 304 120 180 Total £000 696 1 697 495 63 558 139 201 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 23. Intangible assets Group Cost As at 1 January 2023 Additions As at 31 December 2023 Accumulated amortisation As at 1 January 2023 Charge for year As at 31 December 2023 Carrying value at 31 December 2023 Carrying value at 31 December 2022 Company Cost As at 1 January 2023 Additions As at 31 December 2023 Accumulated amortisation As at 1 January 2023 Charge for year As at 31 December 2023 Carrying value at 31 December 2023 Carrying value at 31 December 2022 24. Deposits from customers Retail customers: term deposits Corporate customers: term deposits Customer Contracts £000 Intellectual Property Rights £000 IT Software and Website Development £000 2,930 7 2,937 1,161 214 1,375 1,562 1,769 1,245 757 2,002 523 218 741 1,261 722 2,549 1,484 4,033 2,337 251 2,588 1,445 212 IT Software and Website Development £000 31 893 924 6 57 63 861 25 2023 £000 377,899 12,522 390,421 25. Creditors and accrued charges Other creditors and accruals Commission creditors Lease liability Taxation creditors Group Company 2023 £000 12,623 174 1,358 254 14,409 2022 £000 10,096 1,398 1,614 – 13,108 2023 £000 453 – 91 – 544 82 Total £000 6,724 2,248 8,972 4,021 683 4,704 4,268 2,703 Total £000 31 893 924 6 57 63 861 25 2022 £000 291,238 12,961 304,199 2022 £000 232 – 208 – 440 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 83 26. Deferred consideration Deferred consideration relates to contingent payments due to the sellers on the acquisition of BBSL and BLX respectively. On the acquisition of BLX on 11 October 2021, the Group agreed that a further conditional consideration of up to £483,663 is payable to the sellers in addition to the cash consideration paid. The total amount payable is contingent on the recovery of certain loans and advances found to be in default at acquisition. The fair value on acquisition date was determined to be £387,000. The Group made a payment of £67,000 (2022: £156,093) to the sellers during the period. BLX 27. Loan notes Related parties J Mellon Burnbrae Limited Culminant Reinsurance Ltd Unrelated parties Notes JM BL CR UP Group 2023 £000 1,750 3,200 1,000 5,950 33,367 39,317 2022 £000 1,750 3,200 1,000 5,950 25,382 31,332 2023 £000 20 20 Company 2023 £000 1,750 3,200 1,000 5,950 33,367 39,317 2022 £000 262 262 2022 £000 1,750 3,200 1,000 5,950 25,382 31,332 JM - Two loans, one loan of £1,250,000 maturing on 26 February 2025 with interest payable of 5.4% per annum, convertible to ordinary shares of the Company at a rate of 9.0 pence, one of £500,000 maturing on 31 July 2027, paying interest of 7.5% per annum and convertible to ordinary shares of the Company at a rate of 8.0 pence. BL - Three loans, one of £1,200,000 maturing on 31 July 2027, paying interest of 7.5% per annum, convertible to ordinary shares of the Company at a rate of 8.0 pence, one of £1,000,000 maturing 25 February 2025, paying interest of 5.4% per annum, and one of £1,000,000 maturing 28 September 2025 paying interest of 6.0% per annum. Jim Mellon is the beneficial owner of BL and Denham Eke is also a director. CR - One loan consisting of £1,000,000 maturing on 12 October 2025, paying interest of 6.0% per annum. Greg Bailey, a director, is the beneficial owner of CR. UP – Forty loans (2022: Forty), the earliest maturity date is 22 January 2024 and the latest maturity is 10 October 2028. The average interest payable is 5.87% (2022: 5.52%). 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. 28. 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 84 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. 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 analysis 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. Exposure to risk 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 2023 (2022: none). Funding policy The funding method employed to calculate the value of previously accrued benefits is the Projected Unit Method. Following the cessation of accrual of benefits when the last active member left service in 2011, regular future service contributions to the Scheme are no longer required. However, additional contributions will still be required to cover any shortfalls that might arise following each funding valuation. The most recent triennial full actuarial valuation was carried out at 31 March 2022, 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 2023. 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 2023 £000 1,359 (1,521) (162) 2022 £000 1,289 (1,526) (237) Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 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 Liability for defined benefit obligations at 31 December Movement in plan assets Opening fair value of plan assets at 1 January Interest on plan assets Contribution by employer Return on plan assets Benefits paid Closing fair value of plan assets at 31 December Expense recognised in income statement Net interest cost recognised in the statement of profit and loss Actuarial gain / (loss) recognised in other comprehensive income Return on plan assets Actuarial gain on defined benefit obligations 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 85 2022 £000 2,230 (75) 44 (673) 1,526 2022 £000 1,543 30 57 (266) (75) 1,289 2022 £000 14 2022 £000 (266) 673 407 2022 % 61 13 21 2 3 100 2022 % – 3.1 2.1 5.0 5.0 3.2 2023 £000 1,526 (77) 74 (2) 1,521 2023 £000 1,289 63 57 27 (77) 1,359 2023 £000 11 2023 £000 27 2 29 2023 % 45 20 28 2 5 100 2023 % – 3.1 2.1 5.0 5.0 3.2 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued Life expectancy Current pensioner aged 65 (male) Current pensioner aged 65 (female) Future pensioner aged 65 in 10 years (male) Future pensioner aged 65 in 10 years (female) 86 2022 % 21.6 23.9 22.1 24.7 2023 % 21.3 23.8 21.8 24.5 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. Sensitivity analysis Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below. 2023 2022 Increase Decrease Increase Decrease (76) 20 58 84 (18) (58) (79) 18 53 87 (20) (55) Effect in £’000 Discount rate (0.5% movement) Inflation rate (0.5% movement) Life expectancy (1 year movement) 29. Called up share capital Ordinary shares of no par value available for issue At 31 December 2023 At 31 December 2022 Issued and fully paid: Ordinary shares of no par value At 31 December 2023 At 31 December 2022 Number 200,200,000 200,200,000 Number 116,191,936 115,072,988 £000 19,384 19,195 2022 £000 43,113 7,659 - 62 - (99) 50,735 A. Analysis of changes in financing during the year Group Company Balance at 1 January Issue of loan notes Issue of lease liability Issue of shares via scrip dividend Issue of shares Payment of lease liabilities Balance at 31 December 2023 £000 52,141 7,985 – 91 98 (256) 60,059 2022 £000 44,100 7,660 521 62 – (202) 52,141 2023 £000 50,735 7,985 - 91 98 (117) 58,792 The 2023 Group closing balance is represented by £19,384,000 share capital (2022: £19,195,000), £39,317,000 of loan notes (2022: £31,332,000) and £1,358,000 lease liability (2022: £1,614,000). The 2023 Company closing balance is represented by £19,384,000 share capital (2022: £19,195,000), £39,317,000 of loan notes (2022: £31,332,000) and £91,000 lease liability (2022: £208,000). B. Dividends On 30 May 2023, MFG declared a dividend of £433,000 (2022: £279,000) which could either be taken up in cash or new ordinary shares of 418,993 new shares (2022: 781,349 new shares) were admitted to the Alternative Investment Market (“AIM”) at 21.8974 pence per share (2022: 8.0205 pence per share), at a total cost of £91,000 (2022: £62,000). C. Convertible loans There are three convertible loans totalling £2,950,000 (2022: £2,950,000) (refer to note 27). Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 87 D. Share options and Restricted Stock Units i. Issued during the financial year ended 31 December 2023 On 5 July 2022, 27 October 2022 and 29 November 2023 MFG granted Restricted Stock Units (“RSUs”) under its 2022 RSU Plan. The Group has issued, in total, RSUs over 4,687,500 ordinary shares representing 4.1% of the issued share capital of the Group, including 2,900,000 to certain directors and 1,787,500 to certain employees. The RSUs will have a 2-year term and are subject to certain vesting conditions based upon an overall growth in profitability. Any RSUs granted will fall away should the recipient leave employment before the 2-year term expires. Should the individual vesting conditions be satisfied at the end of the term, the stock will be exercised at nil cost. The Group directors who received RSUs are as follows: • • Douglas Grant, Group Chief Executive Officer was issued 1,925,000 RSUs. Including the 1,243,129 Ordinary Shares in the Company he currently owns, he would hold a total of 3,168,129 on a fully diluted basis, being 2.0% of the new issued share capital of the Company; and James Smeed, Group Finance Director, was issued 475,000 RSUs. On the same basis, he would hold 0.3% of the new issued share capital of the Company. The terms and conditions of the grants are as follows: and will be settled by the physical delivery of shares. Grant date/employees entitled Number of Units Contractual life of options RSUs granted to key employees at 5 July 2022 RSUs granted to directors at 5 July 2022 RSUs granted to key employees at 27 October 2022 RSUs granted to directors at 27 October 2022 RSUs granted to directors and key employees at 29 November 2023 Total RSUs Lapsed RSUs Remaining RSUs 1,020,000 1,100,000 165,000 150,000 2,252,500 4,687,500 (135,000) 4,552,500 2 years 2 years 2 years 2 years 2 years The fair value of employee services received in return for restricted stock units granted is based on the fair value of them measured using the Black-Scholes formula. Service related and non-market performance conditions were not taken into account in measuring fair value. The inputs used in measuring the fair values at the grant of the equity-settled restricted stock unit payment plans were as follows. Fair value of restricted stock units and assumptions Share price at grant date Exercise price Expected volatility * ^ Expected life (weighted average) Risk-free interest rate (based on government bonds) * ^ Forfeiture rate Fair value at grant date ^ Based on past 3 years * Annual rates Grant at 5 July 2022 Grant at 27 October 2022 Grant at 29 November 2023 8.5 pence 14.0 pence 17.5 pence nil 55.14% 2 years 1.65% 0.00% nil 107.71% 2 years 3.15% 0.00% nil 638.12% 2 years 4.43% 0.00% 8.5 pence 14.0 pence 17.5 pence The expected volatility is based on both historical average share price volatility and implied volatility derived from traded options over the group’s ordinary shares of maturity similar to those of the employee options. The charge for the year for share options granted was £113,000 (2022: £18,000). ii. Issued during the financial year ended 31 December 2014 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 per share. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 88 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, with the condition of three-years continuous employment being met. Of the 1,750,000 share options issued, 350,000 (31 December 2022: 1,050,000) remain outstanding. 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: On 30 November 2023, Douglas Grant, Chief Executive Officer, exercised options over 700,000 ordinary shares of no par value (“New Ordinary Shares”) in the Company (the “Options”), at an exercise price of 14 pence per New Ordinary Share, for an aggregate consideration of £98,000. 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 30. List of associates Set out below is a list of associates of the Group: Payitmonthly Ltd (“PIML”) Lesley Stephen & Co Limited (“LSC”) 23 June 2014 £0.08 £0.14 £0.14 55.0% 3 0.5% 33.3% Group 2022 £000 155 – 155 Group 2023 £000 155 42 197 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 £nil (2022: £18,000). As part of the Bank providing loan finance to LSC, on 29 June 2023 the Group acquired 10% of its issued share capital for nil consideration. The receipt of the issued share capital is considered to be linked to the loan facilities financed and therefore its term and interest rate implicit in the finance agreement have been used as the basis to discount the fair value of the gratis shares issued. The Group possesses the capacity to engage in policy-making processes within LSC through its right to designate an individual to attend all board meetings as an observer. Via its representative, the Group also holds the ability to introduce topics for discussion on the agenda, although it doesn’t have voting rights in this regard. Moreover, the Group has introduced constraints on LSC’s board, effectively preventing specified significant actions from being taken without the Group’s consent. The fair value of the financial instrument received has been determined as £42,000 at initial recognition based on the proportionate share of the net asset value of LSC. As part of the transaction, the Group has been granted two warrants to acquire further shares. The first warrant is for 10% of the share capital and the second warrant is for a further 10% of the share capital. The two warrants are exercisable dependent upon the profit before tax achieved by LSC relative to target profit before tax for the relevant financial period. The fair value of the two warrants has been determined to be nil due to the significant uncertainty that exists at acquisition date of achieving such targets. For these reasons the financial instrument is accounted for as an Associate in accordance with IAS 28. The Group’s resulting share of the associate’s total comprehensive income during the year was £nil (2022: £nil). Moreover, the Group has introduced constraints on LSC’s board, effectively preventing specified significant actions from being taken without the Group’s consent. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 89 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 provisionally determined as £42,000 at initial recognition based on the proportionate share of the net asset value of LSC. As part of the transaction, the Group has been granted two warrants to acquire further shares. The first warrant is for 10% of the share capital and the second warrant is for a further 10% of the share capital. The two warrants are exercisable dependent upon the profit before tax achieved by LSC relative to target profit before tax for the relevant financial period. The fair value of the two warrants has been determined to be nil due to the significant uncertainty that exists at acquisition date of achieving such targets. For these reasons the financial instrument is accounted for as an Associate in accordance with IAS 28. 31. List of subsidiaries Set out below is a list of direct subsidiaries of the Group: Carrying value of investments Nature of Business Conister Bank Limited Asset and Personal Finance Edgewater Associates Limited Wealth Management TransSend Holdings Limited Holding Company Manx Ventures Limited Holding Company 31 December 2022 % Holding 100 100 100 100 Date of Incorporation 05/12/1935 24/12/1996 05/11/2007 15/05/2009 All subsidiaries are incorporated in the Isle of Man. Set out below is a list of indirect significant subsidiaries of the Group: 2023 £000 26,092 2,005 – – 2022 £000 21,592 2,005 – – 28,097 23,597 Carrying value of investments Conister Finance & Leasing Limited MFX Limited Payment Assist Limited Blue Star Leasing Limited Ninkasi Rentals & Finance Limited The Business Lending Exchange Limited Principal place of business Country of incorporation Ownership interest UK IOM UK UK UK UK IOM IOM UK UK UK UK 100.0% 100.0% 50.1% 100.0% 90.0% 100.0% Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 90 32. Non-controlling interests in subsidiaries The following table summarises the information about the Group’s subsidiaries that have material NCI, before any intra-group eliminations. 31 December 2023 £000 NCI percentage Cash and cash equivalents Loans and advances to customers Trade and other receivables Property, plant and equipment Intangible assets Loans and borrowings Creditors and accrued charges Deferred tax Net assets Carrying amount of NCI Revenue Profit OCI Total comprehensive income Profit allocated to NCI OCI allocated to NCI Operating activities cashflows Investing activities cashflows Financing activities cashflows Net (decrease) / increase in cashflows 31 December 2022 £’000 NCI percentage Cash and cash equivalents Loans and advances to customers Trade and other receivables Property, plant and equipment Intangible assets Loans and borrowings Creditors and accrued charges Deferred tax Net assets Carrying amount of NCI Revenue Profit OCI Total comprehensive income Profit allocated to NCI OCI allocated to NCI Operating activities cashflows Investing activities cashflows Financing activities cashflows Net increase / (decrease) in cashflows PAL 49.9% 1,249 15,965 1,013 – 380 (4,036) (12,593) – 1,978 987 10,822 1,700 – 1,700 848 – 973 (185) (2,122) (1,334) PAL 49.9% 2,584 9,818 1,116 15 251 (3,089) (10,416) – 279 140 3,407 645 – 645 322 – 585 124 – 709 NRF 10% 369 – 1,133 4,275 23 (145) (4,884) (232) 539 54 1,478 42 – 42 4 – 339 (151) – 188 NRF 10% 219 - 941 4,507 27 (4,355) (628) (217) 494 49 1,660 207 – 207 21 – 87 (158) (12) (83) Total 1,041 852 – Total 189 343 – Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 91 33. Financial Instruments Rivers Finance Group PLC (“RFG”) 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 £138,000 (2022: £122,000) 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 PAL (see below) EAL BLX BBSL NRFL Manx Collections Limited (“MCL”) Three Spires Insurance Services Limited (“Three Spires”) Group 2023 £000 4,456 1,649 1,908 1,390 678 454 41 Group 2022 £000 4,456 1,649 1,908 1,390 678 454 41 10,576 10,576 Company 2023 £000 Company 2022 £000 – – – – – – – – – – – – – – – – Management has determined that a reasonably possible change in the key assumptions would not result in the carrying amount to exceed the recoverable amount of the following CGU’s and accordingly no impairment of goodwill. Payment Assist Limited (“PAL”) On 16 May 2022, the Group (through MVL) announced that it entered into an agreement to acquire 50.1% of the shares and voting interests in UK focused, point of sale lender PAL for a total consideration of £4.244 million payable in cash. The acquisition was completed in September 2022. In addition to the acquisition, MVL has agreed an option to acquire the remaining 49.9% of Payment Assist for a variable cash consideration of 2 times the average net profit per share at the point of exercise, subject to a maximum of £5 million (the “Option”). The Option can be exercised by MVL at any time for the period until PAL has declared a dividend for the financial year ended 31 December 2026. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 92 General 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 goodwill generated on the purchase of PAL is based on 10-year forecasted cash flow projections and then discounted using a 14.2% (2022: 14.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0% on single interest income growth rates. The estimated recoverable amount in relation to the EAL CGU (including also goodwill generated on acquisition of EAL) is based on 10-year forecasted cash flow projections using a 2.0% annual increment, and then discounted using a 13.9% (2022: 14.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on stable profit levels. An impairment loss on EAL goodwill of £200,000 has been recognised in the prior year. The estimated recoverable amount in relation to the goodwill generated on the purchase of BLX is based on 10-year forecasted cash flow projections using a 0% annual increment and then discounted using a 14.2% (2022: 14.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0% on single interest income growth rates. The estimated recoverable amount in relation to the goodwill generated on the purchase of BBSL is based on 10-year forecasted cash flow projections using a 2% annual increment with a terminal value calculated using a 2.0% growth rate of net income and then discounted using a 14.2% (2022: 14.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0% on single interest income growth rates. The estimated recoverable amount in relation to the goodwill generated on the purchase of NRFL is based on 10-year forecasted cash flow projections using a 0% annual increment, and then discounted using a 14.2% (2022: 12.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0%. On the basis of the above reviews no impairment to goodwill has been made in the current year. The estimated recoverable amount in relation to the goodwill generated on the purchase of MCL is based on 10-year forecasted cash flow projection using a 2.0% annual increment, and then discounted using a 14.2% (2022: 11.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors up to 20.0%. 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 no impairment to goodwill has been made in the current year. 35. Loans and amounts due from Group undertakings Amounts due from and to Group undertakings Amounts due from and to Group undertakings relate to intra-group transactions and are unsecured, interest-free and repayable on demand. The amounts will be settled either through cash or net settlement. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued Subordinated loans MFG has issued several subordinated loans as part of its equity funding into the Bank and EAL. Creation 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 23 March 2023 Edgewater Associates Limited 21 February 2017 14 May 2017 Maturity 11 February 2034 27 May 2034 9 July 2034 17 September 2026 22 July 2033 22 October 2033 23 September 2036 14 June 2037 12 June 2038 23 March 2043 21 February 2027 14 May 2027 Interest rate % p.a. 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 2023 £000 500 500 500 400 1,000 1,000 1,100 450 2,000 6,500 150 128 14,228 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 £4,502 (2022: £94,475), at normal commercial interest rates in accordance with the standard rates offered by the Bank. Key management remuneration including Executive Directors Remuneration – executive Directors Remuneration – non-executive Directors Performance Related Pay Pension Equity Settled Restricted Stock Units (see note 11) 2023 £000 569 259 99 45 67 1,039 93 2022 £000 500 500 500 400 1,000 1,000 1,100 450 2,000 – 150 128 7,728 2022 £000 516 172 68 41 9 806 Employment benefits include gross salaries, performance related pay, employer defined contributions and restricted stock units (See note 29D). At 31 December 2023, Douglas Grant had three amortising loans outstanding to Conister Bank Limited with capital outstanding of £315,524 (2022: £376,163). The maximum original term of the three loans is 61 months and the average interest is 2.57% (2022: 7.0%). James Smeed had an amortising loan outstanding to Conister Bank with capital outstanding of £10,847 (2022: £15,463). The original term of the loan is 49 months and the average interest is 3.01% (2022: 3.01%). No impairment is held in respect of these amounts. 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 94 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. At 31 December 2023, £2,677,000 (2022: £1,241,000) had been advanced to PIML. No impairment is held in respect of these amounts. This loan facility is repayable in cash. Loan advance to Lesley Stephen & Co Limited (“LSC”) A total £10 million loan facility is available to LSC to provide the finance required to expand its operations. Interest is charged at commercial rates. At 31 December 2023, £10 million had been advanced to LSC. As part of a finance arrangement between the Bank and LSC, Manx Ventures Limited (“MVL”) (a related entity) acquired a 10% shareholding in RFG. This loan facility is repayable in cash. Subordinated loans The Company has advanced £13,950,000 (2022: £7,450,000) of subordinated loans to the Bank and £278,000 (2022: £278,000) to EAL as at 31 December 2023. See note 35 for more details. 37. Leases A. Leases as lessee The Group leases the head office building in the Isle of Man. The lease’s term is 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 2023 Acquisition of subsidiary Additions As at 31 December 2023 Accumulated depreciation As at 1 January 2023 Charge for the year Eliminated on disposals As at 31 December 2023 Carrying value at 31 December 2023 Carrying value at 31 December 2022 For company only right of use asset disclosure, refer to note 22. Land and Buildings £000 1,960 – – 1,960 385 222 – 607 1,353 1,575 Total £000 1,960 – – 1,960 385 222 – 607 1,353 1,575 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued ii. Amounts recognised in profit or loss Group Company Interest on lease liabilities Depreciation expense Expenses relating to short-term leases and low- value assets iii. Amounts recognised in statement of cash flows Interest paid Capital paid Total cash outflow for leases 38. Regulators 2023 £000 93 222 81 Group 2023 £000 93 256 349 2022 £000 78 180 92 2022 £000 78 202 280 2023 £000 – 60 – Company 2023 £000 – 117 117 95 2022 £000 – 63 – 2022 £000 – 99 99 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 is also regulated by the UK’s Prudential Regulatory Authority (“PRA”) and the UK’s Financial Conduct Authority (“FCA”). 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. The possibility of an outflow of resources embodying economic benefits for all other contingent liabilities of the Group are considered remote and thus do not require separate disclosure. 40. Non-IFRS measures Non-IFRS measures included in the financial statements include the following: Measure Description Net trading income Operating income Net trading income represents net interest income and contributions from non-interest income activities. Operating income represents net trading income other operating income and gains or losses on financial instruments 41. Subsequent events There were no subsequent events occurring after 31 December 2023. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 96 Notes to the Consolidated and Company Financial Statements continued 42. 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 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: • • • initial approval, regular validation and back-testing of the models used; determining and monitoring significant increase in credit risk; and the incorporation of forward-looking information; and Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 97 • 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; 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 of 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 98 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. 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; Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 99 Notes to the Consolidated and Company Financial Statements continued • • • • • Development of contingency plans; Training and professional development; Ethical and business standards; Information technology and cyber risks; and Risk mitigation, including insurance where this is cost-effective. 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. 43. 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 Land and buildings Deferred consideration Fair value Fair value Fair value Fair value Net defined benefit liability Fair value of plan assets less the present value of the defined benefit obligation 44. Material accounting policies There were no new standards, amendments or interpretations issued and made effective during the current year which have had a material impact on the Group. The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2023: • • • Definition of Accounting Estimates – Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors Disclosure Initiative: Accounting Policies – Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction – Amendments to IAS 12 Income Taxes No significant changes followed the implementation of these standards and amendments. The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective. New standards and amendments to standards, adopted but not yet effective with an initial application of 1 January 2024: • Amendments to IAS 12 – International Tax Reform – Pillar Two Model Rules • • • • • Lease Liability in a Sale and Leaseback – Amendments to IFRS 16 Leases Classification of liabilities as Current or Non-Current and Non-current Liabilities with Covenants – Amendments to IAS 1 Presentation of Financial Statements Amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures – Supplier Finance Arrangements IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information IFRS S2 Climate-related Disclosures Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 100 The Group has assessed the impact of these amendments and expects they will not have a material impact, when adopted, on the Group 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 material 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. 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 Employee benefits Share capital and reserves Earnings per share (“EPS”) Segmental reporting No. 100 101 101 101 102 103 104 108 108 108 109 109 110 111 111 111 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. Any contingent consideration is measured at fair value at the date of acquisition. Contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 101 iv. 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. v. 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 less impairment. 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 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. 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 net carrying amount 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 102 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 reporting 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 conveys 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, 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. 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 103 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 temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 104 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. Financial liabilities The Group classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 105 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. 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. 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. v. 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. 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 106 vi. 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 arrangement, 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 a lifetime basis. 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’. 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 Group has identified and documented key drivers of credit risk and credit losses its financial instruments and using an analysis of historical data, has estimated the relationship between macroeconomic variables and credit risk and credit losses; The ECL is derived by reviewing the Group’s loss rate and loss given default over the past 8 years by product and geographical segment; 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 107 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 another type of 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 assessing 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. 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 Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 108 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 44 (G)). 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 44 (E)). 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. Buildings are carried at a revalued amount, being fair value at the date of revaluation less subsequent depreciation and impairment and are revalued annually. If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss. If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus. 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 to expiration of the lease IT equipment Motor vehicles Furniture and equipment Plant and machinery 4 - 5 years 2 - 5 years 4 - 10 years 5 - 20 years Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 109 K. Intangible assets and goodwill i. Goodwill Goodwill that arises on the acquisition of subsidiaries is measured at cost less accumulated impairment losses. 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 with indefinite useful lives that are acquired or built are carried at cost less accumulated impairment losses. 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 to expiration of the agreement Intellectual property rights Website development costs IT Software and website development costs 4 years - indefinite indefinite 5 years Included in intellectual property rights is capitalised costs for acquiring a UK Banking licence. The banking licence is assumed to have an indefinite life as there is no foreseeable limit to the period over which the asset is expected to generate benefits for the business. Costs related to obtaining this asset are held at cost and are not being amortised. 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 and indefinite useful life intangible assets are 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 110 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. M. 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. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in profit or loss. 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 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Notes to the Consolidated and Company Financial Statements continued 111 N. 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. O. 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. P. 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. Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Shareholder Notes 112 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 113 Appendix: Glossary of terms ALCO ARCC BBSL BL BLX Bank Assets and Liabilities Committee Audit, Risk and Compliance Committee Blue Star Business Solutions Limited Burnbrae Limited The Business Lending Exchange Limited Conister Bank Limited Bank’s Board The Bank’s Board of Directors BOE BSL CEO CET1 CFL CGU CODM Company EAL ECF ECL ESG EPS FCA Bank of England 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 Fraud risks Risk of Material Misstatement Due to Fraud FSA FVOCI FVTPL Group HP IAS ICAAP ICG IFA IFRIC IFRS Interim financial statements IOM ISA 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 Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Appendix: Glossary of terms continued 114 JM LSE MBL MCL MFG MFX MFX.L MVL NEC NOMCO NRFL OCI PAL PIML QCA REMCO RFG RMF SBA Scheme SICR SPPI SR 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 Payment Assist Limited 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 Subsidiaries MFG’s subsidiaries being Bank, BBSL, BLX, CFL, ECF, EAL, MFX, MVL, NRFL TCF Treating Customers Fairly Three Spires Three Spires Insurance Services Limited UK UP United Kingdom Unrelated parties Financial Statements | Manx Financial Group PLC | Annual Financial Statements 2023 Clarendon House Victoria Street Douglas Isle of Man IM1 2LN Tel: (01624) 694694 Fax: (01624) 624278 www.mfg.im
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