CIN.L Regulatory News (CIN)

 17 December 2019

City of London Group plc

("COLG" or "the Company" and, together with its subsidiaries and associates, "the Group")

Results for the six-month period ended 30 September 2019

The Company announces its unaudited interim results for the six-month period from 1 April 2019 to 30 September 2019, along with an update on business developments.

Business developments

·; After a successful cash raise last year, the Group now aims to undertake a further capital raising exercise, raising between £25m and £50m in early 2020. This process will mainly facilitate development of Recognise.

·; Recognise submitted its formal application for a UK banking licence in November, following an extensive pre-application process. With the momentum gained with the on-going development of the banking infrastructure and its processes, Recognise should be well-placed to receive authorisation to accept deposits and commence trading in the latter part of 2020.

·; As part of its strategic planning to strengthen its executive team, Recognise appointed David Jenkins as Chief Financial Officer and Patrick Ferguson as Chief Risk Officer, both of whom have extensive experience in the banking sector, in November. These follow earlier appointments of an Operations Director and a Chief People Officer.

·; The development of the banking infrastructure is underway with the appointment of technology partners to facilitate cloud-based technology.

·; Property & Funding Solutions Ltd, which provides bridging and development finance for commercial customers, made progress in the period with an increase in the level of new lending enquiries.

·; The recently established commercial finance broking division of Acorn to Oaks has a good pipeline of transactions which are expected to complete in the second half of the year.

·; In October CAML completed the re-financing of another £3.5m block funding facility with Hampshire Trust Bank on competitive terms.

·; Milton Homes continues to be affected by the continuing slow-down in the housing market but a number of sales in the pipeline is expected to complete in the second half.

Financial results

·; Loss before tax £3.3m after absorbing costs of £1.3m associated with the UK banking licence application (2018/19 first half loss before tax £2.3m).

·; Milton Homes business generated £1m of cash after repayment of the partnership loan in the period but it made a loss of £1.2m before shareholder capital charges due to the modest positive house price change over the period.

·; Consolidated NAV per share attributable to shareholders 79p (31 March 2019: 83p)

Michael Goldstein, Chief Executive Officer, commented:

"We are delighted that our Recognise subsidiary has achieved a key milestone with the formal submission of its application to be authorised as a bank in November, following a lengthy pre-application exercise which began in the early part of 2018. Following the success of our cash raising exercise in March and April 2019, we have the funds available to complete the build out of the banking infrastructure which is currently underway. We have also strengthened the executive team further through the new appointments made since March.

The performance of both CAML and PFS has been satisfactory in the period.

The underlying business of Acorn to Oaks remains robust. The second half results are expected to benefit from transactions generated by the recently established commercial finance broking division that will complete during the period.

Overall, looking forward, we are well placed to deliver on our strategic objectives of serving the UK SME market and increasing the financial strength of the Group, so delivering value for our shareholders."

For further information:

LEI: 2138003UW63TMQ5ZFD85

Notes to Editors:

City of London Group plc is quoted on AIM (TIDM: CIN) and is the parent company of a forward-thinking organisation focused on serving the UK SME market. It is primed for the future, but grounded with traditional values and a strength and depth of expertise, looking to grow through its two-pronged strategy. The Group's expertise covers equity release, finance for the SME sector, and secured lending. The Group has experience with commercial banking and mortgages, and access to funding arrangements such as commercial, SME, bridging and development finance, home reversion plans, and asset and loan finance.

www.cityoflondongroup.com

Chief Executive Officer's review

I am pleased to present this review which covers the period from 1 April 2019.

Business review

I am delighted to report that Recognise achieved a significant milestone in the banking licence application process with submission of its formal application for authorisation in November 2019. In parallel to the application process, the Recognise team are maintaining great momentum as they continue to develop the banking infrastructure, recruit key personnel and put in place the foundations for the operational processes and procedures which will underpin this new enterprise.

Although timings can move, subject to continued progress, the expectation remains that Recognise will receive 'Authorisation with Restrictions' before the mid-year point in 2020 and full licence by the year end, which will signal the commencement of trading.

With the funds to complete the build out of the banking infrastructure of Recognise already in place following the successful cash raising exercise in March and April 2019, the Group is now undertaking preliminary planning work for a further capital raising exercise of between £25m and £50m in early 2020 to facilitate development of Recognise. This process has started with the support of our joint brokers, Peel Hunt and finnCap.

Recognise Financial Services Limited ("Recognise")

Following the successful fundraise in the first quarter of 2019, the Group is very pleased to report that, in November 2019, its subsidiary, Recognise, formally submitted its application to the Prudential Regulatory Authority (and the Financial Conduct Authority) to be authorised as a Bank. This is a key milestone which follows a pre-application process which commenced in the early part of 2018. It is also an important stage on the journey to create a broadly-based lending business supporting the UK's vital small and medium-sized business market, funded by personal and business customer savings.

The experienced management team at Recognise, led by Chief Executive, Jason Oakley, have had a busy year developing and implementing their plans for the new Bank, including commencing the build of the cloud-based technology infrastructure with key suppliers Mambu and nCino, and entering into a letter of engagement with Newcastle Strategic Solutions Ltd (NSSL). NSSL are the market leaders in outsourced deposit management services with nearly £29bn under management.

In parallel, the team has prepared an extensive inventory of policies, processes and procedures to accompany the key technical documents covering liquidity, capital and resourcing. The infrastructure build is now underway, the core strategy remains unchanged and the original team of five has more than doubled in size.

Recent key appointments have included David Jenkins as Chief Financial Officer and Patrick Ferguson as Chief Risk Officer. David was previously Director of Finance and Capital Management at Aldermore, having help leadership roles at Prudential, Lloyds and ABN AMRO in the past. Patrick is a qualified accountant and a seasoned Chief Risk Officer, most recently a main board director of Risk Strategy and Planning at Newcastle Building Society. They join Craig Pocock, Chief People Officer and Rudolf Heaf, Director of Operations, both highly experienced individuals with deep banking experience.

Adrian Golumbina, previous CFO, whilst remaining in the Recognise leadership team is now able to take on a wider CFO role within the City of London Group and Richard Lumley, who has provided excellent support as Chief Risk Officer from the early stages, has decided to seek a new challenge. We wish them both well in the future and thank them for the significant contribution to Recognise's progress to date.

Recognise, even at this stage, has its own fully constituted board, led by Philip Jenks, a former Chair of Charter Court Financial Services Group, a successful new banking entrant in the last decade. Philip brings highly relevant experience and knowledge to Recognise, as do the four other independent non-executive directors each of whom bring a different skill set to the new board.

The executive team has continued to exercise robust cost control, achieving this stage of progress at a comparative cost well below other participants on the same licence journey and without compromising on the quality of the output or the need to engage professional, external support when required. By maintaining momentum, the expectation remains that Recognise should be well placed to receive authorisation to accept deposits and commence trading in the latter part of 2020.

The bar to achieve a Bank authorisation is rightly set at a high level but the team moves forward with great confidence in the knowledge that the funds are already in place to complete the build out of the new Bank infrastructure. Meanwhile, the SME lending market opportunity remains just as attractive as it was when the strategy was first developed, potentially even greater.

Credit Asset Management Limited ("CAML") and Professions Funding Limited ("PFL")

CAML is a business to business provider of debt finance to UK SMEs, providing asset backed finance and commercial loans to SMEs and, through PFL, loans to professional practice firms. The level of new business and yields achieved by CAML remained stable over the period, although the market remains competitive.

A summary of the financial performance of the business is set out in the table below:

CAML made an operating profit before shareholder capital charges of £42k (2018: profit of £155k). The results for the six months were adversely affected by a provision of £131k in respect of one loan. However, the level of provisions on the lease and loan portfolio overall remains in line with its long run experience and projections.

In October, CAML completed a further re-financing of another £3.5m block funding facility with Hampshire Trust Bank on competitive terms which ensure margins are maintained. The re-financing allows CAML to maintain a secure base from which it can pursue development of new business opportunities.

CAML's management is also providing input to the infrastructure build for the banking platform which is now underway and continues to maintain strict controls over both staff resources and costs.

Property & Funding Solutions Ltd ("PFS")

PFS, the Group's business which provides property bridging and development finance for commercial customers, completed its first full year of trading during the period. The market has proved receptive to its loan offering due to its responsiveness, the close relationships built with customers and brokers, and the certainty of delivery of funding.

A summary of the financial performance of the business is set out in the table below:

(a) PFS started trading in April 2018.

PFS recruited a senior lending manager in June 2019 to expand the team. This has led to an incremental increase in lending activity compared with the six months to 30 September 2018. While the market remains challenging due to the uncertainty of Brexit, the level of new lending enquiries remains encouraging although it is taking longer to complete transactions. Enquiries are being sourced via repeat business, broker introductions, business network recommendations and increasing awareness of PFS in the bridging loan market.

Acorn to Oaks Financial Services Limited ("Acorn to Oaks")

Acorn to Oaks is an independent financial services intermediary authorised by the FCA, which focuses on the SME and property markets, providing whole of market broking advice services for general insurance, commercial finance broking, regulated mortgages, protection, pensions and investments.

A summary of the financial performance of the business is set out in the table below:

(a) Acorn to Oaks became a wholly owned subsidiary on 7 January 2019

The business anticipates the second half of the year will begin to benefit from development and other business initiatives already undertaken. The commercial finance broking division launched earlier in the year has a good pipeline of transactions which are expected to complete over the next six months.

In the general insurance division, where retention of existing clients is strong, Acorn to Oaks has seen a growth in premiums of 4% over the last 12 months with retained income increasing by 6.5% over the same period. The insurance market is hardening and a general increase in premiums is expected as a result in the next few months.

While the level of IFA business has remained stable over the period, the residential mortgage market has been relatively slow due to a lack of confidence generally and, we believe, by uncertainty surrounding Brexit.

Milton Homes Limited ("Milton Homes")

Milton Homes, the Group's equity release provider, administers a UK portfolio of home reversion plans, based on either traditional or innovative models. When a property becomes vacant, Milton Homes sells it and distributes the sale proceeds, including any that may be due to the former occupier or their estate. The result is a leveraged exposure to UK House Price Inflation ("HPI") without maturity concentrations given the spread of realisations over multiple years. Milton Homes does not currently take on new customers.

A summary of the financial performance of the business is set out in the table below:

The portfolio, which comprised interests in 496 properties at 30 September 2019, was externally valued at £70.2m at that date. The number of properties that reverted to Milton Homes during the period was 26 compared with 20 in the previous six months.

While Milton Homes generated cash of £1m after repayment of the partnership loan over the six month period, its results were impacted by the effect of the low changes in the house price index (up by 0.24% in the period compared with an increase of 0.44% in the previous 12 month period) as well as by an increase in the time taken to complete sales due to the general slow-down in the housing market. The business is, however, expecting a number of sales that are in the pipeline to complete over the next few months.

COLG

During the period, COLG has continued to support the activities and development of the Group's businesses. As part of this support, it is actively planning for its next capital raising exercise when it will seek new investors to support the business development of Recognise.

An amount of £0.5m in cash was subscribed for equity in April as part of the successful capital raising exercise which was largely completed in March 2019.

Following COLG's acquisition of additional office space for Recognise and PFS in July 2019, Milton Homes has recently relocated to the space vacated by these companies, so bringing staff of all the London based Group companies into premises managed by COLG.

Risks

The principal risks of the Group are reviewed by the Board, which reviews and agrees policies for managing these risks. The key risks described in the Strategic Report in the 2019 Annual Report are still appropriate. The management team of COLG and the Board are continuing to monitor events relating to Brexit and its potential impact although, as previously reported, such risks have not to date materially impacted the business model or conditions faced by the Group. The Group is adversely affected by a weak property market through its lending businesses and Milton Homes which is directly impacted by movements in the residential property market which delay sales or reduce sales values. The 2019 Annual Report also included information on financial risk management in Notes 33 and 34 of the financial statements.

Outlook

With the formal submission by Recognise of its application for a UK banking licence in November, the Group has made considerable progress in implementing its long-term growth strategy of developing its financial services offering for the UK SME market. While market conditions remain competitive, the Group believes it is well-placed to develop the potential of its existing businesses as alternative sources of credit finance become more difficult for the SME market to access. The Group remains committed to its vision to serve the UK SME market and continues to evolve with changes in market conditions and the business environment

Michael Goldstein

Chief Executive Officer

This half-yearly report may contain certain statements about the future outlook for COLG and its subsidiaries. Although the directors believe their expectations are based on reasonable assumptions, any statements about the future outlook may be influenced by factors that could cause actual outcomes to be materially different. Such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward looking statements.

This half-yearly report has been drawn up and presented with the purpose of complying with English law. Any liability arising out of or in connection with the half-yearly report for the six months to 30 September 2019 will be determined in accordance with English law. The half-yearly results for 2019 and 2018 have neither been audited nor reviewed pursuant to guidance issued by the Auditing Practices Board.

17 December 2019

Unaudited interim results

Condensed consolidated income statement

*  Previous periods represents costs associated with banking licence application as well as acquisitions.

All the operations in both the six months to 30 September 2019 and the year to 31 March 2019 are continuing.

Condensed consolidated statement of comprehensive income

Condensed consolidated balance sheet

Condensed consolidated statement of changes in equity

Condensed consolidated statement of changes in equity (continued)

Condensed consolidated statement of cash flows

Changes in liabilities arising from financing activities

Changes in liabilities arising from financing activities (continued)

Notes to condensed financial statements

1 Basis of preparation

1.1 These interim financial results do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006 and have neither been audited nor reviewed pursuant to guidance issued by the Auditing Practices Board. Statutory accounts for the year ended 31 March 2019 were approved by the directors on 14 July 2019 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement within the meaning of section 498 of the Companies Act 2006.

1.2 Accounting policies

These condensed consolidated financial statements have been prepared in accordance with IAS 34, "Interim Financial Reporting" as adopted by the European Union (the "EU"). The condensed consolidated financial statements do not include all the information required for full annual financial statements and should be read in conjunction with the annual financial statements for the year ended 31 March 2019, which were prepared in accordance with IFRS as adopted by the EU. As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, the condensed consolidated financial statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated financial statements for the year ended 31 March 2019, except for those changes in accounting policies that have been applied with effect from 1 April 2019.

1.3 Adoption of new standards and interpretations

Adoption of new standards is as per Note 2.2 of the Annual Report 2019, with the exception of IFRS 16 which became applicable for accounting periods beginning on or after 1 January 2019 and was adopted in the current financial period.

IFRS 16 'Leases' provides a single lessee accounting model, specifying how leases are recognised, measured, presented and disclosed and has been explained in Note 2.1 the Annual Report 2019.

On its adoption of IFRS 16, the Group has reviewed its existing lease contracts and concluded that all fall under one of the following exemption categories:

a) the lease contract has an option to terminate the contact at a short notice, that is the lease term is less than 12 months, or

b) the lease contracts are of low value as defined in the standard.

Accordingly, the Group has decided to opt for the recognition exemption permitted under IFRS 16 and is recognising these lease expenses on a straight-line basis in the profit and loss account.

1.4 Consistency

The interim report, including the financial information contained therein is the responsibility of, and was approved by, the directors on 17 December 2019. The AIM Rules require that accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing annual accounts except where any changes, and the reason for them, are disclosed. As disclosed in note 1.3 above, the Group has adopted IFRS 16 'Leases' as required under IFRS rules.

The adoption of IFRS 16 'Leases' has no material impact on the results or net assets of the Group.

2 Revenue and cost of sales

3 Segmental reporting

A reportable segment is identified based on the nature and size of its business and risk specific to its operations. It is reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, which is responsible for allocating resources and assessing performance of the operating segments, has been identified as the full Board of the Company.

The Group is managed through its operating businesses: the provision of home release plans to the equity release market, loan, lease and professions financing and the financial services intermediary. A subsidiary, Recognise Financial Services Limited, has submitted an application for a banking licence to the Prudential Regulatory Authority. Information on the activities of each business is given in the Chief Executive Officer's review. The COLG segment includes the Group's central functions.

The Loss from operations in the Consolidated income statement is £972,000 as shown above. 

The quasi-equity intra group payments comprise interest payable to COLG.

The Profit from operations in the Consolidated income statement of £217,000 is the sum of £211,000 and £6,000 as shown above. 

The quasi-equity intra group payments comprise interest payable to COLG.

Consolidated Net Assets at 30/09/19 (unaudited)

Consolidated Net Assets at 31/03/19 (audited)

Consolidated Net Assets at 30/09/18 (unaudited)

The Board reviews the assets and liabilities of the Group on a net basis.

4 Administrative expenses

5 Taxation

The provision is based on the best estimate of the effective rate for the full year, as a result the charge for taxation is for a period of less than one year.

The credit for deferred tax relates to gains arising from the revaluation of investment properties and takes account of losses that can be offset against the gains.

6 Dividends

The directors have not declared an interim dividend for the year ending 31 March 2020.

(Interim 2019: nil). The directors did not recommend payment of a final dividend for the year ended 31 March 2019.

7 Earnings per share

Basic and diluted earnings per share is calculated by dividing the loss attributable to equity holders of the Group by the weighted average number of ordinary shares in issue during the period less those held in treasury and in the Employee Benefit Trust.

The basic and diluted earnings per share are the same as, given the loss for the period, the outstanding share options would reduce the loss per share.

8 Investment properties

9 Financial assets - equity release plans

10 Intangible Assets

During the period, technology-based intangible assets were acquired as part of under a contractual agreement. These intangible assets mainly comprise cost of a licence and of developing a loan platform and were recognised using the cost model approach. As at 30 September 2019, goodwill arising on acquisition of Milton Homes was reviewed for impairment and it was concluded that underlying basis of impairment remains as mentioned in Note 16 of the Annual Accounts.

The goodwill relating to A2O, which was acquired in January 2019, will be reassessed for the first time prior to the year end. Accordingly, the entire impairment provision is in respect of Milton Homes. Impairment of goodwill of £78,000 was charged in the current financial period.

11 Commitments

The holder of the £3,000,000 7% Redeemable Preference Shares issued on 15 July 2015 by a subsidiary, Credit Asset Management Limited, may require the Company to purchase these shares at their face value and any accrued but unpaid dividend if the shares are not redeemed after 7 years.

The Company has put and call option arrangements over the equity interest in Recognise Financial Services Limited held by the three executives leading the banking licence application project. The maximum amount payable by the Company to acquire the equity interest is £5,600,000 which will be satisfied by the issue of the Company's ordinary shares. This is accounted for as a share-based payment although it does not have a material value at 30 September 2019 and, as such, disclosures on a share-based payment have not been included.

The Company acquired all the shares of Acorn to Oaks Financial Services Limited ("Acorn to Oaks"), a financial services intermediary business focusing on SME and property insurance products, for an initial consideration of £1,408,000 in January 2019. Further earn-out consideration, based on a six-times multiple of the average annual profit before tax for the three-year period up to 31 March 2022, may be payable which could increase the consideration by a maximum of £5,000,000. As at 31 March 2019, the Company estimated that deferred consideration of £592,000 would be payable: the amortised cost of £476,000, calculated using an effective interest rate of 6%, was included as part of the cost of acquisition. The amount of the estimated deferred consideration will be reviewed as at 31 March 2020.

12 Financial risk management

Notes 33 and 34 to the annual financial statements to 31 March 2019 include the Company's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and its exposure to credit risk, interest rate risk, price risk and liquidity risk.

The 2019 Annual Report identified the main risk factors around the cash flow forecast in the Strategic Report at that time.

13 Financial instruments

A summary of financial instruments to which the impairment requirements in IFRS 9 are applied

are as follows. Assets and liabilities outside the scope of IFRS 9 are not included in the table below:

Price risk

The Group is subject to price risk on both its investment properties and its financial assets - equity release plans as well as on its legal case investments. The valuation of each of these is a Level 3 valuation in the fair value hierarchy i.e. the valuation techniques use inputs that have a significant effect on the recorded fair value that are not based on observable market data.

The bases of assessing the fair values of the investment properties and financial assets - equity release plans are set out in note 3 of the annual financial statements to 31 March 2019. The sensitivity analysis to changes in unobservable inputs for both investment properties and financial assets - equity release plans is:

·; increases in estimated investment terms and rates would result in a lower fair value; and

·; decreases in estimated investment terms and rates would result in a higher fair value.

Due to the aggregated nature of the investment property and financial asset portfolio it is not possible to accurately quantify sensitivity of an individual input.

The fair value of investments in legal funds is taken to be cost because as at 30 September 2019 there was not a sufficient track record on which to base a valuation. There is no material sensitivity on the valuation of the legal case investments.

Due to their short maturity profiles, management is of the opinion that there is no material difference between the fair value and carrying value of trade and other receivables, cash and cash equivalents, and trade and other payables. The directors therefore consider that the carrying value of financial instruments equates to fair value.

The following tables present the Group's assets that are measured at fair value at 30 September 2019 and 31 March 2019 respectively. No Level 1 or Level 2 assets were held at either date.

The movement on level 3 assets is as follows:

14 Impairment

The provision for impairment of loans and finance leases comprises the following:

The provisions for impairment on loans and finance leases classified as Stage 3, are assessed individually by management, include provisions made for arrears on these agreements.

The table below shows an analysis of movements in the provision for impairments under IFRS 9, together with the coverage provided by the provisions held.

By order of the Board

Michael Goldstein

Chief Executive Officer

17 December 2019