Izola Bank p.l.c.

Annual Report

and

Financial Statements

2021

Company Registration Number: C 16343

Izola Bank p.l.c.

Annual Report 2021

Contents

Directors’ and Other Statutory Reports

Financial Statements

Independent Auditor’s Report

Appendices

Izola Bank p.l.c.

Directors’ and

Other Statutory Reports

2021

Izola Bank p.l.c.

Page

Chairperson’s Statement i

Directors’ Report iii

Directors’ Statement of Compliance with the Code of Principles

of Good Corporate Governance vii

Report of the Remuneration and Nomination Committee xvi

Independent Auditors’ Report - Report required by Capital Markets Rule 5.98

issued by the Malta Financial Services Authority

Izola Bank p.l.c.

Chairperson’s Statement

For the Year Ended 31 December 2021

2021 has undoubtedly been another challenging year with the global economy still coming to terms with

the unprecedented shocks experienced since the outbreak of the Covid-19 pandemic and the ongoing

economic uncertainty brought about by such an event.

At Izola Bank, we continued to focus on being of support to our customers, especially those directly

impacted by the pandemic, in order to help safeguard the viability of their businesses and those dependant

on them. Nevertheless, the Bank remained forward looking and carried on investing strongly in systems and

people to further strengthen its ability to continue growing its business in the years to come.

Bank Performance

During the year ended 31 December 2021, despite the ongoing pandemic and the prevailing negative

interest environment, the Bank managed to generate growth in its revenue streams, increasing its net

interest income by 11% over 2020 levels. Net interest income, which is a key indicator of the Bank’s business

performance, grew by €626,650 compared to the previous year.

Coupled with growth in other operating income, this increase more than offset the rise in expenditure,

resulting in a profit before tax for the year of €820,157; an increase of 36% on 2020. Profit after tax was

€447,981, up 16% compared to the previous year.

The Bank’s Cost-to-Income ratio decreased to 82% (2020: 87%), primarily as a result of the impact of an

increase in overall operating income. This ratio remained relatively elevated due to ongoing investment in

technology, human resources and compliance.

The total assets of the Bank increased by 3.3% to €402,420,451, mainly driven by an expansion in the loan

and treasury portfolios. Factored receivables, a key component of the Bank’s business, declined marginally

by 4%. This decline was mainly driven by a reduction in the repayment cycle of receivables which, ultimately,

results in improved credit quality.

As of 31 December 2021, the Bank remained well capitalised and liquid with the Capital Adequacy Ratio

(CAR) standing at 16.5% and a Liquidity Cover Ratio (LCR) of 1,320%, significantly above European banking

sector norms.

Regulatory Environment

In 2021 the Bank continued strengthening the compliance and risk management functions and remains

committed to monitor all upcoming relevant regulatory developments to ensure full compliance with its

legal and regulatory obligations. The Bank also welcomes the Malta Financial Services Authority’s proactive

approach to supervision and looks forward to more dialogue with the Authority to ensure timely guidance.

Izola Bank p.l.c.

Chairperson’s Statement

For the Year Ended 31 December 2021

The Board

Following a significant increase in the number of meetings of the Board and its Committees in 2020 held for

members to maintain focus on unfolding developments and take appropriate actions as necessary, the

overall number of meetings was reduced in 2021 but still remained at substantially higher levels than in pre-

Covid times. In this regard, I would like to convey my gratitude to my fellow board members for their

unwavering support during this exceptional period.

Solidarity with the community

The Bank strongly believes in taking an active role in society by investing in community-based organisations

that directly address pressing issues within the country. Starting in 2017, the Bank partnered with Foodbank

Lifeline Foundation, a registered NGO which provides short-term emergency food packs to people in

desperate need, regardless of race, religion and gender, until they find a path to stability.

In 2021, Izola Bank continued its support, both financially and in practical terms, to meet the increasing

demand for Foodbank Lifeline’s services which became even more relevant this year. Our ambition is to

continue helping Foodbank Lifeline not only ease hunger in Malta, but also to significantly reduce food

waste and carbon emissions.

Looking ahead

The Bank is committed to its long-term plans to continue seeking further growth in its factoring operations,

and lending activity by further exploring promising niche lending opportunities.

The lingering effects of the pandemic, and more recent geo-political developments, create significant

uncertainty and have adversely impacted global commercial activities. The quantum of this ongoing impact

on economic and market conditions and the shape and speed of an eventual recovery warrant that we

approach the future with vigilance.

Conclusion

On behalf of the Board, I would like to thank our customers for their continued loyalty and support. Finally,

I would like to express my thanks to the management team and all staff members for their hard work and

unfaltering commitment to the Bank.

Ms. Magdalena De Roeck

Chairperson/Director

Izola Bank p.l.c.

24 March 2022

Izola Bank p.l.c.

iii

Directors’ Report

For the Year Ended 31 December 2021

The directors have prepared this report for Izola Bank p.l.c ("the Bank") in accordance with Article 177 of

the Companies Act 1995 (Chapter 386, Laws of Malta) ("the Act") including the further provisions as set out

in the sixth schedule of the Act, together with the financial statements of the Bank for the year ended 31

December 2021.

Board of directors

The directors who served throughout the year were as follows:

Ms. Magdalena De Roeck (Chairperson)

Ms. Caroline Van Marcke

Mr. Simon Azzopardi (i)

Mr. Joseph C. Caruana (i)

Mr. Francis Gouder (i)

Mr. Andrew Mifsud

Mr. Guido Mizzi (i)

Mr. Patrick H. Van Leynseele (i)

(i) independent directors

Company secretary

Mr. Calvin Bartolo

Principal activities

Izola Bank p.l.c. is registered in Malta as a public limited liability company under the Companies Act, 1995

(Chapter 386, Laws of Malta). The Bank is licensed by the Malta Financial Services Authority to carry out the

business of banking in terms of the Banking Act, 1994 (Chapter 371, Laws of Malta).

The Bank is principally engaged in providing corporate banking and factoring services to resident and non-

resident customers including to related parties with simple and easy to use savings products for both local

and foreign individuals and businesses.

Operational Review

During the financial period under review, the Bank continued growing and diversifying its retail customer

depositor base, raising funding from Malta, Belgium and Germany and continued building its factoring and

lending business in Malta. The Bank also carried on developing lending and factoring services, both in Malta

and in Belgium to continue strengthening, and further diversifying these activities in the years ahead.

A review of the business of the Bank for the year ended 31 December 2021 and an indication of future

developments are provided in the Chairperson’s Statement, which can be found in the front section of this

Annual Report.

Izola Bank p.l.c.

Directors’ Report – continued

For the Year Ended 31 December 2021

Principal risks and uncertainties

The main risks that the Bank has identified are credit risk arising from changes in credit quality and the

recoverability of loans and amounts due from Maltese and Belgian counterparties, concentration risk arising

from an uneven distribution of counterparties and liquidity and interest rate risks which are inherent in the

nature of the business of banking. Other risks which are closely monitored by management include foreign

exchange risk and investment price risk, reputational risk, operational risk as well as cyber-security and

business continuity risks.

Risk management policies have been established to identify and analyse the risks faced by the Bank, to set

out appropriate risk limits and controls, and to monitor risks and adherence to limits. A detailed overview

of these risks, together with the respective financial metrics are outlined in note 4 of the Financial

Statements.

Directors' responsibilities for the financial statements

The Directors are required by the Companies Act, 1995 to prepare financial statements which give a true

and fair view of the state of affairs of the Bank as at the end of each reporting period and of the profit or

loss for that period. In preparing the financial statements, the Directors are responsible for:

• ensuring that the financial statements have been drawn up in accordance with International

Financial Reporting Standards as adopted by the EU;

• selecting and applying appropriate accounting policies;

• making accounting estimates that are reasonable in the circumstances; and

• ensuring that the financial statements are prepared on the going concern basis unless it is

inappropriate to presume that the Bank will continue in business as a going concern.

The Directors are also responsible for designing, implementing and maintaining such internal controls as

they deem necessary to enable the preparation of financial statements that are free from material

misstatement, whether due to fraud or error, and that comply with the Companies Act, 1995 and the

Banking Act, 1994. They are also responsible for safeguarding the assets of the Bank and hence for taking

reasonable steps for the prevention and detection of fraud and other irregularities.

The financial statements of the Bank for the year ended 31 December 2021 are included in this Annual

Report and made available on the Bank’s website. The Directors are responsible for the maintenance and

integrity of the Annual Report on the website in view of their responsibility for the controls over, and the

security of, the website. Access to information published on the Bank’s website is available in other countries

and jurisdictions where legislation governing the preparation and dissemination of financial statements may

differ from requirements or practice in Malta.

Izola Bank p.l.c.

Directors’ Report – continued

For the Year Ended 31 December 2021

Dividends and reserves

Following the lifting of ECB ‘Recommendation on dividend distributions during the COVID-19 pandemic’

(ECB/2020/19) dated 27 March 2020, the Directors are proposing, subject to the necessary regulatory

approval, a dividend payment of €2,000,000, representing a dividend per share of € 5.00.

In the interest of preservation of capital and liquidity, the Directors are proposing this dividend is paid as a

bonus issue.

Going concern pursuant to Capital Markets Rule 5.62

The financial statements are prepared on a going concern basis. The directors regard that pursuant to

Capital Markets Rule 5.62, this is appropriate, after due consideration of the Bank’s profitability, liquidity,

the statement of financial position, capital adequacy and solvency. Specifically, the directors have prepared

financial and capital plans for the next three years which show that the Bank is able to continue operating

as a going concern for the foreseeable future.

Information pursuant to Capital Markets Rule 5.64

The Bank does not have any listed securities carrying voting rights.

Statement of the Directors pursuant to Capital Markets Rule 5.68

The Directors confirm that, to the best of their knowledge:

• the financial statements give a true and fair view of the financial position of the Bank as at 31

December 2021, and of its financial performance and its cash flows for the year then ended in

accordance with International Financial Reporting Standards as adopted by the EU; and

• the Annual Report includes a fair review of the development and performance of the business and

the position of the Bank, together with a description of the principal risks and uncertainties that

they faced.

Information pursuant to Capital Markets Rule 5.70.1

The Bank provides a range of banking services to the Van Marcke Group, of which the Bank itself is a

member. Ms. Magdalena de Roeck, Ms. Caroline Van Marcke and Mr. Patrick Van Leynseele are indirectly

interested in this business relationship by virtue of their directorships of various companies within the Van

Marcke Group.

Further details can be found within Note 31 of the Financial Statements.

Izola Bank p.l.c.

Directors’ Report – continued

For the Year Ended 31 December 2021

Information pursuant to Capital Markets Rule 5.68

Pursuant to Capital Markets Rule 5.68, we, the undersigned, declare that to the best of our knowledge, the

financial statements included in the Annual Report, and prepared in accordance with the requirements of

International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets,

liabilities, financial position and profit or loss of the Bank, and that the Directors’ Report includes a fair

review of the development and performance of the business and position of the Bank, together with a

description of the principal risks and uncertainties that it faces.

Auditors

PricewaterhouseCoopers have expressed their willingness to continue in office. A resolution proposing the

re-appointment of PricewaterhouseCoopers as auditors of the Bank will be submitted at the forthcoming

Annual General Meeting.

Signed on behalf of the Board of Directors on 24 March 2022 by Mr. Andrew Mifsud (Chief Executive

Office/Director) and Mr. Guido Mizzi (Director) as per the Directors' Declaration on ESEF Annual Financial

Report submitted in conjunction with the Annual Financial Report.

Registered Address

53-58 East Street

Valletta

Malta

Tel: +356 2124 1258

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

vii

Pursuant to Capital Markets Rule 5.97 as issued by the Malta Financial Services Authority, Izola Bank p.l.c.

(the ‘Bank’) hereby includes a Statement of Compliance reporting on the extent to which the Bank has

adopted the Code of Principles of Good Corporate Governance appended as Appendix 5.1 to the said

Capital Markets Rules (the ‘Principles’) and the effective measures that the Bank has taken to ensure

compliance with these Principles during the financial year under review.

Introduction

The adoption of the Principles is not mandatory, however the Board of Directors (the ‘Board’) of Izola Bank

p.l.c. believes that the adoption of these Principles is in the best interest of the Bank and its shareholders.

The Bank applies all the provisions of the Code of Principles of Good Corporate Governance (the

"Principles"), save where there exist circumstances that warrant non-adherence thereto, as outlined in Part

Two to this Statement. During the financial year under review, the Bank did not apply any corporate

governance practices beyond the provisions under national law.

PART ONE - Compliance with the Code

Principle 1: The Board

The Bank is headed by an effective Board and all directors exercise prudent controls which enable risk to be

assessed and managed. The Board is composed of members who are honest and competent, making them

fit and proper to conduct the business of the Bank. The directors are of the appropriate calibre, having the

necessary experience to provide leadership, integrity, and judgement in directing the Bank. All directors are

responsible for determining the Bank’s strategic aims and its organisational structure. The directors

regularly review management performance and ensure that the Bank has the appropriate mix of financial

and human resources to meet its objectives. Every director is conversant with the statutory and regulatory

requirements connected to the business of the Bank and regularly attends meetings of the Board. Directors

are appointed by the shareholders during the Bank’s Annual General Meeting for a period of one year.

The Board delegates specific responsibilities to the Audit and Risk Committee, the Remuneration and

Nomination Committee, the Credit Committee, the Strategy Committee and the Asset and Liability

Committee. Each Committee has its own terms of reference which are in turn approved by the Board.

Principle 2: Chairperson and Chief Executive Officer (‘CEO’)

The Bank’s current organisational structure incorporates the position of a CEO and that of a Chairperson,

both of which are occupied by two different individuals. In line with the Board of Directors’ terms of

reference, there is a clear division of responsibilities between the running of the Board and the CEO’s

responsibility in managing the Bank’s business. The separation of roles of the Chairperson and the CEO

avoids concentration of authority and power in one individual.

The Chairperson is responsible to lead the Board and set out the agenda and ensures that the directors

receive precise, timely and objective information so that they can take sound decisions and effectively

monitor the performance of the Bank. During the Board meeting, the Chairperson encourages active

engagement by all Board members and ensures that the opinions of all the directors are considered in the

discussion of complex or contentious issues.

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

viii

Principle 2: Chairperson and Chief Executive Officer (‘CEO’) – continued

The CEO is responsible to drive and deliver performance within strategic goals and business plans agreed by

the Board. He actively leads the senior management in the day-to-day running of the Bank and the execution

of the agreed strategy. He takes decisions in all matters affecting the operations, performance, and strategy

of the business, except for those matters reserved for the Board or specifically delegated by the Board to

its Committees.

Principle 3: Composition of the Board

The Board considers that it is of sufficient size for the requirements of the business and its members possess

the required diversity of knowledge and experience to properly execute their duties as directors. Each of

the directors is skilful, competent, knowledgeable, and experienced to fulfil the role diligently. The CEO was

appointed to the Board of Directors in 2019 and provides the Board with all necessary management and

operational information.

During the year under review, the Board consisted of five independent Non-Executive Directors, two Non-

Independent, Non-Executive Directors including the Chairperson (as set out in the Directors’ Report) and

one Executive Director, being the CEO. In determining the independence of its directors, the Board has

referred to the principles relating to independence contained in the Code. Each independent non-executive

director has made a declaration in writing to that effect in line with the requirements emanating from Code

Provisions 3.4. With specific reference to Code Provision 3.2.5, the Board notes that Mr. Joseph Caruana’s

tenure as a Board member has exceeded 12 years, however it is of the opinion that this in no way impacts

his judgement and does not colour his independence in any manner. All directors shall disclose their

interests and external commitment, both ahead of their appointment and, where significant changes arise,

during their tenue as directors. This ensures that directors’ business interests and commitments do not give

rise to potential conflicts of interest and allow them to devote the necessary time and attention to properly

execute their duties on the Board.

Principle 4: Responsibilities of the Board

The Board’s role and responsibility is to execute the four basic roles of corporate governance namely:

accountability, monitoring, strategy formation and policy development.

The Board regularly reviews and evaluates corporate strategy, major operational and financial plans, risk

policy and performance objectives, and monitors implementation and corporate performance within the

parameters of all relevant laws, regulations, and codes of best business practice. The Board ensures that

policies and procedures are in place to maintain the highest standards of corporate conduct, including

compliance with laws, regulations, business and ethical standards by the Bank and its employees. Board

members are provided with regular training and information sessions on topical matters such as

developments in banking regulation and emerging trends in the business of banking.

The Board requires management to constantly monitor performance and report to its satisfaction, at least

on a quarterly basis, fully and accurately on the key performance indicators (‘KPI’s’). Business risks and KPI’s

are benchmarked against industry norms so that the Bank’s performance can be effectively evaluated.

The Board delegates specific responsibilities to the following Committees:

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

Principle 4: Responsibilities of the Board – continued

Board Committees

Audit and Risk Committee

The Audit and Risk Committee’s Terms of Reference include the monitoring of the financial reporting

process, the effectiveness of the Bank’s internal control, internal audit and risk management systems, and

the statutory audit of the Bank’s annual financial statements. Given that the nature of Related Party

Transactions does not change from year to year, the vetting and approving of Related Party Transactions is

a matter dealt with by the Board.

The Audit and Risk Committee protects the interests of the Bank’s shareholders and assists the directors in

conducting their role effectively so that the Bank’s decision-making capability and the accuracy of its

reporting and financial results are maintained at a high level at all times. It ensures that the Bank maintains

a robust finance function responsible for accounting and financial data. This Committee has non-executive

responsibility for oversight of, and advice to, the Board on matters relating to financial reporting. The

Committee monitors the integrity of the Bank’s financial statements, any formal announcements relating

to the Bank’s financial performance and reviews significant financial reporting judgements contained

therein.

The Committee approves the internal audit work plan, which will include assessment of controls relating to

financial reporting and other risks as appropriate. The Audit and Risk Committee also has the responsibility

to appoint the external auditors, review and monitor the external auditor’s independence, and assess the

effectiveness of the statutory audit process.

In terms of Capital Markets Rules 5.117, 5.118 and 5.119, the Audit and Risk Committee is composed of

three non-executive directors. All three non-executive directors are considered independent since they are

free from any business, family or other relationship with the Bank or its management that may create a

conflict of interest such as to impair their judgement. The Chairman of the Audit and Risk Committee is

appointed by the Board of Directors.

In terms of Capital Markets Rule 5.119, Mr Guido Mizzi is the director whom the Board considers as

independent of the Bank and competent in accounting, given his extensive experience as a former managing

partner of a local accountancy firm. Mr. Van Leynseele is a partner in a Brussels law firm and a member of

the Bar in both Brussels and New York. Mr. Azzopardi has an extensive background in product development,

predominantly in the financial services sector and technology-focused businesses.

All three directors have experience serving on various other boards and are considered competent to fulfil

their responsibilities as members of the Audit and Risk Committee of the Bank. The Board thus considers

that the committee members have the competence relevant to the banking sector.

Meetings held: 5

Members Attended

Mr. Guido Mizzi (Chairman) 5

Mr. Simon Azzopardi 4

Mr. Patrick H. Van Leynseele 5

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

Principle 4: Responsibilities of the Board – continued

Other Board members have a right to attend the meetings. The Audit and Risk Committee has direct access

to the Head of Finance and Treasury, who is responsible for the preparation and integrity of financial

statements, and a direct reporting line to the Head of Risk and Compliance, who is responsible for ensuring

proper execution of the risk management and control framework. The Head of IT, who is responsible for the

maintenance of internal controls in relation to Information and Communications Technology (‘ICT’), attends

meetings when ICT-related topics are discussed. Both the internal and external auditors are also invited to

attend meetings on an ad-hoc basis. The Company Secretary acts as Secretary to the Committee.

Remuneration and Nomination Committee

In its nomination function, the Committee is primarily tasked with identifying and nominating new Board

candidates for the approval of the Board. The Committee periodically assesses the structure, size,

composition, and performance of the Board and makes recommendations to the Board regarding any

changes. It is also tasked with reviewing the remuneration structure for the Bank’s senior management and

all staff, evaluating the impacts of remuneration considerations on its overall risk profile and corporate

culture. This Committee is also responsible to periodically assess the skills, knowledge, and experience of

individual directors, and of the Board collectively, and report on this to the Board.

The Remuneration and Nomination Committee is composed of three non-executive directors, two of whom

are independent and meets at least once a year. The Remuneration and Nomination Committee is tasked

with oversight of performance and remuneration practices, making proposals to the Board on the

remuneration policy for directors and leading the process for Board appointments. The Committee also

assesses the size, composition and performance of the Board and the individual and collective suitability of

directors. The terms of reference of this Committee are in line with Code Provisions of 8.A.2 - 8.A.6 and

8.B.2 - 8.B.8. Further information on the Bank’s remuneration practices is included within the Report of the

Remuneration and Nomination Committee immediately following the Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance.

Meetings held: 2

Members Attended

Mr. Francis Gouder (Chairman) 2

Ms. Caroline Van Marcke 2

Mr. Patrick H. Van Leynseele 2

The Company Secretary acts as Secretary to the Committee.

Credit Committee

The Credit Committee is composed of two independent non-executive directors and the CEO and operates

within a Board-approved credit sanctioning limit. Proposals falling outside the Committee’s limits are

referred together with the Committee’s recommendations to the Board for consideration and

determination.

Meetings held: 6

Members Attended

Mr. Joseph C. Caruana (Chairman) 6

Mr. Francis Gouder 6

Mr. Andrew Mifsud 6

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

Principle 4: Responsibilities of the Board – continued

The Company Secretary acts as Secretary to the Committee. The Head of Credit regularly attends the

meetings.

Strategy Committee

The Committee is responsible for making recommendations to the Board of Directors in respect of the

Bank’s business model and forward-looking strategy, taking into consideration the risks and opportunities

related to various strategies. The Committee is also responsible for analysing the implementation of the

business model and strategy or any changes thereto, including any potential ICT implications.

It is composed of three directors and meets at least once a year. The Bank’s Senior Management team and

other bank executives may be invited to attend meetings. The Company Secretary acts as Secretary to the

Committee.

Meetings held: 2

Members Attended

Mr. Simon Azzopardi (Chairman) 2

Ms. Caroline Van Marcke 2

Mr. Andrew Mifsud 2

Management Committee

Asset and Liability Management Committee (ALCO)

The ALCO meets at least quarterly to monitor the Bank’s financial performance, and review and manage

financial risks in accordance with Bank policies, namely: interest rate, liquidity and funding risk, solvency,

market sector and country risk; and counterparty and foreign exchange risk. The ALCO reports to the Board

on a quarterly basis.

The ALCO is chaired by the CEO and is also composed of the Head of Finance and Treasury, and the Senior

Finance and Treasury Manager. The Company Secretary acts as Secretary to the Committee.

Meetings held: 10

Members Attended

Mr. Andrew Mifsud (Chairman) 10

Mr. Calvin Bartolo 10

Mr. Kurt Grima 10

Principle 5: Board Meetings

During the financial year ended 31 December 2021 the Board met six times. Notice of the dates of

forthcoming meetings together with all board papers were circulated well in advance to the directors so

that they had ample opportunity to consider the information and prepare for the next scheduled Board

meeting. After each Board meeting and before the next meeting, minutes that faithfully recorded

attendance and decisions were prepared and circulated to all directors.

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

xii

Principle 5: Board Meetings – continued

Attendance of the Board members during the financial year ended 31 December 2021 was as follows:

Meetings Held: 6

Members Attended

Ms. Magdalena De Roeck (Chairperson) 6

Ms. Caroline Van Marcke 6

Mr. Simon Azzopardi 5

Mr. Joseph C. Caruana 6

Mr. Francis Gouder 6

Mr. Andrew Mifsud 6

Mr. Guido Mizzi 6

Mr. Patrick H. Van Leynseele 6

Company Secretary

Calvin Bartolo

Principle 6: Information and Professional Development

All new directors are briefed in detail by the CEO and Company Secretary on the Bank’s organisation and

activities and their responsibilities as directors.

When they judge it necessary, all directors can access independent professional advice at the Bank’s

expense to enable them to discharge their responsibilities as directors. All directors also have access to the

services of the Company Secretary for advice on all governance matters.

The Bank is committed to provide for the development and training of management and employees. The

Board is updated at least annually with the latest staff development programme. In accordance with Code

Provision 6, the Board is responsible for the appointment of the CEO whilst, in line with Code Provision 6.5,

the CEO is responsible for the recruitment and appointment of senior management. Training of

management and employees is a priority and, in this respect, access to internal and external training is

provided by the Bank to management and employees. The Bank also has a system in place which monitors

management and staff engagement. As part of succession planning and talent management, the Board and

the CEO ensure that the Bank implements appropriate schemes to recruit, retain and motivate high quality

staff members.

Principle 7: Evaluation of the Board’s Performance

The Board has set up the Remuneration and Nomination Committee to periodically review and monitor the

effectiveness of the Bank’s Board suitability policy and to guide the execution of suitability assessments of

directors. The Chairperson reports on the Committee’s activities and submits recommendations on areas

falling within its remit upon request of the Board of Directors. In line with its policies, the Bank performs a

suitability assessment every 2 years, with the most recent one performed in May 2021.

The Committee may request information or reports from internal departments to facilitate discussions and

decision-making. It may also provide guidance on how policies pertaining to performance, remuneration

and training are to be communicated internally.

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

xiii

Principle 8: Committees

The Board established a Remuneration and Nomination Committee to oversee matters of remuneration

and nomination in line with best practice. More detailed information regarding remuneration is presented

in the Report of the Remuneration and Nomination Committee following the Directors’ Statement of

Compliance with the Code of Principles of Good Corporate Governance.

Principles 9 and 10: Relations with Shareholders and with the Market and Institutional Shareholders

The Bank provides the market with regular, timely, accurate and detailed information in accordance with

the requirements of the Capital Markets Rules by way of company announcements.

The Bank communicates with its shareholders through the Bank’s Annual General Meeting as well as by way

of the Annual Report and Financial Statements.

The Bank has an Internal Code of Dealing Policy to give guidance to the Bank’s directors and employees on

procedures to be followed when dealing in the Bank’s securities and on the treatment of Inside Information

in line with the provisions of the Prevention of Financial Markets Act and any related subsidiary legislation

and regulations.

The Bank’s shareholders are not custodians, banks, financial institutions, fund managers, stockbrokers, or

investment managers and as a result, Principle 10 is not applicable.

Principle 11: Conflicts of Interest

The directors are always strongly aware of their responsibility to act in the interest of the Bank and its

shareholders as a whole and of their obligation to avoid conflicts of interest. The latter may and do arise on

specific matters. In such instances, the Bank ensures that such conflicts, actual or potential, are managed in

the best interest of the Bank. Each director is required to disclose in full any matter where there is a potential

or actual conflict of interest, whether such conflict arises from personal interests or the interests of the

companies in which such person is a director or officer. Directors do not participate in a discussion

concerning matters in which they have a conflict of interest unless the Board finds no objection to the

presence of such director. In any event, the director shall refrain from voting on the matter.

On joining the Board, and regularly thereafter, the directors are informed of their obligations on dealing in

securities of the Bank within the parameters of the law, including the Capital Markets Rules, and the

directors follow the required procedures. Interests of directors are disclosed within note 31 - Related Parties

- to the accompanying Financial Statements.

Principle 12: Corporate Social Responsibility

Over the past 25 years, the Bank has transformed itself to be in a better position to deliver on its purpose:

enabling purposeful growth. This value is at the heart of the Bank’s CSR initiatives, as it continues to provide

both tangible and immediate contributions to the community’s welfare. The Bank’s approach to CSR is

through investing in community-based organisations that directly address pressing issues within the country

– issues if left unattended would have dire consequences for people in need.

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

xiv

Principle 12: Corporate Social Responsibility – continued

Foodbank Lifeline Foundation

In 2018, the Bank became an official sponsor of Foodbank Lifeline Foundation Malta, a registered NGO,

which provides short-term emergency food packs to people in desperate need, regardless of race, religion

and gender – till they find a path to stability. Over the course of this relationship, the Bank has increased its

support, both financially and in practical terms to meet the increasing demand for Foodbank Lifeline’s

services – presently feeding thousands every year.

The Bank identified ways that went beyond one-off monetary donations, wanting to contribute on a

continuous basis, with long-term benefits for the Foodbank. The Bank and Foodbank Lifeline share a joint

vision of hoping that one day there will be no need for a foodbank in Malta. Until that day comes, the Bank

is committed to supporting the community and ensuring that where possible no one should suffer the

indignity of hunger.

• Supporting Foodbank Foundation’s Digital Presence.

The Bank sponsored the design, development and hosting of the Foodbank Lifeline’s new website. The

website includes a platform where Care Professionals can enter quick referrals online, where visitors can

access information on how to help Foodbank Lifeline or catch up on the latest updates and where people in

need can follow the steps required to obtain a referral. Maintaining a regular presence in the community is

vital for Foodbank Lifeline. The Bank also sponsors the management of the Foodbank’s social pages

(Facebook and Instagram), through hiring interns that oversee the day-to-day posts, comments and

messages. The Bank also injects funds to promote various campaigns that need boosting.

• Reverse Advent Calendar Campaign

Held once a year in the run up to Christmas, the Reverse Advent Calendar Campaign is a way for the

community to get involved in helping the less fortunate. The campaign is hugely popular with local schools,

businesses, and families. The Bank oversees the entire campaign including the media productions and

bookings and press coverage.

PART TWO – Non-Compliance with the Code

Principle 2 – Code Provision 2.3

The Chairperson of the Bank cannot be considered independent in accordance with the principles relating

to independence contained in the Code.

Principle 4 – Code Provision 4.2.7

The Code Provision recommends that the Board should develop a succession policy for the future

composition of the Board and particularly the executive component thereof, for which the Chairman should

hold key responsibility. The Board does not have a succession policy in place for the future composition of

the Board of Directors. This approach may be revised in the future in line with changes to the Bank’s size

and/or organisational structure.

Principle 6 – Code Provision 6.4.4

Code Provision 6.4.4 recommends the CEO to establish a succession plan for senior management. The Board

does not have a succession policy in place for senior management. This approach may be revised in the

future in line with changes to the Bank’s size and/or organisational structure.

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

Principle 7 – Code Provision 7.3

Code Provision 7.3 recommends that the non-executive Directors are responsible for the evaluation of the

Chairperson, taking into account the views of the executive directors. This evaluation has not been adopted

to date but may be revised with future policy changes.

Capital Markets Rule 5.97.4

The information required by this Capital Markets Rule is found in the Directors’ Report, within the Directors’

Responsibilities section.

The Directors’ Statement of Compliance with the Code of Principles of Good Corporate Governance was

approved by the Board of Directors on 24 March 2022.

Izola Bank p.l.c.

Report of the Remuneration and Nomination Committee

For the Year Ended 31 December 2021

xvi

Governance

The Bank’s Remuneration and Nomination Committee comprises three non-executive directors and is

tasked with the oversight of the Bank’s remuneration and nomination practices. Information in respect of

the functions, composition, and attendance to meetings of the Remuneration and Nomination Committee

is disclosed within the Directors’ Statement of Compliance with the Code of Principles of Good Corporate

Governance.

The Report of the Remuneration and Nomination Committee was approved by the Board of Directors at the

Board meeting held on 24 March 2022.

Remuneration Policy

The aim of the Bank’s Remuneration Policy is to increase transparency in remuneration matters, to support

the business goals of the Bank by efficient remuneration structures, and to create common basic values and

guidelines for the Bank when offering remuneration and benefits to the senior management team of the

Bank.

There were no deviations from the procedure for the implementation of the Bank’s Director’s Remuneration

Policy.

Remuneration Statement

Executive Management

Reference to senior management shall mean the CEO, the Head of Finance & Treasury, the Head of

Operations, the Head of Credit, the Head of IT, the Head of Risk and Compliance and the Head of HR. The

Board is of the opinion that the remuneration packages for senior management are in line with local market

expectations and are at an appropriate level to attract and retain executives with the appropriate skills,

qualities, and experience to ensure the effective management of the Bank.

The terms and conditions of employment of senior management are set out in the respective indefinite

contracts of employment. Senior management are not entitled to share options or profit sharing. There are

no supplementary pension or early retirement schemes in place and notice periods are as established by

law. Senior management are eligible for an annual salary increase and discretionary performance bonus

(not exceeding fixed remuneration) in line with the Bank’s overall performance, individual performance and

general market remuneration trends.

Non-cash benefits to which senior management are entitled are the use of a company car. Other benefits

afforded to all staff member, including senior management, are personal accident, life, and health insurance

cover.

Loans amounting to €373,516 were advanced to key management personnel as disclosed in note 31.3 to

the financial statements.

There have been no significant changes in the Bank’s remuneration policy for senior management during

the year under review. During 2020, the Bank continued offering all staff members, including senior

management, subsidies on home loan interest rates and intends to start contributing to a personal pension

scheme during 2022.

Izola Bank p.l.c.

Report of the Remuneration and Nomination Committee

For the Year Ended 31 December 2021

xvii

Executive Management – continued

Total emoluments of senior management for the year ended 31 December 2021 are as follows:

Fixed Remuneration

Variable Remuneration

Share Options

Others

€444,467

€109,500

None

Non-cash benefits

referred to

immediately above.

During the year under review, no special payments (sign-on and/or severance pay), payments exceeding €1

million or any payments subjects to deferral were made to Identified Staff.

Directors

As of 31 December 2021, the Board was composed of 7 non-executive directors and one executive director.

The maximum annual aggregate emoluments that may be paid to the directors are approved by the

shareholders in a General Meeting. This amount was fixed at an aggregate sum of €175,000 at the Annual

General Meeting held on 26 March 2021.

None of the directors had service contracts with the Bank as at the end of the financial year.

Furthermore, none of the directors, in their capacity as a director of the Bank, are entitled to profit sharing,

share options, pension benefits or any other remuneration.

In line with the Bank’s Remuneration Policy, none of the Directors are eligible to receive variable

remuneration in their function as Directors. In this respect, there is no formal provision for the reclamation

of variable remuneration.

Total emoluments received by directors relative to their directorship of the Bank in respect of the financial

year ended 31 December 2021 are disclosed in the table below:

Fixed Remuneration

Variable Remuneration

Share Options

Others

€137,000

None

Izola Bank p.l.c.

Financial Statements

2021

Izola Bank p.l.c.

Page

Financial Statements:

Statement of Profit or Loss and Other Comprehensive Income 1

Statement of Financial Position 2

Statement of Changes in Equity 3

Statement of Cash Flows 5

Notes to the Financial Statements 6

Independent Auditors’ Report

Izola Bank p.l.c.

Statement of Profit or Loss and Other Comprehensive Income

For the Year Ended 31 December

Notes

2021

2020

€

Interest and similar income

10,704,557

10,575,188

Interest expense

(4,513,733)

(5,011,314)

Net interest income

6,190,824

5,563,874

Fee and commission income

119,866

136,427

Fee and commission expense

(130,061)

(69,535)

Net fee and commission (expense)/income

(10,195)

66,892

Other operating income

571,309

311,098

Total operating income

6,751,938

5,941,864

Depreciation of property and equipment

(243,933)

(173,974)

Amortisation of intangible assets

(600,229)

(420,939)

Changes in expected credit losses and other credit

impairment charges

(385,692)

(172,797)

Employee compensation and benefits

9.2

(2,103,290)

(1,765,851)

Other administrative expenses

9.4

(2,598,637)

(2,803,412)

Profit before tax

820,157

604,891

Income tax expense

(372,176)

(219,671)

Profit for the year

447,981

385,220

Other comprehensive income

Items that will not be reclassified to profit or loss

Loss on property revaluation

(135,382)

Income taxes

(39,524)

(174,906)

Items that may be reclassified subsequently to profit

or loss

Debt instruments measured at fair value through

other

other comprehensive income:

- Net movement in fair value, before tax

(1,483,446)

484,348

- Income taxes

519,206

(169,521)

- Net gains reclassified to profit or loss on disposal,

before tax

(442,395)

(172,944)

- Income taxes

154,838

60,530

(1,251,797)

202,413

Other comprehensive income for the year, net of tax

(1,251,797)

27,507

Total comprehensive income for the year, net of tax

(803,816)

412,727

Earnings per share

1.12

0.96

The accompanying notes on pages 7 to 109 are an integral part of these financial statements.

Izola Bank p.l.c.

Statement of Financial Position

As at 31 December

Notes

2021

2020

€

ASSETS

Balances with Central Bank of Malta and cash

16,193,768

18,612,618

Loans and advances to banks

25,420,282

22,695,594

Financial investments

117,280,712

109,304,630

Factored receivables

95,051,834

99,155,608

Loans and advances to customers

131,369,341

121,555,833

Property and equipment

12,565,395

11,994,449

Intangible assets

1,774,370

1,550,091

Current tax asset

793,029

824,359

Other assets

1,971,720

3,603,758

Total assets

402,420,451

389,296,940

LIABILITIES

Amounts owed to institutions

55,000,000

35,000,000

Amounts owed to banks

274,715

250,576

Amounts owed to customers

297,780,509

304,384,729

Debt securities in issue

11,940,167

11,923,078

Deferred tax liabilities

170,011

845,309

Accruals

3,975,122

2,809,505

Total liabilities

369,140,524

355,213,197

EQUITY

Called up share capital

10,000,000

Capital contribution reserve

17,032,675

Property revaluation reserve

3,521,238

Fair value reserve

(612,547)

639,250

Depositor compensation scheme reserve

1,288,168

1,707,717

Reserve for general banking risks

45,091

3,860

Retained earnings

2,005,302

1,179,003

Total equity

33,279,927

34,083,743

Total liabilities and equity

402,420,451

389,296,940

Memorandum items

Commitments

92,738,305

96,000,451

The accompanying notes on pages 7 to 109 are an integral part of these financial statements.

The financial statements on pages 1 to 109 were approved and authorised for issue by the Board of Directors

on 24 March 2022. The financial statements were signed on behalf of the Bank's Board of Directors by Mr.

Andrew Mifsud (Chief Executive Officer) and Mr. Guido Mizzi (Director) as per the Directors' Declaration on

ESEF Annual Financial Report submitted in conjunction with the Annual Report and Financial Statements

2021.

Izola Bank p.l.c.

Statement of Changes in Equity

For the Year Ended 31 December 2021

Property

Fair

Depositor

Capital

Reserve for

revaluation

value

compensation

contribution

general banking

Retained

Capital

reserve

scheme reserve

reserve

risks

earnings

Total

€

Balance at 1 January 2021

10,000,000

3,521,238

639,250

1,707,717

17,032,675

3,860

1,179,003

34,083,743

Total comprehensive income

Profit for the year

447,981

Other comprehensive income

Transfers and other movements

(419,549)

41,231

378,318

Financial investments measured at fair value through other

comprehensive income

- Net movement in fair value, net of tax

(964,240)

- Net gains reclassified to profit or loss on disposal, net of tax

(287,557)

Total other comprehensive income

(1,251,797)

(419,549)

41,231

378,318

(1,251,797)

Total comprehensive income for the year

(1,251,797)

(419,549)

41,231

826,299

(803,816)

Balance at 31 December 2021

10,000,000

3,521,238

(612,547)

1,288,168

17,032,675

45,091

2,005,302

33,279,927

The accompanying notes on pages 7 to 109 are an integral part of these financial statements.

Izola Bank p.l.c.

Statement of Changes in Equity

For the Year Ended 31 December 2020

Property

Fair

Depositor

Capital

Reserve for

revaluation

value

compensation

contribution

general banking

Retained

Capital

reserve

scheme reserve

reserve

risks

earnings

Total

€

Balance at 1 January 2020

10,000,000

3,696,144

436,837

628,571

17,032,675

3,860

1,872,929

33,671,016

Total comprehensive income

Profit for the year

385,220

Other comprehensive income

Transfers and other movements

1,079,146

(1,079,146)

Loss arising on property revaluation, net of tax

(174,906)

Financial investments measured at fair value through other

comprehensive income

- Net movement in fair value, net of tax

314,827

- Net gains reclassified to profit or loss on disposal, net of tax

(112,414)

Total other comprehensive income

(174,906)

202,413

1,079,146

(1,079,146)

27,507

Total comprehensive income for the year

(174,906)

202,413

1,079,146

(693,926)

412,727

Balance at 31 December 2020

10,000,000

3,521,238

639,250

1,707,717

17,032,675

3,860

1,179,003

34,083,743

The accompanying notes on pages 7 to 109 are an integral part of these financial statements.

Izola Bank p.l.c.

Statement of Cash Flows

For the Year Ended 31 December

Note

2021

2020

€

Cash used in operating activities

10,160,681

(8,108,692)

Income tax paid

(342,102)

(561,879)

Net cash inflows/(outflows) from operating activities

9,818,579

(8,670,571)

Cash flows from investing activities

Payments to acquire property and equipment and

intangible assets

(1,639,455)

(1,022,616)

Payments to acquire investments

(85,996,927)

(87,424,086)

Proceeds from disposal of investment securities

76,537,399

59,299,332

Interest received from financial investments

2,066,104

1,529,179

Payments on investments which are traded but not yet acquired

(1,500,000)

Net cash flows used in investing activities

(9,032,879)

(29,118,187)

Cash flows from financing activities

Interest paid on debt securities in issue

(540,000)

Net cash flows used in financing activities

(540,000)

Net increase/(decrease) in cash and cash equivalents

245,700

(38,328,758)

Cash and cash equivalents at beginning of year

39,724,978

78,053,736

Cash and cash equivalents at end of year

39,970,678

39,724,978

The accompanying notes on pages 7 to 109 are an integral part of these financial statements.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

Page

Reporting entity

Intangible assets

Basis of preparation

Other assets

Significant accounting policies

Amounts owed to institutions

Financial risk management and

review

Amounts owed to banks

Net interest and similar income

Amounts owed to customers

Net fee and commission income

Debt securities in issue

Other operating income

Deferred tax assets and liabilities

Changes in expected credit losses

and other credit impairment

charges

Other liabilities

100

Profit before tax

Share capital and reserves

100

Income tax expense

Commitments

102

Earnings per share

Net cash generated from operating

activities

102

Financial assets and financial

liabilities

Cash and cash equivalents

103

Balances with Central Bank of

Malta and cash

Related parties

105

Loans and advances to banks

Operating segments

105

Investment securities

Critical accounting estimates and

judgements

107

Factored receivables

Comparative information

109

Loans and advances to customers

Subsequent events

110

Property and equipment

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

1 Reporting entity

Izola Bank p.l.c. (the “Bank”) is a public limited liability company domiciled and incorporated in

Malta. The Bank is a credit institution licenced in Malta and is primarily involved in the provision of

lending and factoring services to corporate and retail customers, as well as the raising of deposits

from retail customers.

2 Basis of preparation

2.1 Statement of compliance with IFRSs as adopted by the European Union

These financial statements have been drawn up in accordance with International Financial

Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (“IASB”),

including interpretations issued by the IFRS Interpretations Committee (“IFRIC”), and as adopted

by the European Union (“EU”).

These financial statements have also been prepared and presented in accordance with the

provisions of the Companies Act, 1995 (Chapter 386, Laws of Malta) and the Banking Act, 1994

(Chapter 371, Laws of Malta).

2.2 Basis of measurement

These financial statements have been prepared on a historical cost basis, except for:

• Financial investments measured at fair value through other comprehensive income

(“FVOCI”);

• Financial investments designated at FVOCI or at fair value through profit or loss (“FVTPL”);

and

• Property within ‘Property and equipment’ measured at revalued amount.

2.3 Standards, interpretations and amendments to published standards effective in 2021

During the financial year ended 31 December 2021, the Bank adopted the following amendments

to existing standards that are mandatory for financial years starting on or after 1 January 2021:

• Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 – Interest Rate Benchmark

Reform – Phase 2 (effective for financial years starting on or after 1 January 2021)

• Amendments to IFRS 16 – Covid-19 Related Rent Concessions (effective for financial years

starting on or after 1 April 2021)

• Amendments to IFRS 4 – deferral of IFRS 9 (effective for financial years starting on or after

1 January 2021)

The adoption of these revisions to the requirements of IFRSs as adopted by the EU did not result in

significant changes to the Bank’s accounting policies impacting the Bank’s financial performance

and position.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

2 Basis of preparation – continued

2.3 Standards, interpretations and amendments to published standards effective in 2021 –

continued

Interest Rate Benchmark Reform

The IASB published ‘Interest Rate Benchmark Reform – Phase 2: Amendments to IFRS 9, IAS 39,

IFRS 7, IFRS 4 and IFRS 16’ in August 2020, which became effective from 1 January 2021 and was

also endorsed for use by the EU during 2021. These amendments represent the second phase of

the IASB’s project on the effects of interest rate benchmark reform, addressing issues affecting

financial statements when changes are made to contractual cash flows as a result of the reform.

As a result of the limited exposure to IBOR related financial instruments, these amendments had

an insignificant effect on the Bank’s financial statements.

Financial instruments carried using amortised cost measurement

‘Phase 2’ of the amendments requires that, for financial instruments carried using amortised cost

measurement (that is, financial instruments measured at amortised cost and debt instruments

measured at fair value through other comprehensive income), changes to the basis for determining

the contractual cash flows required by interest rate benchmark reform are reflected by adjusting

the effective interest rate. No immediate gain or loss is recognised.

These expedients are only applicable to changes that are required by the interest rate benchmark

reform, which is the case if, and only if, the change is necessary as a direct consequence of the

interest rate benchmark reform and the new basis for determining the contractual cash flows is

economically equivalent to the previous basis (that is, the basis immediately preceding the

change).

As a result, under these amendments, changes made to a financial instrument that are

economically equivalent and required by the interest rate benchmark reform, do not result in the

derecognition or a change in the carrying amount of the financial instrument, but instead require

the effective interest rate to be updated to reflect the change in the interest rate benchmark.

Where some or all of a change in the basis for determining the contractual cash flows of a financial

asset and liability does not meet the above criteria, the above practical expedient is first applied to

the changes required by the interest rate benchmark reform, including updating the instrument’s

effective interest rate. Any additional changes are accounted for in the normal way (that is,

assessed for modification or derecognition, with the resulting modification gain/loss recognised

immediately in profit or loss where the instrument is not derecognised).

The Bank’s financial instruments carried using amortised cost measurement that are deemed to be

impacted by the interest rate benchmark reform solely consist of a loan to a related party, linked

to LIBOR and denominated in US Dollars, amounting to €1.05 million as at 31 December 2021. In

this respect, the amendments have an insignificant impact on the financial statements.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

2 Basis of preparation – continued

2.3 Standards, interpretations and amendments to published standards effective in 2021 –

continued

Exposures classified within the remaining principal portfolios of financial instruments measured

using amortised cost measurement, namely ‘Balances with Central Bank of Malta’, ‘Financial

investments’, ‘Loans and advances to banks’ and ‘Loans and advances to customers’ are linked to

EURIBOR. As at 31 December 2021, there is no current indication that this benchmark rate will be

demised in the near future and, in this respect, these are not deemed to be impacted by the

interest rate benchmark reform.

2.4 Standards, interpretations and amendments to published standards that are not yet effective

Certain new accounting standards and interpretations have been published, which are not

mandatory for 31 December 2021 reporting periods and have not been early adopted by the Bank.

These standards are not expected to have a material impact on the Bank in the current or future

reporting periods and on foreseeable future transactions.

The changes resulting from the above standards, interpretations and amendments are not

expected to have a material effect on the financial statements of the Bank.

2.5 Functional and presentation currency

These financial statements are presented in Euro (€), which is the Bank’s functional currency.

2.6 Use of judgements and estimates

The preparation of financial statements in conformity with IFRSs as adopted by the EU requires the

use of certain accounting estimates. In this respect, management is required to exercise their

judgement in the process of applying the Bank’s accounting policies. This requires assumptions to

estimate the carrying amount of assets and liabilities, as well as the recognition of income and

expenses. Due to the inherent uncertainty and high level of subjectivity involved in making such

judgements, actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates

are recognised prospectively.

Information about critical accounting judgements, assumptions and estimation uncertainties as at

31 December 2021 is disclosed within Note 33 – Critical accounting estimates and judgements in

applying the Bank’s accounting policies, as well as within the following notes to the financial

statements:

• Expected credit losses on factored receivables and loans and advances to customers: Note 4

• Valuation of financial instruments: Note 4

• Valuation of property within ‘Property and equipment’: Note 17

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

2 Basis of preparation – continued

2.7 Going Concern

The financial statements are prepared on a going concern basis, as the Directors are satisfied that

the Bank has the resources to continue in business for the foreseeable future. In making this

assessment, the Directors have considered a wide range of information relating to present and

future conditions, including future projections of profitability, cash flows, capital requirements and

capital resources. These considerations include stressed scenarios that reflect the increasing

uncertainty that the global Covid-19 pandemic has had on the Bank’s operations, as well as

considering potential impacts on profitability, capital, and liquidity.

3 Significant accounting policies

3.1 Financial assets

3.1.1 Recognition and initial measurement

The Bank recognises a financial asset in its statement of financial position when it becomes a party

to the contractual provisions of the instrument. Regular way purchases and sales of financial assets

are recognised on trade date, being the date on which the Bank commits to purchase or sell the

asset. Financial assets are derecognised when the rights to receive cash flows from the financial

assets have expired or have been transferred and the Bank has transferred substantially all the risks

and rewards of ownership.

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. Transaction costs of

financial assets carried at FVTPL are expensed in profit or loss.

3.1.2 Classification and measurement

At initial recognition, the Bank classifies its financial assets in the following measurement

categories:

• Financial assets measured at FVTPL;

• Financial assets measured at FVOCI; and

• Financial assets measured at amortised cost.

The classification depends on the Bank’s business model for managing the financial assets and the

contractual terms of the cash flows.

For assets measured at fair value, gains and losses will either be recorded in profit or loss or OCI.

For investments in equity instruments that are not held for trading, this will depend on whether

the Bank has made an irrevocable election at the time of initial recognition to account for the equity

investment at FVOCI.

The Bank reclassifies debt instruments when and only when its business model for managing those

assets changes.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.2 Classification and measurement – continued

Debt investments

Subsequent measurement of debt investments depends on the Bank’s business model for

managing the asset and the cash flow characteristics of the asset.

Business model assessment

The Bank performs an assessment of the objective of a business model in which an asset is held at

a portfolio level since this is deemed to best reflect the way the business is managed and the

monitoring of financial information by management. The information considered in the

performance of this assessment includes:

• the stated policies and objectives for the portfolio and the operation of those policies in

practice. In particular, management considers whether the strategy focuses on earning

contractual interest revenue, maintaining a particular interest rate profile, matching the

duration of the financial assets to the duration of the liabilities that are funding those

assets, or realising cash flows through the sale of assets;

• the manner in which the performance of the portfolio is evaluated and reported to the

Bank's management;

• the risks that affect the performance of the business model (and the financial assets held

within that business model) and its strategy for how those risks are managed;

• how managers of the business are compensated for business performance (e.g. whether

compensation is based on the fair value of the assets managed or the contractual cash

flows collected); and

• the frequency, volume, and timing of sales transacted in prior periods, the reasons for

such sales and management’s expectations in respect of future sales activity. Information

about sales activity is not considered in isolation but as part of an overall assessment of

how the Bank's stated objective for managing the financial assets is achieved and how

cash flows are realised.

Financial assets that are held for trading or financial assets that are managed and whose

performance is evaluated on a fair value basis are measured at FVTPL since such assets are neither

held with the objective to collect contractual cash flows nor held with the objective to collect

contractual cash flows and sell financial assets.

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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.2 Classification and measurement – continued

In assessing whether the contractual cash flows are solely payments of principal and interest

(“SPPI”), the Bank 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. In making the assessment, the

Bank considers:

• contingent events that would change the amount and timing of cash flows;

• leverage features;

• prepayment and extension terms;

• terms that limit the Bank's claim to cash flows from specified assets; and

• variable interest rates and features that modify consideration of the time value of money.

In some cases, loans originated by the Bank that are secured by collateral limit the Bank's claim to

cash flows from the underlying collateral (non-recourse loans). The Bank applies judgment in

assessing whether non-recourse loans meet the SPPI criterion.

The Bank typically considers the following information when making this judgement:

• whether the contractual arrangement specifically defines the amounts and dates of the

cash payments of the loan;

• the fair value of the collateral relative to the amount of the secured financial asset;

• the ability and willingness of the borrower to make contractual payments,

notwithstanding a decline in the value of collateral;

• whether the borrower is an individual or a substantive operating entity or is a special-

purpose entity;

• the Bank's risk of loss on the asset relative to a full-recourse loan;

• the extent to which the collateral represents all or a substantial portion of the borrower's

assets; and

• whether the Bank will benefit from any upside from the underlying assets.

Financial assets measured at amortised cost

A debt instrument is measured at amortised cost if it meets both of the following conditions and is

not designated at FVTPL:

• the financial asset is held within a business model where the objective is to hold financial

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”).

Interest income from these financial assets is recognised in ‘Interest income’ using the effective

interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or

loss and presented in ‘Other operating income’ together with foreign exchange gains and losses.

Impairment losses are presented as separate line item in the statement of profit or loss.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.2 Classification and measurement – continued

The 'amortised cost' of a financial instrument is the amount at which the financial instrument 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 (“ECL”)

allowance.

Such financial assets comprise primarily ‘Balances with Central Bank of Malta’, ‘Loans and advances

to banks’, ‘Factored receivables’ and ‘Loans and advances to customers’.

Financial assets measured at fair value through other comprehensive income

A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not

designated at FVTPL:

• the financial asset is held within a business model where the 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.

Movements in the carrying amount are taken through OCI, except for the recognition of

impairment gains or losses, interest income and foreign exchange gains and losses, which are

recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss

previously recognised in OCI is reclassified from equity to profit or loss and recognised in ‘Other

operating income’. Interest income from these financial assets is recognised in ‘Interest income’

using the effective interest rate method. Foreign exchange gains and losses are presented in ‘Other

operating income’, and impairment expenses are presented as separate line item in the statement

of profit or loss.

Such financial assets comprise primarily debt securities measured at FVOCI and classified within

‘Financial investments’.

Equity investments designated at fair value through other comprehensive income

The Bank subsequently measures all equity investments at fair value. On initial recognition of an

equity investment that is not held for trading, the Bank may irrevocably elect to present

subsequent changes in fair value in OCI. This election is made on an instrument-by-instrument basis

and is irrevocable.

Where the Bank’s management has elected to present fair value gains and losses on equity

investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or

loss following the derecognition of the investment. Dividends from such investments continue to

be recognised in profit or loss as ‘Other operating income’ when the Bank’s right to receive

payments is established.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.2 Classification and measurement – continued

Such financial assets comprise primarily equity investments designated at FVOCI and classified

within ‘Financial investments’.

Financial assets measured at fair value through profit or loss

Debt instruments that do not meet the criteria for amortised cost or FVOCI are automatically

classified and measured at FVTPL. The Bank 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. A

gain or loss on a debt instrument that is subsequently measured at FVTPL is recognised in profit or

loss and presented net within ‘Other operating income’ in the period in which it arises.

In addition, equity investments that are not designated at FVOCI at initial recognition are also

classified and measured at FVTPL. Changes in the fair value of financial assets measured at FVTPL

are recognised in ‘Other operating income’ in the statement of profit or loss as applicable.

Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI

are not reported separately from other changes in fair value.

Such financial assets comprise primarily equity investments designated at FVTPL at initial

recognition and classified within ‘Financial investments’.

3.1.3 Derecognition

The Bank derecognises a financial asset when the contractual rights to the cash flows from the

financial asset expire or 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 Bank 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.

Any cumulative gain/loss recognised in OCI in respect of equity investment securities designated

at FVOCI is not recognised in profit or loss on derecognition of such securities. Any interest in

transferred financial assets that qualify for derecognition that is created or retained by the Bank is

recognised as a separate asset or liability.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.4 Modifications of terms

If the contractual terms of a financial asset are modified, the Bank evaluates whether the cash flows

arising from the modified asset are substantially different than those arising from the original

contractual terms of the asset. The Bank applies judgement in assessing whether a change in

contractual terms (such as a change in interest rates or the remaining term of the loan) is

substantial enough to represent an expiry of the original instrument by considering, among others:

• If the borrower is in financial difficulty, whether the modification merely reduced the

contractual cash flows to amounts the borrower is expected to be able to pay;

• Whether any substantial new terms that substantially affect the risk profile of the asset

are introduced;

• Significant extension of the term of the instrument when the borrower is not in financial

difficulty;

• Significant change in the interest rate;

• Change in the currency in which the asset is denominated; and

• Insertion of collateral, other security or credit enhancements that significantly affect the

associated credit risk.

If the cash flows are substantially different, the contractual rights to cash flows from the original

financial asset are deemed to have expired. In this case, the original financial asset is derecognised

(Note 3.1.3) and a new financial asset is recognised at fair value plus any eligible transaction costs.

The date of renegotiation is consequently considered to be the date of initial recognition for

impairment calculation purposes, including for the purpose of determining whether a significant

increase in credit risk has occurred. However, the Bank also assesses whether the new financial

asset recognised is deemed to be credit-impaired at initial recognition, especially in circumstances

where the renegotiation was driven by the borrower being unable to make the originally agreed

payments.

Any fees received as part of the modification are accounted for as follows:

• fees that are considered in determining the fair value of the new asset and fees that

represent reimbursement of eligible transaction costs are included in the initial

measurement of the asset; and

• other fees are included in profit or loss as part of the gain or loss on derecognition.

If the modification of a financial asset measured at amortised cost or FVOCI is not deemed to be

substantial and therefore does not result in the derecognition of the financial asset, the Bank

recalculates the gross carrying amount of the financial asset using the original effective interest

rate of the asset and recognises the resulting adjustment as a modification gain or loss in profit or

loss. For floating-rate financial assets, the original effective interest rate used to calculate the

modification gain or loss is adjusted to reflect current market terms at the time of the modification.

Any costs or fees incurred and fees received in relation to the modification of contractual terms

are reflected in an adjustment to the gross carrying amount of the modified financial asset and

amortised over the remaining term of the modified financial asset. Modification gains or losses are

presented within ‘Interest income’ in profit or loss.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.4 Modifications of terms – continued

If cash flows are modified in view of concessions granted to borrowers experiencing financial

difficulties, the objective of the modification is usually to maximise recovery of the original

contractual terms rather than to originate a new asset with substantially different terms. If the

modification of the financial asset results in the forgiveness of cash flows, the Bank considers

whether a portion of the asset should be written off before the modification takes place. This

approach impacts the result of the quantitative assessment and means that the derecognition

criteria are not usually met in such cases. Modification gains or losses arising as a result of

renegotiations in response to financial difficulties experienced by a borrower are presented

together with impairment losses in profit or loss.

3.1.5 Impairment

The Bank assesses on a forward-looking basis the expected credit losses (“ECL”) associated with its

debt instruments carried at amortised cost and FVOCI and with the exposure arising from loan

commitments, including:

• Loans and advances to banks;

• Debt instruments classified within ‘Financial investments’;

• Factored receivables; and

• Loans and advances to customers.

The Bank recognises credit loss allowances in respect of the above portfolios of financial assets at

each reporting date. No credit loss allowances are recognised in respect of equity investments.

The measurement of ECL reflects:

• an unbiased and probability-weighted amount that is determined by evaluating a range of

possible outcomes;

• the time value of money; and

• reasonable and supportable information that is available without undue cost or effort at

the reporting date about past events, current conditions and forecasts of future economic

conditions.

The Bank measures credit loss allowances at an amount equal to lifetime ECL except for the

following financial instruments, in respect of which credit loss allowances are measured as 12-

month ECL:

• debt securities classified within ‘Financial investments’ that are determined to have low

credit risk at the reporting date; and

• financial instruments that have not had a significant increase in credit risk (“SICR”) since

initial recognition.

Balances held with credit institutions in reputable jurisdictions classified within ‘Loans and

advances to banks’ and debt securities classified within ‘Financial investments’ are considered to

have low credit risk when the financial instrument is assigned an ‘investment-grade’ credit risk

rating. The Bank does not apply the low credit risk exemption to any other financial instrument.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.5 Impairment – continued

12-month ECLs are a portion of lifetime ECLs and represent the lifetime cash shortfalls that result

from default events on a financial instrument that are possible within 12 months from reporting

date. Financial instruments for which a 12-month ECL is recognised are referred to as 'Stage 1’

financial instruments.

Lifetime ECLs are the ECLs that result from all possible default events over the expected life of the

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.

Note 4 provides more detail in respect of the methodology applied for the measurement of credit

loss allowances. Credit loss allowances 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;

• Undrawn loan commitments: generally, as a provision, measured as the present value of

the difference between the contractual cash flows that are due to the Bank if the

commitment is drawn down and the cash flows that the Bank expects to receive;

• Financial instruments having both a drawn and undrawn component, whereby the Bank

cannot identify the ECL on the loan commitment component separately from those on the

drawn component: the Bank presents a combined credit loss allowance for both

components as a deduction from the gross carrying amount of the drawn component;

• Debt instruments measured at FVOCI: no loss allowance is recognised in the Statement of

Financial Position against the carrying amount of the asset because the carrying amount

of these assets represents their fair value. However, the credit loss allowance is disclosed

and is recognised in the fair value reserve within other comprehensive income; and

• Financial guarantee contracts: generally, as a provision, measured as the expected

payments to reimburse the holder less any amounts that the Bank expects to recover.

Renegotiated financial assets

The Bank renegotiates loans and advances to customers in financial difficulties (referred to as

‘forbearance activities’) to maximise collection opportunities and minimise the risk of default.

This practice is not applied to exposures classified within ‘Factored receivables’.

If the terms of a financial asset are renegotiated or an existing financial asset is replaced with a

new one due to financial difficulties of the borrower, an assessment is performed to determine

whether the financial asset should be derecognised. The implications on the ECL calculation

depend on whether the renegotiation leads to derecognition or otherwise, as follows:

• If the restructuring does not result in derecognition of the existing asset, renegotiated

loans are typically considered credit-impaired and accordingly classified as Stage 3 assets

unless no unlikeliness-to-pay (“UTP”) events are deemed to have occurred. Assets that are

credit-impaired at the time of renegotiation remain in Stage 3 post renegotiation. The

credit loss allowance in respect of such exposures is estimated by reference to the

expected cash flows arising from the modified financial asset.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.5 Impairment – continued

When evidence suggests that the renegotiated loan is no longer credit-impaired, the asset

is transferred out of Stage 3 based on an assessment of historical and forward-looking

information and an evaluation of the credit risk over the expected life of the asset,

including information about the circumstances that led to the renegotiation.

• If the restructuring results in derecognition of the existing asset, the restructured asset is

considered a ‘new’ financial asset. Any new financial assets that arise following

derecognition events as a result of substantial modification to the terms of the instrument

are classified as Stage 1 assets, unless the new financial asset is credit-impaired on initial

recognition, in which case it will be classified as a purchased or credit-impaired (“POCI”)

financial asset. A loss is booked in profit or loss (normally as a write-off) since the new

instrument is recognised at fair value.

Other than originated credit-impaired loans, all other modified loans can be transferred out of

Stage 3 if they no longer exhibit any evidence of being credit-impaired and, in the case of

renegotiated loans, there is sufficient evidence to demonstrate a significant reduction in the risk of

non-payment of future cash flows over the minimum observation period, and there are no other

indicators of impairment.

Credit-impaired financial assets

At each reporting date, the Bank assesses whether financial assets carried at amortised cost and

debt instruments classified within ‘Financial investments’ and measured at FVOCI are credit-

impaired (referred to as 'Stage 3 financial assets'). A financial asset is classified as '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 information:

• 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 Bank on terms that the Bank would not

consider otherwise;

• it becoming probable that the borrower will enter bankruptcy or other financial

reorganisation; or

• the disappearance of an active market for a security because of financial difficulties.

A loan that has been renegotiated due to a deterioration in the borrower's condition is usually

considered to be credit-impaired unless there is evidence that the default risk has reduced

significantly and if there are no other impairment indicators. In addition, a loan that is overdue for

90 days or more is considered credit-impaired.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.5 Impairment – continued

In assessing whether a financial investment is credit-impaired, the Bank considers the following

factors:

• The market's assessment of creditworthiness as reflected in bond yields;

• The rating agencies' assessments of creditworthiness, if available;

• The issuer’s ability to access the capital markets for new debt issuance;

• The probability of debt restructuring, resulting in holders suffering losses through

voluntary or mandatory debt forgiveness; or

• In case of sovereign debt issuers, 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.

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 Bank 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. Indicators that

there is no reasonable expectation of recovery include (i) ceasing enforcement activity and (ii)

where the Bank’s recovery method is foreclosing on collateral and the value of the collateral is such

that there is no reasonable expectation of recovering in full. This assessment is performed at the

individual asset level.

Recoveries of amounts previously written off are presented within 'Change in expected credit

losses and other credit impairment charges' in profit or loss.

Financial assets that are written off could still be subject to enforcement activities to comply with

the Bank's procedures for recovery of amounts due.

3.2 Financial liabilities

3.2.1 Initial recognition, classification and measurement

The Bank recognises a financial liability on its Statement of Financial Position when it becomes a

party to the contractual provisions of the instrument. Financial liabilities not at fair value through

profit or loss are recognised initially at fair value, being the fair value of consideration received, net

of transaction costs that are directly attributable to the acquisition or the issue of the financial

liability.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.2 Financial liabilities – continued

3.2.1 Initial recognition, classification and measurement – continued

The Bank classifies its financial liabilities, other than financial guarantees and loan commitments,

as subsequently measured at amortised cost. Financial liabilities measured at amortised cost

comprise principally amounts owed to Central Bank of Malta, banks and customers, debt securities

in issue together with accruals.

3.2.2 Derecognition

The Bank derecognises a financial liability when its contractual obligations are discharged,

cancelled, or expire.

In addition, the Bank derecognises a financial liability when its terms are modified, and the cash

flows of the modified liability are substantially different. In this case, a new financial liability based

on the modified terms is recognised at fair value. The difference between the carrying amount of

the financial liability derecognised and consideration paid is recognised in profit or loss.

Consideration paid includes non-financial assets transferred, if any, and the assumption of

liabilities, including the new modified financial liability.

If the modification of a financial liability is not deemed to be substantial and therefore does not

result in the derecognition of the original financial liability, the amortised cost of the financial

liability is recalculated by discounting the modified cash flows at the original effective interest rate

and the resulting gain or loss is recognised in profit or loss. For floating-rate financial liabilities, the

original effective interest rate used to calculate the modification gain or loss is adjusted to reflect

current market terms at the time of the modification. Any costs and fees incurred are recognised

as an adjustment to the carrying amount of the liability and amortised over the remaining term of

the modified financial liability by re-computing the effective interest rate on the instrument.

3.3 Offsetting financial instruments

Financial assets and financial liabilities are offset and the net amount presented in the statement

of financial position when, and only when, the Bank 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 Bank's trading activity.

3.4 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 Bank has access at that date. The fair

value of a liability reflects its non-performance risk.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.4 Fair value measurement – continued

When one is available, the Bank measures the fair value of an instrument using the quoted price in

an active market for that instrument. A market is regarded as ' active' if transactions for the asset

or liability take place with sufficient frequency and volume to provide pricing information on an

ongoing basis.

If there is no quoted price in an active market, then the Bank uses valuation techniques that

maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The

chosen valuation technique incorporates all the factors that market participants would take into

account in pricing a transaction.

The best evidence of the fair value of a financial instrument on initial recognition is normally the

transaction price - i.e. the fair value of the consideration given or received. If the Bank determines

that the fair value on initial recognition differs from the transaction price and the fair value is

evidenced neither by a quoted price in an active market for an identical asset or liability nor based

on a valuation technique for which any unobservable inputs are judged to be insignificant in

relation to the measurement, then the financial instrument is initially measured at fair value,

adjusted to defer the difference between the fair value on initial recognition and the transaction

price.

Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of

the instrument but no later than when the valuation is wholly supported by observable market

data or the transaction is closed out.

If an asset or a liability measured at fair value has a bid price and an ask price, then the Bank

measures assets and long positions at a bid price and liabilities and short positions at an ask price.

Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk

that are managed by the Bank on the basis of the net exposure to either market or credit risk are

measured on the basis of a price that would be received to sell a net long position (or paid to

transfer a net short position) for the particular risk exposure. Portfolio-level adjustments - e.g. bid-

ask adjustment or credit risk adjustments that reflect the measurement on the basis of the net

exposure - are allocated to the individual assets and liabilities on the basis of the relative risk

adjustment of each of the individual instruments in the portfolio.

The fair value of a financial liability with a demand feature (e.g. a demand deposit) is not less than

the amount payable on demand, discounted from the first date on which the amount could be

required to be paid.

The Bank recognises transfers between levels of the fair value hierarchy as of the end of the

reporting period during which the change has occurred.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.5 Property and equipment

3.5.1 Recognition and measurement

All property and equipment is initially recorded at historical cost, including transaction costs.

Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Items of property and equipment are measured at cost or revalued amount less accumulated

depreciation and any accumulated impairment losses.

Freehold property is subsequently measured at fair value based on periodic valuations by external

independent valuers, less subsequent depreciation. A revaluation is carried out if there is an

indication that the fair value of the property differs materially from the carrying amount as at the

reporting date. Any accumulated depreciation at the date of revaluation is eliminated against the

gross carrying amount of the asset and the net amount is restated to the revalued amount of the

asset.

Equipment is subsequently stated at historical cost less accumulated depreciation and impairment

losses.

3.5.2 Revaluation surplus or deficit

Increases in the carrying amount arising on revaluation of property are credited to the Property

revaluation reserve within equity. Decreases that offset previous increases of the same individual

asset are recognised in the Property revaluation reserve in equity; all other decreases are expensed

in profit or loss. Any subsequent increases are credited to profit or loss up to the amount previously

debited, at which point such increases continue to be credited to the Property revaluation reserve.

Upon disposal of the premises, the relevant portion of the revaluation reserve realised is released

and transferred from the Property revaluation reserve to retained earnings.

Where parts of an item of property and equipment have different useful lives, these are accounted

for as separate items of property and equipment.

3.5.3 Subsequent costs

The cost of replacing a component of an item of property and equipment is recognised in the

carrying amount of the item if it is probable that the future economic benefits emanating from

such component will flow to the Bank and its cost can be measured reliably. The carrying amount

of the replaced part is derecognised. The costs of the day-to-day servicing of property and

equipment are recognised in profit or loss as incurred.

3.5.4 Depreciation

Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives

of each part of an item of property and equipment from the date they are available for use.

Land is not depreciated. Upon revaluation of property, accumulated depreciation is eliminated

against the gross carrying amount of the asset.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.5 Property and equipment – continued

3.5.4 Depreciation – continued

The estimated useful lives for the current and comparative years are as follows:

Premises and improvements 10 – 100 years

Computer hardware 5 years

Motor vehicles 5 years

Other equipment 5 – 7 years

Items with an initial cost of less than €250 (including taxes) are expensed immediately.

3.5.5 Derecognition

Property and equipment are derecognised upon disposal or when no future economic benefits are

expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the

difference between the net disposal proceeds and the carrying amount of the asset) is included in

profit or loss in the year the asset is derecognised. The asset’s residual value, useful life and method

is reviewed, and adjusted if appropriate, at each financial year end.

3.6 Intangible assets - software

Software acquired by the Bank is stated at cost less accumulated amortisation and any

accumulated impairment losses.

Subsequent expenditure on software assets is capitalized only when it increases the future

economic benefits embodied in the specific asset to which it relates. All other expenditure is

expensed as incurred.

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. The estimated useful life of software for the current and

comparative periods is three to fifteen years.

Amortisation methods, useful lives and residual values are reviewed at each financial year end and

adjusted if appropriate.

3.7 Impairment of non-financial assets

The carrying amounts of the Bank’s non-financial assets, other than deferred tax assets, are

reviewed at each reporting date to determine whether there is any indication of impairment. If any

such indication exists, the asset’s recoverable amount is estimated.

The recoverable amount of an asset is the greater of its value in use and its fair value less costs to

sell. In assessing value in use, the estimated future cash flows are 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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.7 Impairment of non-financial assets – continued

For impairment testing, assets that cannot be tested individually are grouped together into the

smallest group of assets that generates cash inflows from continuing use that are largely

independent of the cash inflows of other assets.

An impairment loss is recognised if the carrying amount of an asset or cash-generating unit (“CGU”)

exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss.

Impairment losses recognised in prior periods are assessed at each reporting date for any

indications that the loss has decreased or no longer exists. An impairment loss is reversed if there

has been a change in the estimates used to determine the recoverable amount. 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.

3.8 Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of

ordinary shares are recognised as a deduction from equity net of any tax effects. The Bank presents

basic earnings per share (“EPS”) data for its ordinary shares. Basic EPS is calculated by dividing the

profit or loss attributable to ordinary shareholders of the Bank by the weighted average number

of ordinary shares outstanding during the period.

3.9 Financial guarantees and loan commitments

'Financial guarantees' are contracts that require the Bank to make specified payments to reimburse

the holder for a loss that it incurs because a specified debtor fails to make payment when it is due

in accordance with the terms of a debt instrument. 'Loan commitments' are firm commitments to

provide credit under pre-specified terms and conditions.

Financial guarantees issued or commitments to provide a loan at a below-market interest rate are

initially measured at fair value. Subsequently, they are measured at the higher of the credit loss

allowance determined in accordance with IFRS 9 and the amount initially recognised less, when

appropriate, the cumulative amount of income recognised in accordance with the principles of IFRS

15. Loan commitments provided by the Bank are measured as the amount of the credit loss

allowance.

Liabilities arising from financial guarantees and loan commitments are included within provisions.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.10 Interest income and expense

Effective interest rate

Interest income and expense are recognised in profit or loss using the effective interest method.

The 'effective interest rate' is the rate that exactly discounts estimated future cash payments or

receipts through the expected life of the financial instrument to:

• the gross carrying amount of the financial asset; or

• the amortised cost of the financial liability.

When calculating the effective interest rate for financial instruments other than POCI financial

assets, the Bank estimates future cash flows by reference to the contractual terms of the financial

instrument, excluding expected credit losses. For POCI financial assets, a credit-adjusted effective

interest rate is calculated by reference to estimated future cash flows also taking into consideration

expected credit losses.

The calculation of the effective interest rate includes transaction costs and fees paid or received

that are an integral part of the effective interest rate. Transaction costs include incremental costs

that are directly attributable to the acquisition or issue of a financial asset or financial liability.

Calculation of interest income and expense

The effective interest rate of a financial asset or financial liability is calculated on initial recognition

of a financial asset or a financial liability. 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. The effective interest rate is revised because of

periodic re-estimation of cash flows of floating rate instruments to reflect movements in market

rates of interest.

However, for financial assets that are classified as credit-impaired after initial recognition, interest

income is calculated by applying the effective interest rate to the amortised cost / 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.

For financial assets that were credit-impaired on initial recognition, interest income is calculated

by applying the credit-adjusted effective interest rate to the amortised cost of the asset. The

calculation of interest income does not revert to a gross basis, even if the credit risk of the asset

improves.

Presentation

Interest income calculated using the effective interest method presented in profit or loss

includes:

• interest on financial assets measured at amortised cost; and

• interest on debt instruments measured at FVOCI.

Interest expense presented in profit or loss interest in respect of financial liabilities measured at

amortised cost.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.11 Fees and commission income and expense

Fees and commission income and expense that are integral to the effective interest rate on a

financial asset or liability are included in the measurement of the effective interest rate.

Other fees and commission income, including account servicing fees, credit administration charges

and similar fees, are recognised as the related services are performed. When a loan commitment

is not expected to result in the drawdown of a loan, the related loan commitment fees are

recognised on a straight-line basis over the commitment period.

A contract with a customer that results in a recognised financial instrument may be partially in

scope of IFRS 9 and partially in scope of IFRS 15. In such an event, the Bank first applies IFRS 9 to

separate and measure the part of the contract that is in scope of IFRS 9 and then applies IFRS 15

to the residual.

Other fee and commission expense relates mainly to transaction and service fees, which are

expensed as the services are received.

3.12 Other operating income

The line item includes fair value changes, interest, dividends and foreign exchange differences

attributable to financial instruments measured at FVTPL.

3.13 Dividend income

Dividend income is recognised when the right to receive income is established. Usually, this is the

ex-dividend date for quoted equity investments. Dividends are presented in net trading income,

net income from other financial instruments measured at FVTPL or other revenue based on the

underlying classification of the equity investment.

Dividends on equity instruments designated as at FVOCI that clearly represent a recovery of part

of the cost of the investment are presented in other comprehensive income.

3.14 Leases

At inception of a contract, the Bank 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. To assess whether a contract conveys the right to

control the use of an identified asset, the Bank uses the definition of a lease in IFRS 16.

The Bank does not have right-of-use over assets that span over a long term or that are of significant

value.

Short term leases and leases of low-value assets

The Bank has elected not to recognise right-of-use assets and lease liabilities for leases of low-value

assets and short-term leases. The Bank recognises the lease payments associated with these leases

as an expense on a straight-line basis over the lease term.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.15 Employee benefits

The Bank contributes towards the State pension defined contribution plan in accordance with local

legislation and to which it has no commitment beyond the payment of fixed contributions.

Obligations for contributions to the defined contribution plan are recognised as an expense in

profit or loss as they fall due.

3.16 Income tax

Income tax expense comprises current and deferred tax. Current tax and deferred tax are

recognised in profit or loss except to the extent that it relates to items recognised directly in equity,

or in other comprehensive income.

Current tax comprises the expected tax payable or receivable on the taxable income or loss for the

year and any adjustment to the tax payable or receivable in respect of previous years. The amount

of current tax payable or receivable is the best estimate of the tax amount expected to be paid or

received that reflects uncertainty related to income taxes, if any. It is measured using tax rates

enacted or substantively enacted at the reporting date. Current tax also includes any tax arising

from dividends. Current tax assets and liabilities are offset only if certain criteria are met.

Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible

temporary differences to the extent that it is probable that future taxable profits will be available

against which they can be used. Future taxable profits are determined based on the reversal of

relevant taxable temporary differences. If the amount of taxable temporary differences is

insufficient to recognise a deferred tax asset in full, then future taxable profits, adjusted for

reversals of existing temporary differences, are considered, based on business plans. Deferred tax

assets are reviewed at each reporting date and are reduced to the extent that it is no longer

probable that the related tax benefit will be realised; such reductions are reversed when the

probability of future taxable profits improves.

Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the

extent that it has become probable that future taxable profits will be available against which they

can be used. Deferred tax is measured at the tax rates that are expected to be applied to temporary

differences when they reverse, using tax rates enacted or substantively enacted at the reporting

date. Deferred tax assets and liabilities are only offset when they arise in the same tax reporting

group and relate to income taxes levied by the same taxation authority, and when the Bank has a

legal right to offset.

3.17 Foreign currency transactions

Transactions in foreign currencies are translated into the functional currency of the Bank at the

spot exchange rates at the date of the transactions.

Monetary assets and liabilities denominated in foreign currencies are translated into the functional

currency at the spot exchange rate at the reporting date. The foreign currency gain or loss on

monetary items is the difference between the amortised cost in the functional currency at the

beginning of the year, adjusted for effective interest and payments during the year, and the

amortised cost in the foreign currency translated at the spot exchange rate at the end of the year.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

3 Significant accounting policies – continued

3.17 Foreign currency transactions – continued

Non-monetary assets and liabilities that are measured at fair value in a foreign currency are

translated into the functional currency at the spot exchange rate at the date on which the fair

value is determined. Non-monetary items that are measured based on historical cost in a foreign

currency are translated using the spot exchange rate at the date of the transaction.

Foreign currency differences arising on translation are generally recognised in profit or loss save

for foreign currency differences arising from equity investments in respect of which an election

has been made to present subsequent changes in fair value in other comprehensive income.

3.18 Cash and cash equivalents

Cash and cash equivalents comprise notes and coins in hand, unrestricted balances held with the

Central Bank of Malta and highly liquid financial assets with original maturities of three months or

less from the date of acquisition that are subject to an insignificant risk of changes in their fair

value, and are used by the Bank in the management of its short-term commitments.

Cash and cash equivalents are carried at amortised cost in the statement of financial position.

3.19 Segment reporting

An operating segment is a component of the Bank that engages in business activities from which it

may earn revenues and incur expenses, including revenue and expenses that relate to transactions

with any of the Bank’s other components, whose operating results are reviewed regularly by the

Bank’s Board of Directors (being the chief operating decision maker), to make decisions about

resources allocated to each segment and assess its performance, and for which discrete financial

information is available.

3.20 Dividend distribution

Dividend distribution to the Bank’s shareholders is recognised as a liability in the Bank’s financial

statements in the period in which the dividends are approved by the Bank’s shareholders.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review

4.1 Organisation

The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s

risk management framework. The Board has established the Audit and Risk Committee and the

Credit Committee with the responsibility for monitoring risk in their specified areas. Non-

executive directors sit on these Committees whereas the Chief Executive Officer (“CEO”) is either

a member of, or otherwise attends, all Committees. The Committees report regularly to the Board

of Directors on their activities. The Board has also established an Asset and Liability Management

Committee (“ALCO”) which is a management committee that reports to the Board of Directors on

a quarterly basis.

Risk management policies have been established to identify and analyse the risks faced by the

Bank, to set out 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, products and services offered. The Bank has developed appropriate risk management

training for the needs of the relevant staff members.

4.2 Risk exposure

The Bank is exposed to a number of risks, which it manages at different organisational levels.

The main categories of risk are:

• Credit risk;

• Market risk;

• Liquidity risk; and

• Operational risk.

4.3 Credit risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial

instrument fails to meet its contractual obligations, and arises principally from the Bank’s factored

receivables, loans and advances to customers and banks, investment debt securities, and loan

commitments arising from lending activities. For risk management reporting purposes, the Bank

considers and consolidates all elements of credit risk exposure (such as individual obligor default

risk, country and sector risk).

The Bank follows standards, policies and procedures established by the Bank’s Board of Directors

for the control and monitoring of credit risk. The Board of Directors has delegated the

responsibility for the management of credit risk to the Credit Committee within a Board-approved

credit sanctioning limit. The Bank’s management reports to the Credit Committee and the Board

of Directors in respect of their responsibility for the management and oversight of credit risk

within the Bank’s portfolios of financial instruments. The responsibilities comprise the following:

• Formulating credit policies in consultation with business units, in respect of collateral

requirements, credit risk assessments, risk grading and reporting, legal procedures, and

compliance with regulatory and statutory requirements.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

• Establishing the authorisation structure for the approval and renewal of credit facilities.

Authorisation limits are allocated to the CEO, the Head of Finance and Treasury, the Credit

Committee or the Board of Directors, as appropriate.

• Reviewing and assessing credit risk: the Bank’s Credit department assesses the level of

credit risk exposure in respect of all credit exposures, both prior to origination as well as

thereafter. In this respect, the Credit department performs credit risk reviews on a

periodic basis to monitor the level of credit risk subsequent to origination date. Exposures

in excess of designated limits are referred for approval to the Credit Committee or the

Board of Directors, as necessary.

• Limiting concentrations of exposure to counterparties, geographies and industries (for

lending exposures) and to issuers, credit rating bands, markets and countries (for financial

investments).

• Developing and maintaining the Bank's risk gradings to categorise exposures according to

the degree of default risk. The current risk grading framework consists of 6 grades

reflecting varying degrees of default risk, as described in Note 4.3.4 of the financial

statements. The responsibility for setting risk grades lies with the final approving executive

or committee, as appropriate. Risk grades are subject to regular reviews by senior

management.

• Developing and maintaining the Bank's processes for measuring expected credit losses

(“ECLs”), including:

• The initial approval, regular validation and back-testing of the models used;

• The identification of SICR and UTP events; and

• The incorporation of forward-looking information in the ECL calculation.

• Reviewing compliance of departments with agreed exposure limits, including those for

selected industries, country risk and product types. Regular reports on the credit quality

of the Bank’s portfolios are provided to the Credit Committee, which may require

appropriate corrective action to be taken. These include reports containing estimates of

ECL allowances.

• Providing advice, guidance and specialist skills to departments to promote best practice

throughout the Bank in respect of the management of credit risk.

The Bank’s principal exposure to credit risk arises from the ‘Factored receivables’ portfolio as well

as the Bank’s lending portfolio classified as ‘Loans and advances to customers’. The former portfolio

comprises two sub-portfolios, both of which represent factoring of receivables on a non-recourse

basis: i) factoring of local bills of exchange (hereinafter referred to as the “Bills of exchange

factoring” sub-portfolio) amounting to €66.6 million as at 31 December 2021; and ii) factoring of

invoices issued by local and foreign customers (hereinafter referred to as the “Invoice factoring”

sub-portfolio) amounting to €29.3 million as at 31 December 2021.

‘Loans and advances to customers’ comprises the sanctioning of term loans and advances and

overdraft facilities to local corporate customers, amounting to €95.3 million as at 31 December

2021, as well as term lending exposures provided to related parties on an arm’s length basis,

amounting to €36.4 million as at 31 December 2021.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

The outbreak of the Covid-19 pandemic during the financial year ended 31 December 2020 has

resulted in unprecedented economic conditions, which have impacted a significant number of the

Bank's customers’ business models, income levels and cash flow generation capacity. The level of

economic uncertainty induced by the pandemic remains elevated as at 31 December 2021,

specifically in respect of the emergence of new waves of infections or virus strains, the status and

efficacy of vaccination programmes, together with the unwinding of government support schemes

and regulatory relief measures.

The level of local macroeconomic uncertainty increased subsequent to the grey-listing of Malta by

the Financial Action Task Force (“FATF”) in June 2021. The estimated economic impact of grey-

listing remains uncertain since this is highly dependent on the speed at which Malta exits grey-

listing, the effectiveness of national efforts to address the findings, and the response of foreign

investors.

In this respect, the Bank has continued to support its customers and adapted its credit risk

management processes accordingly to enable the identification of deterioration in credit risk within

its portfolios as early as possible and estimating credit loss allowances using the best possible

judgement.

During the financial years ended 31 December 2020 and 2021, the Bank granted moratoria on

capital and/or interest payments to customers and originated new loans to provide relief to

customers experiencing liquidity pressures induced by the prevailing macroeconomic conditions.

In this respect, the Bank enhanced its credit risk monitoring activities on its loan portfolio,

especially in respect of customers being granted moratoria or relief facilities, to determine whether

the shock induced by Covid-19 may transform into long-term financial difficulties, thereby

potentially requiring a downgrade of individual exposures to stage 2 or stage 3 to reflect the change

in the level of credit risk as appropriate.

During 2021, the Bank continued to individually rate borrowers deemed mostly impacted by the

pandemic through individual credit risk assessments, on the basis of recently obtained

management information and, where available, forecasts. More information became available in

respect of the impact of Covid-19 on specific borrowers during 2021, enabling management to

assess borrower-specific credit risk levels and identify SICR or UTP events.

In respect of the Bills of exchange factoring sub-portfolio, the Bank has enhanced its credit risk

management processes at origination through the development of a scorecard designed to capture

increased levels of credit risk in respect of individual debtors. The Bank assesses the individual

debtor’s level of credit risk by reference to the debtor’s net disposal income and employment

status, amongst other factors featuring in the scorecard. Specifically, the Bank has restricted the

factoring of bills of exchange in respect of debtors whose employment is deemed to have been

impacted by the pandemic. In case of corporate debtors, the Bank has halted new financing of bills

of exchange in respect of companies operating in sectors that are deemed to have been

significantly impacted by the pandemic, including the car rental services industry, the tourism and

accommodation industry, and the taxi industry.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

Similarly, the Bank has enhanced its credit risk management processes at origination in respect of

Invoice factoring facilities by restricting factoring of new invoices in respect of corporate customers

which are deemed to have been impacted by the pandemic, such as corporate customers operating

within the aviation industry.

The unprecedented nature of the pandemic induced an elevated level of uncertainty in respect of

economic outlook. In this respect, the extent to which macroeconomic forecasts accurately reflect

the effects of new virus strains, the distribution and efficacy of vaccines (and vaccine boosters) and

eventual business recovery remains uncertain. These factors necessitate heightened expert

judgement to determine the range of possible economic outcomes used for the purposes of

estimating ECL. Further information in respect of macroeconomic forecasts reflected within the

ECL calculations is provided in Note 4.3.2.4.

4.3.1 Credit risk measurement

Measurement of credit risk considers that an exposure varies with changes in market conditions,

expected cash flows and the passage of time. The Bank’s internal models measure expected credit

losses by portfolio using probability of default (“PD”), exposure at default (“EAD”) and loss given

default (“LGD”) parameters.

(a) Loans and advances to customers

The Bank uses internal credit risk grades (refer to Note 4.3.4) to reflect its assessment of the

probability of default of individual counterparties or facilities. Internal credit risk gradings are based

on payment behaviour, loan specific information and expert judgement of the Bank’s Credit

Committee.

Information considered by the Bank when determining the internal credit risk grades includes the

payment behaviour of the borrower, compliance with financial covenants, and other information

impacting a corporate borrower’s creditworthiness assessment, including historical information in

respect of its financial performance and financial position as well as forecasted financial

information. Management also takes into consideration non-financial indicators in the

performance of credit risk assessments, such as the timeliness of the provision of financial

information, the industry-specific outlook and the impact of general macroeconomic conditions on

the borrower’s financial performance.

The internal credit risk grades are calibrated such that they reflect the increased risk of default at

each higher risk grade. The rating is determined at the borrower level through the performance of

a creditworthiness assessment of the borrower in each periodic review, which is performed at least

on an annual basis.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.1 Credit risk measurement – continued

(b) Factored receivables

Unlike corporate exposures classified within ‘Loans and advances to customers’, both bills of

exchange factoring and invoice factoring facilities classified within ‘Factored receivables’ are not

managed on a credit by credit basis due to the high volume of relatively low value and

homogeneous exposures.

In respect of bills of exchange factoring facilities, the credit risk assessment after the date of initial

recognition is based on the payment behaviour of debtors, which is monitored on an ongoing basis.

The Bank therefore distinguishes between ‘problematic’ and ‘non-problematic’ exposures by

reference to the number of overdue monthly bill payments at any given point in time.

In respect of invoice factoring facilities, the Bank performs its credit risk assessment at the debtor

level by (i) monitoring the payment behaviour of any particular debtor by reference to the

proportion of invoices which are past due at any given point in time; and (ii) determining PDs by

reference to a credit score assigned to each debtor, which credit score is sourced from a third party

external vendor and captures other information about the borrower which impacts their

creditworthiness, such as financial performance and previous delinquency history.

Other financial assets include balances with the Central Bank of Malta, loans and advances to banks

and financial investments. The Bank considers public credit ratings determined by external credit

rating agencies to assess the probability of default of individual counterparties. Such public credit

ratings are continuously monitored and updated, with the associated PD being determined by

reference to realised default rates over the prior 12 months. In determining the probability of

default of individual counterparties, the Bank distinguishes between investment-grade and sub-

investment grade counterparties.

4.3.2 Expected credit loss measurement

IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial

recognition as summarised below:

• A financial instrument that is not credit-impaired upon initial recognition is classified in

‘Stage 1’.

• If a significant increase in credit risk (“SICR”) since initial recognition is identified, the

financial instrument is moved to ‘Stage 2’ but is not yet deemed to be credit-impaired.

Refer to Note 4.3.2.1 for a description of how the Bank determines when a SICR has

occurred.

• If the financial instrument becomes credit-impaired, the financial instrument is moved to

‘Stage 3’. Refer to Note 4.3.2.2 for the Bank’s definition of credit-impaired.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.2 Expected credit loss measurement – continued

• Financial instruments in ‘Stage 1’ have their ECL measured at an amount equal to the

portion of lifetime expected credit losses that result from default events possible within

the next 12 months. Instruments in ‘Stage 2’ or ‘Stage 3’ have their ECL measured based

on expected credit losses on a lifetime basis. Refer to Note 4.3.2.3 for a description of

inputs, assumptions and estimation techniques used in measuring the ECL.

• A pervasive concept in measuring ECL in accordance with IFRS 9 is that forward-looking

information is considered. Note 4.3.2.4 includes an explanation of how the Bank has

incorporated forward looking information into ECL models.

• Purchased or originated credit-impaired financial assets are those financial assets that are

credit-impaired upon initial recognition. The ECL in respect of POCI exposures is always

measured on a lifetime basis (‘Stage 3’).

The expected credit loss requirements apply to financial assets measured at amortised cost and

FVOCI, and certain loan commitments. At initial recognition, a credit loss allowance (or provision

in the case of loan commitments) is required for ECL resulting from default events that are possible

within the next 12 months (“12-month ECL”). In the event of a significant increase in credit risk, an

allowance (or provision) is required for ECL resulting from all possible default events over the

expected life of the financial instrument (“lifetime ECL”).

The Bank recognises credit loss allowances at an amount equal to 12-month ECL for debt

investment securities that are determined to have low credit risk at the reporting date. The Bank

considers a debt security to have low credit risk when it is considered ‘investment-grade’, as

defined by external credit rating agencies. The following diagram summarises the impairment

requirements under IFRS 9 (other than POCI financial assets):

4.3.2.1 Significant increase in credit risk

When determining whether the risk of default on a financial instrument has increased significantly

since initial recognition, the Bank 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 Bank's historical experience and expert credit assessment

and including forward-looking information.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.2 Expected credit loss measurement – continued

4.3.2.1 Significant increase in credit risk – continued

For exposures classified within ‘Loans and advances to customers’, the Bank primarily identifies

whether a SICR has occurred since initial recognition by reference to the internal risk gradings

determined on an individual borrower level. The Bank allocates each exposure to an internal credit

risk grade based on financial and non-financial information which is deemed to be predictive of the

risk of default. Amongst other things, reference is made to audited financial statements,

management accounts, budgets and projections. Management applies expert credit judgement in

assessing the level of credit risk attributable to specific borrowers. Exposures are subject to ongoing

monitoring, which may result in an exposure being moved to a different internal rating grade (refer

to Note 4.3.4).

The Bank classifies non-defaulted exposures into ‘Stage 2’ when the borrower is classified within

the ‘Substandard’ internal credit risk grade and / or forbearance measures have been granted to

the borrower, unless additional UTP events have been identified.

As referred to previously, the macroeconomic conditions being experienced as a result of the

Covid-19 pandemic have exacerbated the level of uncertainty, particularly with respect to the

identification of customers that would have experienced a SICR. This is also attributable to

limitations in credit information available on customers, particularly where these customers were

granted a general payment moratorium, as well as the potential delay in default emergence as a

result of the application of other government support schemes which might veil longer term

financial difficulties.

Borrowers that requested payment deferrals/moratoria or relief facilities, which are deemed

mostly impacted by the pandemic, are assessed periodically for SICR and UTP events by reference

to recently obtained management information, including forecasts. During 2021, more information

became available in respect of the impact of Covid-19 on specific borrowers and industry sectors,

both in terms of actual financial performance and revised forecasts reflecting more accurate

impacts of the pandemic when compared to prior year estimates. This enabled management to

better identify SICR events, resulting in migrations from stage 1 to 2, as per information presented

in Note 4.3.5.

In relation to ‘Factored receivables’, SICR is generally determined on the basis of delinquency

related indicators since less information is available at asset level to enable the timely identification

of a SICR.

In addition, the Bank uses a backstop of 30 days past due to determine whether a significant

increase in credit risk has occurred since origination in respect of loans and advances to customers

as well as exposures classified within the Bills of exchange factoring portfolio.

Due to the short-term nature of facilities within the Invoice factoring portfolio, the Bank does not

distinguish between exposures classified within Stage 1 or Stage 2 since the lifetime PD is deemed

to be equivalent to the 12-month PD.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.2 Expected credit loss measurement – continued

4.3.2.1 Significant increase in credit risk – continued

In the case of other financial assets (including loans and advances to banks and debt investment

securities), the Bank applies the low credit risk simplification to exposures having an ‘investment

grade’ public credit rating. In this respect, such exposures are not subject to the SICR assessment.

Moving from ‘investment-grade’ to ‘sub-investment grade’ does not automatically trigger a SICR.

4.3.2.2 Definition of default and credit-impaired assets

The Bank’s assessment to determine the extent of increase in credit risk of a financial instrument

since initial recognition is performed by considering the change in the risk of default occurring over

the remaining life of the financial instrument.

The Bank applies the definition of default in a consistent manner with internal credit risk

management practice for the relevant instruments and the definition considers qualitative and

quantitative factors where appropriate.

The Bank determines that a financial instrument is credit-impaired or in default (and accordingly

classified as Stage 3) by considering relevant objective evidence, primarily whether:

• contractual payments of either principal or interest are past due for more than 90 days

for any material credit obligations to the Bank; and

• for exposures classified within loans and advances to customers, there are other

indicators that the borrower is unlikely to pay without realisation of collateral, such as an

observed deterioration in the financial performance and / or financial position of the

borrower; covenant breaches; concessions granted to a borrower experiencing financial

difficulties.

As described earlier, the staging determination in respect of factored receivables is based on

payment behaviour, since these portfolios comprise exposures which are homogeneous and

individually low in value.

The default definition is applied consistently when modelling PD, EAD and LGD parameters

throughout the Bank’s expected credit loss calculations.

Due to the elevated level of uncertainty induced by the Covid-19 pandemic, as well as the potential

delayed default emergence due to the implementation of government support schemes, the Bank

performed borrower-level assessments in respect of exposures classified within loans and

advances to customers to determine whether the short-term economic shock as a result of the

pandemic may transform into long-term borrower financial difficulties, thereby potentially

requiring a downgrade of individual exposures to Stage 3 to reflect the level of change in credit

risk.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.2 Expected credit loss measurement – continued

4.3.2.2 Definition of default and credit-impaired assets – continued

An instrument is considered to have cured from defaulted status when it no longer meets any of

the default criteria for a period of three consecutive months and, in case of forborne exposures, a

period of 12 consecutive months.

The Bank considers other financial assets to be in default when a payment (including a coupon

payment) becomes overdue by 1 day or more.

4.3.2.3 Measurement of ECL

The key inputs into the measurement of ECL comprise the PD, LGD and EAD, with the term structure

being determined in respect of each parameter.

ECL for exposures in Stage 1 is calculated by multiplying the 12-month PD by LGD and EAD. Lifetime

ECL is calculated by multiplying the lifetime PD by LGD and EAD.

ECL are determined by projecting the PD, LGD and EAD for each future period until maturity and

for each individual exposure. These three components are multiplied and adjusted for the

likelihood of survival (i.e. the exposure has not prepaid or defaulted in an earlier month). This

effectively calculates ECL for each future month, which are then discounted back to the reporting

date. The discount rate used in the ECL calculation is the original effective interest rate.

Probability of default

The PD represents the likelihood of a borrower defaulting on its financial obligation (as defined in

Note 4.3.2.2), either over the next 12 months (12-month PD) or over the remaining lifetime

(lifetime PD) of the obligation.

In the case of loans and advances to customers, the PD calculation is based on a transition matrix

approach. The main assumptions underlying the latter approach is that the PD does not depend on

‘months on book’ and that the future PD depends on current characteristics of the exposure or

borrower.

Specifically, the Bank employs statistical models to analyse data collected in respect of each

individual borrower, including financial performance, payment behaviour and country risk, and

assign a credit score accordingly. Credit scores are then mapped to a rating scale, on the basis of

which a PD is assigned to each borrower. The rating scale to PD matrices are calibrated based on

historical default data observed in the market, where the data was sourced from external credit

rating agencies.

As described in Note 4.3.2, the determination of staging is based on a qualitative assessment

performed at borrower level. In this respect, the estimation of 12-month or lifetime PDs in respect

of any given borrower is determined by reference to assigned internal credit risk grades.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.2 Expected credit loss measurement – continued

4.3.2.3 Measurement of ECL – continued

Lifetime PDs are estimated by applying a maturity profile to the 12-month PD. The maturity profile

looks at how defaults develop on a portfolio from the point of initial recognition throughout the

lifetime of the loans. The maturity profile is based on historical observed data and is assumed to

be the same across all assets within a portfolio.

In the case of bills of exchange factoring facilities, the Bank’s PDs are determined by reference to

an internally developed statistical model based on a Markov chain approach. In this respect, 12-

month transition matrices were derived from internal historical data. Default is considered to be

an absorbing state, whereby if an exposure is defaulted, it subsequently remains in default for the

purposes of estimation of PDs.

A seven-tier rating scale has been developed, designed to capture different potential states of

delinquency, ranging from a ‘current’ status to a ‘360DPD+’ status. Exposures classified within each

of the seven-tier rating scales are assigned a PD determined on the basis of internal historical

delinquency information. Each tier is then mapped to a relative stage, as described in Note 4.3.4.

A cure rate is also applied, also estimated by reference to internal historical delinquency

information in respect of this portfolio.

In the case of invoice factoring facilities, PDs are sourced from an external vendor. In this respect,

a debtor-specific credit score is assigned by the external vendor based on borrower-specific

information. PDs are then determined by reference to the debtor-specific credit score. Due to the

short-term maturity profile of such exposures, no distinction is made between 12-month and

lifetime PDs for the purposes of the ECL calculation.

Market data is used to estimate the PD of financial investments. If a counterparty or exposure

migrates between external credit ratings, this will lead to a change in PD.

As described in further detail in Note 4.3.2.4, the 12-month and lifetime PDs estimated in respect

of loans and advances to customers and bills of exchange factoring facilities also take into

consideration forward-looking economic information.

Loss given default

The LGD represents the Bank’s expectation of the extent of the loss on a defaulted exposure. LGD

is expressed as a percentage loss per unit of exposure at the time of default (EAD). The Bank

estimates the LGD on the basis of historical recovery rates of claims against defaulted

counterparties. The estimation of LGD considers the structure and seniority of the claim, together

with the nature and recoverability / enforceability of collateral and associated recovery costs.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.2 Expected credit loss measurement – continued

4.3.2.3 Measurement of ECL – continued

Loans and advances to customers are primarily secured by residential and / or commercial real

estate, as well as cash pledges. In respect of the former, the LGD takes into consideration projected

collateral values, historical discounts to market values to reflect a deduction in future proceeds due

to costs to sell and potential loss in value in a forced sale scenario, and time to repossession. A key

determinant for the LGD applied to exposures secured by real estate is the adjusted Loan-to-Value

ratio of individual facilities, which takes into account the expected recovery by applying haircuts

for the cost to sell the property.

For unsecured loans and advances to customers, a 100% LGD is assumed by the Bank.

For bills of exchange factoring facilities, the LGD is determined by reference to the value of the

motor vehicle being financed. Specifically, it is assumed that the original value of the motor vehicle

is depreciated on a straight-line basis over its useful life. In addition, the LGD calculation also takes

into consideration the collateral provided by the factoring clients, which comprises pledged cash

held with the Bank to cover potential losses from factored bills of exchange.

In the case of invoice factoring facilities, the Bank purchases credit insurance from a foreign third

party underwriter which provides insurance cover in respect of losses up to 95% of each eligible

invoice. In this respect, the LGD applied to invoice factoring facilities is determined on this basis.

Exposure at default

EAD represents the expected exposure in the event of a default. The EAD of a financial asset is its

gross carrying amount at the time of default. For lending commitments, the EAD reflects an

estimation of potential future drawdowns permissible in terms of the contract, which are

estimated based on historical observations and forward-looking expectations.

For loans and advances to customers and bills of exchange factoring facilities, the Bank estimates

the EAD by reference to the current exposure to the counterparty and potential changes to the

exposure due to contractual repayments.

For invoice factoring facilities, the EAD is assumed to be equal to the gross carrying amount of the

exposure at reporting date, since repayments from each facility are expected to be made in one

instalment in line with the invoice credit terms.

Period over which ECL is measured

The Bank measures ECL considering the risk of default over the maximum contractual period over

which it is exposed to credit risk (including any extension options), even if, for credit risk

management purposes, the Bank considers a longer period. The maximum contractual period

extends to the date at which the Bank has the right to require repayment of an advance or

terminate a loan commitment.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.2 Expected credit loss measurement – continued

4.3.2.3 Measurement of ECL – continued

However, for revolving facilities that include both a loan and an undrawn commitment component,

the Bank measures ECL over a period longer than the maximum contractual period if the Bank's

contractual ability to demand repayment and cancel the undrawn commitment does not limit the

Bank's exposure to credit losses to the contractual notice period. These facilities do not have a fixed

term or repayment structure and are managed on a collective basis. The Bank can cancel them with

immediate effect, albeit this contractual right is not enforced in the normal day-to-day

management unless the Bank becomes aware of an increase in credit risk at facility level. This

longer period is estimated considering the credit risk management actions that the Bank expects

to take, and that serve to mitigate ECL. These include a reduction in limits, cancellation of the

facility and/or turning the outstanding balance into a loan with fixed repayment terms.

4.3.2.4 Forward-looking information incorporated in the ECL model

The calculation of ECL incorporates forward-looking information. The Bank performs a historical

analysis to identify the key economic variables affecting credit risk and expected credit losses for

each portfolio. These economic variables and their associated impact on ECL may vary by portfolio.

Expert judgement has been applied in the process.

The key drivers of credit risk and credit losses for each portfolio were determined on the basis of a

statistical regression analysis of historical relationships between macroeconomic variables and

market default data. These key macroeconomic variables determined in respect of each portfolio

are disclosed below:

• Loans and advances to customers: the Euro area real Gross Domestic Product (“GDP”) and

the Euro area Terms of Trade (“ToT”), reflecting the impact of general economic activity

on the financial performance of corporate entities;

• Bills of exchange factoring: the Euro area real GDP, which is deemed to be a good indicator

of general economic activity.

Given the short-term nature of invoice factoring facilities, the impact of forward-looking

information on the estimation of ECL in respect of these exposures is not deemed to be significant.

Three possible scenarios are considered to capture non-linearity across credit portfolios. The

‘baseline’ scenario represents the most-likely outcome. Macroeconomic forecasts in respect of

these macroeconomic variables are sourced from an authoritative source on a semi-annual basis,

providing the best estimate view of the economy over the next five years. After five years, to

project the macroeconomic variables out for the full remaining lifetime of each financial

instrument, a mean reversion approach is used, with the macroeconomic variables assumed to

tend to a long-run average growth rate.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.2 Expected credit loss measurement – continued

4.3.2.4 Forward-looking information incorporated in the ECL model – continued

In addition to the ‘baseline’ scenario, the Bank considers an ‘upside’ and a ‘downside’

macroeconomic scenario, which respectively represent a more optimistic and a more pessimistic

outcome, reflecting economically plausible upside and downside scenarios. The relative paths for

the macroeconomic variables in the ‘upside’ and ‘downside’ scenarios are determined through

statistical variance analysis techniques applied to the ‘baseline’ scenario.

Each scenario is weighted by a probability of occurrence, determined by a combination of

macroeconomic research and expert credit judgment, taking into account the range of possible

outcomes each chosen scenario represents. The ECL under each scenario is multiplied by the

appropriate scenario weighting to determine a probability-weighted ECL.

As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high

degree of inherent uncertainty and, as a result, the actual outcomes may be significantly different

to those projected. The level of uncertainty was exacerbated following in the aftermath of the twin

shocks of a public health emergency triggered by the Covid-19 pandemic and the resultant

economic fallout, which have been felt around the world.

The sharp contraction in economic activity experienced in both global and local economies has had

varying effects on different industry sectors, with borrowers operating or employed within such

industry sectors experiencing financial difficulties. At the same time, measures designed to soften

the extent of the damage to economic activity and the labour market were announced by the

Maltese government, as well as European and local regulatory authorities. Such measures include

income support to households, funding support to businesses (including through government

guaranteed schemes), as well as the granting of general public moratoria on capital and/or interest

repayments in response to the outbreak of the pandemic.

The current financial year was characterised by strong economic growth as the global and local

economies bounced back resulting in abnormally high growth rates principally due to a spending

spree unfolding as facilitated by successful vaccination campaigns. The strong growth rates during

2021 reflect the dynamics throughout the year, but also the low base value in 2020 due to the

economic downturn. The autumn wave of infections towards the end of the year was stronger than

expected, resulting in stricter government measures. The base assumption is that these measures

remain focused on the unvaccinated, as current vaccines are expected to provide a degree of

efficacy against the variants, thus avoiding the need for prolonged, full-scale lockdowns in the

eurozone. However, it is forecasted that the effect of the pandemic on economic activity will be

more contained than in previous outbreaks. The unwinding of government support schemes and

regulatory relief measures introduced in response to the pandemic also commenced during the

current financial year, taking cognisance of economic developments.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.2 Expected credit loss measurement – continued

4.3.2.4 Forward-looking information incorporated in the ECL model – continued

In view of the above, a significant judgement within the Bank’s estimation of credit loss allowances

relates to the determination of forward-looking scenarios reflecting potential future economic

conditions under different scenarios and their impact on the ECL calculation. The Bank considers

these forecasts to represent its best estimate of the possible outcomes.

The most significant year end assumptions used for the ECL estimate as at 31 December 2021 and

31 December 2020 are set out below.

As at 31 December 2021

Euro area real GDP growth rate (%)

Euro area Terms of Trade (%)

Baseline

Upside

Downside

Baseline

Upside

Downside

2022

3.10

6.34

-0.14

-1.60

-0.61

-2.60

2023

2.21

5.46

-1.03

-0.63

0.36

-1.62

2024

1.70

4.95

-1.54

-0.21

0.79

-1.20

2025

1.42

4.66

-1.83

-0.02

0.97

-1.01

2026

1.77

5.02

-1.47

-0.29

0.71

-1.28

As at 31 December 2020

Euro area real GDP growth rate (%)

Euro area Terms of Trade (%)

Baseline

Upside

Downside

Baseline

Upside

Downside

2021

2.21

2.71

1.71

-0.22

0.28

-0.72

2022

1.70

2.20

1.20

-0.14

0.36

-0.64

2023

2.34

2.84

1.84

-0.14

0.36

-0.64

2024

2.08

2.58

1.58

-0.16

0.34

-0.66

2025

2.04

2.54

1.54

-0.15

0.35

-0.65

The weightings assigned to the ‘baseline’, ‘upside’ and ‘downside’ scenarios are 50% (2020: 50%),

25% (2020: 25%) and 25% (2020: 25%) respectively.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.2 Expected credit loss measurement – continued

4.3.2.4 Forward-looking information incorporated in the ECL model – continued

Economic scenarios sensitivity analysis of ECL estimates

The outcome of the Bank’s credit loss allowances estimation process is sensitive to judgements and

estimations made throughout the incorporation of forward-looking economic conditions.

Management has assessed the sensitivity of ECLs by assigning a 100% weighting to the baseline,

downside and upside scenarios respectively. The Bank’s credit loss allowances would increase by

€862,371 (2020: €22,203) if these had to be estimated solely on the basis of the downside scenario

and would reduce by €232,781 (2020: €22,203) if these had to be estimated solely on the basis of

the upside scenario.

4.3.3 Maximum exposure to credit risk

The Bank’s maximum credit risk exposure to on and off-balance sheet financial instruments, before

taking account of any collateral held or other credit enhancements can be classified in the following

categories:

• Financial assets recognised in the statement of financial position comprise balances with

Central Bank of Malta, loans and advances to banks, financial investments, factored

receivables, and loans and advances to customers. The maximum exposure to credit risk in

respect of these financial assets equals their carrying amount.

• Commitments in respect of factored receivables, overdrafts, and credit cards - the

maximum exposure to credit risk is the full amount of the committed facilities (Note 27).

The following table presents the maximum exposure to credit risk from balance sheet and off-

balance sheet financial instruments before taking account of any collateral held or other credit

enhancements.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.3 Maximum exposure to credit risk – continued

Accrued income substantially arises from factored receivables and loans and advances to

customers. Expected credit losses in respect of accrued income, which are not deemed material,

have been allocated to factored receivables and loans and advances to customers. Similarly,

expected credit losses in respect of undrawn commitments are also allocated to loans and

advances to customers.

2021

2020

Gross

carrying

Allowance

carrying

Allowance

amount

For ECL

amount

For ECL

€

Credit risk exposure relating to

on-balance sheet assets

Subject to IFRS 9 impairment

requirements

Financial assets measured at

amortised cost

Balances with Central

Bank of Malta

16,192,155

18,581,607

Loans and advances to banks

25,420,282

22,695,594

Factored receivables

- Bills of exchange factoring

66,550,268

(15,000)

69,015,861

- Invoice factoring

29,277,379

(760,813)

30,941,233

(801,486)

Loans and advances to

customers

131,698,327

(328,986)

121,935,543

(379,710)

Accrued income

1,335,715

1,563,376

Debt securities measured at

FVOCI

96,730,990

(11,860)

88,695,880

Credit risk exposure

367,205,116

(1,116,659)

353,429,094

(1,181,196)

Credit risk exposure relating to

off-balance sheet instruments

Undrawn commitments to lend

92,738,305

96,000,451

Credit risk exposure

459,943,421

(1,116,659)

449,429,545

(1,181,196)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.3 Maximum exposure to credit risk – continued

4.3.4 Credit quality analysis

As described in Note 4.3, the Bank’s internal credit risk grades are designed to highlight exposures

which require closer management attention because of their greater probability of default and

potential loss. The credit quality of the Bank’s portfolios of financial instruments is assessed by

reference to the Bank’s standard credit rating system, as described below:

Credit quality

Financial

Bills of exchange

Invoice

classification

investments

factoring

Regular

BBB and above

Not past due

Watch

BBB- to C

1 to 30 days past due

Substandard

31 to 90 days past

due

31 to 90 days past

due

Doubtful

Default

Past due by more

than 90 days

Past due by more

than 90 days

Loss

Amount partially or

fully written off

Amount partially or

fully written off

2021

2020

Fair

value

€

Credit risk exposure relating to on-balance sheet assets not

subject to IFRS 9 impairment requirements

Equity investments designated at FVOCI

30,275

39,935

Equity investments measured at FVTPL

20,519,447

20,568,815

Credit risk exposure

20,549,722

20,608,750

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.4 Credit quality analysis – continued

The credit quality of loans and advances to customers is managed by the Bank’s Credit department

using internal credit ratings, defined as follows.

Credit quality

Risk attributes

classification

Regular

A customer having no overdue interest and/or capital payments

overdue or a recent history of default. Regular exposures are typically

deemed to have minimal risk of future losses on the basis of strong

financial position and performance.

Watch

A customer having interest and/or capital payments overdue by up to

30 days. ‘Watch’ exposures typically exhibit deteriorating financial

position and performance and initial signs of financial difficulties.

Substandard

A customer having interest and/or capital payments overdue by more

than 30 days and up to 90 days. ‘Substandard’ exposures typically

exhibit a prolonged deterioration in financial position and

performance which raises concerns in respect of potential debt service

shortfalls.

Doubtful

A customer having interest and/or capital payments overdue by more

than 90 days. ‘Doubtful’ exposures are considered to be defaulted on

the basis of the identification of unlikeliness to pay events as defined

in Note 3.1.5, whereby it becomes evident that the borrower will not

be in a position to meet contractual repayments without resorting to

the sale / repossession of collateral.

Loss

Amount partially or fully written off

The following tables summarise the credit loss allowances recognised as at 31 December 2021 and

2020 in respect of each class of financial instruments by stage distribution.

Allowance for ECL

2021

Gross

carrying

amount

Stage 1

Stage 2

Stage 3

Net carrying

amount

€

Loans and advances to

customers measured at

amortised cost

131,698,327

(263,165)

(1,699)

(64,122)

131,369,341

Factored receivables

measured at amortised

cost

95,827,647

(93,303)

(682,510)

95,051,834

ECL allowance per stage

(356,468)

(1,699)

(746,632)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.4 Credit quality analysis – continued

Allowance for ECL

2020

Gross

carrying

amount

Stage 1

Stage 2

Stage 3

Net carrying

amount

€

Loans and advances to

customers measured at

amortised cost

121,935,543

(212,190)

(167,520)

121,555,833

Factored receivables

measured at amortised

cost

99,957,094

(84,166)

(717,320)

99,155,608

ECL allowance per stage

(296,356)

(884,840)

Allowance for ECL

2021

Fair value

Stage 1

Stage 2

Stage 3

€

Debt securities measured

at FVOCI

96,730,990

(11,860)

hbo

Allowance for ECL

2020

Fair value

Stage 1

Stage 2

Stage 3

€

Debt securities measured

at FVOCI

88,695,880

The credit loss allowances in respect of balances with Central Bank of Malta and Loans and

advances to banks are deemed insignificant.

The following tables present information in respect of the credit quality of financial assets

measured at amortised cost and debt securities measured at FVOCI.

As at 31 December 2021

Stage 1

Stage 2

Stage 3

Total

Loans and advances to

banks measured at

amortised cost

Grade 1: Regular

25,420,282

Gross carrying amount

25,420,282

Allowance for ECL

Net carrying amount

25,420,282

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.4 Credit quality analysis – continued

As at 31 December 2020

Stage 1

Stage 2

Stage 3

Total

Loans and advances to

banks measured at

amortised cost

Grade 1: Regular

22,695,594

Gross carrying amount

22,695,594

Allowance for ECL

Net carrying amount

22,695,594

As at 31 December 2021

Stage 1

Stage 2

Stage 3

Total

Debt securities

measured at FVOCI

Grade 1: Regular

96,730,990

Fair value

96,730,990

Allowance for ECL

(11,860)

As at 31 December 2020

Stage 1

Stage 2

Stage 3

Total

Debt securities

measured at FVOCI

Grade 1: Regular

88,695,880

Fair value

88,695,880

Allowance for ECL

As at 31 December 2021

Stage 1

Stage 2

Stage 3

Total

Loans and advances to

customers measured

at amortised cost

Grade 1: Regular

122,115,721

Grade 2: Watch

4,936,292

Grade 3: Substandard

3,172,018

Grade 4: Doubtful

1,425,198

Grade 5: Loss

49,098

Gross carrying amount

127,052,013

3,172,018

1,474,296

131,698,327

Allowance for ECL

(263,165)

(1,699)

(64,122)

(328,986)

Net carrying amount

126,788,848

3,170,319

1,410,174

131,369,341

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.4 Credit quality analysis – continued

Loan commitments subject to impairment in accordance with IFRS 9 and included with loans and

advances to customers in the tables above are rated as Grade 1 – Regular and classified as Stage 1.

As at 31 December 2020

Stage 1

Stage 2

Stage 3

Total

Loans and advances to

customers measured at

amortised cost

Grade 1: Regular

117,599,558

Grade 2: Watch

4,168,465

Grade 3: Substandard

Grade 4: Doubtful

167,520

Grade 5: Loss

Gross carrying amount

121,768,023

167,520

121,935,543

Allowance for ECL

(212,190)

(167,520)

(379,710)

Net carrying amount

121,555,833

As at 31 December 2021

Stage 1

Stage 2

Stage 3

Total

Factored receivables

measured at amortised

cost

Grade 1: Regular

36,598,774

Grade 2: Watch

18,928,174

Grade 3: Substandard

26,530,945

Grade 4: Doubtful

13,769,754

Gross carrying amount

55,526,948

26,530,945

13,769,754

95,827,647

Allowance for ECL

(93,303)

(682,510)

(775,813)

Net Carrying amount

55,433,645

26,530,945

13,087,244

95,051,834

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.4 Credit quality analysis – continued

The following tables present information in respect of the overdue status of the gross carrying

amount of factored receivables and loans and advances to customers analysed by stage

distribution.

As at 31 December 2020

Stage 1

Stage 2

Stage 3

Total

Factored receivables

measured at amortised

cost

Grade 1: Regular

94,701,728

Grade 2: Watch

4,249,213

Grade 3: Substandard

134,426

Grade 4: Doubtful

346,085

Grade 5: Loss

525,642

Gross carrying amount

98,950,941

134,426

871,727

99,957,094

Allowance for ECL

(84,166)

(717,320)

(801,486)

Net Carrying amount

98,866,775

134,426

154,407

99,155,608

As at December 2021

As at December 2020

Factored

receivables

Stage 1

Stage 2

Stage 3

Total

Stage 1

Stage 2

Stage 3

Total

Current

36,598,774

94,701,728

Overdue < 30 days

18,928,174

4,249,213

Overdue > 30 days

26,530,945

134,426

Overdue > 90 days

13,769,754

13,087,244

871,727

Total

55,526,948

26,530,945

13,769,754

95,827,647

98,950,941

134,426

871,727

99,957,094

Loans and advances

to customers

Stage 1

Stage 2

Stage 3

Total

Stage 1

Stage 2

Stage 3

Total

Current

127,052,013

3,172,018

130,224,031

121,768,023

167,520

121,935,543

Overdue > 90 days

1,474,296

Total

127,052,013

3,172,018

1,474,296

131,698,327

121,768,023

167,520

121,935,543

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.5 Reconciliation of changes in gross carrying amount and allowances for ECL

The credit loss allowance recognised is impacted by a variety of factors, as described below:

• transfers between Stage 1 and Stages 2 or 3 due to financial instruments experiencing

significant increases (or decreases) of credit risk or becoming credit-impaired during the

period, and the consequent “step up” (or “step down”) between 12-month and Lifetime

ECL;

• additional allowances for new financial instruments recognised during the period, as well

as releases in respect of financial instruments derecognised during the period;

• impact on the measurement of ECL due to changes in PD, LGD or EAD during the period;

• impacts on the measurement of ECL due to changes made to models and assumptions;

and

• write-offs of allowances related to assets that were written off during the period.

The ECL charge for the financial year ended 31 December 2021 was higher compared to the prior

financial year charge, driven generally by increases in lending and charges relating to the impact of

the Covid-19 pandemic on the financial performance of borrowers. This was particularly relevant

in respect of loans and advances to customers, where signs of financial difficulties became

apparent in respect of certain corporate borrowers resulting in a downward migration to Stage 2

or Stage 3 reflecting the identification of SICR or UTP events respectively.

In addition, improvements to the Bank’s ECL methodology during the financial year ended 31

December 2021, resulted in a downward migration of borrowers from Stage 1 to Stages 2 or 3

within the bills of exchange factoring portfolio. Notwithstanding that, the impact on the ECL in

respect of these borrowers was immaterial due to the fact that, as described in more detail in

section 4.3.2.3, the LGD calculation takes into consideration the cash collateral pledged by factoring

clients to cover potential losses from factored bills of exchange.

Specifically in respect of the invoice factoring portfolio, the Bank reviewed long outstanding

exposures as at 31 December 2021 in order to assess their recoverability, resulting in write-offs

amounting to €320,006.

The following tables provide a reconciliation of the gross carrying amount and credit loss

allowances relating to loans and advances to customers and factored receivables. A full

reconciliation of changes in expected credit losses and other credit impairment charges is

presented in Note 8 of the financial statements.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.5 Reconciliation of changes in gross carrying amount and allowances for ECL – continued

Stage 1

Stage 2

Stage 3

Total

Gross

carrying

Allowance

carrying

Allowance

carrying

Allowance

carrying

Allowance

amount

for ECL

amount

for ECL

amount

for ECL

amount

for ECL

Loans and advances to customers

€

At 1 January 2021

121,768,023

(212,190)

167,520

(167,520)

121,935,543

(379,710)

New and further lending (*)

37,709,028

(64,809)

1,622,414

97,692

(7,382)

39,429,134

(72,191)

Repayments and disposals

(29,168,664)

(642)

(373,716)

108,745

(29,542,380)

108,103

Transfers of financial instruments

Stage 1 to Stage 2

(1,923,320)

1,159

1,923,320

(1,159)

Stage 1 to Stage 3

(1,333,054)

2,013

1,333,054

(2,013)

Net remeasurement of ECL arising from

stage transfers and changes in risk

parameters

11,304

(540)

(119,922)

(109,158)

Amounts written off

(123,970)

123,970

(123,970)

123,970

At 31 December 2021

127,052,013

(263,165)

3,172,018

(1,699)

1,474,296

(64,122)

131,698,327

(328,986)

Total income statement charge for the

year

50,724

*New and further lending classified within Stage 2 in the table above represents exposures originated under the terms of the MDB CGS during the financial year

ended 31 December 2021 and subsequently migrated to Stage 2 on the basis of identified SICR events triggered by the sustained impact of the COVID-19

pandemic.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.5 Reconciliation of changes in gross carrying amount and allowances for ECL – continued

Stage 1

Stage 2

Stage 3

Total

Gross

carrying

Allowance

carrying

Allowance

carrying

Allowance

carrying

Allowance

amount

for ECL

amount

for ECL

amount

for ECL

amount

for ECL

Loans and advances to customers

€

At 1 January 2020

86,595,244

(74,798)

158,396

(156,293)

86,753,640

(231,091)

New and further lending

64,594,659

(55,795)

64,594,659

(55,795)

Repayments and disposals

(29,412,756)

25,406

(29,412,756)

25,406

Transfers of financial instruments

Stage 1 to Stage 3

(9,124)

9,124

Net remeasurement of ECL arising from

stage transfers and changes in risk

parameters

(107,003)

(11,227)

(118,230)

Amounts written off

At 31 December 2020

121,768,023

(212,190)

167,520

(167,520)

121,935,543

(379,710)

Total income statement charge for the

year

148,619

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.5 Reconciliation of changes in gross carrying amount and allowances for ECL – continued

Stage 1

Stage 2

Stage 3

Total

Gross

carrying

Allowance

carrying

Allowance

carrying

Allowance

carrying

Allowance

amount

for ECL

amount

for ECL

amount

for ECL

amount

for ECL

Factored receivables

€

At 1 January 2021

98,950,941

(84,166)

134,426

871,727

(717,320)

99,957,094

(801,486)

New and further lending (*)

31,498,819

(33,920)

6,835,423

2,353,495

(79,067)

40,687,737

(112,987)

Repayments and disposals

(37,741,056)

9,596

(6,204,935)

(550,056)

360,636

(44,496,047)

370,232

Transfers of financial instruments

Stage 1 to Stage 2

(25,766,031)

25,766,031

Stage 1 to Stage 3

(11,414,574)

4,078

11,414,574

(4,078)

Net remeasurement of ECL arising from

stage transfers and changes in risk

parameters

11,089

(562,667)

(551,578)

Amounts written off

(1,151)

(319,986)

319,986

(321,137)

320,006

At 31 December 2021

55,526,948

(93,303)

26,530,945

13,769,754

(682,510)

95,827,647

(775,813)

Total income statement charge for the

year

(25,673)

*New and further lending classified within Stages 2 and 3 in the table above represents exposures originated during the financial year ended 31 December 2021

and migrated to Stages 2 and 3 on the basis of missed repayments.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.5 Reconciliation of changes in gross carrying amount and allowances for ECL – continued

Stage 1

Stage 2

Stage 3

Total

Gross

carrying

Allowance

carrying

Allowance

carrying

Allowance

carrying

Allowance

amount

for ECL

amount

for ECL

amount

for ECL

amount

for ECL

Factored receivables

€

At 1 January 2020

105,146,757

(124,541)

1,093,945

(703,962)

106,240,702

(828,503)

New and further lending

Repayments and disposals

(6,061,390)

7,179

(171,023)

(6,232,413)

7,179

Transfers of financial instruments

- Stage 1 to Stage 2

(134,426)

134,426

Net remeasurement of ECL arising from

stage transfers and changes in risk

parameters

33,197

(64,554)

(31,357)

Amounts written off

(51,195)

51,195

(51,195)

51,195

At 31 December 2020

98,950,941

(84,165)

134,426

871,727

(717,321)

99,957,094

(801,486)

Total income statement charge for the

year

(27,017)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.6 Renegotiation of financial instruments and forbearance

The contractual terms of a loan may be modified for several reasons, including changing market

conditions, customer retention and other factors not related to a current or potential credit

deterioration of the customer. Where terms have been modified, an existing exposure may be

derecognised if the modification is deemed to be substantial, with the renegotiated instrument

being recognised as a new instrument measured at the fair value as at the date of modification and

allocated to Stage 1 (assuming it is not credit-impaired at that time).

When the terms of an instrument are modified and the modification does not result in

derecognition, the determination of whether the asset's credit risk has increased significantly

reflects comparison of:

• the residual lifetime PD at the reporting date based on the modified terms; with

• the residual lifetime PD estimated based on data on initial recognition and the original

contractual terms.

The Bank has aligned its policies with the European Securities and Markets Authority (“ESMA”)

Public Statement on the Treatment of Forbearance Practices in IFRS Financial Statements of

Financial Institutions. Under certain circumstances, the Bank may renegotiate the terms and

conditions of a loan in response to actual or perceived financial difficulties of a customer.

Renegotiations of exposures customers in financial difficulties (referred to as 'forbearance

activities') are designed to maximise collection opportunities and minimise the risk of default.

Under the Bank's forbearance policy, loan forbearance is granted on a selective basis if the debtor

is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor

made all reasonable efforts to pay under the original contractual terms and the debtor is expected

to be able to meet the revised terms.

The revised terms usually include maturity extensions, changes to the timing of interest payments,

and amendments to the terms of loan covenants. Both retail and corporate loans are subject to

the forbearance policy. The Credit Committee regularly reviews reports on forbearance activities.

For financial assets modified as part of the Bank's forbearance policy, the Bank assesses whether

the modification has improved or restored the Bank's ability to collect interest and principal and

the probability of default in view of previous experience of similar forbearance activity. As part of

this process, the Bank evaluates the borrower's payment performance against the modified

contractual terms and considers various behavioural indicators.

Generally, forbearance is a qualitative indicator of a significant increase in credit risk and may

constitute evidence that an exposure is credit-impaired. A renegotiated loan is typically presented

as credit-impaired when there has been a change in contractual cash flows as a result of a

concession which the lender would otherwise not consider; and it is probable that without the

concession, the borrower would be unable to meet contractual payment obligations in full.

Accordingly, this will represent a significant concern regarding the borrower’s ability to meet

contractual payments, and the loan will be disclosed as credit-impaired, unless the concession

granted is insignificant.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.6 Renegotiation of financial instruments and forbearance – continued

Renegotiated loans are classified as non-credit impaired where the renegotiation has resulted from

significant concern about a borrower’s ability to meet contractual payment terms but contractual

cash flows are expected to be collected in full following the renegotiation and no other unlikely-to-

pay indicators are evident.

In the event that a forborne exposure is deemed to be credit-impaired, the renegotiated loan will

continue to be disclosed as credit-impaired until there is sufficient evidence to demonstrate a

significant reduction in the risk of non-payment of future cash flows, and there are no other

indicators of impairment. In this respect, a customer needs to demonstrate consistently good

payment behaviour over a period before the exposure is no longer considered to be credit-

impaired.

As at 31 December 2021 and 2020, there were no forborne exposures within the factored

receivables portfolio.

As at 31 December 2021, forborne loans and advances to customers comprised exposures with one

borrower, operating within the wholesale and retail trade industry. The carrying amount in respect

of this exposure, which is classified within Stage 3 as at 31 December 2021, is €1,425,193. Credit

loss allowances in respect of this exposure amount to NIL as at 31 December 2021. As at 31

December 2020, there were no forborne loans and advances to customers.

Interest income recognised during the financial year ended 31 December 2021 in respect of

forborne exposures amounted to €60,934 (2020: €NIL).

The movement in the carrying amount of forborne loans and advances, before impairment

allowances, is analysed below. Exposures eligible for a general payment moratorium are not

considered to be forborne loans and are therefore not included in the table below.

Forborne exposures

2021

2020

€

At 1 January

Loans to which forbearance measures have been

extended during the year

1,368,266

Increase in exposure amount

56,927

At 31 December

1,425,193

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.6 Renegotiation of financial instruments and forbearance – continued

Information on loans and advances subject to CBM compliant moratoria

During the financial year ended 31 December 2020, a number of government support schemes and

regulatory relief measures were announced in response to the outbreak of the Covid-19 pandemic,

one of which being the granting of moratoria on capital and/or interest payments to provide relief

to individual and corporate customers during the ensuing macroeconomic recession triggered by

the pandemic. In this regard, the Central Bank of Malta issued Directive No. 18 On Moratoria on

Credit Facilities in Exceptional Circumstances ('Directive No. 18') in order to provide guidance on

the treatment of such instances, in line with European Banking Authority ('EBA') Guidelines on

legislative and non-legislative moratoria on loan repayments applied in the light of the Covid-19

crisis (the 'EBA Guidelines'). These are referred to as general payment moratoria.

In line with the EBA Guidelines and Directive No. 18, exposures meeting established criteria and

eligible for the granting of a general payment moratorium are not classified as

forborne/renegotiated, unless the borrower was already experiencing financial difficulties prior to

the pandemic. Nevertheless, the Bank performed an assessment in respect of such exposures in

order to determine whether the short-term shock may transform into long-term financial

difficulties, thereby potentially requiring a downgrade to Stage 2 or Stage 3 to reflect the level of

credit risk as appropriate. This assessment was performed on a periodic basis at borrower level in

respect of loans and advances to customers.

In accordance with the requirements of Directive No. 18, applications for new general payment

moratoria or for extensions of existing general payment moratoria were accepted until 31 March

2021, with the total duration of the moratorium, inclusive of extensions, being limited to nine

months. In this respect, applications for new general payment moratoria or for extensions of

general payment moratoria received after 31 March 2021, or extending beyond the maximum

duration prescribed by Directive No. 18, are considered to be forbearance measures. In addition,

the granting of moratoria which do not meet the conditions of a general payment moratorium are

also considered to be forbearance measures.

As at 31 December 2020, outstanding gross loans and advances subject to general payment

moratoria amounted to €14,668,299, all classified in Stage 1. The allowance for ECL in respect of

Stage 1 loans subject to general payment moratoria amounted to €70,200.

During the financial year ended 31 December 2021, no extensions to general payment moratoria

in respect of loans subject to general payment moratoria as at 31 December 2020 were granted.

During 2021, the Bank did not grant new moratoria to obligors in respect of general payment

moratoria as established within Directive No. 18 and the EBA Guidelines.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.6 Renegotiation of financial instruments and forbearance – continued

Extensions to existing moratoria and new moratoria granted during the financial year ended 31

December 2021, which do not meet the criteria established within Directive No. 18 and the EBA

Guidelines, are classified as renegotiated loans.

As at 31 December 2021, no outstanding gross loans and advances were subject to general

payment moratoria.

The following tables provide information on exposures subject to general payment moratoria in

line with Directive No. 18:

of which: Other financial corporations

3,184,356

of which: Other financial corporations collateralised

by commercial immovable property

790,500

2021

Number of

obligators

Gross

Carrying

Amount

Of which

expired

€

of which granted

200

13,271,633

of which: Households

2,367,237

of which: Households – collateralised by residential

immovable property

204,879

of which: Non-financial corporations

7,193,262

of which: Non-financial corporations – SME’s

7,193,262

of which: Non-financial corporations collateralised by

commercial immovable property

1,445,487

1,445,48

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.6 Renegotiation of financial instruments and forbearance – continued

of which: Other financial corporations

3,416,649

of which: Other financial corporations

collateralised by commercial

immovable property

1,120,977

4.3.7 Analysis of collateral

The Bank employs a range of policies and practices to mitigate credit risk. The most common of

these is accepting collateral for funds advanced. The Bank has internal policies on the acceptability

of specific classes of collateral or credit risk mitigation.

The Bank’s policies regarding obtaining collateral have not significantly changed during the

reporting period and there has been no significant change in the overall quality of the collateral

held by the Bank since the prior period.

2020

Number of

obligators

Gross

Carrying

Amount

Of which

active

Of which

expired

€

of which granted

200

14,668,299

12,645,229

2,023,070

of which: Households

3,472,982

1,998,846

1,474,136

of which: Households – collateralised

by residential immovable property

221,799

of which: Non-financial corporations

7,778,668

7,229,734

548,934

of which: Non-financial corporations –

SME’s

7,778,668

7,229,734

548,934

of which: Non-financial corporations

collateralised by commercial

immovable property

1,438,318

1,183,016

255,303

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.7 Analysis of collateral – continued

Loans and advances to customers

The Bank holds collateral against loans and advances to customers in the form of pledges over

deposits held with the Bank, charges over real estate and corporate receivables. In response to the

Covid-19 pandemic, the Bank provided support to its customers by offering loans originated in

terms of the Malta Development Bank (“MDB”) Covid-19 Guarantee Scheme (“CGS”). In this

respect, up to 90% of such exposures are guaranteed by the Government of Malta, with the

guarantee amount capped to 50% of all MDB CGS exposures originated by the Bank.

A portion of the Bank’s loans and advances to customers has sufficiently low loan-to-value (“LTV”)

ratios which results in no credit loss allowances being recognised in accordance with the Bank’s

ECL model.

The following is an analysis of the extendible value of the collateral (capped at the carrying amount

of the loan) held by the Bank against exposures of loans and advances to customers:

Carrying amounts

2021

2020

€

Loans and advances to customers

131,368,327

121,555,833

Of which secured by:

Cash deposits held with the Bank

33,343,198

38,993,761

Bills of exchange with recourse

9,872,005

4,428,565

Real estate

31,590,896

44,410,783

Unlisted shares

796,478

Assignment of receivables

15,721,059

902,206

MDB CGS guarantee

25,815,046

21,816,167

Total carrying amount secured by collateral

116,342,204

111,347,960

Residual unsecured exposure amounts

15,026,123

10,207,873

Allowance for ECL

(328,986)

(379,710)

During 2020, the Bank had confirmed its participation in the MDB CGS, whereby the risk of newly

originated loans under the scheme to viable businesses experiencing liquidity pressures resulting

from the effects of the pandemic are mitigated by a government guarantee. In this respect, as at

31 December 2021, gross loans subject to the MDB CGS amounted to €25,815,046 (2020:

€21,918,000), of which a maximum of €12,907,523 is considered guaranteed. As at 31 December

2021, gross loans originated under this scheme classified as Stage 1 and Stage 2 amounted to

€22,576,540 (2020: €21,816,167) and €3,135,998 (2020: €NIL) respectively. As at 31 December

2021, loans originated under this scheme classified in Stage 3 amounted to €102,508 (2020: €NIL).

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.7 Analysis of collateral – continued

The allowance for ECL in respect of the corresponding loans classified as Stage 1, Stage 2 and Stage

3 amounted to €9,959 (2020: €17,615), €3,990 (2020: €NIL) and €32 (2020: €NIL) respectively.

Factored receivables

Factored receivables comprise bills of exchange and invoices factored on a no-recourse basis. The

former each sub-portfolio is secured by the motor vehicles being financed, with a pledge on cash

deposits placed by factoring clients and held with the Bank also providing coverage on a first loss

basis. The value of motor vehicles held as collateral in respect of factored bills of exchange as at 31

December 2021 and 2020, estimated by reference to the depreciated value of the motor vehicle

to capture the loss in value through use, is presented in the table below.

2021

2020

€

Type of collateral

Motor vehicles

66,535,568

69,015,861

Invoice factoring facilities are secured by credit insurance from a foreign third party underwriter

providing insurance cover in respect of losses up to 95% of each eligible invoice.

Collateral held in respect of credit-impaired financial assets

The Bank closely monitors collateral held for financial assets considered to be credit-impaired, as

it becomes more likely that the Bank will take possession of collateral to mitigate potential credit

losses. Financial assets that are credit-impaired and in respect of which related collateral is held in

order to mitigate potential losses are shown below:

As at 31 December 2021

Extendible

Gross

value of

carrying

Allowance

Carrying

collateral

amount

for ECL

amount

held

€

Loans and advances to customers

Overdrafts

74,740

(25,105)

49,635

48,022

Fixed term loans

1,399,556

(39,017)

1,360,539

1,322,690

Factored receivables

Bills of exchange factoring

12,000,786

10,679,121

Invoice factoring

1,059,380

(682,510)

376,870

14,459,722

(747,717)

13,786,745

12,049,833

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.7 Analysis of collateral – continued

As at 31 December 2020

Extendible

Gross

value of

carrying

ECL

Carrying

collateral

amount

allowance

amount

held

€

Loans and advances to customers

Overdrafts

8,191

(8,191)

Fixed term loans

159,329

(159,329)

Factored receivables

Invoice factoring

871,727

(717,320)

154,407

1,039,247

(884,840)

154,407

The LTV ratio in respect of credit-impaired loans and advances to customers as at 31 December

2021 is 43% (2020: 0%). These loans and advances to customers are classified as forborne Stage 3

exposures as at 31 December 2021 and are secured by commercial and residential real estate. As

at 31 December 2020, there were no forborne loans and advances to customers.

Credit-impaired invoice factoring facilities are secured by credit insurance cover procured from

third party insurers up to 95% of credit losses in respect of each insured exposure.

As at 31 December 2021 and 2020, there were no forborne exposures within the factored

receivables portfolio.

No collateral is held in respect of financial investments and loans and advances to banks.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.8 Write-off policy

The Bank writes off a loan, security and/or factored receivable balances (and any related credit loss

allowances) when management determines that the loan, security and/or factored receivable is

uncollectible. This determination is reached after considering information such as occurrence of

significant changes in the borrower’s/issuer’s financial position such that the borrower/issuer can

no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the

entire exposure. During the current year, amounts receivable of €443,976 (2020: €51,196) were

written off by the Bank.

4.3.9 Settlement risk

'Settlement risk' is the risk of loss due to the failure of an entity to honour its obligations to deliver

cash, securities or other assets as contractually agreed. The Bank's activities do not expose it to

significant settlement risk.

4.3.10 Industry concentration

The following table analyses the Bank’s loans and advances to customers and factored receivables

by business segment:

2021

2020

€

Accommodation and food services

2,596,576

2,604,853

Construction and real estate activities

43,408,653

19%

40,364,029

18%

Households and individuals

57,909,264

26%

59,925,013

27%

Manufacturing

10,387,443

8,688,652

Services

61,115,298

27%

56,430,133

26%

Transportation

8,349,363

8,735,511

Wholesale and retail trade

40,002,795

18%

43,207,414

20%

Other Sectors

2,651,783

755,836

226,421,175

100%

220,711,441

100%

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.10 Industry concentration – continued

The following table analyses the Bank’s investment portfolio by business segment:

4.3.11 Concentration risk

In addition to industry concentration mentioned in Note 4.3.10, the Bank monitors concentration

of credit risk by counterparty and by geographic location. An analysis of credit risk concentration

(net of credit loss allowances) is shown on the next page.

2021

2020

€

Sovereign debt

74,066,906

63%

70,959,098

65%

Local corporate bonds:

- Financial services

2,446,950

2,418,150

- Real estate

5,508,875

5,462,201

- Telecommunications

4,169,766

1,699,500

- Tourism

4,005,194

2,668,096

- Other

6,533,299

5,488,835

Equity investments

20,549,722

17%

20,608,750

19%

117,280,712

100%

109,304,630

100%

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.11 Concentration risk – continued

Loans and advances

to customers

Factored receivables

to banks

Financial investments

2021

2020

2021

2020

2021

2020

2021

2020

€

Carrying amount

131,369,341

121,555,833

95,051,834

99,155,608

25,420,282

22,695,594

117,280,712

109,304,630

Concentration by counterparty

Corporates

130,180,000

120,299,601

36,673,177

40,945,564

20,217,134

15,318,632

Private individuals

1,189,341

1,256,232

57,559,639

57,549,312

Sovereign

819,018

660,732

74,066,906

70,959,098

Banks and financial services

25,420,282

22,695,594

22,996,672

23,026,900

Concentration by location

Europe:

- Malta

92,603,090

73,428,924

70,699,216

70,645,966

4,448,968

6,445,127

96,730,990

88,695,880

- Belgium

29,844,346

39,210,942

23,038,656

25,010,510

19,250,048

13,790,391

30,275

39,935

- France

3,500,000

757,115

802,301

20,519,447

20,568,815

- Other

4,376,378

4,402,206

556,847

2,696,831

1,721,266

2,460,076

USA

1,045,527

1,013,761

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.11 Concentration risk – continued

Concentration by location for loans and advances to customers and banks and investment

securities is measured based on the location of the borrower or issuer of the security.

4.4 Market risk

Market risk comprises the risk of losses in value caused by unexpected changes in market prices

(interest rates, equity prices, foreign exchange rates and credit spreads) before the affected

positions can be closed out or hedged.

Market risk for the Bank consists of three elements:

• Interest rate risk, which is the risk of losses because of changes in interest rates.

• Exchange rate risk, which is the risk of losses on the Bank’s positions in foreign currency

because of changes in exchange rates.

• Investment price risk, which is the risk of losses because of changes in investments prices.

4.4.1 Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in

market interest rates. The Bank’s operations are subject to the risk of interest rate fluctuations to

the extent that interest-earning assets and interest-bearing liabilities mature or re-price at

different times or at different amounts. The Bank accepts deposits from customers at both fixed

and floating rates and for varying maturity periods. This risk is managed through the matching of

the interest resetting dates on assets and liabilities. However, the Bank seeks to maximise the

spread over the cost of capital by investing funds in a portfolio of securities and loans and

receivables with a longer tenure than the liabilities (therefore carrying a negative maturity gap

position) through the efficient management of shorter-term liabilities over the medium to longer

term. The table on the next page summarises re-pricing mismatches at reporting date together

with the effective interest rates where applicable.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.4 Market risk – continued

4.4.1 Interest rate risk – continued

2021

Carrying

amount

Effective

interest

rate

Less than

three

months

Between

three months

and one year

Between one

year and five

years

More than

five years

€

Assets

Balances with Central Bank of Malta

16,192,155

-0.50

16,192,155

Loans and advances to banks

25,420,282

-0.38

25,420,282

Financial investments:

- Debt securities measured at FVOCI

96,730,990

1.63

26,290,338

70,440,652

Factored receivables

95,051,834

5.25

35,424,112

16,585,061

42,209,256

833,405

Loans and advances to customers

131,369,341

3.57

60,168,735

37,378,400

31,580,767

2,241,439

Total assets

364,764,602

137,205,284

53,963,461

100,080,361

73,515,496

Liabilities

Amounts owed to institutions

55,000,000

-0.25

35,000,000

10,000,000

Amounts owed to banks

274,715

0.10

274,715

Amounts owed to customers

297,780,509

1.09

127,542,936

61,767,353

88,307,388

20,162,832

Debt securities in issue

11,940,167

4.52

11,940,167

Total liabilities

364,995,391

162,817,651

71,767,353

110,247,555

20,162,832

Interest repricing gap

(25,612,367)

(17,803,892)

(10,167,194)

53,352,664

Cumulative gap

(25,612,367)

(43,416,259)

(53,583,453)

(230,789)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.4 Market risk – continued

4.4.1 Interest rate risk – continued

2020

Carrying

amount

Effective

interest rate

Less than

three months

Between

three months

and one year

Between one

year and five

years

More than

five years

€

Assets

Balances with Central Bank of Malta

18,581,607

-0.50

18,581,607

Loans and advances to banks

22,695,594

-0.05

22,695,594

Financial investments:

- Debt securities at FVOCI

88,695,880

1.53

3,694,895

7,472,085

41,090,000

36,438,900

Factored receivables

99,155,608

6.07

35,143,647

16,782,116

46,628,999

600,848

Loans and advances to customers

121,555,833

3.46

50,114,512

35,719,204

33,463,479

2,258,638

Total assets

350,684,522

130,230,255

59,973,405

121,182,478

39,298,386

Liabilities

Amounts owed to institutions

35,000,000

-0.25

35,000,000

Amounts owed to banks

250,576

0.10

250,576

Amounts owed to customers

304,384,729

1.26

102,520,535

50,862,078

128,767,430

22,234,686

Debt securities in issue

11,923,078

4.53

11,923,078

Total liabilities

351,558,383

102,771,111

85,862,078

140,690,508

22,234,686

Interest repricing gap

27,459,144

(25,888,673)

(19,508,030)

17,063,700

Cumulative gap

27,459,144

1,570,471

(17,937,559)

(873,859)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.4 Market risk – continued

4.4.1 Interest rate risk – continued

4.4.1.1 Interest rate profile

The interest rate profile of the Bank’s interest-bearing financial instruments as at 31 December

2021 and 2020 is presented below:

2021

2020

€

Fixed

Variable

Fixed

Variable

Interest-earning assets

Financial investments – debt

securities

96,730,990

88,695,880

Factored receivables:

- Invoice factoring

28,516,566

30,139,747

- Bills of exchange factoring

66,535,268

69,015,861

Loans and advances to

customers

75,772,648

55,572,973

94,906,061

26,649,772

Balances with Central Bank of

Malta and cash

16,192,155

18,581,607

Loans and advances to banks

25,420,282

22,695,594

267,555,472

97,185,410

282,757,549

67,926,973

Interest-bearing liabilities

Amounts owed to institutions

(55,000,000)

(35,000,000)

Amounts owed to customers

(229,305,887)

(68,474,622)

(217,642,313)

(86,742,416)

Debt securities in issue

(11,940,167)

(11,923,078)

Amounts owed to banks

(274,715)

(250,576)

(296,246,054)

(68,749,337)

(264,565,391)

(86,992,992)

4.4.1.2 Fair value sensitivity analysis for fixed rate instruments

Financial instruments issued at fixed interest rates potentially expose the Bank to fair value interest

rate risk. Balances with Central Bank of Malta, loans and advances to customers and to banks,

amounts owed to Central Bank of Malta, customers and banks, and debt securities in issue are

measured at amortised cost and are therefore not subject to fair value interest rate risk. The Bank’s

financial investments measured at FVTPL are equity instruments and are therefore not subject to

interest rates.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.4 Market risk – continued

4.4.1 Interest rate risk – continued

4.4.1.2 Fair value sensitivity analysis for fixed rate instruments - continued

In this respect, the fair value sensitivity for fixed rate instruments is only performed in respect of

debt financial investments measured at FVOCI. A sudden increase of 50 basis points in the yield to

maturity of the benchmark 10-year Malta Government Stock would lead to a decrease in value of

debt financial investments measured at FVOCI amounting to €2,835,263 (2020: €637,821). Such a

decrease would be recognised in other comprehensive income and in equity. A decrease of 50 basis

points in interest rates would have an equal but opposite effect on other comprehensive income

and equity.

4.4.1.3 Cash flow sensitivity analysis for variable rate instruments

The Bank is exposed to cash flow interest rate risk principally in respect of financial assets and

liabilities subject to variable interest rates. Taking cognisance of the nature of the Bank’s financial

assets and liabilities, a sensitivity analysis in respect of interest rate changes in relation to the

Bank’s variable rate financial assets is presented hereunder in line with the requirements

emanating from IFRS 7.

The sensitivity of interest rate gaps to various interest rate scenarios is monitored by management.

Standard scenarios that are considered on a quarterly basis include a 50-basis point (bp) parallel

rise or fall in all the yield curves. An analysis of the Bank’s sensitivity to an increase or decrease in

market interest rates is presented below. This analysis assumes that all other variables, in particular

exchange rates, remain constant.

Impact on

Profit

or loss

Equity

€

2021

+ 50 basis points

(187,399)

- 50 basis points

187,399

2020

+ 50 basis points

113,877

- 50 basis points

(84,522)

4.4.1.4 Interest rate benchmark reform

A fundamental reform of major interest rate benchmarks is being undertaken globally to replace

or reform Interbank Offered Rates (“IBOR”) with alternative nearly risk-free rates (referred to as

‘IBOR reform’). As disclosed in Note 2.3, the Bank’s exposure to financial instruments impacted by

the IBOR reform is not significant, since the Bank’s exposures are predominantly remunerated at

fixed interest rates and the Bank does not deal in derivative financial instruments. Furthermore,

where financial instruments are linked to EURIBOR, no impact is expected since there is no

indication that this benchmark rate will be demised in the near future.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.4 Market risk – continued

4.4.2 Currency risk

Currency risk is the risk that the value of a financial instrument fluctuates due to changes in foreign

exchange rates. The Bank holds and deals in foreign currency with the aim to service the foreign

exchange buying and selling activity of its clients. The Bank does not speculate on its foreign

exchange holdings. The Bank’s foreign exchange exposure is mainly limited to the United States

Dollar and Swiss Francs, originating from the Bank's corporate banking business. The Bank manages

this risk by ensuring that its foreign currency denominated liabilities are matched to corresponding

assets in the same currency.

Exposure to foreign currencies is maintained at minimum levels and within the prescribed limits

set by the Bank’s Board of Directors. In the scenario whereby all foreign currencies fluctuate

upwards or downwards by 20% against the Euro, the carrying amounts of financial assets and

liabilities would fluctuate upwards or downwards by €115,807 and €46,042 (2020: €229,954 and

€153,302) respectively.

The following table provides an analysis of the financial assets and liabilities of the Bank into

relevant currency groupings:

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.4 Market risk – continued

4.4.2 Currency risk – continued

2021

2020

Euro

Other

currencies

Total

Euro

Other

currencies

Total

€

Financial assets

Balances with Central

Bank of Malta and cash

16,193,768

18,612,618

Loans and advances to

banks

24,692,346

727,936

25,420,282

22,080,068

615,526

22,695,594

Investment securities:

- Debt securities

96,730,990

88,695,880

- Equity investments

20,549,722

20,608,750

Factored receivables

95,051,834

99,155,608

Loans and advances

to customers

130,323,814

1,045,527

131,369,341

120,542,072

1,013,761

121,555,833

Other assets

1,335,715

1,563,376

384,878,189

1,773,463

386,651,652

371,258,372

1,629,287

372,887,659

Financial liabilities

Amounts owed to

institutions

55,000,000

35,000,000

Amounts owed to banks

274,715

250,576

Amounts owed to

customers

297,201,303

579,206

297,780,509

303,675,256

709,473

304,384,729

Debt securities in issue

11,940,167

11,923,078

Other liabilities

3,975,122

2,809,505

368,391,307

579,206

368,970,513

353,658,415

709,473

354,367,888

Net open position

16,486,882

1,194,257

17,681,139

17,599,957

919,814

18,519,771

As at 31 December 2021 and 2020, the Bank was not exposed to any significant currency risk in

respect of off-balance sheet exposures. Balances under other currencies represent exposures

predominantly to the US Dollar.

4.4.3 Investment price risk

The exposure of the Bank to this risk is not significant. Frequent management reviews are carried

out to ensure high quality of the portfolio.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.5 Liquidity risk

Liquidity risk is the risk that the Bank’s obligations to repay liabilities or fund new loans exceeds the

Bank’s ability to raise funds from either the liquidation of assets or the acceptance of new deposits.

Liquidity risk arises primarily due to mismatches in the maturity profile of a bank’s financial assets

and liabilities, which exposes a bank to the risk that it might not be able to meet its liabilities as

they become due or will have to do so at excessive cost. Liquidity risk may also be affected by the

depth of the market in which the Bank operates.

Liquidity risk is divided into two categories:

• Market (product) liquidity risk: risk of losses arising from difficulties in accessing a product

or market at the required time, price and volume.

• Funding liquidity risk: risk of losses arising from a timing mismatch the maturities of financial

assets and liabilities, resulting in a risk that the Bank does not meet obligations when due

or will have to raise funding at higher than normal rates.

The Bank’s approach to managing liquidity risk is to ensure, as far as possible, that it always has

sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions,

without incurring unacceptable losses or risking damage to the Bank’s reputation. The key

elements of the Bank's liquidity strategy are as follows.

• Maintaining a diversified funding base consisting of customer deposits (both retail and

corporate) and wholesale market deposits, whilst also maintaining contingency facilities.

• Carrying a portfolio of highly liquid assets, diversified by currency and maturity.

• Monitoring maturity mismatches, behavioural characteristics of the Bank's financial assets

and financial liabilities, and the extent of asset encumbrance which might prevent financial

assets from being used as collateral to obtain further funding.

• Stress testing of the Bank's liquidity position against various exposures and global, country-

specific and Bank-specific events.

Liquidity policies and procedures are reviewed by internal audit. All liquidity policies are subject to

review by the Asset and Liability Management Committee and the approval of the Board of

Directors.

The Bank’s liquidity and funding risk management framework employs two key measures to define,

monitor and control the liquidity and funding risk:

• The Liquidity Coverage Ratio (“LCR”), which measures the Bank’s level of High-Quality Liquid

Assets (“HQLAs”) against expected net cash outflows over a one-month period. This ratio is

used to gauge the short-term resilience of the Bank’s liquidity profile in terms of the

requirements emanating from European Commission (‘EC’) Delegated Regulation 2015/61.

• The Net Stable Funding Ratio (“NSFR”) is used to monitor the structural long-term funding

position of the Bank. The NSFR requires institutions to maintain sufficient stable funding

relative to required stable funding, and reflects a bank’s long-term funding profile (funding

with a term of more than a year). It is designed to complement the LCR.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.5 Liquidity risk – continued

Details of the Bank’s ratios at the reporting dates and during the reported periods are presented

below:

LCR

NSFR

2021

2020

2021

2020

As at 31 December

1,320%

4,322%

164%

177%

Average for the year

2,525%

5,141%

163%

206%

Maximum for the year

3,634%

11,011%

166%

229%

Minimum for the year

1,090%

1,066%

158%

177%

4.5.1 Contractual maturity ladder

The Bank also monitors the contractual maturity ladder, which provides insight into the extent to

which the Bank relies on maturity transformation in respect of contractual cash flows. More

precisely, the maturity ladder is used to determine the availability of liquid assets to meet liquidity

gaps for diverse time horizons.

The following table provides an analysis of the financial assets and liabilities of the Bank into

relevant remaining maturity groupings based on the ability of recovery or repayment:

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.5 Liquidity risk – continued

4.5.1 Contractual maturity ladder – continued

At 31 December 2021

Less than one

month

Between one

and three

months

Between three

months and

one year

Between one

and five years

More than five

years

No maturity

date

Total

€

Financial assets

Balances with Central Bank of Malta

13,535,330

2,656,825

16,192,155

Loans and advances to banks

25,420,282

Financial investments:

- Equity investments

20,549,722

- Debt securities

26,290,338

70,440,652

96,730,990

Factored receivables

20,220,035

15,204,077

16,585,061

42,209,256

833,405

95,051,834

Loans and advances to customers

9,513,793

9,734,192

22,602,524

72,081,834

17,436,998

131,369,341

Other assets

1,335,715

Total assets

70,025,155

24,938,269

39,187,585

140,581,428

88,711,055

23,206,547

386,650,039

Financial liabilities

Amounts owed to institutions

35,000,000

10,000,000

55,000,000

Amounts owed to banks

274,715

Amounts owed to customers

80,933,275

43,496,995

61,998,441

91,162,354

20,198,444

297,780,509

Debt securities in issue

11,940,167

Other liabilities

3,975,122

Total liabilities

85,183,112

78,496,995

71,998,441

113,102,521

20,198,444

368,979,513

Liquidity gap

(15,157,957)

(53,558,726)

(32,810,856)

27,478,907

68,512,611

23,206,547

17,679,526

Cumulative gap

(15,157,957)

(68,716,683)

(101,527,539)

(74,048,632)

(5,536,021)

17,670,526

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.5 Liquidity risk – continued

4.5.1 Contractual maturity ladder – continued

At 31 December 2020

Less than one

month

Between one

and three

months

Between three

months and

one year

Between one

and five years

More than five

years

No maturity

date

Total

€

Financial assets

Balances with Central Bank of Malta

15,541,232

3,040,375

18,581,607

Loans and advances to banks

22,695,594

Financial investments:

- Equity investments

20,608,750

- Debt securities

3,694,895

7,472,085

41,090,000

36,438,900

88,695,880

Factored receivables

20,571,657

14,571,990

16,782,116

46,628,999

600,848

99,155,608

Loans and advances to customers

20,100,313

9,588,683

13,255,043

54,074,406

24,537,388

121,555,833

Other assets

1,563,376

Total assets

84,167,067

24,160,673

37,509,244

141,793,405

61,577,136

23,649,125

372,856,650

Financial liabilities

Amounts owed to institutions

35,000,000

Amounts owed to banks

250,576

Amounts owed to customers

87,695,426

18,605,252

47,082,661

128,774,105

22,227,285

304,384,729

Debt securities in issue

11,923,078

Other liabilities

2,809,505

Total liabilities

90,755,507

18,605,252

82,082,661

140,697,183

22,227,285

351,558,383

Liquidity gap

(6,588,440)

5,555,421

(44,573,417)

1,096,222

39,349,851

23,649,125

21,298,265

Cumulative gap

(6,588,440)

(1,033,019)

(45,606,436)

(44,510,214)

(5,160,363)

18,488,762

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.5 Liquidity risk – continued

4.5.2 Cash flows payable by the Bank under financial liabilities by residual maturity

The table below shows a maturity analysis of undiscounted cash flows payable in respect of financial liabilities by residual contractual maturities of the instruments:

Carrying

amount

Gross

nominal

outflow

Repayable

on demand

Less than

three

months

Between

three

months and

one year

Between

one and five

years

More than

five years

€

At 31 December 2021

Amounts owed to institutions

55,000,000

(54,857,843)

(34,911,062)

(9,974,589)

(9,972,192)

Amounts owed to banks

Amo

274,715

(274,715)

Amounts owed to customers

297,780,509

(307,149,714)

(68,449,774)

(51,560,478)

(70,239,049)

(95,166,586)

(21,733,827)

Debt securities in issue

11,940,167

(14,160,000)

(540,000)

(13,620,000)

364,995,391

(376,442,272)

(68,724,489)

(86,471,540)

(80,753,638)

(118,758,778)

(21,733,827)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.5 Liquidity risk – continued

4.5.2 Cash flows payable by the Bank under financial liabilities by residual maturity – continued

Carrying

amount

Gross

nominal

outflow

Repayable

on demand

Less than

three

months

Between

three

months and

one year

Between

one and five

years

More than

five years

€

At 31 December 2020

Amounts owed to institutions

35,000,000

(34,937,192)

Amounts owed to banks

Amo

250,576

(250,576)

Amounts owed to customers

304,384,729

(315,380,277)

(86,742,416)

(20,059,489)

(50,992,699)

(137,155,106)

(20,430,567)

Debt securities in issue

11,923,078

(14,700,000)

(540,000)

(14,160,000)

351,558,383

(365,268,045)

(86,992,992)

(20,059,489)

(86,469,891)

(151,315,106)

(20,430,567)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.6 Operational risk

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated

with the Bank’s processes, personnel, technology, and infrastructure, as well as from external

factors other than credit, market, and liquidity risks, such as risks arising from legal and regulatory

requirements and generally accepted standards of corporate behaviour. Operational risks arise

from all the Bank’s operations.

Management of operational risk

The Bank’s objective is to manage operational risk to balance the avoidance of financial losses and

damage to the Bank’s reputation with overall cost effectiveness. The Bank’s operational risk

management activities comprise actions to:

• Adopt policies, processes, and procedures to control and/or mitigate material operational

risks.

• Identify and assess the operational risk inherent in all material products, activities,

processes, and systems. Before new products, activities, processes, and systems are

introduced or undertaken, the inherent operational risk is subject to adequate assessment.

• Monitor all potential operational risks and material exposures to losses.

• Monitor whether there is motive, means and opportunity within the overall control

environment to commit fraudulent acts.

• Adopt contingency and business continuity plans to ensure the Bank’s ability to operate on

an ongoing basis and limit losses in the event of severe business disruption.

The primary responsibility for the development and implementation of controls to address

operational risk is assigned to senior management. Periodic operational risk reports are submitted

to the Bank’s Audit and Risk Committee. A financial measurement of this risk is estimated by the

Bank for the purpose of allocating risk capital using the Basic Indicator Approach under the Capital

Requirements Directive rules. The capital requirement for operational risk under this method was

calculated at €960,383 as at 31 December 2021 (2020: €913,256).

4.7 Fair value measurement of financial instruments

The fair value of financial assets that are traded in active markets are based on quoted market

prices or dealer price quotations. For all other financial instruments, the Bank determines fair value

using other valuation techniques.

(a) Valuation models

The Bank measures fair value 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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.7 Fair value measurement of financial instruments – continued

• 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.

• Level 3: inputs that are unobservable. This category includes all instruments for which the

valuation technique includes inputs that are not observable, 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.

Valuation techniques include net present value and discounted cash flow models. Assumptions and

inputs used in valuation techniques include risk-free and benchmark interest rates.

Fair values reflect the credit risk of the instrument and include adjustments to take into account

the credit risk of the counterparty as appropriate.

The objective of valuation techniques is to arrive at a fair value measurement that reflects the price

that would be received to sell the 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 Bank has access at that date.

(b) Valuation framework

The Bank’s financial assets measured at fair value comprise investments in Malta Government

Stocks, corporate bonds listed on the Malta Stock Exchange, and collective investment schemes.

Malta Government Stocks, corporate bonds and unquoted equity investments are classified as

financial investments measured at FVOCI. Equity investments representing units in collective

investment schemes are classified as financial investments measured at FVTPL. The Head of

Finance and Treasury has overall responsibility for independently verifying the results of all fair

value measurements.

The table below analyses financial instruments measured at fair value at the reporting date by fair

value measurement categorisation within the fair value hierarchy. The amounts reflect the carrying

amount recognised in the statement of financial position.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.7 Fair value measurement of financial instruments – continued

Level 1

Level 2

Level 3

Total

€

31 December 2021

Financial investments:

- Debt securities

96,730,990

- Equity investments

20,519,447

30,275

20,549,722

117,250,437

30,275

117,280,712

31 December 2020

Financial investments:

- Debt securities

88,695,880

- Equity investments

20,568,815

39,935

20,608,750

109,264,695

39,935

109,304,630

Financial investments – Debt securities

This category of assets is carried at fair value, measured by reference to quoted market prices as

at 31 December 2021 and 2020.

Financial investments – Equity investments

The Bank has an interest in an open-ended investment fund as disclosed in Note 15.4, which is

carried at fair value, determined by reference to the net asset value of fund as at 31 December

2021 and 2020.

The Bank’s exposure to unquoted equity investments is deemed immaterial as at 31 December

2021 and 2020.

No transfers of financial instruments between different levels of the fair value hierarchy have

occurred during the financial years ended 31 December 2021 and 2020.

(d) Financial instruments not measured at fair value

The fair value of the debt securities in issue as at 31 December 2021 amounted to €12,360,000

(2020: €12,000,000) whilst the carrying amount of these debt securities was €11,940,167 (2020:

€11,923,078). The carrying amount of all other financial instruments not measured at fair value is

deemed by management to approximate their fair value as described below.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.7 Fair value measurement of financial instruments – continued

Balances with Central Bank of Malta, loans and advances to banks and factored receivables

These categories of assets are reported net of credit loss allowances to reflect the estimated

recoverable amounts. Balances with Central Bank of Malta and loans and advances to banks re-

price within 3 months, whilst factored receivables are relatively short-term in nature. The carrying

amounts of these financial assets are therefore deemed to be a reasonable approximation of their

fair value.

Loans and advances to customers

46% (2020: 41%) of loans and advances to customers reprice within 3 months and hence, the

carrying amount of these financial assets approximate their fair value. 52% (2020: 57%) reprice

after more than three months and within five years. The remaining reprice after more than five

years. 25% (2020: 32%) of these instruments are cash secured by deposits from customers held by

the Bank. There were no significant changes in the market interest rates during the term of these

advances. Fair values in relation to loans and advances to customers, which also includes customer

accounts repayable on demand are deemed to be fairly close to carrying amounts principally in

view of the fact that the Bank has the ability to re-price the majority of the exposures at its

discretion within a period of short notice of up to a maximum of 12 months.

Amounts owed to institutions

Amounts owed to institutions amounting to €55,000,000 (2020: €35,000,000) represent loans

contracted in terms of the ‘Eurosystem Monetary Policy Operations - Central Bank of Malta

Directive No.8’ and are carried at amortised cost. These amounts are secured by a pledge on a

portion of the Bank’s portfolio of investments in Malta Government Stocks as disclosed in Note

15.2. The fair value of these amounts is deemed to approximate the carrying amount in view of the

short-term nature of the financial liability.

Amounts owed to customers

This category of liabilities is carried at amortised cost and amounts to €297,780,509 (2020:

€304,384,729). 43% (2020: 34%) of customer deposits reprice within three months or less and, in

this respect, their carrying amount is deemed to be a reasonable approximation of their fair value.

In respect of longer-term fixed-maturity deposits, which are re-priceable upon their contractual

maturity date, the fair value of these liabilities is deemed to approximate their respective carrying

amount in view of the insignificant changes in market interest rates since origination.

Amounts owed to banks

This category of liabilities is carried at amortised cost and amounts to €274,715 (2020: €250,576).

These liabilities are short-term in nature and, in this respect, their carrying amount is deemed to

approximate their fair value.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.7 Fair value measurement of financial instruments – continued

Debt securities in issue

This category of liabilities is carried at amortised cost. The debt securities in issue are quoted and

the fair value has been determined by reference to the market price, which was €103.00 as at 31

December 2021 (2020: €100), resulting in a fair value of €12,360,000 (2020: €12,000,000).

(e) Non-financial instruments measured at fair value

The judgements and estimates made in determining the fair values of property classified within

‘Property and equipment’, which is recognised and measured at fair value in the statement of

financial position are described hereunder.

The Bank engages external, independent and qualified valuers to determine the fair value of its

properties at least at least every three years. At the end of each reporting period, the directors

update their assessment of the fair value of each property, taking into account the most recent

independent valuations and other market factors.

The Bank’s property, classified within ‘Property and equipment’, comprises the Bank’s offices and

other operational premises. All the recurring property fair value measurements at 31 December

2021 and 2020 use significant unobservable inputs and are accordingly categorised within Level 3

of the fair valuation hierarchy. The last independent valuation of these properties was performed

as at 11 December 2020.

The external valuations of the Level 3 property have been performed using predominantly the

traditional investment method of valuation based on the capitalised rentals approach. In view of

the limited market information available, the valuations have been performed using unobservable

inputs. In relation to the capitalised rentals approach, the significant unobservable inputs include:

• a capitalisation rate applied at 6% (2020: 6%) which is effectively the discount rate

adjusted for anticipated growth; and

• the expected annual rental value (“ERV”) taking into account the rental rate per square

metre for comparable properties located in proximity to the Bank’s property with

adjustments for differences in the size, age, exact location and condition of the property.

The assumed monthly rental rate per square metre is €23.27 (2020: €23.27).

Effectively, the capitalisation rate indicates the return the investor expects to receive through

annual rental value.

Market activity has been impacted in a number of sectors, which has led to a heightened level of

uncertainty within the local property market. The real impact of the pandemic and Malta’s grey

listing by the Financial Action Task Force on property prices will not be fully known until market

conditions stabilise.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.8 Capital base

The Bank is a licenced credit institution and must therefore comply with the minimum capital

requirements prescribed by the Capital Requirements Regulation. The Bank has adopted the

Standardised Approach to calculate its capital requirements.

4.8.1 Capital management

The Bank is required to maintain sufficient capital to comply with regulatory capital requirements.

The Bank’s capital management processes ensure an efficient use of capital in relation to risk

appetite as well as business development. The Bank’s regulatory capital comprises Tier 1 capital,

which includes ordinary share capital, the capital contribution reserve, retained earnings and other

reserves.

All financial instruments arising from the Bank’s operations are categorised as banking book

exposures, and risk-weighted assets are determined according to specified requirements that seek

to reflect the varying levels of risk attached to assets and to exposures not recognised in the

statement of financial position.

The Bank has complied with all capital requirements directives and rules throughout the financial

years ended 31 December 2021 and 2020. There have been no material changes in the Bank’s

management of capital during the respective financial years.

4.8.2 Calculation of minimum capital requirement and risk-weighted assets

The minimum capital requirements are calculated in respect of the Bank’s exposure to credit,

market, and operational risks. The capital ratio is calculated in line with the definitions emanating

from the Capital Requirements Regulation (“CRR”) and, in accordance with these regulations, is

required to be above 8% at all times.

Total risk-weighted assets are determined by multiplying the capital requirements for market risk

and operational risk by 12.5 (i.e. the reciprocal of the minimum capital ratio of 8%) and adding the

resulting figures to the sum of risk-weighted assets for credit risk.

The following is an analysis of the bank’s capital base in accordance with the CRR’s requirements.

2021

2020

€

Tier 1 capital

Ordinary share capital

10,000,000

Capital contribution

17,032,675

Retained earnings

2,005,302

1,179,003

Property revaluation reserve

3,521,238

Fair value movement reserve

(612,547)

639,250

Other reserves

45,091

3,860

Deductions related to intangible assets

(1,774,370)

(1,550,091)

Total regulatory capital

30,217,389

30,825,935

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

4 Financial risk management and review – continued

4.8 Capital base – continued

4.8.2 Calculation of minimum capital requirement and risk-weighted assets – continued

Further information in respect of the Bank's capital adequacy ratios may be found in sections 3 and

4 of Appendix 1 - Pillar 3 disclosures as at 31 December 2021, which are subject to internal review

by the Bank.

5 Net interest income

2021

2020

Note

€

Interest income

Factored receivables

4,989,116

6,009,954

Loans and advances to customers

4,567,305

3,645,882

Amounts owed to institutions

135,521

10,694

Financial investments measured at FVOCI

1,710,715

1,672,784

Amortisation of premium on financial

investments measured at FVOCI

15.5

(698,100)

(764,126)

Total interest income

10,704,557

10,575,188

Interest expense

Loans and advances to banks

(98,542)

(97,607)

Amounts owed to customers

(3,858,102)

(4,356,618)

Debt securities in issue

(540,000)

Amortisation of debt issuance costs

(17,089)

Total interest expense

(4,513,733)

(5,011,314)

Net interest income

6,190,824

5,563,874

6 Net fee and commission income

2021

2020

€

Account maintenance and other bank charges

119,866

136,427

Fee and commission income

119,866

136,427

SWIFT and bank charges

(130,061)

(69,535)

Fee and commission expense

(130,061)

(69,535)

Net fee and commission (expense)/income

(10,195)

66,892

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

6 Net fee and commission income – continued

Performance obligations and revenue recognition policies

Fee and commission income from contracts with customers is measured based on the consideration

specified in a contract with a customer. The Bank recognises revenue when it transfers control over a

service to a customer.

The following table provides information about the nature and timing of the satisfaction of

performance obligations in contracts with customers, including significant payment terms, and the

related revenue recognition policies.

Type of service

Nature and timing of satisfaction of performance

obligations, including significant payment terms

Revenue recognition under IFRS 15

Retail and

corporate

banking service

The Bank provides banking services to corporate

customers, including the provision of credit facilities,

foreign currency transactions, account maintenance

and servicing fees.

Transaction-based fees for foreign currency

transactions and credit facilities are charged to the

customer's account when the transaction takes place.

Servicing fees are charged on a periodical basis and are

based on fixed rates reviewed annually by the Bank.

No fees are charged to the Bank’s retail customer base.

Revenue from account maintenance and

servicing fees is recognised over time as

the services are provided.

Revenue related to transactions is

recognised at the point in time when the

transaction takes place.

7 Other operating income

2021

2020

€

Net (losses)/gains on financial investments

measured at FVTPL

(59,028)

110,889

Net gains on disposal of financial investments

measured at FVOCI

442,395

172,944

Net gain/(loss) from foreign exchange activities

90,196

(46,172)

Other income

97,746

73,437

571,309

311,098

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

8 Changes in expected credit losses and other credit impairment charges

2021

2020

€

Changes in expected credit losses:

Factored receivables

(25,673)

27,017

Loans and advances to customers

50,724

(148,619)

Debt financial investments measured at FVOCI

(11,860)

13,191

(121,602)

Other credit impairment charges:

Write-offs

- Factored receivables

(320,006)

(51,195)

- Loans and advances to customers

(123,970)

Recoveries

- Loans and advances to customers

45,093

(398,883)

(51,195)

(385,692)

(172,797)

9 Profit before tax

9.1 Profit before income tax is stated after fees, exclusive of VAT, charged by the Bank’s statutory

auditor in relation to the financial years ended 31 December 2021 and 2020 comprise the following:

2021

2020

€

Statutory audit services

60,000

54,600

Other assurance services

4,500

2,300

Other non-assurance services

9,240

8,300

9.2 Personnel expenses incurred by the Bank during the respective financial years are analysed as

follows:

2021

2020

€

Directors’ fees

137,000

105,000

Staff costs:

- wages, salaries and allowances

1,849,474

1,559,965

- defined contribution social security costs

116,816

100,886

2,103,290

1,765,851

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

9 Profit before tax - continued

9.3 The weekly average number of persons employed by the Bank during the respective financial years

was as follows:

2021

2020

€

Managerial

Supervisory and clerical

9.4 Other expenses incurred by the Bank during the respective financial years are analysed as follows:

2021

2020

€

IT support and maintenance costs

1,351,039

999,287

Professional fees

457,408

448,406

Marketing expenses

129,374

56,050

Depositor compensation scheme contributions

1,089,904

Other expenses

660,816

209,765

2,598,637

2,803,412

10 Income tax expense

10.1 Total income tax expense

Note

2021

2020

€

Income Statement

Current tax charge for the year

(373,430)

(299,900)

Deferred tax income

1,254

80,229

Total income tax expense

(372,176)

(219,671)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

10 Income tax expense – continued

10.2 The tax recognised in profit or loss on the Bank’s profit before tax differs from the theoretical

amount that would arise using the applicable tax rate as follows:

2021

2020

€

Profit before income tax

820,157

604,891

Income tax at the applicable tax rate of 35%

(287,055)

(211,712)

Tax effect of:

- Non-deductible expenses

(106,298)

(24,739)

- Other differences

21,177

16,780

Tax expense

(372,176)

(219,671)

11 Earnings per share

Earnings per share is calculated on the profit attributable to ordinary shareholders of the Bank for

the year ended 31 December 2021 amounting to €447,981 (2020: €385,220) divided by 400,000

(2020: 400,000), being the equivalent number of ordinary shares in issue and ranking equally for

dividend during the year.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

12 Classification of financial assets and financial liabilities

The following table provides a reconciliation between line items in the statement of financial

position and categories of financial instruments.

2021

Note

At FVTPL

FVOCI – debt

instruments

FVOCI – equity

instruments

Amortised cost

Total carrying

amount

Balances with Central Bank

of Malta and cash

16,193,768

Loans and advances to

banks

25,420,282

Investment securities

20,519,447

96,730,990

30,275

117,280,712

Factored receivables

95,051,834

Loans and advances to

customers

131,369,341

Other assets

1,971,720

Total financial assets

20,519,447

96,730,990

30,275

270,006,945

387,287,657

Amounts owed to

institutions

55,000,000

Amounts owed to banks

274,715

Amounts owed to

customers

297,780,509

Debt securities in issue

11,940,167

Other liabilities

3,975,122

Total financial liabilities

368,970,513

2020

Note

At FVTPL

FVOCI – debt

instruments

FVOCI – equity

instruments

Amortised cost

Total carrying

amount

Balances with Central Bank

of Malta

18,612,618

Loans and advances to

banks

22,695,594

Investment securities

20,568,815

88,695,880

39,935

109,304,630

Factored receivables

99,155,608

Loans and advances to

customers

121,555,833

Other assets

3,603,758

Total financial assets

20,568,815

88,695,880

39,935

265,623,411

374,928,041

Amounts owed to

institutions

35,000,000

Amounts owed to banks

250,576

Amounts owed to

customers

304,384,729

Debt securities in issue

11,923,078

Other liabilities

2,809,505

Total financial liabilities

354,367,888

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

13 Balances with Central Bank of Malta and cash

2021

2020

€

Balances with Central Bank of Malta

16,192,155

18,581,607

Cash and items in transit

1,613

31,011

16,193,768

18,612,618

Balances with the Central Bank of Malta comprise mandatory reserve deposits of €1,368,657 (2020:

€1,332,658) and are not available for use in the Bank’s day-to-day operations. During the current

and prior years, the Bank has been compliant with the reserve deposit requirement. These balances

also comprise an amount of €1,288,168 (2020: €1,707,717) pledged in favour of the Depositor

Compensation Scheme. Credit loss allowances in respect of balances with the Central Bank of Malta

are deemed to be negligible.

14 Loans and advances to banks

2021

2020

€

Repayable on call and at short notice

25,420,282

22,695,594

Credit loss allowances in respect of loans and advances to banks are deemed to be negligible.

15 Financial investments

15.1 Composition of investment portfolio

2021

2020

€

Debt securities measured at FVOCI

96,730,990

88,695,880

Equity investments designated at FVOCI

30,275

39,935

Equity investments measured at FVTPL

20,519,447

20,568,815

117,280,712

109,304,630

At 31 December 2021, credit loss allowances in respect of debt securities measured at FVOCI

amounted to €11,860 (2020: nil).

15.2 Debt financial investments measured at FVOCI comprise:

2021

2020

€

Malta Government Stocks

74,066,906

70,959,098

Local corporate bonds

22,664,084

17,736,782

96,730,990

88,695,880

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

15 Investment securities – continued

The Bank’s holdings of debt financial investments measured at FVOCI represent securities

quoted on the Malta Stock Exchange.

As at 31 December 2021, a portion of the Bank’s investment in Malta Government Stocks with

a fair value of €58,128,816 (2020: €58,177,400) was pledged in favour of the Central Bank of

Malta as collateral held in respect of the Bank’s participation in the ECB Pandemic Emergency

Longer-Term Refinancing Operations (“PELTROs”) amounting to €55,000,000 as at that date

(2020: €35,000,000).

15.3 Equity investments designated at FVOCI comprise:

2021

2020

€

Unquoted equity holding

30,275

39,935

(Society for Worldwide Interbank Financial

Telecommunications SCRL – SWIFT)

15.4 Equity investments measured at FVTPL comprise:

2021

2020

€

Collective investment schemes

20,519,447

20,568,815

These represent investments in investment-grade money market funds measured at FVTPL.

15.5 The table below summarises the movement in financial investments:

€

At 1 January 2021

109,304,630

Acquisitions

85,996,927

Disposals

(76,537,399)

Amortisation of premium

(698,100)

Net fair value movement

(785,346)

At 31 December 2021

117,280,712

At 1 January 2020

81,369,795

Acquisitions

87,424,087

Disposals

(59,299,333)

Amortisation of premium

(764,126)

Net fair value movement

574,207

At 31 December 2020

109,304,630

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

16 Factored receivables

2021

2020

€

Receivables factored on a non-recourse basis:

- Invoice factoring

29,277,379

30,941,233

- Bills of exchange factoring

66,550,268

69,015,861

Allowance for ECL

(775,813)

(801,486)

95,051,834

99,155,608

17 Loans and advances to customers

Note

2021

2020

€

Term loans and advances to third parties

61,091,191

52,146,936

Term loans and advances to related parties

31.3

36,442,579

45,360,049

Credit cards and overdrafts

34,164,557

24,428,558

Allowance for ECL

(328,986)

(379,710)

131,369,341

121,555,833

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

18 Property and equipment

18.1

Premises and

Computer

Other

Motor

Total

improvements

hardware

equipment

Vehicles

€

Cost/revalued

amount

At 1 January 2020

13,382,058

11,970,665

642,999

661,770

106,624

Acquisitions

684,845

579,764

96,225

8,856

Premises revaluation

(135,382)

At 31 December 2020

13,931,521

12,415,047

739,224

670,626

106,624

At 1 January 2021

13,931,521

12,415,047

739,224

670,626

106,624

Acquisitions

814,947

622,124

160,490

2,423

29,910

Disposals

(31,610)

At 31 December 2021

14,714,858

13,037,171

899,714

673,049

104,924

Depreciation

At 1 January 2020

1,763,098

580,421

550,372

559,929

72,376

Charge for the year

173,974

70,686

48,251

36,718

18,319

At 31 December 2020

1,937,072

651,107

598,623

596,647

90,695

At 1 January 2021

1,937,072

651,107

598,623

596,647

90,695

Charge for the year

243,933

83,109

115,596

27,773

17,455

Depreciation released

on disposal

(31,542)

At 31 December 2021

2,149,463

734,216

714,219

624,420

76,608

Carrying amount

At 1 January 2020

11,618,960

11,390,244

92,627

101,841

34,248

At 31 December 2020

11,994,449

11,763,940

140,601

73,979

15,929

At 31 December 2021

12,565,395

12,302,955

185,495

48,629

28,316

18.2 The carrying amount of premises and improvements that would have been included in the

financial statements had these assets not been revalued (see Note 3.5) and had been carried at

cost less depreciation would have been €8,320,687 (2020: €7,781,672).

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

18 Property and equipment – continued

18.3 As at 31 December 2021, capital expenditure authorised and contracted for amounted to

€1,615,000 (2020: €2,100,000). The bulk of this expenditure will be directed toward construction

and refurbishment works at what will eventually become the Bank’s main premises at Castille

Square.

18.4 Revaluation of premises

The Bank’s premises are measured at revalued amount less accumulated depreciation. The

revaluation amount is determined based on open market values provided periodically, at least

every five years, by independent valuers. The Bank occupies almost the full complement of two

adjacent and prestigious houses – Nos. 53 and 58 in East Street, Valletta, close to the ‘Lower

Barrakka’ Gardens and with views of the Grand Harbour and the Three Cities. The buildings date

back to the eighteenth century and are structurally sound and complete of finishes of a very high

standard. In 2017, the Bank acquired new premises at 4, Castille Place and as at 31 December

2021 was in the process of extensive improvements and refurbishment to the building.

Information in respect of the fair value measurement of the properties measured at revalued

amount is disclosed in Note 4.7.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

19 Intangible assets

Computer

software

€

Cost

At 1 January 2020

3,914,383

Acquisitions

337,771

At 31 December 2020

4,252,154

At 1 January 2021

4,252,154

Acquisitions

824,508

At 31 December 2021

5,076,662

Amortisation

At 1 January 2020

2,281,124

Charge for the year

420,939

At 31 December 2020

2,702,063

At 1 January 2021

2,702,063

Charge for the year

600,229

At 31 December 2021

3,302,292

Carrying amount

At 1 January 2020

1,633,259

At 31 December 2020

1,550,091

At 31 December 2021

1,774,370

As at 31 December 2021, capital expenditure authorised and contracted for amounted to

€1,400,000 (2020: NIL). The bulk of this expenditure will be directed toward the procurement and

development of the core banking system.

20 Other assets

2021

2020

€

Accrued income

1,335,715

1,563,376

Accounts receivable and prepayments

636,005

2,040,382

1,971,720

3,603,758

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

21 Amounts owed to institutions

The Bank participates in the PELTROs with the ECB. In this respect, part of the Malta Government

Stocks held by the Bank as at 31 December 2021 and 2020 (see Note 15) were pledged in favour of

the Central Bank of Malta as collateral in respect of the Bank’s participation in the PELTROs.

22 Amounts owed to banks

2021

2020

€

Repayable on demand

274,715

250,576

274,715

250,576

23 Amounts owed to customers

2021

2020

€

Repayable on demand

68,449,774

86,742,416

Term deposits

229,330,735

217,642,313

297,780,509

304,384,729

24 Debt securities in issue

2021

2020

€

At 1 January

11,923,078

11,905,989

Amortisation of debt issuance costs during the year

17,089

At 31 December 2021

11,940,167

11,923,078

Debt securities in issue as at 31 December 2021 and 2020 represent unsecured debt securities with

a nominal value of €12,000,000 issued on 30 June 2015 and redeemable on 30 June 2025. These

debt securities, which are listed on the Malta Stock Exchange, are denominated in Euro and pay

interest at a fixed rate of 4.5%. The debt securities constitute a general, direct, unconditional, and

unsecured obligation of the Bank and shall at all times rank pari passu with other unsecured debt.

The Bank has not had any defaults of interest or any other breaches with respect to these debt

securities during the financial years ended 31 December 2021 and 2020.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

25 Deferred tax assets and liabilities

The recognised deferred tax assets and liabilities are expected to be recovered or settled

principally after more than 12 months from the end of the reporting period, and are attributable

to the following:

Assets

Liabilities

Net

Assets

Liabilities

Net

2021

2020

€

Depreciation of property

and equipment and

amortisation of

intangible assets

(329,988)

(359,958)

Revaluation of properties

(558,446)

Fair value gains on

financial investments

- measured at FVOCI

329,833

(344,211)

- measured at FVTPL

(2,240)

3,888

Allowance for ECL

390,830

413,418

720,663

(890,674)

(170,011)

417,306

(1,262,615)

(845,309)

Movement in temporary differences relates to:

At 1 January

Recognised in

At 31 December

2021

profit or loss

equity

2021

€

Depreciation of property and

equipment and amortisation

of intangible assets

(359,958)

29,970

(329,988)

Revaluation of properties

(558,446)

Fair value gains on financial

investments

- measured at FVOCI

(344,211)

674,044

329,833

- measured at FVTPL

3,888

(6,128)

(2,240)

Allowance for ECL

413,418

(22,588)

390,830

(845,309)

1,254

674,044

(170,011)

At 1 January

Recognised in

At 31 December

2020

profit or loss

equity

2020

€

Depreciation of property and

equipment and amortisation

of intangible assets

(377,252)

17,294

(359,958)

Revaluation of properties

(518,922)

(39,524)

(558,446)

Fair value gains on financial

investments

- measured at FVOCI

(235,220)

(108,991)

(344,211)

- measured at FVTPL

(16,486)

20,374

3,888

Allowance for ECL

370,857

42,561

413,418

(777,023)

80,229

(148,515)

(845,309)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

100

26 Other liabilities

2021

2020

€

Accrued interest payable

3,325,807

2,663,125

Other accrued expenses

649,315

146,380

3,975,122

2,809,505

27 Share capital and reserves

27.1 Share capital

Ordinary shares

2021

2020

No.

On issue at 1 January and 31 December – fully paid

400,000

At 31 December 2021, the authorised and issued share capital comprised 400,000 ordinary shares

(2020: 400,000) of €25 each. The holders of ordinary shares are entitled to receive dividends as

declared from time to time and are entitled to one vote per share at shareholders’ meetings of the

Bank.

During an Extraordinary General Meeting held on 27 July 2021 the Shareholders approved a

resolution whereby the authorised share capital was re-designated from 400,000 ordinary shares

at €25 each to 20,000,000 ordinary shares at €0.50 each. The resolution also included the re-

designation of the authorised share capital to 120,000,000 ordinary shares at €0.50 each and the

increase in issued share capital through the capitalisation of €17,000,000 out of the capital

contribution reserve. The Bank issued and allotted thirty-four million (34,000,000) ordinary shares

of €0.50 each to IBL T Limited (C16322) and IBL I Limited (C16321) respectively, in accordance with

the existing shareholding, and credited as fully paid-up shares.

Following Company Announcement IZB89, published on the 27 July 2021, relating to the

redenomination, reclassification and increase in share capital and the related changes to the

Memorandum and Articles of Association, the Bank obtained all the necessary approvals and the

shares have been reclassified and redenominated on 16 February 2022 and the additional shares

have been issued with effect from 25 February 2022.

27.2 Capital contribution reserve

These amounts represent irrevocable and unconditional contributions by the shareholders and are

interest free and are repayable at the sole discretion of the Bank. As disclosed in Note 27.1, the

Bank obtained regulatory approval for the conversion of €17,000,000 from its capital contribution

reserve into fully paid-up ordinary share capital on 25 February 2022.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

101

27 Share capital and reserves – continued

27.3 Property revaluation reserve

The property revaluation reserve represents the surplus arising on the revaluation of the Bank’s

premises, net of related deferred tax effects. This reserve is not available for distribution.

27.4 Fair value reserve

The fair value reserve comprises:

• the cumulative movement in the fair value of equity investments measured at FVOCI, net

of deferred tax; and

• the cumulative movement in the fair value of debt securities measured at FVOCI net of

deferred tax and allowances for ECL.

27.5 Depositor compensation scheme reserve

The depositor compensation scheme reserve represents amounts set aside from retained earnings.

As at 31 December 2021, a total amount of €1,288,168 (2020: €1,707,717) was placed with the

Central Bank of Malta and pledged in favour of the Depositor Compensation Scheme.

27.6 Reserve for general banking risks

Banking Rule 09 (BR09) requires the Bank to hold a Reserve for General Banking Risks, calculated

as a percentage of non-performing loans. This reserve is required to be funded from planned

dividends. In this respect, the reserve at the end of the year amounted to €45,091 (2020: €3,860).

27.7 Availability of reserves for distribution

2021

2020

€

Distributable

2,005,302

1,179,003

Non-distributable

21,274,625

22,904,740

23,279,927

24,083,743

27.8 Dividends

On 27 July 2020, the European Central Bank (‘ECB’) issued a Recommendation on dividend

distributions during the Covid-19 pandemic and repealing Recommendation ECB/2020/19

(ECB/2020/35), which inter alia recommended that no dividends be paid out by credit institutions

until 1 January 2021 and that no irrevocable commitment to pay out dividends be undertaken by

credit institutions for the financial years 2019 and 2020.

On 15 December 2020, the ECB issued another Recommendation on dividend distributions during

the Covid 19 pandemic and repealing Recommendation ECB/2020/35 (ECB/2020/62), which

encourages prudence on the part of credit institutions when deciding on or paying out dividends.

As a result, the ECB generally considered distributions exceeding the lower of 15% of accumulated

profit for the financial years ended 31 December 2019 and 2020 and 20 basis points in terms of the

Common Equity Tier 1 ratio to lack prudence. In this respect, no dividends were declared or paid in

respect of the financial year ended 31 December 2020.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

102

27 Share capital and reserves – continued

27.8 Dividends – continued

On 23 July 2021, the ECB issued another Recommendation repealing Recommendation

ECB/2020/62 (ECB/2021/31) with effect from 30 September 2021. Proposed dividends in respect

of the financial year ended 31 December 2021 amounts to €2,000,000, representing a net dividend

of €5.00 per ordinary share calculated by reference to the number of issued ordinary shares as at

31 December 2021. A resolution to this effect will be proposed for approval by the Annual General

Meeting on 24 March 2022, subject to regulatory approval.

28 Commitments

2021

2020

€

Unutilised factoring, overdraft facilities and

credit card commitments

92,738,305

96,000,451

The Bank may unconditionally cancel undrawn factoring commitments amounting to €61,283,083

(2020: €74,575,239) at its discretion.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

103

29 Net cash from operating activities

2021

2020

€

Profit for the year

447,981

385,220

Adjustments for:

Depreciation of property and equipment

243,933

173,974

Amortisation of intangible assets

600,229

420,939

Income tax expense

372,176

219,671

Allowance for ECL

385,692

172,797

Interest income on debt financial

investments

(1,710,715)

(1,672,784)

Interest expense on debt securities in issue

540,000

Net unrealised gain/(loss) from financial

investments measured at FVTPL

59,028

(110,889)

Realised gains on disposal of financial

investments

(442,395)

(172,944)

Amortisation of premiums and discounts on

debt financial investments

698,100

764,126

Amortisation of debt issuance costs

17,089

1,211,118

737,199

Movements in reserve deposit with Central

Bank of Malta

(35,999)

Movements in loans and advances to customers

(9,762,784)

(35,181,902)

Movements in factored receivables

4,129,447

6,405,210

Movements in amounts owed to institutions

20,000,000

35,000,000

Movements in amounts owed to banks

24,139

254

Movements in amounts owed to customers

(6,604,220)

(15,352,830)

Movements in accruals and deferred income

1,198,980

283,377

10,160,681

(8,108,692)

30 Cash and cash equivalents

2021

2020

€

Cash

1,613

31,011

Balances with Central Bank of Malta

14,823,498

17,248,949

Loans and advances to banks with contractual

maturity of three months or less

25,420,282

22,695,594

Amounts owed to banks

(274,715)

(250,576)

39,970,678

39,724,978

Balances with the Central Bank of Malta exclude mandatory reserve deposits of €1,368,657 (2020:

€1,332,658) and are not available for use in the Group’s day-to-day operations. During the financial

years ended 31 December 2021 and 2020, the Bank has complied with the reserve deposit

requirement at all times. Balances with the Central Bank of Malta also comprise an amount of

€1,288,168 (2020: €1,707,717) pledged in favour of the Depositor Compensation Scheme.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

104

31 Related parties

31.1 Identity of related parties, and parent and ultimate controlling party

Related parties of the Bank include the ultimate parent, all entities controlled by the ultimate

parent, key management personnel, close family members of key management personnel and

entities which are controlled or jointly controlled by key management personnel or their close

family members.

Key management personnel are defined as those persons having authority and responsibility for

planning, directing and controlling the activities of the Bank, being the directors and the Bank’s

executive management. Reference to executive management shall mean the CEO, the Head of

Finance & Treasury, the Head of Operations, the Head of Credit, the Head of IT, the Head of Risk

and Compliance and the Head of HR.

The Bank’s immediate parent is IBL T Limited, the registered office of which is 53-58, East Street,

Valletta VLT 1251, Malta.

The financial results and assets and liabilities of the Bank are included in the consolidated financial

statements of Carlenco Finance NV, with registration number 0755.471.533, the registered office

of which is Lar Blok Z5, 8511 Kortrijk, Belgium.

Magdalena De Roeck and Caroline Van Marcke have an indirect beneficial interest in the

shareholding of the Bank and have significant control in the ultimate parent.

31.2 Related party transactions

Interest, fees, and other income/expenses in respect of related parties, principally comprising

entities within the Van Marcke Group, in the statement of profit or loss and other comprehensive

income comprise:

2021

2020

€

Interest and similar income

1,572,688

3,550,956

Fee and commission income

86,645

91,000

Other operating income

65,492

73,170

Interest expense

374,943

487,864

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

105

31 Related parties – continued

31.3 Related party balances

The statement of financial position includes outstanding transactions and balances with related

parties, principally comprising entities within the Van Marcke Group, as follows:

2021

2020

€

Assets

Loans and advances to customers

36,442,579

45,360,049

Prepayments and accrued income

508,679

589,211

Liabilities

Amounts owed to customers

29,511,433

48,466,322

Debt securities issued to directors

290,000

Accruals

11,706

39,838

Loans and advances to customers include four (2020: four) outstanding loans to key management

personnel amounting to €250,000, €97,699, €17,782 and €8,035 (2020: €250,000, €34,933,

€21,270 and €10,897). The first loan amounting to €250,000 (2020: €250,000) is secured against

property in Malta, bears interest at 1.75% per annum and is repayable after more than five years

from the reporting date. The remaining amounts are unsecured and bear interest between 1% and

1.75% (2020: 1% and 1.18%) per annum and are repayable after more than five years.

31.4 Transactions with key management personnel

2021

2020

€

Directors’ fees

137,000

105,000

Compensation to key management personnel - salaries

553,967

408,656

32 Operating segments

32.1 The segment reporting of the Bank is presented in terms of the following business segments,

determined in accordance with the disclosure requirements in respect of reportable segments

under IFRS 8 – Operating Segments:

Reportable segment

Description of activities

Factoring

Principally factoring of bills of exchange and invoices on a no-recourse

basis

Lending

Principally lending to corporate clients

Other

Principally treasury and other central functions

Revenues earned and expenses incurred in respect of each of the reportable business segments

are presented in the table below. No reconciliation is required since there are no differences

between the measurements of the reportable segments’ profits or losses and the information

disclosed in the statement of profit or loss and other comprehensive income.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

106

32 Operating segments – continued

2021

2020

Total

Lending

Factoring

Other

Total

Lending

Factoring

Other

€

Interest and similar

income

10,704,557

4,989,116

4,567,305

1,148,136

10,575,188

3,635,188

6,020,648

919,352

Interest expense

(4,513,733)

(2,103,734)

(1,925,871)

(484,128)

(5,011,314)

(1,722,624)

(2,853,033)

(435,657)

Net interest income

6,190,824

2,885,382

2,641,434

664,008

5,563,874

1,912,564

3,167,615

483,695

Net fee and commission

income

(10,195)

59,248

(55,493)

(13,950)

66,892

112,525

(39,587)

(6,046)

Other operating income

571,309

311,098

Total operating income

6,751,938

2,944,630

2,585,941

1,221,367

5,941,864

2,025,089

3,128,028

788,747

Depreciation and

amortisation

(844,162)

(369,264)

(302,889)

(172,009)

(594,913)

(174,500)

(336,297)

(84,116)

Changes in expected

credit losses and other

credit impairment

charges

(385,692)

(28,153

(345,679))

(11,860)

(172,797)

(148,619)

(24,178)

Employee compensation

and benefits

(2,103,290)

(920,048)

(754,670)

(428,572)

(1,765,851)

(517,960)

(998,214)

(249,677)

Other administrative

expenses

(2,598,637)

(1,136,728)

(932,403)

(529,506)

(2,803,412)

(822,297)

(1,584,735)

(396,380)

Profit before tax

820,157

490,437

250,300

79,420

604,891

361,713)

184,604

58,574

32.2 Geographical information

The Bank provides all its services from Malta. In presenting information on the basis of geographical

segments, segment revenue is based on the geographical location of customers. Segment assets

are based on the geographical location of the assets.

2021

2020

€

Revenue

Malta

7,525,207

6,436,545

Belgium

3,870,525

4,447,098

11,395,732

11,022,713

Non-current assets

Malta – tangible and intangible assets

14,339,765

13,544,540

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

107

32 Operating segments – continued

32.2 Geographical information – continued

The Bank’s major customer is the Group of which it forms part. Belgium is the country of domicile

of this Group.

Information about revenues, costs, and balances as a result of transactions with this Group is set

out in Note 31.

33 Critical accounting estimates and judgements

The preparation of financial statements in accordance with the requirements emanating from

IFRSs as adopted by the EU requires the use of accounting estimates which, by definition, will

seldom equal the actual results. Management also needs to exercise judgement in applying the

Bank’s accounting policies.

This note provides an overview of the areas that involved a higher degree of judgement or

complexity, and of items which are more likely to be materially adjusted due to estimates and

assumptions turning out to be wrong. Detailed information about these estimates and judgements

is included in other notes together with information about the basis of calculation for affected line

items in the financial statements.

Measurement of ECL in respect of loans and advances to customers and factored receivables

The estimation of credit loss allowances in respect of loans and advances to customers and

factored receivables is an area that requires the use of complex models and significant

assumptions about future economic conditions and credit behaviour.

A number of significant judgements are required in the measurement of ECL, including:

• The determination of criteria for the identification of significant increase in credit risk and

unlikeliness-to-pay events;

• The choice of appropriate models and assumptions for the measurement of ECL; and

• The selection of forward-looking scenarios used in the estimation of credit loss

allowances, including judgements and assumptions in relation to the number and severity

of scenarios as well as the relative probability weights assigned to each scenario.

The measurement of the credit loss allowances is an area that requires the use of complex models

and of statistical analyses of historical information, supplemented with significant management

judgement, to assess whether current and future macroeconomic conditions are such that the level

of ECL is likely to be greater or less than historical experience. The ECL models are reviewed

regularly in light of differences between loss estimates and actual loss experience, although

available information in respect of the Bank’s historical loss experience since the initial adoption of

IFRS 9 is still contained. The level of estimation uncertainty and judgement has increased as a result

of the economic effects of the Covid-19 pandemic, especially since there is no observable historical

trend, which can be reflected within the models, that will accurately represent the effects of the

economic changes brought about by the pandemic. Therefore, the underlying models and their

calibration, including how they react to forward-looking economic conditions, remain highly

subjective.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

108

33 Critical accounting estimates and judgements – continued

A detailed description of the inputs, assumptions and estimation techniques used in measuring ECL

in respect of loans and advances to customers and factored receivables is disclosed in Note 4.3.2.

The underlying risk factors have a high degree of interdependency and there is no single factor to

which credit loss allowances as a whole is sensitive.

A key judgement in the context of the Covid-19 pandemic is whether the heightened level of

macroeconomic uncertainty and its effects are more likely to be temporary or prolonged. The

shape of recovery is also a significant uncertainty. This in turn increases significantly the level of

subjectivity around the estimation of credit loss allowances in respect of loans and advances to

customers and factored receivables. Although the effective implementation of vaccination roll-out

programmes has amongst other factors, led to an economic recovery during 2021, the level of

subjectivity around the estimation of credit loss allowances remains significant, particularly due to

successive waves of infections, the potential mutation of Covid-19 variants, the efficacy of such

vaccines/boosters upon the emergence of new virus strains, and the unwinding of government

support schemes and regulatory relief measures.

In this regard, management applied a higher level of expert judgement in order to assess the

impact of the pandemic on the Bank’s level of defaults, including evaluating the impact of

government support schemes and regulatory relief measures, and the unwinding of such

measures, on both the incidence of default events and the severity of losses as described below.

The identification of customers experiencing significant increase in credit risk or credit impairment

in the context of the elevated level of uncertainty is highly judgemental due to limitations in

available credit information on customers. This is particularly relevant where customers have

accepted payment deferrals and other relief measures designed to address short-term liquidity

issues or have extended those deferrals.

For loans and advances to customers, the Bank performs periodic credit assessments at borrower

level by reference to recent historical management information and financial forecasts, where

available. As part of these credit assessments, judgement is exercised in evaluating all relevant

information on indicators of impairment, particularly where factors indicate deterioration in the

financial condition and outlook of borrowers affecting their ability to pay. In particular, customers

being granted moratoria or liquidity relief facilities in terms of the MDB CGS were monitored

closely in order to determine whether the shock induced by Covid-19 may transform into long-

term financial difficulties, especially corporate customers operating in industry sectors deemed to

be most impacted by Covid-19.

In relation to factored receivables, ECL models are generally reliant on the assumption that default

emergence is directly impacted by delinquency related indicators since less information is available

at asset level to enable the timely identification of SICR or UTP events.

For credit-impaired loans and advances to customers, management estimates credit loss

allowances by reference to the realisable value of security under different scenarios. Judgement is

applied in estimating the forecasted recoveries from the sale of collateralised properties, including

around valuation haircuts and time to recovery. The heightened level of uncertainty within the

local property market, driven by the pandemic, increases the level of expert judgement required

to predict with reasonable accuracy the recoverability of exposures through the sale of collateral,

since the real impact of the pandemic will not be fully known until market conditions stabilise.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

109

33 Critical accounting estimates and judgements – continued

Significant judgement is required in establishing the number, severity and relative weightings of

forward-looking economic scenarios. The level of expert judgement required is exacerbated by the

heightened level of uncertainty around predictions in respect of the potential impacts of

epidemiological assumptions in relation to the pandemic, of the efficacy of vaccines/boosters upon

the emergence of new virus strains, and of the effectiveness of government support schemes and

regulatory relief measures together with the impacts of their unwinding, on key macroeconomic

variables and, as a result on forward-looking PDs. As alluded to earlier, there is an absence of an

observable historical trend that can accurately represent the severity and speed of the economic

impacts brought about by the pandemic. Moreover, the complexities of government support

schemes and their unwinding, regulatory guidance on the treatment of customer impacts (such as

forbearance) and the unpredictable pathways of the pandemic taking cognisance of potential new

virus strains, have never been modelled. Consequently, in some cases, modelled assumptions and

linkages between economic factors and credit losses may underestimate or overestimate ECL in

these conditions.

Malta’s grey-listing by the FATF during the financial year ended 31 December 2021 has

compounded the level of economic uncertainty within local markets. The estimated economic

impact of grey-listing remains difficult to gauge, since this is highly dependent on the speed at

which Malta exits grey-listing, the effectiveness of national efforts to address the findings, as well

as the response from foreign investors. Significant judgement is required to assess the potential

impact of the grey-listing on the local economy.

In view of the above, management considered the sensitivity of the ECL outcome to the

macroeconomic forecasts by recalculating the ECL under the different scenarios, applying a 100%

weighting to each scenario. The effect of economic uncertainty on ECL is disclosed in the sensitivity

analysis presented in Note 4.3.2.4. The ECL calculated for the upside and downside scenarios

should not be taken to represent the upper and lower limits of possible ECL outcomes as there is

a high degree of estimation uncertainty in the numbers representing tail risk scenarios when

assigned a 100% weighting.

34 Comparative Information

Certain items of the comparative period have been reclassified to conform to the presentation of

the current year’s financial statements. These include reclassifications under Notes 5, 13, 29 and

reorganisation of certain line items and subtotals under Note 4 since the revised presentation is

more relevant and appropriate.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2021

110

35 Subsequent events

The Russian military invasion of Ukraine during February 2022 is deemed by management to

constitute a non-adjusting post-balance sheet event. Although there has been long-standing

geopolitical tension between Russia and Ukraine, a conclusive threat of invasion only became

evident during February 2022 and therefore does not provide additional evidence about conditions

that existed as at 31 December 2021.

Notwithstanding the above management performed an assessment to evaluate the potential

impact of the Russian military invasion of Ukraine and the Bank’s financial position and ongoing

financial performance. In this respect the assessment considered impacts on the valuation of assets

as a result of credit and market risk, the effect of the military invasion on the Bank’s processes as

well as on the customers’ business environment and supply chains, and other risk factors including

the potential impact of sanctions and market instability.

Based on this assessment, it was concluded that the impact of the Russian military invasion of

Ukraine on the Bank’s going concern assessment and on its core business lines appears to be

minimal. Given the elevated level of uncertainty and the potentially devastating impact from the

evolution of these events, the Bank will continue to monitor the situation closely and to update its

assessment as required.

Izola Bank p.l.c.

Appendices

2021

Izola Bank p.l.c.

Page

Appendix I - Pillar 3 Disclosures as at 31 December 2021 i

Appendix II - Five-Year Summary xvi

Appendix III – Supplementary Financial Information xix

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

CONTENTS

INTRODUCTION

1. RISK MANAGEMENT OBJECTIVES AND POLICIES

2. BOARD AND COMMITTEES STRUCTURE

3. OWN FUNDS

4. CAPITAL ADEQUACY AND LIQUIDITY

5. CREDIT RISK

6. STANDARDISED APPROACH TO CREDIT RISK

7. REMUNERATION POLICY

8. CREDIT RISK MITIGATION

9. CONCLUSION

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

INTRODUCTION

Background to Pillar 3 disclosures

The objective of Basel III Pillar 3 is to improve market discipline through effective public disclosure and to

complement requirements under Pillar 1 and Pillar 2. To that end, Pillar 3 introduces additional public

disclosure requirements and represents an increase in the amount of information made publicly available

by banks and investment firms regarding capital structure, capital adequacy, risk management and risk

measurement.

Nature of Disclosures

This document serves as the Basel III Pillar 3 disclosures of Izola Bank p.l.c. in accordance with the Malta

Financial Services Authority (‘MFSA’) Banking Rule 7 (BR07). Banking Rule BR/07 follows the disclosure

requirements of Directive 2013/36/EU (Capital Requirements Directive — Pillar 1) and EU Regulation No

575/2013 (Capital Requirements Regulation — Pillar 2) of the European Parliament and of the Council of 26

June 2013.

The Annual Report of Izola Bank p.l.c. has been filed with the MFSA Registry of Companies and the MFSA

Banking Unit. These Pillar 3 disclosures refer to the financial year ended 31

December 2021 and have been

included in the Annual Report for 2021.

The Bank has in place a formal policy to comply with the disclosure requirements laid down in Banking Rule

BR/07/2018. The Directors, after due consideration of the size and complexity of the Bank, do not feel it

necessary to produce Pillar 3 disclosures more frequently than annually. Banking Rule BR/07 requirements

are incorporated in this document if they are deemed relevant for the Bank.

As outlined in the requirements of banking regulations, these disclosures are not subject to an external

audit, except to the extent that any disclosures are equivalent to those made in the Financial Statements,

which have been prepared in accordance with the International Financial Reporting Standards (‘IFRS’) as

adopted by the EU. The Bank’s management is responsible for the verification of these Pillar 3 disclosures.

The Bank, through its internal verification process, is satisfied that these disclosures are presented fairly.

1 RISK MANAGEMENT OBJECTIVES AND POLICIES

The principal risks to which Izola Bank p.l.c. is exposed are business, credit concentration, operational and

interest rate risk in the non-trading book. Counterparty risk is also recognised as important.

Business risk

Business risk is the risk that the Bank may not be able to carry out its business plan or its desired strategy

and could therefore suffer losses if its income falls. This is a risk that every business faces. The two main

contributors to the business risk arise from the Bank’s dependence on the Group as its anchor client and

the general business environment in Malta and Belgium. There are no specific mitigating factors though it

is to be noted that the Group is itself diversified and has a large number of clients and suppliers which in

turn helps to diversify the underlying risk.

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

iii

Concentration risk

Concentration risk arises as a result of the concentration of exposures within the same category, whether it

is geographical location, product type, industry sector or counterparty type. These risks are managed

through adherence to Board approved lending criteria.

The Bank recognizes that credit concentration risk is present in the Bank’s factoring business in view of the

fact that factored debtors are mainly active in the property, building and construction sector in Belgium and

to the retail sector in Malta. Credit concentration risk is mitigated by a comprehensive credit insurance

policy covering credit risks arising from the Bank's factoring exposures in Belgium and Malta. Furthermore,

the diversification of the Bank’s business model is also an important contributor towards reducing this risk.

The credit risk concentration to the factored receivables in Malta is mitigated through the dispersion of

debtors combined with security over the underlying asset. Furthermore, the Bank retains insurance for

credit risk on a major part of its invoice factoring business. As the Bank continues its growth path,

concentration risk is reduced as each new product or business line launched reduces the overall scale of

previous concentrations.

Operational risk

Operational risk is associated with the Bank’s internal processes and systems and the potential for these

not to function properly. Through implementing a robust internal control system, the Bank is able to

mitigate many of the identified risks. The Bank also maintains third party insurance to cover certain risk

events such as computer fraud and cybersecurity risk. Regular reporting on operational risk is made to the

Audit and Risk Committee.

Interest rate risk in the banking book (IRRBB)

Market risk incorporates the loss of income which in the Bank’s case would be as a result of changes to

interest rates. Izola Bank p.l.c. limits this exposure to movements in interest rates by matching, as much as

possible, its advances to deposits in the same maturity bands.

2 BOARD AND COMMITTEES STRUCTURE

The Bank’s Board of Directors comprises seven non-executive directors and one executive director and

meets quarterly throughout the year. In addition, the Board delegates specific responsibilities to the

Remuneration and Nomination Committee, the Audit and Risk Committee, the Credit Committee, the

Strategy Committee and the Asset and Liability Management Committee (ALCO).

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

Remuneration and Nomination Committee

Composition: The Remuneration and Nomination Committee comprises three non-executive

directors.

Main Functions: The Remuneration and Nomination Committee is tasked with delving into the detail of

oversight of remuneration and nomination practices.

Frequency: This Committee meets at least once a year.

Credit Committee

Composition: The Credit Committee is made up of two non-executive independent directors and the

Chief Executive Officer.

Main Functions: The Credit Committee considers credit applications and keeps credit limits under

review.

Frequency: The Committee meets at least four times a year.

Audit and Risk Committee

Composition: The Audit and Risk Committee comprises three non-executive independent directors.

Main Functions: The primary purpose of the Audit and Risk Committee is to protect the interests of the

Bank’s shareholders and assist the directors in conducting their role effectively so that

the Bank’s decision-making capability, the accuracy of its reporting and financial results

and the Bank’s risk management processes are maintained at a high level at all times.

The Committee provides independent review, monitoring, and assessment of:

- the integrity of the annual financial statements

- the effectiveness of management’s system of internal control

- the effectiveness of the Bank’s risk management processes

- the Bank’s compliance with applicable laws and regulations

- the Bank’s ethical and business standards

- the appointment of the Bank’s internal and external auditors

Frequency: The Committee meets at least four times a year.

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

Strategy Committee

Composition: This Committee is made up of two non-executive directors and the Chief Executive

Officer.

Main Functions: The Committee is responsible for making recommendations to the Board of Directors

on the Bank’s business model and forward-looking strategy, taking into consideration

the risks and opportunities related to various strategies. The Committee is also

responsible for analysing the implementation of the business model and strategy or

any changes thereof, including any potential ICT consequences.

Frequency: The Committee meets at least once a year.

Asset and Liability Management Committee (ALCO)

Composition: This Committee is made up of the Chief Executive Officer, the Head of Finance and

Treasury and the Senior Finance and Treasury Manager.

Main Functions: The Asset and Liability Management Committee:

- monitors the Bank’s financial performance, and reviews and manages financial

risks in accordance with Bank policies;

- manages the Bank’s balance sheet in respect of the adequate matching of assets

and liabilities, asset mix, liabilities and balance sheet growth;

- formulates a forward-looking strategy for the Bank in terms of the mix of assets

and liabilities given its expectations of the future and the potential consequences

of interest rate movements, liquidity constraints, foreign exchange exposure and

capital adequacy.

Frequency: The Committee meets at least four times a year.

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

3 OWN FUNDS

During the year ended 31 December 2021, the Bank complied with all the externally imposed capital

requirements to which it was subject. The following table summarises the composition of the Bank’s

regulatory capital as reported to the MFSA as at 31 December 2021.

Own Funds

2021

€

Common Equity Tier 1 (CET1) Capital: instruments and reserves 31,858,707

Paid up capital instruments 27,032,675

Retained Earnings 2,005,302

Accumulated other comprehensive income (and other reserves) 2,953,782

------------------

CET1 Capital before regulatory adjustments 31,991,759

===========

Regulatory deductions and adjustments

Deductions related to intangible assets (1,774,370)

------------------

Total Own Funds 30,217,389

===========

Composition of Own Funds

i. Ordinary Shares: At 31 December 2021, the authorised share capital comprised 400,000 ordinary

shares of €25 each. All shares in issue are fully paid up. The holders of ordinary shares are entitled

to receive dividends as declared from time to time and are entitled to one vote per share at

shareholders’ meetings of the Bank.

ii. Accumulated other comprehensive income: this includes the balance available for distribution to

the shareholders.

iii. Capital Contribution: this represents a contribution by the shareholders to the distributable

reserves of the Bank.

iv. Fair value reserve: this represents fair value movements on investments classified at Fair Value

through Other Comprehensive Income (FVOCI), net of tax.

v. Revaluation Reserve: this represents reserves arising from the revaluation of tangible fixed

assets, net of tax.

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

vii

4 CAPITAL ADEQUACY AND LIQUIDITY

4.1 Internal Capital Adequacy Assessment Process (ICAAP)

ICAAP Methodology

The Bank’s latest ICAAP report is based on 31

December 2020 figures.

The Bank has chosen to base its ICAAP on the results of the Pillar 1 calculation with additional Pillar 2 risks

– business risk, credit concentration and interest rate risk in the banking book – assessed separately through

stress testing and added to Pillar 1. The Bank has also further analysed its operational risk exposure through

stress testing in order to determine whether an additional Pillar 2 charge for operational risk may be

necessary.

The Bank’s ICAAP also contains three-year projections as well as the capital plan, and the Board monitors

that there are adequate capital resources to support the corporate goals contained within the plan.

In order to produce a capital plan, the Bank’s ICAAP contains calculations of the capital resources

requirement (effectively the minimum capital required) for each of the three years using the standardised

approach for credit risk and the basic indicator approach for operational risk.

Under the standardised approach for credit risk, the Bank applies a risk weighted asset value to each of its

exposure classes and provides 8% of that risk weighted asset value as the minimum capital requirement for

credit risk.

Under the basic indicator approach for operational risk, the Bank calculates its average net income over the

previous three years and provides 15% of that average net income as the minimum capital requirement for

operational risk.

4.2 Credit Risk Capital Requirements by Standardised Approach Exposure Class

Capital Requirement by exposure class as at 31 December 2021

Capital Requirement

€

Central Government or Central Banks

Corporates

4,381,575

Institutions

417,078

Retail

4,298,917

Exposures secured by Mortgages on Immoveable Property

1,587,116

Collective Investment Undertakings (CIUs)

328,311

Other

1,280,841

Total

12,293,838

4.3 Market Risk Capital Requirement

The market risk capital requirement of the Bank is not significant, comprising a foreign exchange risk charge

of €95,677.

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

viii

4.4 Operational Risk Capital Requirement

The gross income registered by the Bank in 2021, 2020 and 2019 amounted to €6,751,938, €5,941,864 and

€6,458,838 respectively. The operational risk capital requirement for 2021 amounted to €957,632.

4.5 Calculation of minimum capital requirement and risk-weighted assets

Statement of

financial

position value

Risk weighted

exposure

Capital

requirement

Statement of

financial

position value

Risk weighted

exposure

Capital

Requirement

2021

2020

€

On balance sheet assets

Balances with Central Bank of

Malta and cash

16,193,768

18,643,629

Financial investments

117,280,712

25,453,264

2,036,261

109,304,630

20,757,598

1,660,608

Loans and advances to banks

25,420,282

5,084,056

406,725

22,695,594

4,539,119

363,130

Factored receivables

95,051,834

45,046,468

3,603,717

99,155,608

46,125,716

3,690,057

Loans and advances to

customers

131,369,341

78,255,925

6,260,474

121,555,833

53,532,546

4,282,604

Property and equipment

12,565,395

13,044,225

1,043,538

11,994,449

959,556

Intangible assets

1,774,370

1,550,091

Prepayments and accrued

income

2,764,749

2,776,609

222,129

4,428,117

2,928,115

234,249

402,420,451

169,660,547

13,572,844

389,296,940

139,877,543

11,190,203

Off balance sheet items

Commitments

92,738,305

96,600,451

Credit risk capital requirement

169,660,547

13,572,844

139,877,543

11,190,203

Foreign exchange risk capital

requirement

1,195,963

95,677

927,597

74,208

Operational risk capital

requirement

11,970,399

957,632

11,378,491

910,279

Total capital requirement

182,826,909

152,183,631

Total own funds

30,217,389

30,825,934

Capital adequacy ratio

16.5%

20.2%

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

4.6 Liquidity Coverage Ratio

The Liquidity Coverage Ratio (LCR) metric measures a bank’s liquidity risk profile based on the stock of

unencumbered high-quality liquid assets (HQLA) which can be easily converted in financial markets at no,

or little loss of value, in relation to the estimated total net cash outflows over a 30-calendar day stress

scenario.

The goal of this stress test is to ensure that the institution can meet its liquidity needs for a 30-day

hypothetical financial stress scenario. The LCR is governed by the Liquidity Coverage Ratio Delegated Act

(EU) 2015/61 which became a minimum regulatory standard from 1 October 2015. As of January 1, 2022,

the minimum LCR regulatory limit required for banks is 100%.

The LCR ratio as at 31 December 2021 was 1,320% (2020: 4,322%). As at 31 December 2021 and 2020 and

during the respective financial periods, the LCR ratio was within both the regulatory minimum and the risk

appetite set by the Bank.

4.7 Leverage Ratio

The Leverage Ratio (LR) tool was designed by the Basel Committee on Banking Supervision (BCBS) as an easy

and understandable metric to mitigate against risks of excessive leverage. This measure was introduced to

serve as a complementary tool with other approaches to risk-based capital requirements, and the European

Banking Authority (EBA) established, by Regulation (EU) No 1093/2010 of the European Parliament and of

the Council, that the leverage ratio requirement should be calibrated at 3%.

The leverage ratio is calculated as the capital measure, which shall be the Tier 1 Capital according to Article

25 of the CRR, divided by the total exposure measure comprising of both on and off-balance sheet

exposures, net of any deductions applied directly to Tier 1 Capital.

The leverage ratio as at 31 December 2021 was 8.0% (2020: 8.6%). As at 31 December 2021 and 2020 and

during the respective financial periods, the leverage ratio was within both the regulatory minimum and the

risk appetite set by the Bank.

5 CREDIT RISK

5.1 Credit risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to the financial instrument

fails to meet its contractual obligations. For risk management reporting purposes, the Bank considers and

consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector

risk).

The Bank follows standards, policies and procedures established by the Board of Directors for the control

and monitoring of all risks. The Board of Directors has delegated the responsibility for the management of

credit risk to the Credit Committee. The Bank’s management is responsible for the oversight of the Bank’s

credit risk. The Bank’s credit risk policies and procedures are reviewed regularly through internal audit.

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

5.2 Definition of ‘past due’ and ‘impaired’ for accounting purposes

Impaired factored receivables

These comprise factored receivables for which the Bank determines an expected credit loss based on the

probability that it will be unable to collect all principal and interest due according to the contractual terms

of the factored receivables agreements.

Allowance for impairment on factored receivables

2021

2020

€

Factored receivables – gross

95,827,647

99,957,094

------------------

12-month ECL

93,303

84,166

Lifetime ECL

682,510

717,320

Table 5.2 Neither past due nor impaired loans and securities

2021

2020

€

Loans and advances to customers

127,052,013

121,555,833

Loans and advances to banks

25,420,382

22,695,594

Investment securities

117,280,712

109,304,630

-----------------

269,753,107

253,556,057

==========

5.3 Description of approaches and methods adopted for determining value adjustments and provisions

Allowances for impairment

The Bank establishes an allowance for expected credit losses that represents its estimate of expected losses

in its factored receivables and loans & advances portfolios. The main components of this allowance are

outlined in note 4.4 of the financial statements.

2021

2020

€

Allowance for expected credit losses on factored receivables

775,813

801,486

Allowance for expected credit losses on loans and advances

328,986

379,710

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

Table 5.3 Total period end and average exposures after individual impairment and prior to credit risk mitigation by

exposure class.

Exposure as at 31/12/2021

Average Exposure for period to

31/12/2021

€ 000s

Central Government or Central Banks

91,848

117,268

Corporates

121,395

94,591

Institutions

26,067

20,869

Secured by mortgages

45,943

47,601

Retail

80,655

79,230

Equities & CIUs

20,550

5,569

Other

15,962

15,582

Total

402,420

380,710

Table 5.5 Distribution of the exposures by industry/counterparty type

Central

Government

or Central

Banks

Corporates

Institutions

Secured by

mortgages

Equities &

CIUs

Retail

Other

Total

€ 000s

Monetary Financial

Institutions

16,462

26,067

20,550

440

63,519

Sovereigns

75,386

Manufacturing

9,628

1,161

10,422

Wholesale and retail

trade

35,784

4,506

40,289

Real estate, renting

and business activities

15,388

869

16,257

Construction

20,227

8,389

28,615

Households

61,331

61,310

Other

40,736

48,501

3,960

15,982

106,622

Total

91,848

121,763

26,067

48,501

20,550

80,656

15,982

402,420

Table 5.4 Geographic distribution of exposure classes

Malta

Europe

Rest of the World

Total

€ 000s

Central Government or

Central Banks

91,817

91,848

Corporates

59,248

61,102

1,046

121,396

Secured by mortgages

45,291

652

45,943

Institutions

5,096

20,971

26,067

Equities & CIUs

20,550

Retail

71,554

9,101

80,655

Other

15,403

556

15,961

Total

288,408

112,964

1,048

402,420

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

xii

Table 5.6 Residual Maturity Breakdown of the exposures

< 1 year

1 – 5 years

> 5 years

Total

€ 000s

Central Government or

Central Banks

18,820

16,227

56,801

91,848

Corporates

58,632

44,583

18,180

121,395

Institutions

25,168

900

26,069

Secured by mortgages

20,243

11,498

14,202

45,943

Retail

24,068

55,059

1,528

80,655

Equities & CIS

20,550

Other

2,161

13,799

15,960

Total

169,642

127,368

105,410

402,420

5.4 Past Due Exposures and Impaired Assets

Table 5.7 Impaired, past due exposures - provisions by industry sector

Standardised exposure

classes

Expected Credit Losses

Charged to income statement in

the year ended 31 December 2021

€ 000s

Central Government or

Central Banks

Corporates

991

(64)

Institutions

Retail

Secured by mortgages

Equities & CIUs

Other

Total

1,117

(64)

Table 5.8 Impaired, past due exposures - provisions by geographic area

Standardised exposure

classes

Expected Credit Losses

Charged to income statement in

the year ended 31 December 2021

€ 000s

Malta

109

Europe

1,008

(85)

Rest of the World

Total

1,117

(64)

Table 5.9 Movement in allowances for impaired and past due exposures and provisions

Individual & collective provisions

€ 000s

Opening balance

1,181

Expected credit loss increase

(64)

Closing balance

1,117

Amounts written off

438

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

xiii

6 STANDARDISED APPROACH TO CREDIT RISK

6.1 Exposure to Institutions

Fitch Rating Agency is the External Credit Assessment Institution (ECAI) used to rate exposures to

institutions. The external ratings are mapped to the prescribed credit quality assessment scale that in turn

produces standard risk weightings in line with Article 119 of the Credit Requirements Regulations (CRR).

The following table shows the exposure values before and after Credit Risk Mitigation associated with the

credit quality step under the Standardised Approach.

Table 6.1 Institutions

Credit Quality Step

Risk Weight

Regulation - Ratings

Exposure

Exposure After CRM

€ 000s

20%

Art. 121(3) - Fitch AAA to A

26,067,391

5,213,478

6.2 Exposure to Central Government and Central Bank

Exposures to central government and central bank denominated and funded in the domestic currency of

the central government and central bank are assigned a risk weight of 0% in line with Article 114(4) of the

CRR.

Table 6.2 Central Government and Central Bank

Credit Quality

Step

Risk Weight

Banking Regulation

Exposure

Exposure After CRM

€ 000s

Art. 114(4)

91,848,174

6.3 Exposure to Retail & Corporates (including SMEs)

A large part of corporate exposures has a 0% risk weighting as it is cash secured. A number of corporate

exposures are secured by real estate and are allocated a 35% or 50% risk weighting. The rest are allocated

a 75% or 100% risk weighting as they are unsecured with a portion subject to a reduction by virtue of the

application of the SME support factor.

Table 6.3 Corporates

Credit Quality

Step

Risk Weight

Banking Regulation

Exposure

Exposure After CRM

€ 000s

Art. 400(1) (g)

31,278,074

35%

Art. 125(1) (a)

11,043,379

3,513,337

50%

Art. 126(1) (a)

34,899,543

16,325,622

75%

Art. 123 (a) (b) (c)

77,658,027

53,736,462

100%

Art. 122 (2)

57,542,240

54,769,689

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2021

xiv

7 REMUNERATION POLICY

The Board has established a Remuneration Policy the aim of which is to increase transparency when offering

remuneration and benefits to the Bank’s staff. More details concerning remuneration are provided with the

remuneration report as part of the Annual Report 2021.

8 CREDIT RISK MITIGATION

8.1 Collateral

Analysis of collateral is disclosed in Note 4.4.3 of the Annual Report 2021.

Table 8.1 Exposure value covered by eligible financial collateral

€ 000s

Central Government or Central Banks

71,998

Corporates

Institutions

7,384

Retail

36,960

Total

116,342

9. CONCLUSION

This disclosure document has been prepared in accordance with the requirements of Banking Rule 7 issued

by the Malta Financial Services Authority (MFSA).

Izola Bank p.l.c.

Appendix II - Five-Year Summary

Statement of Profit or Loss and Other Comprehensive Income

2021

2020

2019

2018

2017

€

€ € € €

Interest receivable and

similar income

10,704,557

10,575,188 10,158,455 8,081,029 7,065,787

Interest payable and

similar charges

(4,513,733)

(5,011,314) (3,972,954) (2,627,953) (2,544,779)

----------------- ----------------- ----------------- ----------------- -----------------

Net interest income

6,190,824

5,563,873 6,185,501 5,453,076 4,521,008

Fee and commission income

(10,195)

66,892 62,351 33,658 431,604

Other operating income

571,309

311,098 210,986 318,151 2,149,619

Other operating charges

(5,546,089)

(5,164,175) (3,873,224) (3,497,085) (3,195,559)

Net impairment gain/losses

(385,692)

(172,797) (90,400) 134,698 (349,741)

----------------- ----------------- ----------------- ----------------- -----------------

Profit before tax

820,157

604,891 2,495,213 2,442,498 3,556,931

Income tax expense

(372,176)

(219,671) (1,034,473) (934,319) (1,295,527)

----------------- ----------------- ----------------- ----------------- -----------------

Profit for the year

447,981

385,220 1,460,740 1,508,179 2,261,404

========== ========== ========== ========== =========

Other comprehensive income

for the year, net of income tax

(1,251,797)

27,507 875,549 (245,292) (117,779)

----------------- ----------------- ----------------- ----------------- -----------------

Total comprehensive income

for the year

(803,816)

412,727 2,336,289 1,262,887 2,143,625

========== ========= ========= ========= =========

Earnings per share

1.12

0.96 3.65 3.77 5.65

========== ========= ========= ========= =========

Izola Bank p.l.c.

Appendix II - Five-Year Summary

xvi

Statement of Financial Position

2021

2020

2019

2018

2017

€

€ € €

ASSETS

Balances with Central Bank of Malta

and cash

16,193,768

18,612,618 39,087,309 2,513,413 1,950,931

Investments

117,280,712

109,304,630 81,369,795 42,111,712 57,213,412

Loans and advances to banks

25,420,282

22,695,594 40,549,407 18,788,220 20,079,499

Factored receivables

95,051,834

99,155,608 105,412,199 86,260,140 48,583,631

Other loans and advances to customers

131,357,481

121,555,833 86,522,549 74,286,614 65,524,805

Property and equipment

13,044,225

11,994,449 11,618,961 10,264,853 10,343,320

Intangible assets

1,295,540

1,550,091 1,633,259 1,653,214 1,634,529

Other assets

1,983,580

3,603,758 1,576,048 1,275,436 1,299,677

Current tax asset

793,029

824,359 562,378 - -

----------------- ----------------- ------------------- ------------------- -------------------

Total assets

402,420,451

389,296,940 368,331,905 237,153,602 206,629,804

========== ========== =========== =========== ===========

LIABILITIES

Balance owed to Central Bank of Malta

55,000,000

35,000,000 - 13,000,000 16,300,000

Deposits from banks

274,715

250,576 250,322 250,068 -

Deposits from customers

297,780,509

304,384,729 319,737,813 177,157,086 145,767,422

Debt securities in issue

11,940,167

11,923,078 11,905,989 11,888,899 11,871,811

Deferred tax liabilities

170,011

845,309 777,023 560,484 724,009

Current tax payable

- - 802,074 1,154,671

Accruals

3,975,122

2,809,505 1,989,742 1,410,264 1,340,051

------------------ ------------------ ------------------- ------------------- -------------------

Total liabilities

369,140,524

355,213,197 334,660,889 205,068,875 177,157,964

========== ========== =========== =========== ===========

EQUITY

Called up share capital

10,000,000

10,000,000 10,000,000 10,000,000 10,000,000

Property revaluation reserve

3,521,238

3,521,238 3,696,144 2,629,651 2,657,412

Fair value reserve

(612,547)

639,250 436,837 627,781 876,876

Depositor compensation scheme reserve

1,288,168

1,707,717 628,571 409,640 354,523

Reserve for general banking risk

45,091

3,860 3,860 6,470 36

Capital contribution

17,032,675

17,032,675 17,032,675 16,032,675 12,532,675

Retained earnings

2,005,302

1,179,003 1,872,929 2,378,510 3,050,318

------------------ ------------------ ------------------- ------------------- -------------------

Total equity attributable to

equity holders of the Bank

33,279,927

34,083,743 33,671,016 32,084,727 29,471,840

========== ========= ======== ======== ========

Total liabilities and equity

402,420,451

389,296,940 368,331,905 237,153,602 206,629,804

========== ========= ======== ======== ========

Memorandum items Commitments 92,738,305 96,000,451 71,868,667 88,918,753 60,202,304

========== ========= ======== ======== ========

Izola Bank p.l.c.

Appendix II - Five-Year Summary

xvii

Statement of Cash Flows

2021

2020 2019 2018 2017

€

€ € € €

Net cash from operating activities 9,818,579 (8,670,571) 99,049,941 (23,180,595) (23,180,595)

------------------ ------------------ ------------------ ------------------ ------------------

Cash flows from investing activities

Payments to acquire property,

equipment and intangible assets (1,639,455) (1,022,615) (683,999) (559,531) (5,839,157)

Payments to acquire investments (85,996,927) (89,109,086) (50,641,277) (9,412,713) (12,604,899)

Proceeds from disposals of investments 76,537,399 59,299,332 10,672,792 24,129,036 21,170,143

Interest received from investments 2,066,104 1,529,179 1,227,372 949,252 1,524,330

Dividend received - - - 199,411 262,536

Payments on investments which are

traded but not yet acquired - (1,500,000) - - -

------------------ ------------------ ------------------ ------------------ ------------------

Net cash used in investing activities (9,032,879) (29,118,187) (39,425,112) 15,305,456 4,512,953

------------------ ------------------ ------------------ ------------------ ------------------

Cash flows from financing activities

Dividends paid to shareholders - - (1,750,000) (2,150,000) (2,000,000)

Net capital contribution received - - 1,000,000 3,500,000 1,096,154

Interest paid on debt securities (540,000) (540,000) (540,000) (540,000) (540,000)

------------------ ------------------ ------------------ ------------------ ------------------

Net cash from / (used in)

financing activities (540,000) (540,000) (1,290,000) 810,000 (1,443,846)

------------------ ------------------ ------------------ ------------------ ------------------

Net movement in cash and

cash equivalents 245,700 (38,328,758) 58,334,829 (978,865) (20,111,488)

========== ========== ========== ========== ===========

Izola Bank p.l.c.

Appendix II - Five-Year Summary

xviii

Accounting Ratios

2021

2020

2019

2018

2017

% % %

Net interest income and other

operating income to total assets

1.68

1.53 1.75 2.45 3.44

Operating expenses to total assets

1.47

1.37 1.08 1.42 1.72

Profit before tax to total assets

0.20

0.16 0.68 1.03 1.72

Pre-tax return on capital employed

2.82

2.14 8.63 8.60 13.90

Profit after tax to equity

1.36

1.13 4.34 4.70 7.67

Izola Bank p.l.c.

Appendix III – Supplementary Financial Information

Directors’ interest in the share capital of the Bank or in any related company as at 31

December 2021

xix

No director has a direct beneficial or non-beneficial interest in the share capital of the Bank.

Magdalena De Roeck and Caroline Van Marcke have an indirect beneficial interest in the shareholding of

the Bank through their indirect shareholding in Carlenco Finance NV, a company registered in Belgium with

registration number 0447.152.677. VMKG PLLC is the ultimate holding company of the Group to which the

Bank belongs.

Furthermore, Magdalena De Roeck and Caroline Van Marcke are also directors of IBL I Limited and IBL T

Limited and other companies forming part of the Group.

Shareholders holding 5% or more of the Share Capital as at 31st December 2020

IBL I Limited

Ordinary "A"

100

€25.00

IBL T Limited

Ordinary "B"

399,999

100

€25.00

Number of Shareholders

Class

Number of Shares

Number of Holders

Class A

Class B

399,999

Range

Class "A"

Class "B"

1 – 5,000

5,001 & over

As at date of publication of the annual report, no changes were effected to the shareholding structure.

PwC_fl_4cp.eps

Independent auditor’s report

To the Shareholders of Izola Bank p.l.c.

Report on the audit of the financial statements

Our opinion

In our opinion:

· The financial statements give a true and fair view of the financial position of Izola Bank p.l.c. (the “Bank”) as at 31 December 2021, and of the Bank’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the EU; and

· The financial statements have been prepared in accordance with the requirements of the Maltese Banking Act (Cap. 371) and the Maltese Companies Act (Cap. 386).

Our opinion is consistent with our additional report to the Audit Committee.

What we have audited

Izola Bank p.l.c.’s financial statements comprise:

· the statement of profit or loss and other comprehensive income for the year ended 31 December 2021;

· the statement of financial position as at 31 December 2021;

· the statement of changes in equity for the year then ended;

· the statement of cash flows for the year then ended; and

· the notes to the financial statements, which include significant accounting policies and other explanatory information.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (‘ISAs’). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the bank in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (‘IESBA Code’) together with the ethical requirements of the Accountancy Profession (Code of Ethics for Warrant Holders) Directive issued in terms of the Accountancy Profession Act (Cap. 281) that are relevant to our audit of the financial statements in Malta. We have fulfilled our other ethical responsibilities in accordance with these Codes.

To the best of our knowledge and belief, we declare that non-audit services that we have provided to the bank are in accordance with the applicable law and regulations in Malta and that we have not provided non-audit services that are prohibited under Article 18A of the Accountancy Profession Act (Cap. 281).

The non-audit services that we have provided to the bank, in the period from 1 January 2021 to 31 December 2021, are disclosed in note 9.1 to the financial statements.

Our audit approach

Overview

	· Overall materiality: €332,900, which represents 1% of net assets.
	· Credit loss allowances in respect of loans and advances to customers and factored receivables

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the bank, the accounting processes and controls, and the industry in which the bank operates.

Materiality

The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They 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 financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.

Overall materiality

€332,900

How we determined it

1% of net assets

Rationale for the materiality benchmark applied

We chose net assets as the benchmark because, in our view, the actual return payable to the equity holders of the bank is heavily dependent on the adequacy of the Balance Sheet capitalisation in view of the regulatory restrictions in respect of dividend distributions. We also considered the fact that the principal users of the bank’s financial statements are the ultimate parent of the bank and its bondholders.

We chose 1% which is within the range of quantitative materiality thresholds that we consider acceptable.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above €16,600 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matter

How our audit addressed the Key audit matter

Credit loss allowances in respect of loans and advances to customers and factored receivables

Credit loss allowances in respect of loans and advances to customers and factored receivables represent management’s best estimate of expected credit losses (‘ECLs’) within these portfolios at the balance sheet date.

The Bank has two main portfolios:

· Loans and advances to customers, principally comprising secured loans to local corporates; and

· Factored receivables, which comprise the factoring of bills of exchange issued to local debtors and the factoring of invoices payable by Maltese, Belgian, French and Dutch debtors, both factored on a non-recourse basis.

The measurement of ECLs in respect of these portfolios, particularly for loans and advances to customers, requires a considerable level of judgement since the determination of ECLs is subject to a high degree of estimation uncertainty. In this respect, it is considered a key area of focus.

The development of the models designed to estimate ECLs on financial instruments measured at amortised cost in accordance with the requirements of IFRS 9 requires a considerable level of judgement. The outbreak of the Covid-19 pandemic has exacerbated the level of uncertainty around the calculation of ECLs, giving rise to heightened subjectivity in the determination of model assumptions used to estimate key model risk parameters and hence necessitating a higher level of expert judgement.

In general, the bank calculates ECL by using the following key inputs: probability of default (‘PD’), loss given default (‘LGD’) and exposure at default (‘EAD’). The maximum period considered when measuring ECL is the maximum period over which the bank is exposed to credit risk.

Credit loss allowances relating to loans and advances to customers are determined at an instrument level. For non-defaulted (Stages 1 and 2) exposures, the bank uses an ECL model developed by an external vendor in which key risk parameters are estimated at a borrower level. Specifically, PDs are determined by reference to quantitative (financial statement information) and qualitative (payment behaviour and country risk) model inputs, which are used to generate a borrower-specific credit score. Credit scores are then mapped to a rating scale, on the basis of which a PD is assigned to each borrower. The rating scale to PD matrix is calibrated by reference to historical market default data sourced from external credit rating agencies. PDs are then adjusted using statistical regression techniques to simulate the PD under multiple macroeconomic forecasts (conditional PiT PD).

Loans and advances to customers are primarily secured by residential and / or commercial real estate, as well as cash pledges and government guarantees under the terms of the Malta Development Bank Covid-19 Guarantee Scheme (‘MDB CGS’). The LGD used for loans and advances to customers secured by real estate is driven by the adjusted loan-to-value (‘LTV’) ratio of the individual facilities which takes into account a market value haircut (that includes costs to sell). No ECL is attributed to exposures (or parts thereof) which are cash secured, whereas losses in respect of exposures secured by the MDB CGS are assumed to be up to 90% covered by the government guarantee.

For defaulted (Stage 3) loans and advances to customers, discounted cash flow models are utilised in order to estimate ECLs. Judgement is required to determine when a default has occurred and then to estimate the expected future cash flows related to that loan which are dependent on parameters or assumptions in respect of the valuation of collateral (including forced sale discounts). The bank is also required to assess multiple scenarios in this respect, which scenarios will have probabilities attached.

Credit loss allowances relating to all factored receivables (Stages 1, 2 and 3) are determined through the use of ECL models.

For non-defaulted factored bills of exchange, the Bank’s PDs are determined by reference to a statistical model developed by an external vendor. Transition matrices were developed by reference to internal historical delinquency data. A portfolio segmentation approach was determined to categorise exposures sharing similar credit risk characteristics. In this respect, a multi-tier rating scale was developed, representing different states of delinquency, with a common PD being assigned to exposures classified within the same tier. The PD is adjusted by applying a cure rate estimated by reference to internal historical delinquency information.

For all factored bills of exchange, the LGD is determined by reference to the estimated value of the underlying asset, being the financed motor vehicle. Specifically, assumptions are made in respect of the expected value of the motor vehicle over its useful life. The LGD also takes into consideration cash collateral pledged by factoring clients to cover potential losses from factored bills of exchange.

For all invoice factoring facilities, PDs are sourced from an external vendor. Specifically, a debtor-specific credit score is assigned by the external vendor based on borrower-specific information. PDs are then determined by reference to the debtor-specific credit score. The LGD is in turn modelled by reference to the credit insurance cover purchased from a foreign third party underwriter which provides insurance cover in respect of losses up to 95% of each eligible invoice.

The bank’s internal credit risk management framework designed to identify significant increase in credit risk (‘SICR’) or unlikeliness-to-pay (‘UTP’) events in respect of loans and advances to customers is based on credit risk assessments performed at individual borrower level, taking into consideration quantitative and qualitative information. In this respect, staging of loans and advances to customers is determined by reference to internal credit risk gradings. Judgement is required to determine a) whether a SICR has occurred since initial recognition of the instrument; or b) when a default has occurred.

The local impact of the pandemic has been mitigated by a number of government programmes and measures, including general payment moratoria which have given rise to the deferral of payments of capital and/or interest over time periods that potentially extended until the end of the current financial reporting period. This factor has increased the level of uncertainty around judgements made in determining the timing of defaults and in respect of staging, particularly in relation to loans and advances to customers. For the purposes of avoiding the cliff edge effect on ECLs upon expiry of the moratoria, the Bank reassessed the internal credit risk ratings of all loans and advances to customers with approved moratoria on the basis of qualitative characteristics to enable the identification of SICR or UTP events as early as possible.

Factored receivables are not managed on a credit by credit basis due to the high volume of relatively low value and homogeneous exposures. In this respect, the bank’s internal credit risk management framework designed to identify SICR or UTP events in respect of such exposures is primarily based on delinquency.

Under IFRS 9, the bank is also required to formulate and incorporate multiple forward-looking economic conditions, reflecting management’s view of potential future economic variables and environments, into the ECL estimates. A number of macroeconomic scenarios based on the selected macroeconomic variables are considered to capture non-linearity across credit portfolios. The complexity attributable to this factor requires management to develop multiple macroeconomic scenarios involving the use of significant judgements. The bank utilises a methodology to generate the economic inputs applied within the ECL models in respect of loans and advances to customers and factored bills of exchange. Given the short-term nature of invoice factoring facilities, the impact of forward-looking information on the estimation of ECL in respect of these exposures is not deemed to be significant.

The outbreak of Covid-19 and the government support and relief measures adopted to mitigate it have significantly impacted macroeconomic factors such as GDP and unemployment, increasing the uncertainty around judgements made in determining the severity and likelihood of macroeconomic forecasts across the different economic scenarios used in ECL models. Overly sensitive ECL modelled outcomes can be observed when current conditions fall outside the range of historical experience.

The level of uncertainty has been exacerbated by Malta’s inclusion in the list of jurisdictions under increased monitoring, referred to as the grey-list, by the Financial Action Task Force (‘FATF’) during the year ended 31 December 2021. This gave rise to an elevated level of uncertainty in respect of judgements made in determining macroeconomic forecasts underlying the different economic scenarios used in ECL models.

Data used in the impairment calculation is sourced from a number of systems, including systems that are not necessarily used for the preparation of accounting records. This increases risk around completeness and accuracy of certain data used to create assumptions and operate the models. In some cases, data is unavailable and reasonable alternatives have been applied to allow calculations to be performed.

Since the estimation of ECLs is subjective in nature and inherently judgemental, the bank’s application of the IFRS 9 impairment requirements is deemed to be an area of focus, especially in the context of Covid-19, which has had an unprecedented impact on the economy and has significantly increased the level of estimation uncertainty around the calculation of credit loss allowances.

We focused on credit loss allowances due to the subjective nature of specific inputs into the calculation and the subjective judgements involved in both timing of recognition of impairment and the estimation of the size of any such impairment.

Accordingly, summarising the key areas relevant to the bank’s measurement of ECLs would include:

· Allocation of assets to stage 1, 2, or 3 using criteria in accordance with IFRS 9;

· Accounting interpretations and modelling assumptions used to build the models that calculate the ECL;

· Completeness and accuracy of data used to calculate the ECL;

· Inputs and assumptions used to estimate the impact of multiple macroeconomic scenarios; and

· Measurements of individually assessed provisions including the assessment of multiple scenarios.

Relevant references in the financial statements:

· Accounting policies: Note 3.1;

· Credit risk management: Note 4.3;

· Note on Changes in expected credit losses and other credit impairment charges: Note 8;

· Note on Factored receivables: Note 16

· Note on Loans and advances to customers: Note 17; and

· Critical accounting estimates and judgements: Note 33.

During our audit of the financial statements for the year ended 31 December 2021, we focused on the key drivers of the estimation of ECL. In this respect, we evaluated and tested the appropriateness of management assumptions and key parameters. Discussions with the Audit Committee and management included:

· the policies and methodologies used by the bank in respect of the estimation of ECLs on loans and advances to customers and factored receivables;

· inputs, assumptions and adjustments to ECL, in particular the determination of risk factors and other inputs within the bank’s models, in respect of which we provided updates on the results of our testing procedures;

· the application of macroeconomic modelling, including the severity and magnitude of modelled scenarios, particularly in the context of the estimated impact of the Covid-19 pandemic and Malta’s grey-listing; and

· individually significant loan impairments.

ECL calculation for non-defaulted loans and advances to customers and for all factored receivables

We understood and critically assessed the models used for ECL estimation in respect of loans and advances to customers and factored receivables. Since modelling assumptions and parameters are based on historic data, we assessed the impact of the unprecedented circumstances we are currently experiencing on the adequacy of key model parameters, since these are based on historical experience that is not necessarily reflective of the current level of credit risk within the portfolios. The appropriateness of management’s judgements was also independently considered in respect of calculation methodologies, calibration of PDs and LGDs, and selection of macroeconomic variables.

Substantive procedures were performed as follows:

· Performed an overall assessment of the ECL provision levels by stage to determine if they were reasonable considering the bank’s portfolio, risk profile, credit risk management practices and the macroeconomic environment.

· Tested a sample of exposures classified within loans and advances to customers to independently review the borrower’s financial performance and ability to meet loan repayments and assess the appropriateness of the internal credit rating assigned by management, taking into consideration the impact of Covid-19 on the repayment capabilities of the sampled borrowers.

· Challenged the criteria used to allocate an asset to stage 1, 2 or 3 in accordance with IFRS 9 and tested assets in stage 1, 2 and 3 to verify that they were allocated to the appropriate stage.

· Tested the completeness and accuracy of key model data inputs utilised within the models for the purposes of the year end ECL calculation.

· Reviewed and assessed the appropriateness of model assumptions, inputs and formulas used in ECL models. This included assessing the appropriateness of model design, methodology and formulas used, specifically challenging the appropriateness of the methodology to derive PDs.

· For loans and advances to customers, assessed the reasonableness of modelled PDs at segment level.

· Tested the segmentation applied in the ECL calculation to determine the PDs in respect of factored bills of exchange and factored invoice facilities.

· Reviewed a sample of property collateral valuations utilised to determine LGDs applied by the bank in respect of loans and advances to customers secured by real estate, using our valuation experts.

· For loans and advances to customers:

o tested the accuracy of the inputs to the LTV ratio calculation, which is a key input to the LGD determination, and assessed the reasonableness of market value haircuts applied to the LTV ratio;

o tested the eligibility of exposures to the government guarantee in terms of the MDB CGS on a sample basis; and

o performed procedures to assess the potential risks associated with unperfected collateral.

· For factored bills of exchange, assessed the reasonableness of the underlying assumptions and the accuracy of the calculations used in the estimation of LGD, specifically the assumptions in relation to the expected value of the underlying assets over the lifetime of the exposure.

· For factored invoices facilities, assessed the reasonableness of the assumption in relation to the determination of LGD by reference to the terms of the credit insurance arrangement with a third party underwriter.

· Performed a recalculation of the ECL for a sample of exposures across portfolios.

· Assessed the reasonableness of macroeconomic scenarios and variables used in the ECL calculation of loans and advances to customers and factored bills of exchange. We assessed whether the severity of the forecasted macroeconomic variables was appropriate in view of the pandemic and the high level of uncertainty surrounding the economic conditions. We challenged the correlation and impact of the macroeconomic factors on the ECL.

· For a sample of invoice factoring facilities which were past due by more than 90 days as at 31 December 2021, performed procedures to assess the recoverability of such exposures.

Our testing of models and model assumptions did not highlight material differences.

Based on the evidence obtained, we found that the model assumptions and data used within the models are reasonable.

ECL calculation for defaulted loans and advances to customers

For defaulted loans and advances to customers, the appropriateness of the methodology and policy used to calculate ECLs was independently assessed. We understood and evaluated the processes for identifying default events within the loan portfolio, as well as the impairment assessment processes.

Substantive procedures were performed in respect of identification of defaults as follows:

· Assessed critically the criteria used by management for identifying borrowers whose financial performance was particularly impacted by Covid-19 and for determining whether a UTP/default event had occurred by testing a sample of performing loans, including from within those sectors that we consider to have been significantly impacted by the pandemic, which had not been identified by management as potentially defaulted, to form our own judgement as to whether management’s judgement was appropriate. Specifically, we challenged whether default events had actually occurred and assessed whether default events had been identified by management in a timely manner.

· Assessed the timeliness of the performance and review of the credit file review process.

Substantive procedures were performed on defaulted exposures in respect of the estimation of the size of the respective ECL provisions, as follows:

· Reviewed the credit files of loans and advances classified within stage 3 to understand the latest developments at the level of the borrower and the basis of measuring the ECL provisions and considered whether key judgements (such as market value haircuts used in the gone concern assessment) were appropriate given the borrowers’ circumstances taking cognisance of the pandemic.

· Challenged the appropriateness of the bank’s methodology in respect of scenarios applied for the exposures referred to above, particularly in respect of the extent to which the bank considers multiple scenarios in determining the recoverability of stage 3 loans as well as the potential impact of the pandemic on the local property market, by forming an independent view of the recoverability of stage 3 loans under different scenarios.

· Tested key inputs and reperformed the impairment calculation used to derive expected cash flows under different scenarios.

· Assessed the appropriateness of property valuations securing impaired loans through our valuation experts.

· Tested the perfection of security in line with the bank’s policy.

Based on our procedures to form an independent view in respect of the reasonableness of the ECL estimated by management, our testing did not highlight material differences.

Other information

The directors are responsible for the other information. The other information comprises all of the information presented in the Annual Report and Financial Statements 2021 (but does not include the financial statements and our auditor’s report thereon).

Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon except as explicitly stated within the Report on other legal and regulatory requirements.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the 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.

Responsibilities of the directors and those charged with governance for the financial statements

The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with IFRSs as adopted by the EU and the requirements of the Maltese Banking Act (Cap. 371) and the Maltese Companies Act (Cap. 386), and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the bank’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 the directors either intend to liquidate the bank or to cease operations, or have no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the bank’s financial reporting process.

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

· Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

· Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the bank’s internal control.

· Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.

· Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the bank’s ability to continue as a going concern. In particular, it is difficult to evaluate all of the potential implications that COVID-19 will have on the bank’s trade, customers and suppliers, and the disruption to its business and the overall economy.

· Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on other legal and regulatory requirements

Report on compliance with the requirements of the European Single Electronic Format Regulatory Technical Standard (the “ESEF RTS”), by reference to Capital Markets Rule 5.55.6

We have undertaken a reasonable assurance engagement in accordance with the requirements of Directive 6 issued by the Accountancy Board in terms of the Accountancy Profession Act (Cap. 281) - the Accountancy Profession (European Single Electronic Format) Assurance Directive (“the ESEF Directive 6”) on the Annual Financial Report of Izola Bank p.l.c. for the year ended 31 December 2021, entirely prepared in a single electronic reporting format.

Responsibilities of the directors

The directors are responsible for the preparation of the Annual Financial Report, including the financial statements, by reference to Capital Markets Rule 5.56A, in accordance with the requirements of the ESEF RTS.

Our responsibilities

Our responsibility is to obtain reasonable assurance about whether the Annual Financial Report, including the financial statements, complies in all material respects with the ESEF RTS based on the evidence we have obtained. We conducted our reasonable assurance engagement in accordance with the requirements of ESEF Directive 6.

Our procedures included:

· Obtaining an understanding of the entity's financial reporting process, including the preparation of the Annual Financial Report in XHTML format.

· Examining whether the Annual Financial Report has been prepared in XHTML format.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Opinion

In our opinion, the Annual Financial Report for the year ended 31 December 2021 has been prepared in XHTML format in all material respects.

Other reporting requirements

The Annual Report and Financial Statements 2021 contains other areas required by legislation or regulation on which we are required to report. The Directors are responsible for these other areas.

The table below sets out these areas presented within the Annual Financial Report, our related responsibilities and reporting, in addition to our responsibilities and reporting reflected in the Other information section of our report. Except as outlined in the table, we have not provided an audit opinion or any form of assurance.

Area of the Annual Report and Financial Statements 2021 and the related Directors’ responsibilities

Our responsibilities

Our reporting

Directors’ report

The Maltese Companies Act (Cap. 386) requires the directors to prepare a Directors’ report, which includes the contents required by Article 177 of the Act and the Sixth Schedule to the Act.

We are required to consider whether the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements.

We are also required to express an opinion as to whether the Directors’ report has been prepared in accordance with the applicable legal requirements.

In addition, we are required to state whether, in the light of the knowledge and understanding of the bank and its environment obtained in the course of our audit, we have identified any material misstatements in the Directors’ report, and if so to give an indication of the nature of any such misstatements.

In our opinion:

· the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

· the Directors’ report has been prepared in accordance with the Maltese Companies Act (Cap. 386).

We have nothing to report to you in respect of the other responsibilities, as explicitly stated within the Other information section.

Directors’ statement of compliance with the Code of Principles of Good Corporate Governance

The Capital Markets Rules issued by the Malta Financial Services Authority require the directors to prepare and include in the Annual Financial Report a Statement of Compliance with the Code of Principles of Good Corporate Governance within Appendix 5.1 to Chapter 5 of the Capital Markets Rules. The Statement’s required minimum contents are determined by reference to Capital Markets Rule 5.97. The Statement provides explanations as to how the bank has complied with the provisions of the Code, presenting the extent to which the bank has adopted the Code and the effective measures that the Board has taken to ensure compliance throughout the accounting period with those Principles.

We are required to report on the Statement of Compliance by expressing an opinion as to whether, in light of the knowledge and understanding of the bank and its environment obtained in the course of the audit, we have identified any material misstatements with respect to the information referred to in Capital Markets Rules 5.97.4 and 5.97.5, giving an indication of the nature of any such misstatements.

We are also required to assess whether the Statement of Compliance includes all the other information required to be presented as per Capital Markets Rule 5.97.

We are not required to, and we do not, consider whether the Board’s statements on internal control included in the Statement of Compliance cover all risks and controls, or form an opinion on the effectiveness of the bank’s corporate governance procedures or its risk and control procedures.

In our opinion, the Statement of Compliance has been properly prepared in accordance with the requirements of the Capital Markets Rules issued by the Malta Financial Services Authority.

We have nothing to report to you in respect of the other responsibilities, as explicitly stated within the Other information section.

Other matters prescribed by the Maltese Banking Act (Cap. 371)

In terms of the requirements of the Maltese Banking Act (Cap. 371), we are also required to report whether:

· we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit;

· proper books of account have been kept by the bank, so far as appears from our examination of those books;

· the bank’s financial statements are in agreement with the books of account;

· in our opinion, and to the best of our knowledge and according to the explanations given to us, the financial statements give the information required by any law which may from time to time be in force in the manner so required.

In our opinion:

· we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit;

· proper books of account have been kept by the bank, so far as appears from our examination of those books;

· the bank’s financial statements are in agreement with the books of account; and

· to the best of our knowledge and according to the explanations given to us, the financial statements give the information required by any law in force in the manner so required.

Other matters on which we are required to report by exception

We also have responsibilities under the Maltese Companies Act (Cap. 386) to report to you if, in our opinion, adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us.

We also have responsibilities under the Capital Markets Rules to review the statement made by the directors that the business is a going concern together with supporting assumptions or qualifications as necessary.

We have nothing to report to you in respect of these responsibilities.

Other matter – use of this report

Our report, including the opinions, has been prepared for and only for the bank’s shareholders as a body in accordance with Article 179 of the Maltese Companies Act (Cap. 386) and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior written consent.

Appointment

We were first appointed as auditors of the bank by the shareholders at the annual general meeting of the bank on 26 March 2021, for the year ended 31 December 2021.

PricewaterhouseCoopers

78, Mill Street

Zone 5, Central Business District

Qormi

Malta

Fabio Axisa

Partner

24 March 2022