Izola Bank p.l.c.

Annual Report

and

Financial Statements

2022

Company Registration Number: C 16343

Izola Bank p.l.c.

Annual Report 2022

Contents

Directors’ and Other Statutory Reports

Financial Statements

Independent Auditor’s Report

Appendices

Izola Bank p.l.c.

Directors’ and

Other Statutory Reports

2022

Izola Bank p.l.c.

Page

Chairperson’s Statement i

Directors’ Report iv

Directors’ Statement of Compliance with the Code of Principles

of Good Corporate Governance xi

Report of the Remuneration and Nomination Committee xx

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 2022

2022 will surely be remembered for the unexpected resurgence of an unstable geopolitical and

macroeconomic climate due to the Russian invasion of Ukraine, supply chain disruptions and rising interest

rates as Central Banks attempted to rein in inflation after over a decade of very loose monetary policy.

From the Bank’s perspective, we continued the implementation of our growth and diversification strategy,

which resulted in a year-on-year growth in operating income of 16%. Furthermore, I would like to mention

the issuance of our subordinated bond, which was very well received by the investor community. I would

like once again to express our thanks for this clear show of confidence in the Bank.

In early 2022, a new business line was introduced when the Bank launched its residential mortgage product

to the retail market in Malta. Subsequently, the Board also considered complementary investment

opportunities to accelerate the level of growth in this business line and introduce further diversification,

always within a conservative risk profile. In this respect, the Board decided to commence the origination of

a portfolio of Dutch NHG (government-guaranteed) mortgages in 2023 whilst continuing to build our local

offering. During 2022, we continued the multi-year comprehensive overhaul of our technology platforms,

successfully replacing our core factoring software and introducing significant upgrades to our AML/CFT

systems and data capabilities.

Looking ahead, the Bank will continue to pursue growth opportunities to further diversify its asset base. The

Board acknowledges the need to focus on being agile and responsive enough to meet new demands in a

rapidly changing economic environment and continue offering and developing sustainable products,

services and solutions through innovation and digitalisation that fully respect the environment around us.

Bank Performance

During the year ended 31 December 2022, the Bank managed to generate growth in its revenue streams,

increasing its net interest income by 24% over 2022 levels. Net interest income, which is by far the primary

indicator of business performance, grew by €1,484,302 compared to the previous year. This increase

resulted in an overall 16% improvement in operating income.

However, the financial year 2022 was also characterised by several exceptional charges, which ultimately

resulted in the Bank registering a marginal loss after tax for the year of €284,219. These exceptional charges

included one-time costs related to the exchange offer accompanying our subordinated bond issue and a

change in IFRS9 provisioning models, resulting in higher Expected Credit Loss (ECL) charges. The Bank also

recognised accelerated depreciation on various IT systems that are being replaced as part of the digital

transformation programme. Finally, increases in Depositor Compensation Scheme (DCS) contributions due

to changes in relevant legislation also contributed to these extraordinary charges.

The Bank’s total assets increased by 4.6% to €421,489,265, mainly driven by growth in the lending and

factoring portfolios. Factored receivables increased by €23.3 million, or 25% on the prior year, whilst lending

increased by €29.0 million, or 22%, compared to 2021. The investment portfolio decreased by €25.7m

compared to December 2021, mainly driven by the liquidation of treasury assets to partially fund new

business and fair value adjustments due to increased yields.

As of 31 December 2022, the Bank remained well capitalised, with the Capital Adequacy Ratio (CAR) and

Core Equity Tier 1 (CET1) Ratio standing at 22.12% and 13.35% respectively, well within the capital

requirements established following the Supervisory Review and Evaluation Process (SREP) by the Malta

Financial Services Authority (MFSA). The downward movement in the Bank’s CET1 ratio was mainly a result

of adverse movements on highly rated sovereign bonds classified as hold-to-collect-and-sell (HTC&S), which,

following the increase in term market yield curves, impacted revaluation reserves negatively, resulting in a

negative fair value reserve net of deferred tax amounting to €10.3 million.

Izola Bank p.l.c.

Chairperson’s Statement

For the Year Ended 31 December 2022

In Financial Year 2022, the Board has decided to initiate a new business line, as the Bank launched its

mortgage product offering to the retail market in Malta. In addition, by the date the financial statements

were authorised for issue, the Bank signed a term sheet submitted by a leading market provider in order to

originate a €100 million portfolio of Dutch mortgages. In this respect, tighter management of liquidity

buffers was deemed even more important in light of the launch of the mortgage business line, first locally

in 2022, followed by the Netherlands in 2023. In support of this significant development, the Bank is

adjusting its funding profile by shifting towards shorter term deposits to fund its mortgage portfolio in order

to manage its net interest margin.

Going forward, this portfolio of high-quality liquid assets would be specifically allocated solely to raise

funding through ECB operations in order to address the above-mentioned liquidity gaps, attributable to the

mortgage business line in particular following the origination of the Dutch mortgage business. Accordingly,

management is considering reclassifying its sovereign bond portfolio out of the fair value through other

comprehensive income (FVOCI) category into the amortised cost category in 2023, since the financial

instruments would be held within a business model where the objective is to hold financial assets to collect

contractual cash flows.

The Bank’s Liquidity Cover Ratio (LCR) of 725% is significantly above European banking sector norms and

results from the Bank’s stable, predominantly retail funding base with a high percentage of fixed-term

rather than demand deposit funding.

Regulatory Environment

In 2022 the Bank continued strengthening the compliance and risk management functions and remained

committed to monitoring all relevant regulatory developments to ensure full compliance with its legal and

regulatory obligations. This hard work and commitment were reflected in, amongst others, the outcome of

the recent Financial Intelligence Analysis Unit’s report on the Bank’s internal AML/CFT processes and

systems and the periodic Supervisory Review and Evaluation Process (SREP) by the Malta Financial Services

Authority.

The Board

The Board of Directors met nine times during the year under review. The corporate governance structure

remains robust and is sustained through challenge and guidance to the management team, not only at

Board meetings but also through the various Board Committees.

Having served on the Board as a non-executive director since 2000, I assumed the chairpersonship of

the Bank in March 2022. On behalf of my fellow board members and the Van Marcke family, I would

like to thank Ms Magdalena De Roeck for her twelve years of chairpersonship of the Bank. Her

devotion and interest enabled the Bank to further develop as an independent, niche bank focusing on

unburdening its customers via digitalisation with a human touch. She can indeed be very proud of her

achievement.

After sixteen years of service as a non-executive director, Mr Joseph Caruana communicated his decision to

retire and not to offer himself to be re-elected to the Board of Directors at the Annual General Meeting held

in March 2022. Mr Caruana was very much appreciated for his vast banking and credit experience, which

he gladly shared with his fellow members and management. It was with deep sadness that we received the

news that he passed away in December 2022. I would also like to welcome Mr Alain Malschaert to the

Board. Appointed in March 2022, I am confident that he will bring additional expertise and insight in the

areas of credit risk management and overall governance from his prior years of work experience at a global,

systemically important bank where, for over 10 years, he led the credit risk management function.

Izola Bank p.l.c.

Chairperson’s Statement

For the Year Ended 31 December 2022

iii

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 2022, Izola Bank continued its financial and practical support to meet the increasing demand for

Foodbank Lifeline’s services, which became even more relevant this year. We aim to continue helping

Foodbank Lifeline not only ease hunger in Malta but also significantly reduce food waste and carbon

emissions.

Looking ahead

Besides focusing on growing the retail mortgage portfolio, in 2023, the Bank will remain committed to

nurturing its factoring operations, corporate lending activity, and deposit-raising capacity, mainly through

our Izola Saver platform. Current economic and market conditions brought about by the factors highlighted

in the first paragraph of this statement merit that we approach the future with restraint.

2023 will also be a milestone year when, after 29 years of operations from our various premises in East

Street, Valletta, we will move to our new head office at Castille Square, Valletta. This will allow the Bank’s

staff to work together under one roof and provide more brand visibility due to the landmark location.

Uncertainty reared its head again in the first quarter of 2023 when the international banking sector was hit

by the collapse of a few U.S. regional banks and the acquisition of Credit Suisse by UBS in Switzerland. These

events led to heightened market turmoil; however, we can safely report that the Bank’s operations were

unaffected.

Conclusion

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

I would like to thank the management team and all staff members for their hard work and unfaltering

commitment to the Bank.

Ms. Caroline Van Marcke

Chairperson/Director

Izola Bank p.l.c.

26 April 2023

Izola Bank p.l.c.

Directors’ Report

For the Year Ended 31 December 2022

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 2022.

Board of directors

The directors who served throughout the year were as follows:

Members

Ms. Magdalena De Roeck (acted as Chairperson until 24 March 2022)

Ms. Caroline Van Marcke (appointed as Chairperson on 24 March 2022)

Mr. Simon Azzopardi

Mr. Joseph C. Caruana*

Mr. Francis Gouder

Mr. Alain Malschaert (appointed on 24 March 2022)

Mr. Andrew Mifsud

Mr. Guido Mizzi

Mr. Patrick H. Van Leynseele

*After sixteen years of service as non-executive director, Mr. Joseph Caruana communicated his decision to

retire and not to offer himself to be re-nominated to the Board of directors at the Annual General Meeting

held on 24 March 2022.

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

A review of the business of the Bank for the year ended 31 December 2022 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 2022

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 2022 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 2022

Dividends and reserves

As disclosed in Note 28.1, the Bank declared a net interim dividend of €2,000,000 at the Annual General

Meeting held on 24 March 2022. The Bank obtained all the necessary approvals on 25 October 2022 and

paid the dividend through a bonus issue of new ordinary shares on 22 November 2022.

In the interest of preservation of capital and liquidity, the Directors are not proposing the payment of a final

dividend.

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 2022, 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 32 of the Financial Statements.

Izola Bank p.l.c.

vii

Directors’ Report – continued

For the Year Ended 31 December 2022

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 26 April 2023 by Mr. Andrew Mifsud (Chief Executive

Office/Director) and Mr. Francis Gouder (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

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

xii

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. 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.

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

xiii

Principle 4: Responsibilities of the Board – continued

The Board delegates specific responsibilities to the following Committees:

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: 6

Members Attended

Mr. Guido Mizzi (Chairman) 6

Mr. Simon Azzopardi 6

Mr. Patrick H. Van Leynseele 6

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

xiv

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. Alain Malschaert (Chairman - appointed on 24

March 2022) 4

Mr. Joseph A. Caruana* 1

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

*After sixteen years of service as non-executive director, Mr. Joseph Caruana communicated his decision to

retire and not to offer himself to be re-nominated to the Board of Directors at the Annual General Meeting

held on 24 March 2022.

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: 8

Members Attended

Mr. Andrew Mifsud (Chairman) 8

Mr. Calvin Bartolo 8

Mr. Kurt Grima 8

Principle 5: Board Meetings

During the financial year ended 31 December 2022 the Board met eight 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

xvi

Principle 5: Board Meetings – continued

Attendance of the Board members during the financial year ended 31 December 2022 was as follows:

Meetings Held: 8

Members Attended

Ms. Magdalena De Roeck (acted as Chairperson until 24 March 2022) 8

Ms. Caroline Van Marcke (appointed as Chairperson on 24 March 2022) 8

Mr. Simon Azzopardi 6

Mr. Joseph C. Caruana* 2

Mr. Francis Gouder 8

Mr. Alain Malschaert (appointed on 24 March 2022) 5

Mr. Andrew Mifsud 8

Mr. Guido Mizzi 8

Mr. Patrick H. Van Leynseele 6

*After sixteen years of service as non-executive director, Mr. Joseph Caruana communicated his decision to

retire and not to offer himself to be re-nominated to the Board of Directors at the Annual General Meeting

held on 24 March 2022.

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

xvii

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 32 - Related Parties

- to the accompanying Financial Statements.

Principle 12: Corporate Social Responsibility

Over the past 28 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

xviii

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 and

religion– 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. Going beyond a one-time annual monetary donation,

the Bank sought to support Foodbank Lifeline using a more hands on strategy through-out the year. The

Bank has become a valued partner to the Foodbank, and a member of the Bank’s staff also sits on the NGO’s

Board of Directors. 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 sponsors the design, development, hosting and maintenance of Foodbank Lifeline’s website which

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 Foodbank Lifeline’s social pages

(Facebook, Instagram and LinkedIn), helping to oversee the day-to-day posts, comments and messages. The

Bank has helped the foodbank gain an impressive 11,000 followers over the last 5 years. The Bank also

injects funds and organises the promotion of various campaigns through-out the year helping to drive food

and monetary donations.

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. It is the largest campaign run by the Bank and

Foodbank Lifeline and is hugely popular with local schools, businesses, and families. The Bank oversees the

entire campaign including the media productions, bookings, press coverage and the ongoing social channel

management.

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.

Izola Bank p.l.c.

Directors’ Statement of Compliance

with the Code of Principles of Good Corporate Governance

xix

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.

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 26 April 2023.

Izola Bank p.l.c.

Report of the Remuneration and Nomination Committee

For the Year Ended 31 December 2022

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 27 July 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, the Head of HR and the

Head of Strategy & Value. 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 comprise the use of a company car. Other

benefits afforded to all staff members, including senior management, are personal accident, life, and health

insurance cover.

Loans amounting to €782,327 were advanced to key management personnel as disclosed in Note 32.3 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 2022, 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 2023.

Izola Bank p.l.c.

Report of the Remuneration and Nomination Committee

For the Year Ended 31 December 2022

xxi

Remuneration Statement - continued

Executive Management - continued

Total emoluments of senior management for the year ended 31 December 2022 are as follows:

Fixed

Remuneration

Variable Remuneration

Share Options

Others

€661,758 €96,000 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 key management personnel.

Directors

As of 31 December 2022, 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 24 March 2022.

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 2022 are disclosed in the table below:

Fixed Remuneration Variable Remuneration Share Options Others

€145,000

None

Izola Bank p.l.c.

Financial Statements

2022

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 2022 2021

€ €

Interest and similar income 5 13,087,771 10,704,557

Interest expense 5 (5,412,645) (4,513,733)

Net interest income 7,675,126 6,190,824

Fee and commission income 6 182,419 119,866

Fee and commission expense

(126,507)

(

130,061

)

Net fee and commission income/(expense) 55,912 (10,195)

Net trading income 7 15,789 31,168

Net (losses)/gains on disposal of financial investments

measured at FVOCI (7,299) 442,395

Other operating income 8 101,325

97,746

Total operating income

840,853

6,751,938

Depreciation of property and equipment 19 (149,201) (243,933)

Amortisation of intangible assets 20 (863,548) (600,229)

Changes in expected credit losses and other credit

impairment charges 9 (919,147) (385,692)

Employee compensation and benefits 10.2 (2,513,276) (2,103,290)

Other administrative expenses

10.4

(3,

783,487

)

(2,598,637)

(Loss)/profit before tax 10 (387,806) 820,157

Income tax credit/(expense) 11 103,587 (372,176)

(Loss)/profit for the year (284,219) 447,981

Other comprehensive income

Items that will not be reclassified to profit or loss

Gain on property revaluation 100,784 -

Income taxes (15,118) -

85,666 -

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

(14,923,822) (1,495,306)

- Income taxes

5,223,338

23,357

Movement in expected credit losses, before tax

34,822 11,860

- Income taxes

(12,188) (4,151)

Net gains reclassified to profit or loss on disposal,

before tax

(7,299) (442,395)

- Income taxes

2,555 154,838

(9,682,594) (1,251,797)

Other comprehensive income for the year, net of

tax

(9,596,928) (1,251,797)

Total comprehensive income for the year, net of tax

(9,881,147) (803,816)

Earnings per share

0c49

0c77

The accompanying notes on pages 7 to 117 are an integral part of these financial statements.

Izola Bank p.l.c.

Statement of Financial Position

As at 31 December

Notes 2022 2021

€ €

ASSETS

Balances with Central Bank of Malta

and cash

17,598,287

6,193,768

Loans and advances to banks 15 10,214,993 25,420,282

Financial investments 16 91,550,927 117,280,712

Factored receivables

118,363,724

5,051,834

Loans and advances to customers 18 160,329,282 131,369,341

Property and equipment 19 11,712,225 12,565,395

Intangible assets 20 1,975,593 1,774,370

Current tax asset 641,499 793,029

Deferred tax asset 26 5,920,924 388,435

Other assets 21 3,181,811 1,971,720

Total assets 421,489,265 402,808,886

LIABILITIES

Amounts owed to institutions 22 40,000,000 55,000,000

Amounts owed to banks

275,815

74,715

Amounts owed to customers 24 335,660,870 297,780,509

Debt securities in issue 25 16,820,322 11,940,167

Deferred tax liabilities 26 436,414 558,446

Accruals and other liabilities 27 4,759,914 3,975,122

Total liabilities 397,953,335 369,528,959

EQUITY

Called up share capital 28 29,000,000 10,000,000

Capital contribution reserve 28 32,675 17,032,675

Property revaluation reserve 28 2,977,302 3,521,238

Fair value reserve

(10,

295,1

)

(612,547)

Depositor compensation scheme reserve 28 831,860 1,288,168

Reserve for general banking risks 28 72,782 45,091

Retained earnings

916,452

2,005,302

Total equity 23,535,930 33,279,927

Total liabilities and equity

21,489,26

402,

808,886

Memorandum items

Commitments

185,068,135

2,738,305

The accompanying notes on pages 7 to 117 are an integral part of these financial statements.

The financial statements on pages 7 to 117 were approved and authorised for issue by the Board of Directors

on 26 April 2023. The financial statements were signed on behalf of the Bank's Board of Directors by Mr.

Andrew Mifsud (Chief Executive Officer) and Mr. Francis Gouder (Director) as per the Directors' Declaration

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

2022.

Izola Bank p.l.c.

Statement of Changes in Equity

For the Year Ended 31 December 2022

Property Fair Depositor Capital Reserve for

hare revaluation value compensation contribution general banking Retained

Notes

Capital

reserve

scheme reserve

reserve

risks

earnings

Total

€ € € € € € € €

Balance at 1 January 2022 10,000,000 3,521,238 (612,547) 1,288,168 17,032,675 45,091

2,005,302

33,279,927

Total comprehensive income

Loss for the year

- - - - - (284,219) (284,219)

Other comprehensive income

Gain arising on property revaluation, net of tax -

85,666 - - - - - 85,666

Financial investments measured at fair value through other

comprehensive income

- Net movement in fair value, net of tax -

- (9,700,484) - - - - (9,700,484)

Movement in expected credit losses, net of tax

22,634

- Net gains reclassified to profit or loss on disposal, net of tax - - (4,744) - - - - (4,744)

Total other comprehensive income - 85,666 (9,682,594) - - - - (9,596,928)

Total comprehensive income for

the year

85,666

(9,682,594)

(284,219)

(9,

)

Transfers within reserves

Transfer of revaluation surplus on disposal of property, net of tax

(629,602) - - - - 629,602 -

Derecognition of deferred tax on fair value of property

137,150

Other transfers 28 - - - (456,308) - 27,691 428,617 -

Total transfers within reserves - (629,602) - (456,308) - 27,691 1,195,369 137,150

Transactions with owners

Contributions by owners 28 17,000,000 - - - (17,000,000) - - -

Issue of bonus shares 28 2,000,000 -

- - - - (2,000,000) -

Total transactions with owners recognised directly in equity 19,000,000 - - - (17,000,000) - (2,000,000) -

Balance at 31 December 2022 29,000,000 2,977,302

2,977,302

(10,295,141) 831,860 32,675

72,782 916,452 23,535,930

The accompanying notes on pages 7 to 117 are an integral part of these financial statements.

Izola Bank p.l.c.

Statement of Changes in Equity

For the Year Ended 31 December 2021

Property

Fair

Depositor

Capital

Reserve for

Share revaluation value compensation contribution general banking Retained

Notes Capital reserve reserve scheme reserve reserve risks earnings Total

€ € € € € € € €

Balance at 1 January 2021 10,000,000 3,521,238 6

39,250 1,707,717 17,032,675 3,860 1,179,003 34,083,743

Total comprehensive income

Profit for the year - - - - - - 447,981 447,981

Other comprehensive income

Financial investments measured at fair value through other

comprehensive income

- Net movement in fair value, net of tax - - (971,949) - - - - (971,949)

- Movement in expected credit losses, net of tax - - 7,709 - - - - 7,709

- Net gains reclassified to profit or loss on disposal, net of tax - - (287,557) - - - - (287,557)

Total other comprehensive income

(1,251,797)

Total comprehensive income for the year - - (1,251,797) - - - 447,981 (803,816)

Transfers within reserves

Other transfers 28 - - - (419,549) - 41,231 378,318 -

Total transfers within reserves - - - (419,549) - 41,231 378,318 -

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 117 are an integral part of these financial statements.

Izola Bank p.l.c.

Statement of Cash Flows

For the Year Ended 31 December

Note 2022 2021

€ €

Cash used in operating activities 30

(30,306,813) 10,160,681

Income tax paid (63,667) (342,102)

Net cash (outflows)/inflows from operating activities (30,370,480) 9,818,579

Cash flow

from investing activities

Payments to acquire property and equipment and

intangible assets (2,478,688) (1,639,455)

Proceeds from disposal of property 2,204,000

Payments to acquire investments (40,740,036) (85,996,927)

Proceeds from disposal of investment securities 51,362,776 76,537,399

Interest received from financial investments 1,612,389 2,066,104

Net cash flows generated from/(used in) investing activities 11,960,441 (9,032,879)

Cash flows from financing activities

Proceeds from issue of debt securities 13,633,597 -

Redemption of debt securities (8,814,000) -

Interest and premium paid on debt conversion (284,663) -

Interest paid on debt securities in issue (540,000) (540,000)

Net cash flows generated from/(used in) financing activities 3,994,934 (540,000)

Net (decrease)

/increase

in cash and cash equivalents

4,415,105

)

245,700

Cash and cash equivalents at beginning of year 39,970,678 39,724,978

Cash and cash equivalents at end of year 31 25,555,573 39,970,678

The accompanying notes on pages 7 to 117 are an integral part of these financial statements.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

Page Page

1 Reporting entity 7 19 Property and equipment 98

2 Basis of preparation 8 20 Intangible assets 100

3 Significant accounting policies 9 21 Other assets 100

Financial risk management and

review

29 22 Amounts owed to institutions 101

5 Net interest and similar income 89 23 Amounts owed to banks 101

6 Net fee and commission income 89 24 Amounts owed to customers 101

7 Net trading income 90 25 Debt securities in issue 101

8 Other operating income 90 26 Deferred tax assets and liabilities 102

Changes in expected credit losses

and other credit impairment

charges

91 27 Accruals and other liabilities 104

10 Profit before tax 91 28 Share capital and reserves 104

11 Income tax expense 92 29 Commitments 106

12 Earnings per share 93 30 Net cash from operating activities 106

Financial assets and financial

liabilities

94 31 Cash and cash equivalents 107

Balances with Central Bank of

Malta and cash

95 32 Related parties 107

15 Loans and advances to banks 95 33 Operating segments 109

16 Financial investments 95 34

Critical accounting estimates and

judgements

112

17 Factored receivables 97 35 Subsequent events 115

18 Loans and advances to customers 97

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 2022

During the financial year ended 31 December 2022, the Bank adopted amendments to existing

standards, specifically amendments to IFRS 3 Business Combinations; IAS 16 Property, Plant and

Equipment; IAS 37 Provisions, Contingent Liabilities and Contingent Assets; and Annual

Improvements 2018-2020, that are mandatory for financial years starting on or after 1 January

2022.

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 2022

2 Basis of preparation – continued

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 2022 reporting periods and have not been early adopted by the Bank.

The IASB has published a number of minor amendments to IFRSs that are effective from 1 January

2023, which have been endorsed by the EU, and other minor amendments to IFRSs that are

effective from 1 January 2024, which have not yet been endorsed by the EU.

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

expected to have a material impact on the Bank in the current or future reporting periods and on

foreseeable future transactions.

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 2022 is disclosed within Note 34 – 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 4.3

 Valuation of financial instruments: Note 4.7

 Valuation of property within ‘Property and equipment’: Note 4.7 and Note 19

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 the application of stressed scenarios that reflect

existing economic uncertainties triggered by the escalation of the military conflict between Russia

and Ukraine, the ensuing inflationary pressures in the aftermath of the global Covid-19 pandemic,

as well as considering potential impacts from other top and emerging risks, including exposure to

interest rate hikes, drops in asset prices, and local jurisdiction risks, and the related impact on

profitability, capital and liquidity.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 of investments in debt instruments 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.

Debt instruments

Subsequent measurement of debt instruments 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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.2 Classification and measurement – continued

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 a profit

margin that is consistent with a basic lending arrangement.

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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.2 Classification and measurement – continued

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

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’.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.2 Classification and measurement – continued

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 losses are presented as a 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.

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

within ‘Financial investments’.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.2 Classification and measurement – continued

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.

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 2022

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 new terms that substantially affect the risk profile of the asset are

introduced;

 Significant extensions to the term of the financial instrument when the borrower is not in

financial difficulty;

 Significant changes to the interest rate;

 Changes in the currency in which the asset is denominated; and

 The 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 a 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 2022

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 2022

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 4.3 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. An amount equal to the allowance that would

arise if the assets were measured at amortised cost is recognised in other comprehensive

income as an accumulated impairment amount, with a corresponding charge to profit or

loss; 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’.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.5 Impairment – continued

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 the 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. 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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.5 Impairment – continued

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 is becoming probable that the borrower will enter bankruptcy or other financial

reorganisation; or

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

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

considered to be credit-impaired unless there is evidence that the 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.

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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

3 Significant accounting policies – continued

3.1 Financial assets – continued

3.1.5 Impairment – continued

Write-off

Loans and debt securities are written off (either partially or in full) when there is no reasonable

expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the

case when the 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) the cessation of enforcement activity and

(ii) instances 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 the 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.

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

principally comprise ‘Amounts owed to institutions’, ‘Amounts owed to banks’, ‘Amounts owed to

customers’, ‘Debt securities in issue’, together with ‘Accruals’.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

3 Significant accounting policies – continued

3.2 Financial liabilities - continued

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

contractual cash flows of the modified liability are substantially different. The terms are

substantially different if the discounted present value of the cash flows under the new terms,

including any fees paid net of any fees received and discounted using the original effective interest

rate, is at least 10% different from the discounted present value of the remaining cash flows of the

original financial liability. In addition, other qualitative factors, such as the currency that the

instrument is denominated in, changes in the type of interest rate, new conversion features

attached to the instrument, and change in covenants, are also taken into consideration. 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. Any costs or fees incurred are recognised as part of the gain or loss on

the extinguishment.

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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

3 Significant accounting policies – continued

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.

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 2022

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 2022

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 derecognition 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 during which 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 capitalised 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 2022

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 the Bank’s ordinary shareholders 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 honour payment commitments

when 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 below-market interest rates 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 2022

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 net carrying amount of the

financial asset after deducting ECL. 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 represents 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 2022

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 primarily comprises realised gains on disposal of financial instruments measured at

FVOCI; foreign exchange differences attributable to the translation of monetary assets and

liabilities to the Bank’s functional currency at reporting date or foreign currency transactions; and

fair value movements, interest income, dividend income 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 other operating

income. 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 2022

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 2022

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 2022

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 2022

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 5 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 €76.7 million as at 31 December 2022 (2021: €66.6 million);

and ii) factoring of invoices issued by local and foreign customers (hereinafter referred to as the

“Invoice factoring” sub-portfolio) amounting to €42.6 million as at 31 December 2022 (2021: €29.3

million).

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.3 Credit risk – continued

‘Loans and advances to customers’ comprises the sanctioning of term loans and advances and

overdraft facilities to local corporate customers, amounting to €112.9 million as at 31 December

2022 (2021: €95.3 million), as well as term lending exposures provided to related parties on an

arm’s length basis, amounting to €42.2 million as at 31 December 2022 (2021: €36.4 million). These

exposures to local and foreign corporate customers are managed in a similar manner for credit risk

management purposes, and are hereinafter collectively referred to as the “Corporate lending” sub-

portfolio.

During the financial year ended 31 December 2022, the Bank started to implement its strategy to

further diversify its asset base through the introduction of a new lending product, namely retail

mortgage lending. In this respect, ‘Loans and advances to customers’ also comprises drawn retail

mortgage lending exposures amounting to €5.9 million as at 31 December 2022 (2021: nil). Given

that retail mortgage lending exposures (hereinafter referred to as the “Retail mortgage lending”

sub-portfolio) are managed in a different manner than corporate lending facilities, the Bank’s credit

risk management activities in respect of the former sub-portfolio are being described and

presented separately from the latter.

The outbreak of the Covid-19 pandemic during the financial year ended 31 December 2020 has

resulted in unprecedented economic conditions and heightened levels of economic uncertainty,

impacting the business models, income levels and cash flow generation capacity of a significant

portion of the Bank’s customers throughout the financial years ended 31 December 2020 and 2021.

The level of economic uncertainty induced by the pandemic has subsided during the financial year

ended 31 December 2022.

Following the removal of Malta from the Financial Action Task Force (“FATF”) grey list in June 2022,

the local economic uncertainties brought about by such grey-listing have also subsided.

Notwithstanding the above, the level of economic uncertainty remains elevated as at 31 December

2022, mainly due to the combined impact of global supply chain disruptions experienced in the

aftermath of the pandemic as well as the outbreak of the military conflict between Russia and

Ukraine in February 2022. Due to this, Europe experienced significant inflationary pressures during

the financial year ended 31 December 2022. In response to this, the European Central Bank (“ECB”)

has repeatedly announced increases in interest rates in a bid to contain inflation.

As a result, the current macroeconomic conditions on the Bank’s portfolios are subject to a

heightened level of uncertainty. Locally, the level of economic uncertainty has been partially

mitigated through the implementation of government support schemes aimed at subsidising

energy prices. Nevertheless, material uncertainties in respect of the duration of the current

inflationary economic environment, potential adjustments to ECB monetary policy in the form of

further interest rate hikes, the market response to increases in interest rates, the ongoing ability

of the Maltese government to maintain energy subsidies at current levels, and the potential

implementation of fiscal policy instruments to curtail inflation remain elevated as at 31 December

2022.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.3 Credit risk – continued

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.

These moratoria have now matured and customers have reverted to pre-moratoria repayment

schedules. In addition, the Bank continues to service facilities granted to support its corporate

customers during the pandemic, which facilities are guaranteed under the Malta Development

Bank Covid-19 Guarantee Scheme.

During 2022, the Bank continued to individually rate borrowers deemed mostly impacted by the

heightened levels of economic uncertainty through individual credit risk assessments, on the basis

of recently obtained management information and, where available, forecasts, 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 assesses credit risk at

origination through a scorecard designed to assess 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.

The macroeconomic uncertainties being experienced throughout Europe, particularly in respect of

the current inflationary pressures and an increasing interest rate environment, induced an elevated

level of uncertainty in respect of economic outlook. In this respect, the extent to which

macroeconomic forecasts accurately reflect potential future developments in the general

macroeconomic environment and the effects of monetary and fiscal policy instruments on markets

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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.1 Credit risk measurement – continued

For corporate lending exposures, 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 borrower level through the performance of a

creditworthiness assessment of the borrower in each periodic review, performed at least annually.

For retail mortgage lending exposures, internal credit risk grades are determined on the basis of

payment behaviour and days past due. Refer to Note 4.3.4 for the definition of the internal retail

credit risk grades used by the Bank.

(b) Factored receivables

Unlike corporate exposures classified within ‘Loans and advances to customers’, 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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.3 Credit risk – continued

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.

 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):

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

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.

For Corporate lending 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 global

supply chain disruptions experienced in the aftermath of the pandemic, together with the

escalation of the military conflict between Russia and Ukraine, resulting in widespread inflationary

pressures and an increasing interest rate environment, 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 potential delays in default emergence as a result of the application of

government support schemes which might veil longer term financial difficulties.

Corporate borrowers are assessed periodically for SICR and UTP events by reference to recently

obtained management information, including forecasts. During 2022, more information became

available in respect of the real impact of the developments referred to above on specific borrowers

and industry sectors. 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 retail mortgage lending exposures classified within ‘Loans and advances to customers’

and ‘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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

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.

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 corporate lending exposures classified within loans and advances to customers,

whether 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; and concessions granted to a

borrower experiencing financial difficulties.

As described earlier, the staging determination in respect of retail mortgage lending exposures and

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 current economic environment, 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 corporate lending

exposures classified within loans and advances to customers to determine whether the economic

shock 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 2022

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 is 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.

Until 2021, the PD calculation for loans and advances to customers was 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.

In this respect, credit scores were assigned to individual borrowers on the basis of financial

performance data, payment behaviour and country risk. Credit scores were then mapped to a

rating scale, on the basis of which a PD was assigned to each borrower. The rating scale to PD

matrices were calibrated based on historical default data observed in the market, where the data

was sourced from external credit rating agencies.

During the financial year ended 31 December 2022, the Bank implemented a credit risk modelling

solution developed by an external vendor to estimate PDs in respect of corporate lending

exposures classified within loans and advances to customers, in view of the lack of internal history

of defaults within this sub-portfolio.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

In this respect, the Bank employs statistical models to analyse financial statement data collected in

respect of each individual borrower and assign a credit score accordingly. Specifically, the Bank

benchmarks the borrower’s financial statements with those of an underlying model dataset

comprising obligors which are comparable to the Bank’s corporate borrowers in terms of size and

industry. Borrower-specific credit scores are then mapped to a PD, which is first adjusted to capture

country- and industry-specific credit risk characteristics and then assigned to each obligor. The

credit score to PD matrices are calibrated based on historical default data observed in the market,

where the data was sourced from publicly available information.

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.

Lifetime PDs are estimated by applying a scalar to the 12-month PD. The scalar, which is based on

historical observed data and is assumed to be the same across all assets within a portfolio, looks at

how defaults develop on a portfolio from the point of initial recognition throughout the lifetime of

the loans.

For retail mortgage lending exposures, PDs are determined by reference to comparable portfolios

at peer banks, given that the portfolio is still in its infancy and the Bank does not have any internally

observable default data.

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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

For financial investments issued by corporates, the PD is estimated using the same methodology

applied in respect of exposures classified within loans and advances to customers. In this respect,

PDs are determined through the use of a credit risk modelling solution developed by an external

vendor.

For sovereign debt securities, the Bank estimates PDs by reference to market data issued by

external credit rating agencies. In this respect, the PDs used in the ECL calculation reflects historical

default rates determined by external credit rating agencies for issuers assigned an external credit

rating which is equivalent to the Bank’s 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.

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 Loan-to-Value ratio of

individual facilities, where the value of the property takes into account the expected recovery from

the sale of the property.

Until 2021, a 100% LGD was assumed by the Bank for unsecured loans and advances to customers.

Subsequent to the model change implemented during the financial year ended 31 December 2022,

the Bank applies LGDs developed by an external vendor and determined by reference to the

carrying amount of tangible assets recognised on the borrower’s balance sheet. Expected

recoveries from the sale of such assets are used to determine the expected loss and are modelled

by reference to assumptions in relation to different haircuts to sale proceeds depending on asset

type and the time value of money. The LGD determined through the use of statistical techniques

by the external vendor also takes into consideration a correlation factor between PDs and LGDs,

with higher LGDs being assigned to borrowers to whom a higher PD is determined by the model.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

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, the Bank estimates the EAD by reference to the expected

balance at default. In this respect, the EAD for term lending exposures (including retail mortgage

exposures) takes into consideration the current exposure to the counterparty as well as future

expected drawdowns of committed facilities, with different drawdown factors applied to partially

drawn and fully unutilised facilities. For revolving exposures, the EAD is estimated by reference to

the maximum potential exposure at default.

For 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 2022

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:

 Corporate lending exposures classified within loans and advances to customers: Until

2021, the Euro area real Gross Domestic Product (“GDP”) and the Euro area Terms of

Trade (“ToT”) represented the key macroeconomic variables used to estimate ECL for such

exposure. Subsequent to the model change, the Bank started estimating forward-looking

ECL by reference to the GDP growth rate, unemployment rate, inflation rate, and interest

rates, all specific to the local Maltese economy, reflecting the impact of general economic

activity on the financial performance of corporate entities; and

 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.

Similarly, the impact of forward-looking information on the estimation of ECL in respect of retail

mortgage lending exposures classified within loans and advances to customers is also deemed to

be insignificant due to the fact that the portfolio is still in its infancy.

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 a forecasted time horizon.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

Until 2021, the macroeconomic forecasts applied in the estimation of ECL for loans and advances

to customers and bills of exchange factoring exposures were modelled over a five-year time

horizon. After five years, to project the macroeconomic variables out for the full remaining lifetime

of each financial instrument, a mean reversion approach was used, with the macroeconomic

variables assumed to tend to a long-run average growth rate.

Subsequent to the implementation of the new model developed by an external vendor and used

to estimate ECLs for corporate lending exposures classified within loans and advances to

customers, macroeconomic forecasts are modelled over a 12-month time horizon. The

macroeconomic modelling approach used to estimate ECL for bills of exchange factoring exposures

remains unchanged.

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 is exacerbated by the economic conditions being

currently experienced in the aftermath of the pandemic and the escalation of the military conflict

between Russia and Ukraine, with global supply chain disruptions triggering inflationary pressures

across Europe and an ensuing monetary policy response from the ECB resulting in an increasing

interest rate environment.

The heightened level of macroeconomic uncertainty experienced in both global and local

economies has had varying effects on different industry sectors. 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 in the form of subsidised energy prices.

The current financial year was characterised by strong economic growth as the global and local

economies bounced back resulting in high growth rates. The base assumption is that the

inflationary pressures and the increasing interest rate environment being experienced at a

continental level will continue to prevail in the short-to-medium term. However, it is forecasted

that the effect of inflationary pressures on local economic activity will be partially contained

through the subsidization of energy prices by the Maltese government.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

The unwinding of such government support schemes, as well as potential further increases in

interest rates designed to contain existing inflationary pressures, represent significant

uncertainties to be taken into consideration when forecasting potential economic paths over the

short-to-medium term.

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 2022 and

31 December 2021 are set out below.

As at 31 December 2022

Projection for

Malta in

2023

Baseline Upside Downside

GDP growth rate 0.4 2.0 -4.0

Unemployment rate 7.1 6.0 8.0

Inflation rate 5.2 4.0 11.0

Interest rates

3.5

3.0

4.5

As at 31 December 2022

Euro area real GDP growth rate (%)

Baseline Upside Downside

2023

0.5

3.1

2.1

2024

4.4

0.9

2025 1.9 4.6 -0.7

2026 1.7 4.4 -0.9

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

The weightings assigned to the ‘baseline’, ‘upside’ and ‘downside’ scenarios are 50% (2021: 50%),

25% (2021: 25%) and 25% (2021: 25%) respectively.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

€445,864 (2021: €862,371) if these had to be estimated solely on the basis of the downside

scenario and would reduce by €251,551 (2021: €232,781) 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 29).

The following table presents the maximum exposure to credit risk from on-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 2022

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.

2022

2021

Gross

carrying Allowance

amount For ECL amount For ECL

€ € € €

Credit risk exposure relating to

balance sheet assets

Subject to IFRS 9 impairment

requirements

Financial assets measured at

amortised cost

Balances with Central

Bank of Malta 17,598,287 - 16,192,155

Loans and advances to banks

10,214,993

25,420,282

Factored receivables

- Bills of exchange factoring 76,657,356 (116,000) 66,550,268 (15,000)

- Invoice factoring 42,611,756 (789,388) 29,277,379 (760,813)

Loans and advances to

customers

- Corporate lending

- Retail mortgages

155,255,795

5,907,178

(816,086)

(17,605)

131,698,327

(328,986)

Accrued income 1,937,194 - 1,335,715

Debt securities measured at

FVOCI

90,972,629

(46,682)

96,730,990

(11,860)

Credit risk exposure 401,155,188

(1,785,761)

367,205,116

(1,116,659)

Credit risk exposure relating to

off-balance sheet instruments

Undrawn commitments to lend

185,068,135 - 92,738,305 -

Total credit risk exposure

586,223,323 (1,785,761) 459,943,421 (1,116,659)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 factoring /

classification investments factoring Retail mortgage

lending

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

2022

2021

Fair Fair

value value

€

Credit risk exposure relating to on-balance sheet assets not

subject to IFRS 9 impairment requirements

Equity investments designated at FVOCI 30,275 30,275

Equity investments measured at FVTPL

548,023

20,519,447

Credit risk exposure

578,298 20,549,722

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 2022 and

2021 in respect of each class of financial instruments by stage distribution.

Allowance for ECL

2022

Gross

carrying

amount Stage 1 Stage 2 Stage 3

Net carrying

amount

€ € € € €

Loans and advances to

customers measured at

amortised cost

- Corporate lending 155,255,795 (705,052) (22,202) (88,832) 154,439,709

- Retail mortgages

5,907,178 (17,605) - - 5,889,573

Factored receivables

measured at amortised

cost 119,269,112 (170,168) (51,391) (683,829) 118,363,724

ECL allowance per stage (892,825) (73,593) (772,661)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.4 Credit quality analysis – continued

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

- Corporate lending

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)

Allowance for ECL

2022 Fair value Stage 1 Stage 2 Stage 3

€ € € €

Debt securities measured

at FVOCI 90,972,629 (46,682) - -

hbo

Allowance for ECL

2021 Fair value Stage 1 Stage 2 Stage 3

€ € € €

Debt securities measured

at FVOCI 96,730,990 (11,860) - -

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 2022

Stage 1

Stage 2

Stage 3

Total

Loans and advances to

banks measured at

amortised cost

€ € € €

Grade 1: Regular 10,214,993 - - 10,214,993

Gross carrying amount 10,214,993 - - 10,214,993

Allowance for ECL

Net carrying amount

10,214,993

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.4 Credit quality analysis – continued

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 - - 25,420,282

Allowance for ECL - - - -

Net carrying amount

25,420,282 - - 25,420,282

As at 31 December 2022

Stage 1 Stage 2 Stage 3 Total

Debt securities

measured at FVOCI

€ € € €

Grade 1: Regular

0,972,629

Fair value 90,972,629 - - 90,972,629

Allowance for ECL (46,682) - - (46,682)

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 - - 96,730,990

Allowance for ECL (11,860) - - (11,860)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.4 Credit quality analysis – continued

As at 31 December 2022

Stage 1 Stage 2 Stage 3 Total

Loans and advances to

customers measured

at amortised cost

€ € € €

Corporate lending

Grade 1: Regular 147,602,932 - - 147,602,932

Grade 2: Watch 4,169,993 - - 4,169,993

Grade 3: Substandard

- 1,481,010 - 1,481,010

Grade 4: Doubtful - - 1,984,580 1,984,580

Grade 5: Loss

17,280

Gross carrying amount 151,772,925 1,481,010 2,001,860 155,255,795

Allowance for ECL (705,052) (22,202) (88,832) (816,086)

Net carrying amount

151,067,873 1,458,808 1,913,028 154,439,709

Retail mortgages

Grade 1: Regular 5,907,178 - - 5,907,178

Gross carrying amount

5,907,178

Allowance for ECL

(

17,605

)

(17,605)

Net carrying amount

5,889,573

Total

Grade 1: Regular 153,510,110 - - 153,510,110

Grade 2: Watch 4,169,993 - - 4,169,993

Grade 3: Substandard

1,481,010

Grade 4: Doubtful

1,984,580

Grade 5: Loss - - 17,280 17,280

Gross carrying amount 157,680,103 1,481,010 2,001,860 161,162,973

Allowance for ECL (722,657) (22,202) (88,832) (833,691)

Net carrying amount

156,957,446 1,458,808 1,913,028 160,329,282

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.4 Credit quality analysis – continued

As at 31 December 2021

Stage 1 Stage 2 Stage 3 Total

Loans and advances to

customers measured at

amortised cost

Corporate

lending

/Total

€ € € €

Grade 1: Regular 122,115,721 - - 122,115,721

Grade 2: Watch 4,936,292 - - 4,936,292

Grade 3: Substandard - 3,172,018 - 3,172,018

Grade 4: Doubtful - - 1,425,198 1,425,198

Grade 5: Loss - - 49,098 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

As at 31 December 2022

Stage 1

Stage 2

Stage 3

Total

Factored receivables

measured at amortised

cost

€ € € €

Grade 1: Regular 60,159,527 - - 60,159,527

Grade 2: Watch 10,165,247 - - 10,165,247

Grade 3: Substandard - 29,141,788 - 29,141,788

Grade 4: Doubtful - - 19,802,550 19,802,550

Gross carrying amount

70,324,774

29,141,78

19,802,550

119,269,112

Allowance for ECL

(

70,168

)

(

51,391

)

(683,829)

(905,388)

Net Carrying amount

70,154,606 29,090,397 19,118,721 118,363,724

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 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 - 26,530,945

Grade 4: Doubtful - - 13,769,754 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

As at December 2022 As at December 2021

Factored

receivables

Stage 1

Stage 2

Stage 3

Total

Stage 1

Stage 2

Stage 3

Total

€

Current

60,159,527

- -

60,159,527 36,598,774

- -

36,598,774

Overdue < 30 days

10,165,247

10,165,247 18,928,174

18,928,174

Overdue > 30 days - 29,141,788 - 29,141,788 - 26,530,945 - 26,530,945

Overdue > 90 days - - 19,802,550 19,802,550 - - 13,769,754 13,769,754

Total

70,324,774 29,141,788 19,802,550 119,269,112 55,526,948 26,530,945 13,769,754 95,827,647

Loans and advances

to customers

Current

7,680,103

1,481,010

159,161,113

127,052,013

3,172,018

130,224,031

Overdue > 90 days - - 2,001,860 2,001,860 - - 1,474,296 1,474,296

Total

157,680,103

1,481,010

2,001,860

161,162,973

127,052,013

3,172,018

1,474,296

131,698,327

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 allowance for ECL in respect of loans and advances to customers as at 31 December 2022

increased significantly compared to the prior year, resulting in an ECL charge for the financial year

ended 31 December 2022 amounting to €504,705. This was primarily driven by the impact of the

newly implemented model during the financial year ended 31 December 2022, which resulted in

higher ECL coverage ratios in respect of loans and advances to customers. The increase in the

allowance for ECL was also driven by the growth in the size of the lending portfolio, which increased

by €29.5 million during the financial year ended 31 December 2022.

In addition, the reconciliation of ECL in respect of loans and advances to customers also shows

downward migrations of borrowers from Stage 1 to Stage 2 and from Stage 2 to Stage 3, primarily

reflecting observed credit deterioration in the aftermath of the Covid-19 pandemic.

The ECL charge in respect of loans and advances to customers for the financial year ended 31

December 2021 was not significant. Downward migrations within the corporate lending portfolio

were effected to reflect cases where signs of financial difficulties became apparent. This resulted

in a downward migration of certain corporate borrowers to Stage 2 or Stage 3 reflecting the

identification of SICR or UTP events respectively. However, the ECL impact arising from such

migrations was not significant in view of the high level of collateral available in respect of

downgraded borrowers. In addition, write-offs amounting to €123,970 were effected during the

financial year ended 31 December 2021.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

The allowance for ECL in respect of factored receivables as at 31 December 2022 increased

compared to the prior year, resulting in an ECL charge for the financial year ended 31 December

2022 amounting to €129,575. This was primarily driven by the growth in the size of the factored

receivables portfolio, which increased by €23.4 million during the financial year ended 31

December 2022.

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 2022 in order to assess their recoverability, resulting in write-offs

amounting to €235,513 (2021: €321,137).

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 9 of the financial statements.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 202

127,052,013

(263,165)

3,172,018

(1,699)

1,474,296

(64,122)

131,698,327

(328,986)

New and further lending

56,625,161

(344,828)

40,143

(

40,143

)

56,665,304

84,971

)

Repayments and

disposals

(25,630,773)

62,505

(399,420)

500

(1,144,073)

26,190

(27,174,266)

89,195

Transfers of financial instruments

Stage 1 to Stage 2

(366,298)

23,794

366,298

(23,794)

Stage

to Stage 3

(1,657,886)

1,177

1,657,886

(1,177)

Net remeasurement of ECL arising from

stage transfers and changes in risk

parameters

(

200,963

)

1,614

(

35,972

)

(

235,321

)

Amounts written off

(26,392)

26,392

(26,392)

26,392

At 31 December 202

157,680,103

(722,657)

1,481,010

(22,202)

2,001,860

(88,832)

161,162,973

(833,691)

Total income statement charge for the

year

(504,705)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 202

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 202

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 2022

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 202

55,526,948

(93,303)

26,530,945

13,769,754

(682,510)

95,827,647

(775,813)

New and further lending

(*)

35,134,754

(86,734)

15,252,579

(24,628)

4,865,367

(484,34

)

55,252,700

(

595,708

)

Repayments and disposals

(20,756,871)

32,337

(5,367,407)

18,203

(5,451,444)

336,503

(31,575,722)

387,043

Transfers of financial instruments

Stage 1 to Stage 2

(5,699,245)

3,055

5,699,245

(3,055)

Stage 1 to Stage 3

(2,428,423)

1,259

2,428,423

(1,259)

Stage 2 to Stage 1

6,123,100

(6,123,100)

Stage 2 to Stage 3

(7,813,97

)

7,813,97

Stage 3 to Stage 1

2,490,227

(2,490,227)

Stage 3 to Stage 2

963,500

(963,500)

Net remeasurement of ECL arising from

stage transfers and changes in risk

parameters

(26,782)

(41,911)

(22,014)

(

90,707

)

Amounts written off

(65,716)

(169,797)

169,797

(235,513)

169,797

At 31 December 2022

70,324,774

(170,168)

29,141,788

(51,391)

19,802,550

(683,8

)

119,269,112

(905,388)

Total income statement charge for the

year

(129,575)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

2,3

3,495

(

9,067)

40,6

7,737

(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)

9,986)

9,986

1,137)

0,006

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

*New and

25,673

*New and further lending classified within Stages 2 and 3 in the tables above represents exposures originated during the financial years ended 31 December 2022

and 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 2022

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 to 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 classified 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 2022

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 2022 and 2021, there were no forborne exposures within the factored

receivables portfolio.

As at 31 December 2022, forborne loans and advances to customers comprised exposures with two

borrowers (2021: one borrower), operating within the wholesale and retail trade industry. The

carrying amount in respect of these exposures, which are classified within Stage 3 as at 31

December 2022, is €1,219,230 (2021: €1,425,193). Credit loss allowances in respect of these

exposures amount to €2,838 as at 31 December 2022 (2021: nil).

Interest income recognised during the financial year ended 31 December 2022 in respect of

forborne exposures amounted to €136,576 (2021: €60,934).

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

202

€

At 1 January

1,425,193

Loans to which forbearance measures have been

extended during the year

612,671

1,368,266

(Decrease)/increase in exposure amount

(818,634) 56,927

At 31 December

1,219,230 1,425,193

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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.

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.

During the financial year ended 31 December 2022, extensions were made to one borrower

operating within the wholesale and retail trade industry, which was subject to a general payment

moratorium as at 31 December 2021. In addition, as at 31 December 2022, the Bank granted new

moratoria to a borrower operating within the information technology industry as established

within Directive No. 18 and the EBA Guidelines during the financial year ended 31 December 2022.

In view of the forbearance allowance granted by the Bank, both exposures have been classified as

‘doubtful’ and treated as Stage 3 exposures in line with the credit policy of the Bank.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.3 Credit risk – continued

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 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.

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. 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

202

€ €

Loans and advances to customers 160,329,282 131,369,341

Of which secured by:

Real estate 72,959,337 31,590,896

Cash deposits held with the Bank 36,757,690 33,343,198

MDB CGS guarantee 19,256,234 25,815,046

Bills of exchange with recourse 13,699,381 9,872,005

Assignment of receivables

5,018,618

15,721,059

Pledges on life insurance policies

462,572

Total carrying amount secured by collateral 148,153,832 116,342,204

Residual unsecured exposure amounts 12,175,450 15,027,137

Allowance for ECL (833,691) (328,986)

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 2022, gross loans subject to the MDB CGS amounted to €19,256,234 (2021:

€25,815,046), of which a maximum of €9,628,117 (2021: €12,907,523) is considered guaranteed.

As at 31 December 2022, gross loans originated under this scheme classified as Stage 1 and Stage

2 amounted to €16,364,488 (2021: €22,576,540) and €1,483,156 (2021: €3,135,998) respectively.

As at 31 December 2022, loans originated under this scheme classified in Stage 3 amounted to

€1,408,590 (2021: €102,508).

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 €17,116 (2021: €9,959), €22,202 (2021: €3,990) and €50,900 (2021: €32)

respectively.

Factored receivables

Factored receivables comprise bills of exchange and invoices factored on a no-recourse basis. The

former 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 2022 and 2021, 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.

2022 2021

€ €

Type of collateral

Motor vehicles 73,786,202 66,535,568

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 2022

Extendible

Gross

value of

carrying

Allowance

Carrying collateral

amount

for ECL

amount held

€

€ €

Loans and advances to customers

Overdrafts

108,722

(39,134)

69,588 101,205

Fixed term loans

1,893,138

(49,698)

1,843,440 3,081,795

Factored receivables

Bills of exchange factoring

16,698,406

- 16,698,406 15,373,954

Invoice factoring

3,104,144

(683,829)

2,420,315 -

21,804,410

(772,661)

21,031,749 18,556,954

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.3 Credit risk – continued

4.3.7 Analysis of collateral – continued

As at 31 December 202

Extendible

Gross

value of

carrying

ECL

Carrying collateral

amount

allowance

amount held

€

Loans and advances to customers

Overdrafts

74,740

(25,105)

49,635

103,982

Fixed term loans 1,399,556 (39,017)

1,360,539 2,982,018

Factored receivables

Bills of exchange factoring

12,

710,374

12,

710,374

10,679,121

Invoice factoring

1,059,380

(682,510)

376,870

15,244,050 (746,632)

14,497,418 13,765,121

The LTV ratio in respect of credit-impaired loans and advances to customers as at 31 December

2022 is 63% (2021: 48%). As at 31 December 2022, credit-impaired loans and advances to

customers comprise two exposures with a carrying amount of €1,219,714 classified as forborne

stage 3 exposures and another two exposures with a carrying amount of €765,350 classified as

non-forborne stage 3 exposures. These exposures are secured by commercial and residential real

estate, with the exception of one forborne Stage 3 exposure which is secured by the MDB CGS

guarantee and cash collateral. As at 31 December 2021, credit-impaired loans and advances to

customers comprise one exposure with a carrying amount of €1,425,198 classified as a forborne

stage 3 exposure, secured by commercial and residential real estate.

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.

No collateral is held in respect of financial investments and loans and advances to banks.

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 €261,905 (2021: €445,107) were

written off by the Bank.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.3 Credit risk – continued

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:

2022 2021

€

Accommodation and food services

2,520,656

2,596,576

Construction and real estate

activities

53,811,039

19%

43,408,653

19%

Households and individuals

72,954,247

26%

57,909,264

Manufacturing 12,127,295 4% 10,387,443 5%

Services 80,124,280 29% 61,115,298 27%

Transportation 8,578,125 3% 8,349,363 4%

Wholesale and retail trade 43,982,936 16% 40,002,795 18%

Other sectors 4,594,428 2% 2,651,783 1%

278,693,006

100%

226,421,175

100%

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.

2022 2021

€ % € %

Sovereign debt 59,810,847 65% 74,066,906 63%

Local corporate bonds:

- Real estate 12,828,010 14% 5,508,875 5%

- Financial services 5,324,241 6% 2,446,950 2%

- Tourism 3,828,382 4% 4,005,194 3%

- Telecommunications 3,641,946 4% 4,169,766 4%

- Other 5,539,203 6% 6,533,299 6%

Equity investments

578,29

20,549,722

17%

91,550,927 100% 117,280,712 100%

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

2022 2021 2022 2021 2022 2021 2022 2021

€ € € € € € € €

Carrying amount 160,329,282 131,369,341 118,363,724 95,051,834 10,214,993 25,420,282 91,550,927 117,280,712

Concentration by counterparty

Corporates

152,53

0,156

130,180,000

51,952,703

36,673,177

6,01

9,447

20,217,134

Private individuals

799,126

1,189,341

65,649,574

57,559,639

Sovereign - - 761,447 819,018 - - 59,810,847 74,066,906

Banks and financial services - - - - 10,214,993 25,420,282 5,720,633 22,996,672

Concentration by location

Europe:

Malta

6,514,907

92,603,090

82,660,500

70,699,216

4,913,366

4,448,968

89,

526,389

4,432,940

- Belgium 35,874,194 29,844,346 31,201,798 23,038,656 5,221,415 19,250,048 30,275 30,275

- France 3,500,000 3,500,000 832,657 757,115 - - 42,313 20,519,447

- Other 4,439,340 4,376,378 3,668,769 556,847 80,212 1,721,266 1,951,950 2,298,050

USA 841 1,045,527 - - - - - -

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 2022

4 Financial risk management and review – continued

4.4 Market risk – continued

4.4.1 Interest rate risk – continued

2022

Carrying

amount

Average

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

17,598,287

2.50%

17,598,287

Loans and advances to banks

10,214,993

0.30%

10,214,993

Financial investments:

Debt securities measured at FVOCI

90,972,629

1.84%

2,000,000

48,5

7,973

40,384,656

Factored receivables

118,363,724

5.96%

1,370,591

6,082,484

63,090,738

7,819,911

Loans

and advances to customers

160,329,282

4.22%

92,543,392

38,784,583

28,755,057

246,250

Total assets

397,478,915

1,727,26

46,867,067

140,433,76

48,450,817

Liabilities

Amounts owed to institutions

40,000,000

0.77

40,000,000

Amounts owed to banks

275,815

0.00%

275,815

Amounts owed to customers

335,660,870

1.25%

134,800,316

103,102,902

78,312,950

19,444,702

Debt securities in issue

16,820,322

4.91%

3,174,653

13,645,669

Total

liabilities

392,757,007

175,076,131

103,102,902

81,487,603

33,090,371

((

Interest repricing gap

3,348,868

)

(

56,235,835

)

58,946,16

15,360,446

Cumulative gap

(13,348,868) (69,584,703) (10,638,538) 4,721,908

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.4 Market risk – continued

4.4.1 Interest rate risk – continued

2021

Carrying

amount

Average

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 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 2022

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

2022 and 2021 is presented below:

2022 2021

€ €

Fixed Variable Fixed Variable

Interest-earning assets

Financial investments – debt

securities

90,972,629

96,730,990

Factored receivables:

- Invoice factoring 41,822,368 - 28,516,566 -

- Bills of exchange factoring 76,541,356 - 66,535,268 -

Loans and advances to

customers:

- Corporate 50,633,347 103,806,362 75,772,648 55,596,693

- Retail - 5,889,573 - -

Balances with Central Bank of

Malta and cash

17,598,287

16,192,155

Loans and advances to banks

10,214,993

25,420,282

259,969,700 137,509,215 267,555,472 97,209,130

Interest-bearing liabilities

Amounts owed to institutions (40,000,000) - (55,000,000) -

Amounts owed to customers

60,658,694

)

(

75,002,176)

(229,305,887)

(68,474,622)

Debt securities in issue

(16,820,322)

(11,940,167)

Amounts owed to banks

(27

5,815

)

(274,715)

(317,479,016) (75,277,991) (296,246,054) (68,749,337)

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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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. An increase of 250 basis points (2021: 50 basis

points) in the yield to maturity of each respective debt security would lead to a decrease in value

of debt financial investments measured at FVOCI amounting to €13,506,468 (2021: €2,835,263).

Likewise, a decrease of 250 basis points (2021: 50 basis points) in interest rates would lead to an

increase in value of debt financial investments measured at FVOCI amounting to €14,204,309

(2021: €2,835,263). Such increases or decreases in fair value would be recognised in other

comprehensive income and in 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 200-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

€

202

0 basis points

(1,478,446)

200 basis points 1,478,446 1,478,446

202

50 basis points (187,399) (187,399)

50 basis points 187,399 187,399

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 €95,757 and €48,595 (2021: €115,807 and

€46,042) 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 2022

4 Financial risk management and review – continued

4.4 Market risk – continued

4.4.2 Currency risk – continued

202

Euro

Other

currencies

Total

Euro

Other

currencies

Total

€ € € € € €

Financial assets

Balances with Central

Bank of Malta and cash 17,598,287 - 17,598,287 16,193,768 - 16,193,768

Loans and advances to

banks

9,743,87

471,120

10,214,993

24,692,346

727,936

25,420,282

Financial investments:

- Debt securities measured

at FVOCI 90,972,629 - 90,972,629 96,730,990 - 96,730,990

Factored receivables 118,356,423 7,301 118,363,724 95,051,834 - 95,051,834

Loans and advances

to customers 160,328,441 841 160,329,282 130,323,814 1,045,527 131,369,341

Other assets 1,937,194 - 1,937,194 1,335,715 - 1,335,715

8,936,847

479,262

399,

416,109

64,328,467

1,773,463

101

930

Financial liabilities

Amounts owed to

institutions

40,000,000

55,000,000

Amounts owed to banks 275,815 - 275,815 274,715 - 274,715

Amounts owed to

customers 335,417,698 243,172 335,660,870 297,201,303 579,206 297,780,509

Debt securities in issue 16,820,322 - 16,820,322 11,940,167 - 11,940,167

Other liabilities 4,759,914 - 4,759,914 3,975,122 - 3,975,122

397,273,749

243,172

397,516,921

368,391,307

579,206

368,970,513

Net currency position 1,663,098 236,090 1,899,188 (4,062,840) 1,194,257 (2,868,583)

As at 31 December 2022 and 2021, 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 2022

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 in respect of 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 2022

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

2022 2021 2022 2021

As at 31 December 725% 1,320% 134% 164%

Average for the year 1,584% 2,525% 161% 163%

Maximum for the year 3,081% 3,634% 179% 166%

Minimum for the year 454% 1,090% 134% 158%

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 2022

4 Financial risk management and review – continued

4.5 Liquidity risk – continued

4.5.1 Contractual maturity ladder – continued

At 31 December 2022

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

14,784,535

2,813,752

17,598,287

Loans and advances to banks

10,214,993

Financial investments:

Equity investments

578,29

Debt

securities

2,000,000

48,587,973

40,384,656

90,972,629

Factored receivables

25,008,507

16,362,084

6,082,484

63,090,738

7,819,911

118,363,724

Loans and advances to customers

16,981,755

8,611,57

38,614,52

65,947,309

30,174,116

160,329,282

Other assets

1,973,194

Total assets

68,962,984

24,973,657

46,697,013

177,626,020

78,378,683

3,392,050

400,030,407

Financial liabilities

Amounts owed to institutions

10,000,000

30,000,000

40,000,000

Amounts owed to banks

275,815

Amounts owed to customers

89,702,291

42,492,871

104,342,245

79,658,759

19,464,704

335,660,870

Debt securities in issue

3,174,653

13,645,669

16,820,322

Other

liabilities

4,759,91

Total liabilities 104,738,020

72,492,871

104,342,245

82,833,412

33,110,373

- 397,516,921

Liquidity gap

5,775,036)

(47,519,214)

(57,645,23

)

94,792,608

45,268,310

3,392,050

2,513,486

Cumulative gap (35,775,036) (83,294,250) (140,939,482)

(46,146,874) (878,564)

2,513,486

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

91,1

53,354

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,

093,521

20,198,444

368,97

,513

(15,157,957)

(53,558,726)

(32,810,856)

27,478,907

68,512,611

23,206,547

17,679,526

Liquidity gap

(15,157,957)

(53,558,726)

(32,810,856)

27,4

,907

68,512,611

23,206,547

17,67

,526

Cumulative gap (15,157,957)

(68,716,683) (101,527,539) (74,039,632) (5,527,021) 17,679,526

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.5 Liquidity risk – continued

4.5.1 Contractual maturity ladder – continued

Amounts owed to customers of €75,002,176 (2021: €68,449,774) as at 31 December 2022 are repayable on demand and included in the ‘less than one month’ bucket in the

tables above. However, the Bank’s experience is that a significant portion of such deposits remains stable. Additionally, a significant part of other deposits maturing within 3

months from the end of the reporting period is typically renewed.

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 202

Amounts owed to institutions

40,000,000

(40,307,014)

Amounts owed to banks

275,815

(275,815)

Amounts owed to customers

335,660,870

(347,359,212)

(75,002,176)

(60,716,266)

(105,299,378)

(83,103,035)

(23,238,357)

Debt securities in issue

16,820,322

(24,616,110)

(843,370)

(6,272,740)

(17,500,000)

Other liabilities

4,759,914

(4,759,914)

7,516,921

(41

7,318,065

)

(75,277,991)

(10

5,783,194)

(106,142,748)

(89,375,775)

(

40,738,357

)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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 202

Amounts owed to

institutions

55,000,000

(54,857,843)

(34,911,062)

(9,974,589)

(9,972,192)

Amounts owed to banks

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)

Other liabilities

3,975,122

(3,975,122)

513

394

)

(68,724,489)

(

90,446,662

)

(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 2022

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 €1,026,733 as at 31 December 2022 (2021: €960,383).

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 2022

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 2022

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 2022

Financial investments:

- Debt securities 88,972,629 - 2,000,000 90,972,629

- Equity investments 548,023 - 30,275 578,298

89,520,652 - 2,030,275 91,550,927

31 December 2021

Financial investments:

- Debt securities 96,730,990 - - 96,730,990

- Equity investments 20,519,447 - 30,275 20,549,722

117,250,437 -

30,275 117,280,712

Financial investments – Debt securities

This category of assets is carried at fair value, measured primarily by reference to quoted market

prices as at 31 December 2022 and 2021.

Financial investments – Equity investments

The Bank has an interest in an open-ended investment fund as disclosed in Note 16.4, which is

carried at fair value, determined by reference to the net asset value of the fund as at 31 December

2022 and 2021.

The Bank’s exposure to unquoted equity investments is deemed immaterial as at 31 December

2022 and 2021.

No transfers of financial instruments between different levels of the fair value hierarchy have

occurred during the financial years ended 31 December 2022 and 2021.

(d) Financial instruments not measured at fair value

Debt securities in issue

The fair value of the debt securities in issue as at 31 December 2022 amounted to €17,281,580

(2021: €12,360,000) whilst the carrying amount of these debt securities was €16,820,322 (2021:

€11,940,167).

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

Loans and advances to customers are carried at amortised cost in the statement of financial

position. The board considers the carrying amounts of these loans to be a reasonable estimate of

their fair value in view of the relatively short periods to repricing or maturity from the end of the

reporting periods.

Amounts owed to institutions

Amounts owed to institutions amounting to €40,000,000 (2021: €55,000,000) 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

16.2. 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 €335,660,870 (2021:

€297,780,509). The majority of the customer deposits reprice within one year or less and, in this

respect, their carrying amount is deemed to be a reasonable approximation of their fair value.

Amounts owed to banks

This category of liabilities is carried at amortised cost and amounts to €275,815 (2021: €274,715).

These liabilities are short-term in nature and, in this respect, their carrying amount is deemed to

approximate their fair value.

Debt securities in issue

This category of liabilities is carried at amortised cost. The debt securities in issue with nominal

value of €14.0 million and €3.2 million are quoted and the fair value has been determined by

reference to the market price (Level 1), which was €100.00 and €103.00 respectively as at 31

December 2022 (2021: €103.00), resulting in a fair value of €14,000,000 and €3,281,580 (2021:

€12,360,000).

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.7 Fair value measurement of financial instruments – continued

(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 every five 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 is required to analyse non-financial assets carried at fair value by level of the fair

value hierarchy within which the recurring fair value measurements are categorised in their

entirety (Level 1, 2 or 3). The different levels of the fair value hierarchy have been defined as fair

value measurements using:

 Quoted prices (unadjusted) in active markets for identical assets (Level 1);

 Inputs other than quoted prices included within Level 1 that are observable for the

asset, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2);

 Inputs for the asset that are not based on observable market data (i.e. unobservable

inputs) (Level 3).

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

2022 and 2021 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 30 September 2022. During 2022, the carrying values of the properties, classified within

property, plant and equipment, have been adjusted to the valuations and the net resultant

adjustment comprised an increase of €100,787 in the carrying values for the Bank. For all

Bank properties, their current use equates to the highest and best use.

A reconciliation from the opening balance to the closing balance of land and buildings for recurring

fair value measurements categorised within Level 3 of the fair value hierarchy, is reflected in Note

19.1. The principal movements reflect changes in fair value, additions, disposals and depreciation

charge for the years ended 31 December 2022 and 2021.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.7 Fair value measurement of financial instruments – continued

(e) Non-financial instruments measured at fair value - continued

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% (2021: 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 €23.24 (2021: €23.27).

Effectively, the capitalisation rate indicates the return the investor expects to receive through

annual rental value.

4.8 Capital base

The Bank is a licensed 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 for credit risk and the Basic Indicator

Approach for operational risk and foreign exchange risk in order to calculate the Pillar 1 minimum

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

and Tier 2 capital, which includes ordinary share capital, the capital contribution reserve, retained

earnings, other reserves and subordinated debt. The Bank’s regulatory capital also included Tier 2

capital

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.

In accordance with the common reporting framework (COREP) submissions, used by credit

institutions for reporting to the supervisory authority under the Capital Requirements Directive

(CRD), submitted by the Bank to the authority, the Bank has complied with all externally imposed

capital requirements including the Common Equity Tier 1 (‘CET1’), Tier 1 Capital (‘T1’), Tier 2 Capital

(‘T2’) and Capital Adequacy Ratio (‘CAR’) throughout the financial years ended 31 December 2022

and 2021. There have been no material changes in the Bank’s management of capital during the

respective financial years.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

4 Financial risk management and review – continued

4.8 Capital base – continued

4.8.2 Calculation of minimum capital requirement and risk-weighted assets

Minimum capital requirements are computed for credit, market and operational risks. The Banking

Act, 1994 requires a bank to maintain a ratio of total regulatory capital to risk-weighted

assets and instruments (the Capital requirements ratio) at or above the prescribed minimum of

8%.

The Bank is compliant with the CRD IV capital requirements and in addition to the prescribed

minimum, Banking Rule BR/15: ‘Capital Buffers of Credit Institutions authorised under the

Banking Act 1994’ requires Banks to hold additional buffers, namely the‘ capital conservation

buffer’ and the ‘countercyclical buffer’. Automatic restrictions on capital distributions apply if the

Bank’s CET1 capital falls below the level of its CRD IV combined buffer.

The Bank is required to maintain a capital conservation buffer of 2.5% and the institution-

specific countercyclical buffer as determined by Article 140 (1) of Directive 2013/36/EU which

is composed of CET1 capital. These buffers were phased in over the period from 1 January 2016

to 31 December 2020.

CRD IV contemplates a countercyclical buffer in line with Basel III, in the form of an institution-

specific countercyclical buffer and the application of increased requirements to address macro-

prudential or systemic risk. This is expected to be set in the range of 0-2.5% of relevant credit

exposure risk-weighted assets, whereby the rate shall consist of the weighted average of the

‘countercyclical buffer’ rates that apply in the jurisdiction where the relevant exposures are

located. Given that the local group’s exposures are all contained within Malta, this buffer was set

at 0%.

On 18 May 2021, the Bank received from the MFSA a SREP Decision letter, whereby in addition to

the regulatory requirements stated above, the Bank is expected to maintain a Pillar 2 Requirement

(P2R) of 3.50% to be held in excess of the minimum own funds requirement and to be maintained

at all times in accordance with Article 104a of the EU’s Capital Requirements Directive (CRD V). In

addition, a Pillar 2 Guidance (P2G) of 1% and made up entirely of CET 1 Capital is to be held over

and above the Overall Capital Requirement (OCR) of 14%.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

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

The following is an analysis of the Bank’s Capital Base in accordance with the CRD’s requirements,

as reported by the Bank in the COREP return:

202

€

Tier 1 capital

Ordinary share capital 29,000,000 10,000,000

Capital contribution 32,675 17,032,675

Retained earnings 916,452 2,005,302

Property revaluation reserve 2,977,302 3,521,238

Fair value movement reserve (10,295,141) (612,547)

Other reserves

72,782

45,091

Deductions related to intangible assets

(1,

399,03

)

(1,774,370)

Total Tier 1 Capital 21,305,034 30,217,389

Subordinated debt

14,000,000

Total Tier 2 Capital 14,000,000 -

Total Own Funds

5,305,034

30,217,389

By reference to regulatory returns submitted to the MFSA in respect of the financial year ended 31

December 2022, as well as regulatory returns submitted to the MFSA up to the date of signing of

these financial statements relating to reporting periods falling after 31 December 2022, the Bank

is deemed to have met all minimum legal capital requirements until signing date.

Further information in respect of the Bank's capital ratios may be found in sections 3 and 4 of

Appendix 1 - Pillar 3 disclosures as at 31 December 2022, which are subject to internal review by

the Bank.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

5 Net interest income

2022 2021

Note € €

Interest income

Factored receivables 6,362,852 4,989,116

Loans and advances to customers 5,345,149 4,567,305

Amounts owed to institutions 28,194 135,521

Financial investments measured at FVOCI

1,738,480

1,710,715

Amortisation of premium on financial

investments measured at FVOCI

(386,904)

(698,100)

Total interest income 13,087,771 10,704,557

Interest expense

On amounts owed to banks (290,730) (98,542)

On amounts owed to customers (4,197,297) (3,858,102)

On debt securities in issue (701,743) (540,000)

Amortisation of debt issuance costs 25 (52,577) (17,089)

Loss on modification of debt securities 25 (170,298) -

Total interest expense (5,412,645) (4,513,733)

Net interest income 7,675,126 6,190,824

6 Net fee and commission income

2022 2021

€ €

Account maintenance and other bank charges 182,419 119,866

Fee and commission income

182,419

119,866

SWIFT

and bank charges

(126,507)

(130,061)

Fee and commission expense (126,507) (130,061)

Net fee and commission income/(expense) 55,912 (10,195)

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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

6 Net fee and commission income – continued

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 Net trading income

2022 2021

€ €

Net gains/(losses) on financial investments measured at

FVTPL 10,543 (59,028)

Net gains from foreign exchange activities

5,246

90,196

15,789 31,168

8 Other operating income

2022 2021

€ €

Other operating income 101,325 97,746

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

9 Changes in expected credit losses and other credit impairment charges

2022 2021

€ €

Changes in expected credit losses:

Factored receivables (129,575) 25,673

Loans and advances to customers (504,705) 50,724

Debt financial investments measured at FVOCI (34,822) (11,860)

(669,102) 64,537

Other credit impairment charges:

Write-offs

- Factored receivables (235,513) (330,006)

Loans and advances to customers

(26,392)

(123,970)

Recoveries

Loans and

advances to customers

11,860

3,747

(250,045) (450,229)

(919,147) (385,692)

10 Profit before tax

10.1 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 2022 and 2021 which comprise the

following:

2022 2021

€ €

Auditors’ remuneration – annual statutory audit 90,000 60,000

Other assurance services 7,000 4,500

Other non

assurance services

2,000

9,240

10.2 Personnel expenses incurred by the Bank during the respective financial years are analysed as

follows:

2022 2021

€ €

Directors’ fees

145,000

137,000

Staff costs:

- wages, salaries and allowances 2,222,340 1,849,474

- defined contribution social security costs 145,936 116,816

2,513,276

2,103,290

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

10 Profit before tax - continued

10.3 The weekly average number of persons employed by the Bank during the respective financial years

was as follows:

2022 2021

€ €

Managerial 8 7

Supervisory and clerical 57 47

10.4 Other expenses incurred by the Bank during the respective financial years are analysed as follows:

2022 2021

€ €

Credit servicing fees 508,534 495,525

Depositor compensation scheme contributions 395,931 -

IT support and maintenance costs 1,204,538 1,351,039

Marketing expenses 175,613 129,374

Professional fees 802,907 457,408

Other expenses 695,964 165,291

3,783,487 2,598,637

11 Income tax expense

11.1 Total income tax expense

Note 2022

2021

€

Income Statement

Current income tax – current year expense (215,197)

(373,430)

Deferred tax credit 26 318,784

1,254

103,587

(372,176)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

11 Income tax expense - continued

11.2 The tax on profit and the result of accounting profit multiplied by the applicable tax rate in Malta

of 35% are reconciled as follows:

2022 2021

€ €

(Loss)/profit before income tax (387,806) 820,157

Tax at the applicable tax rate of 35% 135,732 (287,055)

Tax effect of:

Non

deductible expenses

(

7,447

)

(106,298)

Other differences

(

4,698

)

21,177

103,587 (372,176)

12 Earnings per share

Earnings per share is calculated by dividing the profit or loss after tax attributable to ordinary

shareholders of the Bank by the number of ordinary shares in issue and ranking equally for dividend

during the year.

Note 2022

2021

€

Income Statement

Net profit attributable to equity holders of

the Bank

(284,219)

447,981

Number of ordinary shares in issue 26 58,000,000

58,000,000

Earnings per share (0c49)

0c77

The comparative information has been restated to reflect the bonus issue, share split and the

capitalisation from the capital contribution reserve effected during the current financial year and

the impact on the number of shares in issue, referred to in Note 28, retrospectively.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

13 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.

202

Note At FVTPL

FVOCI

–

debt

instruments

FVOCI

–

equity

instruments Amortised cost

Total carrying

amount

Balances with Central Bank of

Malta and cash 14 - - - 17,598,287 17,598,287

Loans and advances to banks

10,214,993

Investment securities

548,02

90,972,629

30,275

91,550,92

Factored receivables

118,363,724

Loans and advances to

customers 18 - - - 160,329,282 160,329,282

Other assets

2,070,207

Total financial assets

548,02

90,972,629

30,275

308,576,493

127

420

Amounts owed to institutions

40,000,000

Amounts owed to banks

275,815

Amounts owed to customers

335,660,870

Debt

securities in issue

16,820,322

Accruals and o

ther liabilities

4,759,912

Total financial liabilities

397,516,919

202

Note At FVTPL

FVOCI

–

debt

instruments

FVOCI

–

equity

instruments Amortised cost

Total carrying

amount

Balances with Central Bank of

Malta and cash 14 - - - 16,193,768 16,193,768

Loans and advances to banks

25,420,282

Investment securities 16 20,519,447 96,730,990 30,275 - 117,280,712

Factored receivables

95,051,834

Loans and advances to

customers 18 - - - 131,369,341 131,369,341

Other assets

335,715

Total financial assets

20,519,447

96,730,990

30,275

69,370,940

6,651,652

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

Accruals and other liabilities 27 - - - 3,975,122 3,975,122

Total financial liabilities

368,970,513

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

14 Balances with Central Bank of Malta and cash

2022 2021

€ €

Balances with Central Bank of Malta 17,598,287 16,192,155

Cash and items in transit - 1,613

17,598,287 16,193,768

Balances with the Central Bank of Malta comprise mandatory reserve deposits of €1,981,892 (2021:

€1,368,657) 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 €831,860 (2021: €1,288,168) 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.

15 Loans and advances to banks

2022 2021

€ €

Repayable on call and at short notice

10,

214,993

5,420,282

Credit loss allowances in respect of loans and advances to banks are deemed to be negligible.

16 Financial investments

16.1 Composition of investment portfolio

202

€ €

Debt securities measured at FVOCI 90,972,629 96,730,990

Equity investments designated at FVOCI

30,275

Equity investments measured at FVTPL

548,02

20,519,447

91,550,927 117,280,712

16.2 Debt financial investments measured at FVOCI comprise:

2022 2021

€ €

Malta Government Stocks

59,810,847

74,066,906

Local corporate bonds

listed on the Malta Stock Exchange

31,161,782

22,664,084

90,972,629 96,730,990

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

16 Investment securities – continued

16.2 Debt financial investments measured at FVOCI - continued

At 31 December 2022, expected credit loss allowances in respect of debt securities measured

at FVOCI amounted to €46,682 (2021: €11,860).

The Bank’s holdings of debt financial investments measured at FVOCI represent securities

quoted on the Malta Stock Exchange.

As at 31 December 2022, a portion of the Bank’s investment in Malta Government Stocks with

a fair value of €59,810,846 (2021: €58,128,816) 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 €10,000,000 (2021:

€55,000,000) and Targeted Longer-Term Refinancing Operations (“LTROs”) amounting to

€30,000,000 (2021: nil) as at that date.

16.3 Equity investments designated at FVOCI comprise:

2022 2021

€ €

Unquoted equity holding

(Society for Worldwide Interbank Financial

Telecommunications SCRL

–

SWIFT)

30,275

16.4 Equity investments measured at FVTPL comprise:

2022 2021

€ €

Collective investment schemes 42,409 20,519,447

Unrated financial investments 505,614 -

548,023

20,519,447

Collective investment schemes represent holdings in investment-grade money market funds as

part of the active liquidity management of the Bank. The position as of 31 December 2021 was

liquidated during 2022 with the realized gains disclosed in the statement of profit or loss.

Furthermore, the unrated financial investments disclosed above represent equity investments

listed on the Malta Stock Exchange which are unrated by international credit rating agencies.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

16 Investment securities – continued

16.5 The table below summarises the movement in financial investments:

17 Factored receivables

202

€ €

Receivables factored on a non-recourse basis:

Invoice factoring

42,611,756

29,277,379

Bills of exchange factoring

76,657,356

66,550,268

Allowance for ECL

(905,388)

(775,813)

118,363,724 95,051,834

18 Loans and advances to customers

Note

202

€

Term loans and advances to third parties 70,934,420

61,091,191

Term loans and advances to related parties 32.3 42,239,142

36,442,579

Overdrafts 47,989,411

34,164,557

Allowance for ECL (833,691)

(328,986)

160,329,282

131,369,341

€

At 1 January 2022 117,280,712

Acquisitions

40,740,03

Redemptions and disposals

(51,362,776)

Amortisation

of premium

(386,904)

Fair value movement (14,720,141)

At 31 December

2022

91,5

50,92

At 1 January 2021

109,304,630

Acquisitions

85,996,927

Redemptions and disposals (76,537,399)

Amortisation of premium (698,100)

Fair value movement (785,346)

At 31 December 2021

117,280,712

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

19 Property and equipment

19.1

Premises and Computer Motor Other

Total improvements

hardware vehicles equipment

€

Cost/revalued

amount

At 1 January 2021 13,931,521 12,415,047 739,224 106,624 670,626

Acquisitions 814,947 622,124 160,490 29,910 2,423

Disposals (31,610)

- - (31,610)

At 31 December

2021

14,714,858

13,037,171

899,714

104,924

673,049

At 1 January 2022 14,714,858 13,037,171 899,714 104,924 673,049

Acquisitions 1,413,917 1,186,558 86,114 - 141,245

Premises revaluation 100,787 100,787 - - -

Disposals (2,774,204)

(2,724,795)

- - (49,409)

At 31 December 2022 13,455,358

11,599,721

985,828

104,924

764,885

Depreciation

At 1 January 2021 1,937,072 651,107 598,623 90,695 596,647

Charge for the year 243,933 83,109 115,596 17,455 27,773

Depreciation released

on disposals (31,542)

- - (31,542)

At 31 December 2021 2,149,463 734,216 714,219 76,608 624,420

At 1 January 2022 2,149,463 734,216

714,219

76,608

624,420

Charge for the year 149,201 77,820

49,781

5,998

15,602

Depreciation released

revaluation

/disposals

(

555,531

)

20,795

)

(

34,736

)

At 31 December 2022 1,743,133 291,241

764,000

82,606

605,286

Carrying amount

At 1 January 2021 11,994,449 11,763,940 140,601 15,929 73,979

At 31 December 2021 12,565,395 12,302,955 185,495 28,316 48,629

At 31 December 2022

11,712,225

1,308,480

221,828

22,318

159,599

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

19 Property and equipment – continued

19.2 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) but had been carried at

cost less depreciation would have been:

2022

2021

€

Cost

8,372,372

8,795,158

Accumulated depreciation

(295,437)

(430,678)

8,076,935

8,364,480

19.3 As at 31 December 2022, commitments in respect of capital expenditure authorised and

contracted for amounted to €666,000 (2021: €1,615,000). 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.

19.4 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

2022, was in the process of extensive improvements and refurbishment to the building.

Following an Extraordinary General Meeting held on 24 November 2022 and as disclosed in

Company Announcements IZB103 and IZB104, during 2022, the Bank transferred to a related

party, Barrakka Properties Limited, a private limited liability company registered under the laws

of Malta, bearing company registration number C 102595 and having its registered office at 53/58

East Street, Valletta VLT 1251, Malta the following properties: , (i) Apartment 1 and Apartment 2

forming part of the block of buildings numbered 65 and situated in East Street Valletta, Malta and

(ii) the properties numbered 66/67, 82, 83/84/94/95, 98/99 in East Street Valletta, Malta with a

total net carrying amount of €2,204,000 for a cash consideration of €2,204,000.

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 2022

100

20 Intangible assets

Computer

software

€

Cost

At 1 January 2021

4,252,154

Acquisitions

824,508

At 31 December 2021 5,076,662

At 1 January 2022 5,076,662

Acquisitions

1,064,771

At 31 December 2022 6,141,433

Amortisation

At 1 January 2021 2,702,063

Charge for the year

600,229

At 31 December 2021 3,302,292

At 1 January 2022 3,302,292

Charge for the year

863,548

At 31

December 202

4,165,840

Carrying amount

At 1 January 2021 1,550,091

At 31 December 2021 1,774,370

At 31 December 202

1,975,593

As at 31 December 2022, commitments in respect of capital expenditure authorised and contracted

for amounted to €1,179,000 (2021: €1,400,000). The bulk of this expenditure will be directed

toward the procurement and development of the core banking system.

21 Other assets

2022 2021

€ €

Accrued interest 1,437,194 1,335,715

Prepayments 1,244,617 636,005

Other receivables 500,000 -

3,181,811

1,971,720

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

101

22 Amounts owed to institutions

The Bank participates in the ECB LTROs and PELTROs. In this respect, a portion of the Malta

Government Stocks held by the Bank as at 31 December 2022 and 2021 (see Note 16) were pledged

in favour of the Central Bank of Malta as collateral in respect of the Bank’s participation in the

LTROs and PELTROs . As at 31 December 2022, LTROs amounted to €30,000,000 (2021: nil) and

PELTROs amounted to €10,0000 (2021: €55,000,000).

23 Amounts owed to banks

2022 2021

€

Repayable on demand 275,815 274,715

275,815

274,715

24 Amounts owed to customers

202

€ €

Repayable on demand 75,002,176 68,449,774

Term deposits 260,658,694 229,330,735

335,660,870 297,780,509

25 Debt securities in issue

2022 2021

€ €

At 1 January

11,940,167

11,923,078

Debt securities issued

14,000,000

Debt securities converted to new securities

(6,811,900)

Redemption of debt securities (2,002,100) -

Issue costs incurred (528,720) -

Loss on modification of debt securities (Note 5) 170,298 -

Amortisation of debt issuance costs during the year (Note 5) 52,577 17,089

At 31 December 16,820,322 11,940,167

Debt securities in issue as at 31 December 2021 represented 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%. These 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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

102

25 Debt securities in issue – continued

On 6 July 2022, the Bank announced the issue of €14,000,000 5% unsecured subordinated bonds

maturing on 15 September 2032 with an early redemption option held by the Bank on 15

September 2027 and annually thereafter. These debt securities, which are listed on the Malta

Stock Exchange, are denominated in Euro, pay interest at a fixed rate of 5% and are redeemable

at par. The €14,000,000 5% unsecured subordinated bonds will, in the event of winding up of the

Bank, be subordinated to the claims of depositors and all other creditors. As at 31 December 2022,

the contractual amount due at maturity is of €14,000,000.

Holders of the €12,000,000 4.50% Unsecured Bond 2025 with a total nominal amount of

€6,811,900 and a carrying value of €6.79 million subscribed to the unsecured subordinated bond

issued in 2022 by surrendering bonds with a nominal amount of €6,811,900. This exchange did not

result in derecognition and the loss on modification of €170,298 was recognised as an adjustment

to the effective interest rate in profit or loss. Furthermore, the Bank purchased and cancelled an

additional amount of bonds of €2,002,100 in nominal amount from the 4.5% Unsecured Bonds

2025 in accordance with the prospectus dated 18 May 2015.

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 2022 and 2021.

26 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

2022 2022 2022 2021 2021 2021

€ € € € € €

Depreciation of property

and equipment and

amortisation of

intangible assets - (242,851) (242,851) - (329,988) (329,988)

Revaluation of properties - (436,414) (436,414) - (558,446) (558,446)

Fair value changes on

financial investments

- measured at FVOCI 5,543,538 - 5,543,538 329,833 - 329,833

- measured at FVTPL - (4,779) (4,779) - (2,240) (2,240)

Allowance for ECL 625,016 - 625,016 390,830 390,830

6,168,554 (684,044) 5,484,510 720,663 (890,674) (170,011)

Deferred taxes are calculated on all temporary differences under the liability method and are

measured at the tax rates that are expected to apply to the period when the asset is realised or the

liability is settled based on tax rates (and tax laws) that have been substantively enacted by the end

of the reporting period.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

103

26 Deferred tax assets and liabilities – continued

The principal tax rate used is 35% (2021: 35%), with the exception of deferred taxation on the fair

valuation of non-depreciable property, which is computed on the basis applicable to disposals of

immovable property mainly giving rise to a tax effect of 10% of the transfer value (2021: 10%).

Movement in temporary differences relates to:

At 1 January

Recognised in

Recognised

directly

At 31

December

2022 profit or loss OCI equity 2022

€ € € € €

Depreciation of property and

equipment and amortisation of

intangible assets (329,988) 87,137 - - (242,851)

Revaluation of properties

(558,446) - (15,118) 137,150 (436,414)

Fair value changes on financial

investments

- measured at FVOCI 329,833 - 5,213,705 - 5,543,538

- measured at FVTPL (2,240) (2,539) - - (4,779)

Allowance for ECL 390,830 234,186 - - 625,016

(170,011) 318,784 5,198,587 137,150 5,484,510

At 1 January Recognised in Recognised in At 31 December

2021 profit or loss OCI 2021

€ € € €

Depreciation of property and

equipment and amortisation

of intangible assets (359,958) 29,970 - (329,988)

Revaluation of properties (558,446) - - (558,446)

Fair value changes 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)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

104

27 Accruals and other liabilities

202

€

Accrued interest payable 3,744,225 3,325,807

Other accrued expenses 1,015,689 649,315

4,759,914 3,975,122

28 Share capital and reserves

28.1 Share capital

2022 2021

No. of

€ No. of

€

Authorised

Ordinary shares of €25 each - - 400,000 10,000,000

Ordinary shares of €0.50 each 120,000,000 60,000,000

Issued and fully paid up

Ordinary shares of €25 each - - 400,000 10,000,000

Ordinary shares of €0.50 each 58,000,000 29,000,000

At 31 December 2022, the authorised and issued share capital comprised 120,000,000 and

58,000,000 ordinary shares of €0.50 each respectively, (2021 authorised and issued share capital:

400,000 ordinary shares 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. In addition, the authorised share capital

was increased to 120,000,000 ordinary shares at €0.50 each. Through the same resolution, the

Extraordinary General Meeting also approved an increase in issued share capital through the

capitalisation of €17,000,000 out of the capital contribution reserve. In this respect, the Bank

issued and allotted 34,000,000 ordinary shares of €0.50 each to IBL T Limited (C16322) and IBL I

Limited (C16321), in the same proportion as the existing shareholding at the date of issuance,

which shares were credited as fully paid-up shares.

Following Company Announcement IZB89, published on 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 regulatory

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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

105

28 Share capital and reserves - continued

28.1 Share capital - continued

As communicated within Company Announcement IZB91, published on 21 March 2022, the Bank

announced the payment of a net dividend of €2,000,000 to its shareholders. The Bank obtained all

the necessary approvals on 25 October 2022 and paid the dividend through a bonus issue of new

ordinary shares on 22 November 2022, resulting in an increase in issued share capital. In this

respect, issued share capital as at 31 December 2022 amounted to €29,000,000.

28.2 Capital contribution reserve

These amounts represent irrevocable and unconditional contributions by the shareholders and are

interest free and repayable at the sole discretion of the Bank. As disclosed in Note 28.1, the Bank

obtained regulatory approval for the conversion of €17,000,000 from its capital contribution

reserve into fully paid-up ordinary share capital effective on 25 February 2022.

28.3 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.

28.4 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.

28.5 Depositor compensation scheme reserve

The depositor compensation scheme reserve represents amounts set aside by the Bank from its

retained earnings. As at 31 December 2022, a total amount of €831,860 (2021: €1,288,168) was

placed with the Central Bank of Malta and pledged in favour of the Depositor Compensation

Scheme.

28.6 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 €72,782 (2021: €45,091).

28.7 Availability of reserves for distribution

2022 2021

€ €

Distributable

916,452

2,005,302

Non

distributable

(6,

380,522

)

21,274,625

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

106

28 Share capital and reserves - continued

28.8 Dividends

As disclosed in Note 28.1, the Bank declared a net interim dividend of €2,000,000 at the Annual

General Meeting held on 24 March 2022. The Bank obtained all the necessary approvals on 25

October 2022 and paid the dividend through a bonus issue of new ordinary shares on 22 November

2022. No dividends are being declared in respect of the financial year ended 31 December 2022.

29 Commitments

2022 2021

€ €

Unutilised factoring, overdraft facilities and

credit card commitments

185,068,135

92,738,305

The Bank may unconditionally cancel undrawn factoring commitments at 31 December 2022

amounting to €137,794,135 (2021: €61,283,083) at its discretion.

30 Net cash from operating activities

2022 2021

€ €

(Loss)/

Profit for the year

(284,219)

447,981

Adjustments for:

Depreciation of property and equipment 149,201 243,933

Amortisation of intangible assets 863,548 600,229

Income tax (credit)/expense (103,587) 372,176

Allowance for ECL 919,147 385,692

Interest income on debt financial investments (1,738,480) (1,710,715)

Interest expense on debt securities in issue 701,743 540,000

Net unrealised (loss)/gain from financial investments

measured at FVTPL

(10,543)

59,028

Realised gains

/(losses)

on disposal of financial investments

7,299

(442,395)

Amortisation of premiums and discounts on debt financial

investments 386,904 698,100

Loss on modification of debt securities 170,298 -

Amortisation of debt issuance costs 52,577 17,089

113,888

1,211,118

Movements in reserve deposit with Central Bank of Malta (613,235) (35,999)

Movements in loans and advances to customers (29,464,646) (9,762,784)

Movements in factored receivables (23,441,465) 4,129,447

Movements in amounts owed to institutions (15,000,000) 20,000,000

Movements in amounts owed to customers 37,880,361 (6,604,220)

Movements in

other assets and other liabilities

(

781,716

)

223,119

(30,306,813) 10,160,681

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

107

31 Cash and cash equivalents

2022 2021

€ €

Cash - 1,613

Balances with Central Bank of Malta 15,616,395 14,823,498

Loans and advances to banks with contractual

maturity of three months or less 10,214,993 25,420,282

Amounts owed to banks

(275,815)

(274,715)

25,555,573 39,970,678

Balances with the Central Bank of Malta exclude mandatory reserve deposits of €1,981,892 (2021:

€1,368,657) which are not available for use in the Bank’s day-to-day operations. Balances with the

Central Bank of Malta also comprise an amount of €831,860 (2021: €1,288,168) pledged in favour

of the Depositor Compensation Scheme.

32 Related parties

32.1 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 Strategy & Value, the Head of Operations, the Head of Credit, the

Head of Information & Technology, the Head of Risk and Compliance and the Head of Human

Resources.

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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

108

32 Related parties - continued

32.2 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:

202

€

Interest and similar income

3,778,761

1,572,688

Fee and commission income 80,500 86,645

Other operating income 2,100 65,492

Interest expense 332,385 374,943

32.3 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:

2022 2021

€ €

Assets

Loans and advances to customers 42,239,142 36,442,579

Prepayments and accrued income

537,581

508,679

Liabilities

Amounts owed to customers 42,133,209 29,511,433

Debt securities held by directors 364,300 290,000

Accruals 5,743 11,706

Loans and advances to customers include 6 (2021: 4) outstanding loans to key management

personnel amounting to €250,000, €249,413, €14,253, €9,088, €232,995 and €26,578 (2021:

€250,000, €97,699, €17,782 and €8,035). The two loans amounting to €250,000 and €232,995

(2021: €250,000) are secured against property in Malta, bear interest at 1.75% and 1% per annum

respectively. Both loans are repayable after more than five years from the reporting date. The

remaining amounts are unsecured and bear interest between 1.3% and 1.75% (2020: 1% and

1.75%) per annum and are repayable after more than five years.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

109

32 Related parties - continued

32.4 Transactions with key management personnel

2022 2021

€ €

Directors’ fees 145,000 137,000

Compensation to key management personnel - salaries 757,758 553,967

33 Operating segments

33.1 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 and mortgages

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 2022

110

33 Operating segments – continued

33.1 Operating Segments - continued

2022 2022 2022 2022 2021 2021 2021 2021

Total Lending Factoring Other Total Lending Factoring Other

€ € € € € € € €

Interest and similar income

Loans and advances to

customers 5,345,149 5,345,149 - - 4,567,305 4,567,305 - -

Factored receivables 6,362,852 - 6,362,852 - 4,989,116 - 4,989,116 -

Amounts owed to

institutions

28,194

135,521

Financial assets measured at

FVOCI 1,738,480 - - 1,738,480 1,710,715 - - 1,710,715

Amortisation on financial

assets measured at FVOCI (386,904) - - (386,904) (698,100) - - (698,100)

Total interest income 13,087,771 5,345,149 6,362,852 1,379,770

10,704,557 4,567,305

4,989,116

1,148,136

Interest expense

Loans and advances to banks (290,730) (117,100) (86,450) (87,180) (98,542) (24,309) (33,597) (40,636)

Amounts owed to

customers

(4,197,29

)

(1,690,58

)

(1,248,081)

(1,258,631)

(3,858,102)

(951,73

)

(

1,315,379

)

(

1,590,986

)

Debt securities issued (701,743) (282,647) (208,666) (210,430) (540,000) (133,210) (184,107) (222,683)

Amortisation of debt

issuance costs (52,577) (21,177) (15,634) (15,766) (17,089) (4,216) (5,826) (7,047)

Loss on modification of debt

securities

(170,298)

(68,592)

(50,639)

(51,067)

Interest expense (5,412,645) (2,180,101) (1,609,470) (1,623,074)

(4,513,733)

(1,113,472) (1,538,909) (1,861,352)

Net interest income

7,675,126

3,165,04

4,753,38

(24

3,30

)

6,190,824

3,453,833

3,450,207

(713,216)

Net fee and

commission

income/(expense) 55,912 130,753 (61,504) (13,337) (10,195)

59,248

(55,493) (13,950)

Net trading income 15,789 - - 15,789 31,168 - - 31,168

Net (losses)/gains on

disposal of financial

investments

measured at FVOCI (7,299) - - (7,299) 442,395 - - 442,395

Other operating income 101,325 - - 101,325 97,746 - - 97,746

Operating profit/(loss) 7,840,853 3,295,801 4,691,878 (146,826) 6,751,938

3,513,081 3,394,714 (155,857)

Depreciation and

amortisation (1,012,749) (339,220) (585,964) (87,565) (844,162) (369,264)

(302,889) (172,009)

Changes in expected credit

losses and other credit

impairment charges (919,147) (519,237) (365,088) (34,822) (385,692)

(28,153) (345,679)

(11,860)

Employee compensation

and benefits

(2,513,276)

(542,271)

(1,481,981)

(489,024)

(2,103,290)

(920,048

)

(754,670)

(428,572)

Other administrative

expenses (3,783,487) (1,239,828) (2,146,055) (397,604) (2,598,637) (1,136,728) (932,403) (529,506)

(Loss)/profit before tax (387,806) 655,245 112,790 (1,155,841) 820,157

1,058,888 1,059,073

(1,297,804)

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

111

33 Operating segments – continued

33.1 Operating Segments - continued

2022 2022 2022 2022

Total Lending Factoring Other

€ € € €

Assets

Segment assets 398,057,213 160,329,282 118,363,724 119,364,207

Unallocated assets 23,432,052 - - -

Total Assets 421,489,265 160,329,282 118,363,724 119,364,207

Liabilities

Segment liabilities 392,757,007 158,194,468 116,787,689 117,774,850

Unallocated liabilities 5,196,328 - - -

Total Liabilities

397,953,33

158,194,468

116,787,689

117,774,850

2021 2021 2021 2021

Total Lending Factoring Other

€ € € €

Assets

Segment assets 385,315,937 95,051,834 131,369,341 158,894,762

Unallocated assets 17,492,949 - - -

Total Assets 402,808,886 95,051,834 131,369,341 158,894,762

Liabilities

Segment liabilities 364,995,391 90,039,051 124,441,269 150,515,071

Unallocated liabilities 4,533,568 - - -

Total Liabilities 369,528,959 90,039,051 124,441,269 150,515,071

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

112

33.2 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.

2022 2021

€ €

Revenue

Malta 8,977,283 7,525,207

Belgium

4,402,722

3,870,525

13,380,005 11,395,732

Non

current assets

Malta – tangible and intangible assets 13,687,818 14,339,765

Further geographical information about Loans and advances to customers, Factored receivables,

Loans and advances to banks, and Financial investments is set out in Note 4.3.11.

The Bank’s major customer is the Van Marcke Group of which it forms part. Belgium is the country

of domicile of this Group.

Information about revenues, expenses, and balances as a result of transactions with the Group is

set out in Note 32.

34 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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

113

34 Critical accounting estimates and judgements – continued

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.

Notwithstanding the general economic recovery experienced during 2021 and 2022, with rapid

economic growth registered as the global economy rebounded in the aftermath of the Covid-19

pandemic, together with Malta’s removal from the FATF grey list in June 2022, the level of

estimation uncertainty and judgement remains elevated due to the ensuing geopolitical and

macroeconomic events occurring during the financial year ended 31 December 2022.

Specifically, the global supply chain disruptions experienced in the aftermath of the pandemic,

together with the escalation of the military conflict between Russia and Ukraine in February 2022,

have triggered significant inflationary pressures across Europe as well as a slowdown in global

economic growth, resulting in a stagflationary economic environment. In response, the ECB has

adjusted its monetary policy stance during the financial year ended 31 December 2022, which has

been reflected through multiple incremental announced increases in interest rates in a bid to

curtail inflation. In this respect, the current economic outlook is highly characterised by inflationary

pressures and an increasing interest rate environment. In view of the induced level of economic

uncertainty, the underlying models and their calibration, including how they react to forward-

looking economic conditions, remain highly subjective and might not accurately represent the

effects of these economic changes.

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.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

114

34 Critical accounting estimates and judgements – continued

Significant judgement is required in establishing the number, severity and relative weightings of

forward-looking economic scenarios in the context of the heightened level of macroeconomic

uncertainty being experienced. The level of expert judgement required is exacerbated by the

heightened level of uncertainty around predictions in respect of the potential impacts of

assumptions in relation to inflation and interest rates, particularly the potential market response

to further increases in interest rates, and of the effectiveness of government support schemes

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 of the economic impacts brought about by the

geopolitical tensions between Russia and Ukraine as well as the stagflationary and increasing

interest rate environment being currently experienced. Moreover, the complexities of government

support schemes and their unwinding, and the unpredictable pathways of the economic outlook

taking cognisance of potential further changes to fiscal and monetary policies, 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.

The determination of economic forecasts in the current environment thus represents a significant

source of uncertainty, which in turn significantly increases the level of subjectivity around the

estimation of credit loss allowances in respect of loans and advances to customers and factored

receivables.

In addition, the implementation of government support schemes, specifically the subsidisation of

energy prices by the Maltese government, has partially mitigated the impact of inflationary

pressures in the local economy. However, significant uncertainty exists in relation to the Maltese

government’s continued ability to continue subsidising energy prices, especially if the current level

of inflationary pressures remains sustained for a prolonged period of time. In this respect, the

unwinding of government support schemes would have a significant impact on the local economy.

In this regard, management applied a higher level of expert judgement in order to assess the

impact of the current macroeconomic environment on the Bank’s level of defaults, including

evaluating the impact of government support schemes, 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 a 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 in the case of

industry sectors which are benefiting significantly and are heavily reliant on energy price subsidies

designed to curb the impact of inflationary pressures on local businesses, which might lead to

delayed default emergence.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

115

34 Critical accounting estimates and judgements – continued

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, corporate

borrowers operating in industry sectors which are most likely to be impacted by inflationary

pressures and an increasing interest rate environment, as well as being most reliant on the Maltese

government’s subsidization of energy prices, were monitored closely in order to determine

whether these economic shocks may transform into long-term financial difficulties.

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 current inflationary pressures and the potential impact of an

increasing interest rate environment, 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 these macroeconomic events will not be fully known until market conditions

stabilise.

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.

35 Subsequent events

35.1 Notification of additional contributions payable to the Depositor Compensation Scheme

On 3 February 2023, the Depositor Compensation Scheme (the “Scheme”) formally requested the

Bank to settle the amount of €623,844 to cover its pro-rata share of the shortfall in the Scheme’s

available financial means as a result of the pay-out by the Scheme to Nemea Bank plc’s eligible

depositors.

The Bank paid the amount in full on 8 March 2023. The Bank has been notified that the amount is

fully refundable, once the Scheme receives the amount of the shortfall from the Controller of

Nemea Bank plc. Based on the information made available to the Bank as at the date of

authorisation for issuance of these financial statements, it appears to be unlikely that the Controller

would not refund the entire amount to the Scheme in the foreseeable future.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

116

35 Subsequent events - continued

35.2 Reclassification of Malta Government Stock portfolio

During the financial year ending 31 December 2023, the Bank’s management will continue to

pursue potential investment opportunities to further diversify its asset base, in line with the growth

and diversification strategy approved by the Bank’s Board of Directors in the first quarter of 2022.

As part of this strategy, during the financial year ended 31 December 2022 management has

initiated a new business line, as the Bank launched its mortgage product offering to the retail

market in Malta. As at 31 December 2022, the carrying amount of drawn down retail mortgage

exposures was €5.91 million, whereas undrawn commitments as at the same date amounted to

€4.14 million. The development of this business line enables the Bank to diversify its asset portfolios

and to limit the level of concentration risk to specific portfolios within its asset base.

During the financial year ending 31 December 2023, management is actively working towards the

achievement of its growth target levels in line with the approved business plan for the next three

financial periods.

In view of the above, management has considered different investment opportunities which should

support the Bank in achieving higher levels of growth in its retail mortgage business line. In this

respect, by the date the financial statements were authorised for issue, management had signed a

term sheet submitted by a leading market provider in order to originate a €100 million portfolio of

Dutch mortgages.

In support of this significant development, the Bank is adjusting its funding profile by shifting

towards shorter term deposits to fund its mortgage portfolio in order to manage its net interest

margin, given that the yields from a retail mortgage product are materially lower when compared

to the yields from the Bank’s other portfolios of financial assets. In this respect, liquidity gaps in the

Bank’s maturity profile are expected to arise as a result of the launch of longer-term mortgages and

the raising of shorter-term deposits. These liquidity gaps are expected to widen with the

introduction of its Dutch mortgage business, since the mismatch in maturity profiles of the Bank’s

asset and funding bases would be expected to become more pronounced. Management intends to

address these liquidity gaps through the use of secured funding, specifically raising funding through

ECB operations by pledging its portfolio of sovereign bonds to secure funded amounts.

As at 31 December 2022, the Bank’s portfolio of sovereign bonds is measured at FVOCI in view of

the fact it is deemed to be held within a business model where the objective is achieved by both

collecting contractual cash flows and selling financial assets. Going forward, this portfolio of high-

quality liquid assets would be specifically allocated solely to raise funding through ECB operations

in order to address the above-mentioned liquidity gaps, attributable to the mortgage business line

in particular following the origination of the Dutch mortgage business. Accordingly, management

is considering reclassifying its sovereign bond portfolio out of the fair value through other

comprehensive income (FVOCI) category into the amortised cost category in 2023, since the

financial instruments would be held within a business model where the objective is to hold financial

assets to collect contractual cash flows.

Izola Bank p.l.c.

Notes to the Financial Statements

For the Year Ended 31 December 2022

117

35 Subsequent events - continued

35.3 Assessment of emerging risks in relation to events occurring after year end

Many central banks have raised their benchmark interest rates at a significant and rapid pace over

the past year. This significantly reduced the value of fixed rate investments and produced

“unrealised losses” on the balance sheets of banks (either recognised in accumulated other

comprehensive income for portfolios held at fair value through OCI, or unrecognised but disclosed

for portfolios held at amortised cost).

These interest rate increases have also driven customers of banks to shift bank deposits to other

products like money market funds in search of higher yields. This dynamic as well as customers’

increased spending of cash accumulated during the pandemic has culminated in a loss of funding

for many banks.

This combination of reduced values in investment portfolios and increased pressures from deposit

outflows has led to challenges in managing liquidity risk, particularly as selling lower-yielding

investments at a loss to cover deposit outflows erodes capital. The liquidity risk is heightened when

the deposits are larger, concentrated or shorter-term and are not covered by a protected deposit

guarantee scheme, which might give rise to an asset-liability mismatch.

The recent events experienced in the global banking sector subsequent to 31 December 2022

demonstrate the potentially critical impact of increased deposit outflows surpassing existing

liquidity buffers held in the form of cash and highly liquid investments that decline in value and

highlight the need for all banks to continuously evaluate and adapt their liquidity risk and interest

rate risk management practices.

In this respect, the Bank took cognisance of the ongoing developments occurring subsequent to

the reporting date, particularly in view of the financial difficulties experienced by Silicon Valley

Bank, Signature Bank and Credit Suisse Group AG, and performed an assessment to evaluate the

Bank’s ability to withstand liquidity pressures triggered by a potential deposit run.

The Bank holds a portfolio of financial investments measured at fair value through other

comprehensive income, which instruments are predominantly listed and rated as ‘investment

grade’ securities by external credit rating agencies. In this respect, the Bank’s investment portfolio

comprises sovereign bonds with a fair value of €59.8 million, out of which €19.8 million are

unencumbered as at 31 December 2022, as well as local corporate bonds with a fair value of €31.2

million. In addition, the Bank also has unencumbered balances with the Central Bank of Malta

amounting to €13.9 million as well as loans and advances to banks amounting to €10.2 million.

In this respect, the Bank deems that it holds sufficient high quality liquid assets to withstand

pressures arising from a hypothetical stress on its liquidity, such as in a scenario with higher

outflows in respect of deposits not covered by the Depositor Compensation Scheme. The Bank

continues to report healthy levels of liquidity in its Liquidity Coverage Ratio up to 26 April 2023,

well above both internal thresholds as well as minimum legal / regulatory requirements. In this

respect, no material uncertainties to the use of the going concern assumption are deemed to arise.

Izola Bank p.l.c.

Appendices

2022

Izola Bank p.l.c.

Page

Appendix I - Pillar 3 Disclosures as at 31 December 2022 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 2022

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 2022

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 2022 and have been

included in the Annual Report for 2022.

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 2022

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 at least 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).

Remuneration and Nomination Committee

Composition: The Remuneration and Nomination Committee comprises three non-executive

directors.

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2022

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.

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.

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2022

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.

3 OWN FUNDS

During the year ended 31 December 2022, 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 2022.

Own Funds

2022

€

Common Equity Tier 1 (CET1) Capital: instruments and reserves 22,704,070

Paid up capital instruments 29,032,675

Retained Earnings 916,452

Accumulated other comprehensive income (and other reserves) (7,245,057)

------------------

CET1 Capital before regulatory adjustments 22,704,070

===========

Regulatory deductions and adjustments

Deductions related to intangible assets (1,399,036)

Tier 2 Capital

Capital instruments and subordinated loans eligible as T2 Capital 14,000,000

------------------

Total Own Funds 35,305,034

===========

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2022

Composition of Own Funds

i. Ordinary Shares: At 31 December 2022, the authorised share capital comprised 120,000,000

ordinary shares of €0.50 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.

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 2022 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.

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2022

vii

4.2 Credit Risk Capital Requirements by Standardised Approach Exposure Class

Capital Requirement by exposure class as at 31 December 2022

Capital Requirement

€

Central Government or Central Banks

Institutions

455,982

Retail

5,644,751

Corporates

1,575,472

Exposures secured by Mortgages on Immoveable Property

1,932,691

Items associated with particularly high risk

1,587,759

Equities & Collective Investment Undertakings (CIUs)

395,966

Other

128,768

Total

11,721,389

4.3 Market Risk Capital Requirement

The market risk capital requirement of the Bank is not significant, comprising a foreign exchange risk charge

of €19,010.

4.4 Operational Risk Capital Requirement

The gross income registered by the Bank in 2022, 2021 and 2020 amounted to €7,840,853, €6,751,938 and

€5,941,863 respectively. The operational risk capital requirement for 2022 amounted to €1,026,733.

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2022

viii

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

2022

2021

€

On balance sheet assets

Balances with Central Bank of

Malta and cash

17,598,287 - - 16,193,768 - -

Financial investments

91,5

50,927

26,646,809

2,131,745

117,280,712

25,453,264

2,036,261

Loans and advances to banks

10,214,993

2,042,999

163,440

25,420,282

5,084,056

406,725

Factored receivables

118,363,724 69,192,297 5,535,384 95,051,834 45,046,468 3,603,717

Loans and advances to

customers

160,329,282

33,694,541

2,695,563

131,369,341

78,255,925

6,260,474

Property and equipment

11,712,225

936,978

12,565,395

13,044,225

1,043,538

Intangible assets

1,975,593

1,774,370

Prepayments and accrued

income

3,823,311 3,228,492 258,279 2,764,749 2,776,609 222,129

415,568,342 146,517,363 11,721,389 402,420,451 169,660,547 13,572,844

Off balance sheet items

Commitments

85,068,135

92,738,305

Credit risk capital requirement

146,517,363

13,572,843

169,660,547

13,572,844

Foreign exchange risk capital

requirement

237,626

19,010

1,195,963

95,677

Operational risk capital

requirement

12,834,159 1,026,733 11,970,399 957,632

Total capital requirement

159,589,148

182,826,909

Total Tier 1 Capital

Subordinated debt

21,305,033

14,000,000

30,217,389

Total own funds

35,305,033

30,217,389

CET 1 ratio

13.35%

16.5%

Capital adequacy ratio

22.12%

16.5%

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2022

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 2022 was 725% (2021: 1,320%). As at 31 December 2022 and 2021 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 2022 was 5.6% (2021: 8.0%). As at 31 December 2022 and 2021 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 2022

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

2022 2021

€ €

Factored receivables – gross 119,269,112 95,827,647

------------------ ------------------

month ECL

221,559

93,303

Lifetime ECL

683,829

682,510

Table 5.2 Neither past due nor impaired loans and securities

2022 2021

€ €

Loans and advances to customers 157,680,103 127,052,013

Loans and

advances to banks

10,214,993

25,420,382

Investment securities

91,550,92

117,280,712

-----------------

259,446,023 269,753,107

========== ==========

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.

2022 2021

€

Allowance for expected credit losses on factored receivables

905,388

775,813

Allowance for expected credit losses on loans and advances

833,691 328,986

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2022

Table 5.3 Total period end and average exposures after individual impairment and prior to credit risk mitigation by exposure

class.

Exposure as at

31/12/2022

Average Exposure for period to

31/12/2022

€ 000s € 000s

Central Government or Central Banks 85,985 90,234

Institutions 28,499 18,305

Retail 111,755 95,555

Corporates 82,522 89,876

Exposures secured by Mortgages on Immoveable Property 67,076 54,330

Items associated with particularly high risk 15,907 14,403

Equities & Collective Investment Undertakings (CIUs) 4,208 1,920

Other 19,616 17,997

Total 415,568 382,620

Table 5.5 Distribution of the exposures by industry/counterparty type

Central

Governmen

t or Central

Banks

Institutions Corporates Exposures

secured by

Mortgages

Immoveabl

e Property

Equities &

Collective

Investment

Undertakin

gs (CIUs)

Retail Items

associated

with

particularly

high risk

Other Total

€ 000s

Construction

1,024

9,687

16,077

1,889

28,677

Households and

individuals

7,486 70,634 78,120

Monetary Financial

Institutions

15,89

28,499 4,208 48,598

Manufacturing 6,975 7,832 14,807

Real estate, renting

and business

activities

1,899 12,716 2,967 6,448 24,030

Sovereigns 70,09

70,094

Wholesale and retail

trade

21,332 9,889 7,254 38,475

Other sectors 51,292 27,298 6,991 7,570 19,616 112,767

Total

85,98

28,499

82,522

67,076

4,208

111,755

15,907

19,616

415,568

Malta Europe Total

€ 000s € 000s € 000s

Central Government or Central Banks 84,447 1,538 85,985

Institutions 24,178 4,321 28,499

Retail 79,392 32,363 111,755

Corporates

38,424

44,098

82,522

Exposures secured by Mortgages on Immoveable Property 66,396 680 67,076

Items associated with particularly high risk

15,907

Equities & Collective Investment Undertakings (CIUs) 4,135 73 4,208

Other

19,033

583

19,616

Total 331,912 83,656 415,568

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2022

xii

Table 5.6 Residual Maturity Breakdown of the exposures

< 1 year 1 – 5 years > 5 years Total

€ 000s

Central Government or Central Banks 24,779 23,011 38,195 85,985

Institutions 28,499 28,499

Retail 28,310 42,825 40,620 111,755

Corporates

36,709

28,933

16,880

82,522

Exposures secured by Mortgages on Immoveable Property 19,303 18,986 28,787 67,076

Items associated with particularly high risk 9,608 6,299 15,907

Equities & Collective Investment Undertakings (CIUs)

4,208

Other

311

19,305

19,616

Total 151,727 139,359 124,482 415,568

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 2022

€ 000s

Central Government or

Central Banks

Institutions

Retail 116 101

Corporates 1,600 568

Items associated with

particularly high risk

Exposures secured by

Mortgages on Immoveable

Property

Equities & Collective

Investment Undertakings

(CIUs)

Other

Total

1,786

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 2022

€ 000s € 000s

Malta 996 640

Europe 790 29

Rest of the World

Total

1,786

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2022

xiii

Table 5.9 Movement in allowances for impaired and past due exposures and provisions

Individual & collective provisions

€ 000s

Opening balance

1,117

Expected credit loss increase 669

Closing balance 1,786

Amounts written off 262

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

28,499

5,700

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 € 000s

Art. 114(4)

85,985

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.

Izola Bank p.l.c.

Appendix I - Pillar 3 Disclosures as at 31 December 2022

xiv

Table 6.3 Corporates

Credit Quality

Step

Risk Weight Banking Regulation Exposure Exposure After CRM

€ 000s

1 0% Art. 400(1) (g) 54,154 -

2 35% Art. 125(1) (a) 16,992 2,997

3 50% Art. 126(1) (a) 50,119 21,161

4 75% Art. 123 (a) (b) (c) 111,755 70,559

5 100% Art. 122 (2) 86,500 19,693

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 2022.

8 CREDIT RISK MITIGATION

8.1 Collateral

Analysis of collateral is disclosed in Note 4.3.7 of the Annual Report 2022.

Table 8.1 Exposure value covered by eligible financial collateral

€ 000s

Central Government or Central Banks 19,256

Corporates 109,291

Retail 19,607

Total 148,154

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

2022

2021

2020

2019

2018

€

€ € € €

Interest receivable and

similar income

13,087,771

10,704,557 10,575,188 10,158,455 8,081,029

Interest payable and

similar charges

(5,412,645)

(4,513,733) (5,011,314) (3,972,954) (2,627,953)

----------------- ----------------- ----------------- ----------------- -----------------

Net interest income

7,675,126

6,190,824 5,563,873 6,185,501 5,453,076

Fee and commission income

55,912

(10,195) 66,892 62,351 33,658

Net trading income

15,789

31,168 64,717 97,656 (197,123)

Net (losses)/gains on disposal of

financial investments measured

at FVOCI

(7,299)

442,395 172,944 25,000 450,896

Other operating income

101,325

97,746 73,437 88,330 64,378

Other operating charges

(7,309,512)

(5,546,089) (5,164,175) (3,873,224) (3,497,085)

Net impairment gain/losses

(919,147)

(385,692) (172,797) (90,400) (134,698)

----------------- ----------------- ----------------- ----------------- -----------------

(Loss)/Profit before tax

(387,806)

820,157 604,892 2,495,214 2,442,498

Income tax expense

103,587

(372,176) (219,671) (1,034,473) (934,319)

----------------- ----------------- ----------------- ----------------- -----------------

(Loss)/Profit for the year

284,219

447,981 385,221 1,460,741 1,508,179

========== ========== ========== ========== =========

Other comprehensive income

for the year, net of income tax (

9,596,928)

(1,251,797) 27,507 875,549 (245,292)

----------------- ----------------- ----------------- ----------------- -----------------

Total comprehensive income

for the year

(9,881,147)

(803,816) 412,727 2,336,289 1,262,887

========== ========= ========= ========= =========

Earnings per share 0c49 0c77 96c 365c 377c

========== ========= ========= ========= =========

Izola Bank p.l.c.

Appendix II - Five-Year Summary

xvi

Statement of Financial Position

2022

2021

2020

2019

2018

€

€ € €

ASSETS

Balances with Central Bank of Malta

and cash

17,598,287

16,193,768 18,612,618 39,087,309 2,513,413

Investments

91,550,927

117,280,712 109,304,630 81,369,795 42,111,712

Loans and advances to banks

10,214,993

25,420,282 22,695,594 40,549,407 18,788,220

Factored receivables

118,363,724

95,051,834 99,155,608 105,412,199 86,260,140

Other loans and advances to customers

160,329,282

131,369,341 121,555,833 86,522,549 74,286,614

Property and equipment

11,712,225

12,565,395 11,994,449 11,618,961 10,264,853

Intangible assets

1,975,593

1,774,370 1,550,091 1,633,259 1,653,214

Other assets

3,181,811

1,971,720 3,603,758 1,576,048 1,275,436

Deferred tax asset

5,920,924

388,435 - - -

Current tax asset

641,499

793,029 824,359 562,378 -

----------------- ----------------- ------------------- ------------------- -------------------

Total assets

421,489,265

402,808,886 389,296,940 368,331,905 237,153,602

========== ========== =========== =========== ===========

LIABILITIES

Balance owed to Central Bank of Malta

40,000,000

55,000,000 35,000,000 - 13,000,000

Deposits from banks

275,815

274,715 250,576 250,322 250,068

Deposits from customers

335,660,870

297,780,509 304,384,729 319,737,813 177,157,086

Debt securities in issue

16,820,322

11,940,167 11,923,078 11,905,989 11,888,899

Deferred tax liabilities

436,414

558,446 845,309 777,023 560,484

Current tax payable

- - - 802,074

Accruals

4,759,914

3,975,122 2,809,505 1,989,742 1,410,264

------------------ ------------------ ------------------- ------------------- -------------------

Total liabilities

397,953,335

369,528,959 355,213,197 334,660,889 205,068,875

========== ========== =========== =========== ===========

EQUITY

Called up share capital

29,000,000

10,000,000 10,000,000 10,000,000 10,000,000

Property revaluation reserve

2,977,302

3,521,238 3,521,238 3,696,144 2,629,651

Fair value reserve

(10,295,141)

(612,547) 639,250 436,837 627,781

Depositor compensation scheme reserve

831,860

1,288,168 1,707,717 628,571 409,640

Reserve for general banking risk

72,782

45,091 3,860 3,860 6,470

Capital contribution

32,675

17,032,675 17,032,675 17,032,675 16,032,675

Retained earnings

916,452

2,005,302 1,179,003 1,872,929 2,378,510

------------------ ------------------ ------------------- ------------------- -------------------

Total equity attributable to

equity holders of the Bank

23,535,930

33,279,927 34,083,743 33,671,016 32,084,727

========== ========= ======== ======== ========

Total liabilities and equity

421,489,265

402,808,886 389,296,940 368,331,905 237,153,602

========== ========= ======== ======== ========

Memorandum items Commitments

185,068,135

92,738,305 96,000,451 71,868,667 88,918,753

========== ========= ======== ======== ========

Izola Bank p.l.c.

Appendix II - Five-Year Summary

xvii

Statement of Cash Flows

2022

2021 2020 2019 2018

€

€ € € €

Net cash from operating activities

(30,370,480) 9,818,579 (8,670,571) 99,049,941 (17,094,321)

------------------ ------------------ ------------------ ------------------ ------------------

Cash flows from investing activities

Payments to acquire property,

equipment and intangible assets (2,478,688) (1,639,455) (1,022,615) (683,999) (559,531)

Proceeds from disposal of property 2,204,000

Payments to acquire investments (40,740,036) (85,996,927) (89,109,086) (50,641,277) (9,412,713)

Proceeds from disposals of investments 51,362,776 76,537,399 59,299,332 10,672,792 24,129,036

Interest received from financial investments 1,612,389 2,066,104 1,529,179 1,227,372 949,252

Dividend received - - - - 199,411

Payments on investments which are

traded but not yet acquired - - (1,500,000) - -

------------------ ------------------ ------------------ ------------------ ------------------

Net cash used in investing activities

11,960,441 (9,032,879) (29,118,187) (39,425,112) 15,305,456

------------------ ------------------ ------------------ ------------------ ------------------

Cash flows from financing activities

Proceeds from issue of debt securities 13,633,597 - - - -

Redemption of debt securities (8,814,000) - - - -

Dividends paid to shareholders - - - (1,750,000) (2,150,000)

Net capital contribution received - - - 1,000,000 3,500,000

Interest and premium paid on debt conversion (284,663)

Interest paid on debt securities (540,000) (540,000) (540,000) (540,000) (540,000)

------------------ ------------------ ------------------ ------------------ ------------------

Net cash from / (used in)

financing activities (3,994,934) (540,000) (540,000) (1,290,000) 810,000

------------------ ------------------ ------------------ ------------------ ------------------

Net movement in cash and

cash equivalents 25,555,573 245,700 (38,328,758) 58,334,829 (978,865)

========== ========== ========== ========== ===========

Izola Bank p.l.c.

Appendix II - Five-Year Summary

xviii

Accounting Ratios

2022 2021

2020

2019

2018

% % % %

Net interest income and other

operating income to total assets 1.86 1.68 1.53 1.75 2.45

Operating expenses to total assets 1.91 1.47 1.37 1.08 1.42

Profit before tax to total assets (0.09) 0.20 0.16 0.68 1.03

Pre-tax return on capital employed (1.29) 2.82 2.14 8.63 8.60

Profit after tax to equity (1.21) 1.35 1.13 4.34 4.70

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 2022

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 0755.471.533.

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 2022

IBL I Limited Ordinary 135 100% Paid up €0.50

IBL T Limited Ordinary 53,999,865 100% Paid up €0.50

As at date of publication of the annual report, no changes were effected to the shareholding structure.

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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 2022, 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 2022;

· the statement of financial position as at 31 December 2022;

· 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 2022 to 31 December 2022, are disclosed in note 10.1 to the financial statements.

Our audit approach

Overview

	· Overall materiality: €235,000, 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

€235,000

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 €23,500 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, comprising secured loans to local corporates as well as local residential mortgages, the latter representing a new product offering initiated by the Bank during the financial year ended 31 December 2022; 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 prevailing macroeconomic environment during the financial year ended 31 December 2022, was highly characterised by global supply chain disruptions in the aftermath of the Covid-19 pandemic, the escalation of the military conflict between Russia and Ukraine, together with the ensuing inflationary pressures and the shift in ECB monetary policy resulting in an increasing interest rate environment. In this respect, the level of uncertainty around the calculation of ECLs has been exacerbated, 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. During the financial year ended 31 December 2022, the bank modified the model used to estimate ECL in respect of corporate exposures, which inherently required a significant level of judgement to be applied by management in the determination of key assumptions and calibration of key model parameters.

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) model inputs, which are used to generate a borrower-specific credit score. A set of key financial ratios, determined by reference to borrower-specific financial statement inputs, are estimated by the model and benchmarked against equivalent ratios relating to an underlying model dataset comprising obligors which are comparable to the Bank’s corporate borrowers in terms of size and industry in order to determine a borrower-specific credit score. Credit scores are then mapped to a PD by reference to a credit score to PD matrix calibrated on the basis of historical market default data sourced from publicly available information. PDs are adjusted to capture country- and industry-specific credit risk characteristics and assigned to each borrower. PDs are then adjusted using statistical regression techniques to simulate the PD under multiple macroeconomic forecasts (conditional PiT PD).

For exposures classified within the newly launched residential mortgage portfolio, PDs are determined by reference to comparable portfolios at peer banks, in view of the lack of internal observable default data given that the portfolio is still in its infancy.

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.

Following the model change implemented during the current financial year, LGDs for unsecured exposures are determined by reference to the carrying amount of tangible assets recognised on the borrower’s balance sheet. Expected recoveries from the sale of such assets are modelled by reference to assumptions in relation to market value haircuts, taking into consideration asset type and the time value of money. The LGD for unsecured exposures, determined through the use of statistical techniques by the external vendor, also takes into consideration a correlation factor between PDs and LGDs, with higher LGDs being assigned to borrowers for whom a higher PD is determined by the model.

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 corporate 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 global inflationary pressures has been partially mitigated by government measures, specifically the subsidisation of energy prices across the local economy. These economic conditions have 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 corporate customers. For the purposes of avoiding the cliff edge effect on ECLs upon the discontinuation of government subsidies, the Bank assesses the internal credit risk ratings of all loans and advances to corporate customers on an ongoing basis by reference to qualitative characteristics to enable the identification of SICR or UTP events as early as possible.

Factored receivables and exposures classified within the residential mortgage portfolio 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 prevailing macroeconomic conditions in the aftermath of the pandemic, including global supply chain disruptions and the escalation of the military conflict between Russia and Ukraine, which have triggered inflationary pressures and changes in ECB monetary policy resulting in an increasing interest rate environment, together with the government support measures adopted to mitigate inflationary pressures, 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.

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 the current unprecedented macroeconomic and geopolitical environment, which 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 9;

· Note on Factored receivables: Note 17

· Note on Loans and advances to customers: Note 18; and

· Critical accounting estimates and judgements: Note 34.

During our audit of the financial statements for the year ended 31 December 2022, 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.

The revised ECL model used to estimate credit loss allowances in respect of loans and advances to customers represented a significant update to the methodology used by management to estimate ECLs. Accordingly, the underlying assumptions and key judgements around the amended model were reviewed, assessed and tested to evaluate the reasonableness of the modelled ECLs.

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;

· observations in respect of the key assumptions and judgements applied by management in the revised ECL model used to estimate credit loss allowances in respect of loans and advances to customers, together with the impact of the model change on ECLs;

· considerations in respect of the governance framework around the implementation of model changes;

· 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 prevailing macroeconomic conditions in the aftermath of the pandemic, highly characterised by inflationary pressures and an increasing interest rate environment; 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, especially in view of the revised model utilised to estimate ECLs in respect of loans and advances to customers.

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 inflationary pressures and the increasing interest rate environment 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.

· 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 reviewed the appropriateness and reasonableness of the methodology and key assumptions applied by management in the newly implemented ECL model used to determine PDs and LGDs for corporate exposures;

o tested the accuracy of model inputs to the calculation of PDs and unsecured LGDs, which principally comprise borrower-specific quantitative financial statement inputs, on a sample basis;

o assessed the reasonableness of modelled ECLs by reference to ECL coverage rates determined by peer banks in respect of comparable portfolios;

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; 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 invoice 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 high level of uncertainty surrounding the economic outlook as a result of the prevailing inflationary pressures and increasing interest rate environment.

· For a sample of invoice factoring facilities which were past due by more than 90 days as at 31 December 2022, 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 the prevailing macroeconomic environment 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 current economic conditions, 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 prevailing macroeconomic uncertainties.

· 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 current economic conditions 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.

In the case of some impairment provisions, we formed a different view from that of management, but in our view the differences were within a reasonable range of outcomes.

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 2022 (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, future events or conditions may cause the Bank to cease to continue as a going concern.

· 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 2022, 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 2022 has been prepared in XHTML format in all material respects.

Other reporting requirements

The Annual Report and Financial Statements 2022 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 2022 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 on 26 March 2021. Our appointment has been renewed annually by shareholder resolution representing a total period of uninterrupted engagement appointment of 2 years.

PricewaterhouseCoopers

78, Mill Street

Zone 5, Central Business District

Qormi

Malta

Fabio Axisa

Partner

26 April 2023