Interim Results - Six months to 31 March 2022

30 June 2022

PCF Group plc

("PCF", the "Company" or the "Group")

Interim Results

Six months to 31 March 2022

The following summary of the consolidated interim financial statements should be read in conjunction with PCF Group plc's Annual Report & Financial Statements 2021, notably the emerging risks and uncertainties outlined in the Risk Overview.

Garry Stran, Chief Executive Officer, commented:

'During the period under review, the Group focused management and financial resource on the remediation of our control and governance framework, as a result of the well documented challenges the Group has faced. These results reflect the challenges, which the Group has now largely addressed. Management's energies and focus can now return to creating and running an efficient and digitalised business, to drive a return to profitability and the creation of enhanced shareholder value over the medium term.'

Business highlights:

· Net loans and advances reduced to £321 million (September 2021: £364 million).

· Total new business originations were 40% lower at £62 million (2021: £104 million), of which £22 million were originated in the month of March 2022. These origination numbers exclude Azule brokered lending of £15 million (2021: £19 million), which is not included on our balance sheet, but generates commission income in our profit and loss statement.

· The focus remained on writing high quality business, with 87% (2021: 93%) of originations in our top four credit grades. There was a strategic change at the end of this interim period, with our risk appetite returning to pre-COVID levels, as the impact of COVID-19 receded. This is intended to ensure a more appropriate balance of risk in our new loan originations in order to increase yield.

· Customer savings balances reduced to £291 million (September 2021: £327 million) with circa 7,600 customers (September 2021: circa 8,100) mirroring the reduction in the lending book.

Financial highlights:

· Statutory loss before tax of £7.5 million (2021: Statutory profit before tax of £1.4 million)1, with the reduction being driven by lower net interest income due to reduced loans and advances and compressed margin, and higher operating expenses, due to remediation and investment spend.

· Adjusted loss before tax2 of £4.6 million (2021: Adjusted profit before tax of £1.9 million)1.

· Net operating income decreased by 26% to £10.7 million (2021: £14.5 million)1.

· Net interest margin2 decreased to 5.9% (2021: 6.7%)1.

· Staff and operating expenses increased to £15.8 million (2021: £8.9 million) driven partly by remediation costs including dedicated staff, professional advisers and third parties of £2.9 million (2021: £0.5 million), and further investment in staff, to ensure that the operating platform is suitable to recommence growth.

· Cost to income ratio2 increased to 156% (2021: 67%)1.

· Credit impairment charge of £1.5 million (2021: £3.4 million)1 with the reduction primarily driven by lower loans and advances, and the non-recurrence of a provision increase on defaulted receivables in the prior period.

· Impairment charge as a percentage of average gross loans2 was 0.8% (2021: 1.5%)1, reflecting the higher credit quality of the portfolio.

· Statutory return on average equity2 of (33.1)% (2021: 4.3%).

· Loss per share of (3.0) pence (2021: Earnings per share of 0.4 pence)1.

· Total Capital Ratio of 17.0% (September 2021: 17.5%).

· Leverage ratio of 11.9% (September 2021: 11.1%).

· Liquidity Coverage Ratio of 609% (September 2021: 904%).

1The prior period balances have been restated or re-presented for the financial year. Refer to note 4 for further details.

2 Refer to section non-IFRS performance measures on page 6 for further details of the definition of this non-IFRS performance measure.

3Ratios are disclosed on a transition arrangement basis. Refer to page 39 for regulatory capital and leverage ratios presented on a fully loaded basis

Other Matters

On the 7 June 2022, the Company announced that following the Company's possible offer announcement on 31 May 2022, PCF had been contacted by a party in relation to considering a possible combination under which PCF would acquire the other company. Following discussions, the party and the Company have agreed not to progress the proposal and therefore have terminated discussions.

At 10am today, PCF Bank will be holding a question-and-answer session for investors via the Investor Meet Company platform. The session is open to all existing and potential shareholders. Questions can be submitted pre-event via your Investor Meet Company dashboard up until 9am the day before the meeting or at any time during the event.

Investors can sign up to Investor Meet Company and register for the event using the below link:

https://www.investormeetcompany.com/pcf-group-plc/register-investor  

Chief Executive Officer's statement for the six months ended 31 March 2022

Overview

Unusually this statement for the interim period comes shortly after the publication of our Annual Report & Financial Statements 2021, as we return to a normalised reporting schedule following a period of uncertainty and challenge for the business and our colleagues. The efforts and willingness of colleagues to go 'above and beyond' in respect of their dedication to bringing the reporting back on track, following a significant hiatus, is greatly appreciated, and I would like to take this opportunity to thank all of those involved.

The Group's performance in the period inevitably reflects the control and governance challenges we faced, resulting in an increased cost base, driven by significant expenses to remediate legacy issues, and the essential transformation of our systems and functions to prepare for growth. As the remediation activity nears its conclusion we will be able to give more focus to our goal of becoming a data-driven business to enable faster, cheaper, and more consistent decision making and analysis across our business. Investment in technology, in particular data and automation, remains at the heart of our transformation programme, together with our continued work on cultural change.

Capital management has also been a key focus, with the continued prudent management of the loan book adding to pressure on our income line. With hindsight, the switch to higher credit quality lending appears well-founded, during a period of heightened economic and geopolitical unrest. I look forward to growing the lending book once we have stronger confidence in the external environment, and our improved internal controls, subject to our desired capital position.

As a result of the publication of our Annual Report & Financial Statements for the financial year 2021 our shares resumed trading on the 31 May 2022.

The geopolitical uncertainty and dynamic inflationary and interest rate environment of recent months has added to the challenges we face, but these are being managed at both the operational and strategic levels.

Culture, governance and controls, and technology

Following significant senior hires to the Board and Executive team over the last twelve months, the Group has continued to progress in embedding our strengthened culture and governance structure.

The cultural improvement programme ensures our colleagues feel comfortable and empowered to speak up and challenge decisions should they have concerns. I am confident that all colleagues would now proactively raise awareness of, and take personal responsibility for managing risk, speaking up and doing the right thing. Our new purpose, mission and values reflect the importance of this within PCF Group.

Following a rework of the Group's Risk Management Framework (RMF) and control environment, we have continued to hire colleagues to fill key second line of defence roles, and enhance the Group's stress-testing and credit analytics capabilities. The Group's new RMF was approved by the Board in March 2022.

A key area of focus for the Group is for our operational areas to become totally data-driven to ensure speed and consistency of service, decision making, and pricing across our product range. The Group has continued its investment in IT systems, infrastructure and skilled people to continue our journey towards a technologically advanced, digital, and modern operating platform. We plan to leverage economies of scale and move towards our ultimate goal of a zero marginal cost operating model once these systems, supported by our new approach to data-driven decisioning are fully implemented.

Remediation update and transformation focus

Since the start of the remediation programme in 2021, the Group has successfully achieved a number of significant milestones. Our statutory financial reporting is now up to date, with the publication of the Annual Report & Financial Statements for 2020 and 2021, along with the interim reports.

A comprehensive Financial Position and Prospects Procedures (FPPP) review and resulting report was commissioned, and we have progressed well with the control improvements required. A new RMF is currently being embedded across the organisation, and the Financial Control Framework (FCF) has made good progress. These improvements in building a more robust control framework have all been underpinned by the strengthened culture and governance structure.

Following the completion of our remediation programme, we will continue to transform our functions with an aspiration to attain market leading capability within three years.

The transformation programme is focused on automation, improving the customer and partner experience, and ensuring that our control framework is fit for purpose. We will do this through executing against the following five objectives:

· Automation of our business service platform and self-service capability.

· Increased automation of our Financial Reporting, and data-led budgeting and scenario planning.

· Embedding the Risk Management Framework across the Group.

· The creation and leveraging of an improved data warehouse to drive intelligent decisions, at speed, through an automated and self-service led delivery platform.

· The continued development of our people and culture with a specific focus on empowerment and risk management.

Events since 31 March 2022

The suspension of our shares was removed on 31 May 2022, upon the publication of the Annual Report & Financial Statements 2021. The suspension from trading on Alternative Investment Market (AIM) had been in place from 1 April 2022 due to the delay in the publication of the Annual Report & Financial Statements 2021.

To manage capital constraints, and the corresponding implication for our loan originations, we have decided to accelerate an element of our capital raising, by requesting a further investment in the Company from our majority shareholder Somers Limited of circa £4 million. We received the first tranche of £2.7 million on 7 June 2022, with the second tranche expected in early July.

At the same time we are investigating our strategic opportunities. To this end, as announced on 31 May 2022, the Group is in early stage discussions with Castle Trust Capital plc, in relation to a possible offer for the entire issued, and to be issued, shares of the Company. These discussions are continuing to progress.

On the trading side, we have continued to prudently manage our loan book. Our gross loans and advances have stabilised in recent months and we expect this trend to continue for the remainder of this financial year.

Business and financial performance

At a headline level the Group generated a statutory loss before tax of £7.5 million (2021: Statutory profit before tax of £1.4 million).

Staff and operating expenses increased to £15.8 million (2021: £8.9 million) driven partly by remediation costs including dedicated staff, professional advisers and third parties of £2.9 million (2021: £0.5 million). We increased investment in our people, and third party professional services, driving significant enhancements to our control functions and processes, and ensuring that the operating platform is suitable to recommence growth.

Net operating income decreased by £3.8 million to £10.7 million in the period (2021: £14.5 million), largely driven by lower net interest income, as the loan book decreased and margin reduced. Net interest margin reduced to 5.9% in the period (2021: 6.7%) as lending attracting higher yields redeemed and was replaced with lower yielding new assets, with the business continuing to focus on originating loans in our top four credit grades.

The average loan book in the first half of the financial year was £342 million (2021: £426 million). This was as a result of the prudent capital management over the last twelve months, but has reduced income.

The credit impairment charge reduced by £1.9 million to £1.5 million (2021: £3.4 million) reflecting the reduced lending book, and the non-recurrence of a provision increase on defaulted receivables in the prior period.

On an adjusted basis the loss before tax for the period is £4.6 million (2021: Adjusted profit before tax of £1.9 million).

New business origination in the period was lower at £62 million (2021: £104 million). Origination levels were managed prudently to ensure the Group maintained an appropriate level of capital, within regulatory requirements. The second quarter originations were £43 million versus a first quarter of £19 million. The business generated originations of £22 million in March 2022 alone, at an attractive yield. This was the third best month in our history, and demonstrates that our core competencies remain intact.

The Group's cost to income ratio increased to 156% (2021: 67%), with the combination of higher expenses from remediation and investment, and lower net operating income from the reduced balance sheet and lower margins.

The Group generated a statutory loss after tax of £7.5 million (2021: Statutory profit after tax of £1.1 million) which represents a statutory return on average equity of (33.1)% (2021: 4.3%) and a loss per share of (3.0) pence (2021: Earnings per share of 0.4 pence).

Capital, funding and liquidity management

The Group remains extremely focused on ensuring it maintains sufficient levels of capital and liquidity. At 31 March 2022, the Group had a total capital ratio of 17.0% (September 2021: 17.5%) and a liquidity coverage ratio of 609% (September 2021: 904%).

The Group's diversified funding model comprises retail deposits, wholesale funding and drawings from the Bank of England's Term Funding Schemes. At 31 March 2022, the Group held £291 million in deposits and had drawings of £60 million against the Term Funding Schemes. This is in addition to the £7 million of Tier 2 capital from the facility that we have with British Business Investments Limited.

Changes to the Board

Our new Chair, Simon Moore, and Senior Independent Director, Mark Sismey-Durrant, were appointed to the Board on 9 January 2022. Both have a wealth of experience in the banking sector, which will prove invaluable to the Board and the wider Group.

In addition the search for an experienced Chair of Board Risk Committee has been completed and the appropriate regulatory permissions are being sought for the successful candidate. 

Outlook

Financial performance of the Group in the period has been impacted by the increased expenses due to ongoing remediation and investment in transformation activities. As the remediation programme reaches maturity in 2023 financial year, the Group's expense base will start to reduce, although transformation related expenses will remain in the short term.

New business origination volumes are expected to be higher in the second half of the 2022 financial year, although we continue to prudently manage our lending. Net loans and advances have stabilised at the end of this reporting period and we anticipate continued stability in the second half of the financial year. The increased levels of originations in March 2022 gives me confidence for the future growth prospects of the Group.

Our move to a more balanced and appropriate blend of risk in our originations will benefit margin in future periods and in due course lead to an increase in revenues.

As we fund the majority of our loan originations through retail deposits, we are exposed to the rising interest rate environment. As a result we have been proactively managing our fixed term and notice rates to compete in a challenging market. This could lead to margin compression, as interest expense increases over time, unless market conditions are such that the increased cost of funding can be passed onto borrowers, or the business accepts a different risk profile of lending assets.

The Group is also actively exploring strategic opportunities to increase certainty for shareholders and to maximise shareholder value.

The Board is confident that the prudent management of capital, and improvements in culture, governance and controls, has laid solid foundations for future growth. Following the significant focus on satisfying our statutory financial reporting in recent times, we can now turn our attention to the future. I am positive that we now have the right people and controls in place to enable the Group to achieve its true potential, whether that be as a stand-alone business or through one of the strategic opportunities that we are exploring.

G G Stran

Chief Executive Officer

29 June 2022

Financial Review

None-IFRS performance measures

The Group's management believes that the non-IFRS performance measures included in this Interim Report provide valuable information to the readers of the financial statements, as they enable the reader to identify a more consistent basis for comparing the businesses' performance between financial periods, and provide more detail concerning the elements of performance which the managers of these businesses are most directly able to influence, or are relevant for an assessment of the Group. They also reflect an important aspect of the way in which operating targets are defined and performance is monitored by management. However, any non-IFRS performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well.

Non-IFRS performance measures glossary

Net interest margin

Definition: net interest income (annualised) divided by average customer assets (loans and advances to customers). The components of the calculation are summarised below.

Cost: Income ratio

Definition: Total operating expenses (excluding credit impairment charge) divided by Net operating income

Statutory return on average equity

Definition: Statutory profit/(loss) after tax (annualised) divided by average equity

1Annualised on a daycount basis. E.g. for Net interest income of £10,032,000, this is annualised by dividing by 182 (days) and multiplying by 365 (days), equalling £20,119,000.

2Average of balances from 31 March 2022 and 30 September 2021

3Average of balances from 31 March 2021 and 30 September 2020

*The prior period balances have been restated or re-presented for the financial year. Refer to Note 4 for further details

Adjusted profit/(loss) before tax

Definition: This represents management's view of underlying performance. See table below for items excluded from statutory profit/(loss) to arrive at "Adjusted profit/(loss) before tax". No "Adjusted profit/(loss)" measure was disclosed in the Interim Report 2021.

Impairment charge as a % of average gross loans

Definition: Credit impairment charge (annualised) divided by average gross loans

Adjusted return on average equity

Definition: Adjusted profit/(loss) after tax (equivalent to adjusted loss before tax above, with adjustments tax effected and annualised) divided by average equity

1Annualised on a daycount basis. E.g. for Net interest income of £10,032,000, this is annualised by dividing by 182 (days) and multiplying by 365 (days), equalling £20,119,000.

2Average of balances from 31 March 2022 and 30 September 2021

3Average of balances from 31 March 2021 and 30 September 2020

*The prior period balances have been restated or re-presented for the financial year. Refer to Note 4 for further details

Consolidated Income Statement

\* The prior period balances have been restated or re-presented for the financial year. Refer to note 4 for further details.

Consolidated Statement of Comprehensive Income

\* The prior period balances have been restated or re-presented for the financial year. Refer to note 4 for further details.

Consolidated Balance Sheet

The interim financial statements were approved and authorised for issue by the Board on 29 June 2022.

On behalf of the Board

Consolidated Statement of Changes in Equity

(unaudited)

(unaudited)

(audited)

\* The prior period balances have been restated or re-presented for the financial year. Refer to note 4 for further details.

Statement of Cash Flows

\* The prior period balances have been restated or re-presented for the financial year. Refer to note 4 for further details.

Notes to the Interim Financial Statements

1. Basis of preparation

The consolidated interim financial statements for the half-year to 31 March 2022 have been prepared in accordance with the UK adopted IAS 34 'Interim Financial Reporting'. They should be read in conjunction with PCF Group plc Annual Report & Financial Statements 2021 (hereinafter referred to as the 'Annual Report & Financial Statements 2021') which were prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and delivered to the Registrar of Companies. The auditor's report for those accounts contained a qualified opinion on the opening balance sheet at 1 October 2020 relating to Expected Credit Losses and contained a statement under 498(2) and (3) of the Companies Act 2006.

The consolidated interim financial statements have not been audited or subject to review by the Group's auditor.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report section of the Annual Report & Financial Statements 2021. In particular, this Going concern statement should be read in conjunction with the Emerging Risks and Uncertainties section of that Strategic Report which sets out those risks and mitigations.

The financial position of the Group, its cash flows, liquidity position and borrowing facilities are set out in these consolidated interim financial statements for the six months ended 31 March 2022.

In undertaking a going concern review the directors have reviewed a base and alternative short-term financial plan to September 2023, which present a different set of strategic and operating assumptions over that timeframe. In both cases, profitability is dependent on capital being raised. However, there are various uncertainties related to capital raising which are noted in the Emerging risks and uncertainties section of the Strategic Report in the Annual Report & Financial Statements 2021, and the associated capital raising risks may be further exacerbated by the current geopolitical situation.

To manage capital constraints, and the corresponding implication for our loan originations, we have decided to accelerate an element of our capital raising, by requesting further investment in the Company from our majority shareholder Somers Limited of circa £4 million with £2.7 million having being received on 7 June 2022 and a further £1.5 million expected in early July. At the same time we are also investigating other strategic opportunities as outlined in the Chair's statement within the Annual Report & Financial Statements 2021.

Should the Group not be successful in achieving its capital raising, or any other strategic opportunities, there is no certainty that it could continue to originate new lending given its projection that over the Review Period, regulatory capital ratios are forecast to fall below regulatory capital minimum requirements. Should new lending be suspended this would reduce income and the prospect of the Group being able to generate profits which would further impact on its ability to generate capital organically.

In conclusion the raising or organic generation of capital is not guaranteed, nor is the completion of other strategic opportunities and therefore the Directors have concluded that the current lack of certainty, and the associated risks represent a material uncertainty which casts a significant doubt on the Group's ability to continue as a going concern. The Board has a reasonable expectation that it will be able to affect a capital raise or implement strategic opportunities and therefore holds a reasonable expectation that the Group will have adequate resources, notably adequate regulatory capital, to continue its operations for the period to 30 June 2023 being at least the next twelve months from the date of approval of these consolidated interim financial statements. On this basis the Directors continue to adopt the going concern basis in preparing these accounts.

2. Accounting policies

The accounting policies adopted by the Group in the preparation of these consolidated interim financial statements and those which the Group currently expects to adopt in the Annual Report & Financial Statements 2022 are consistent with those disclosed in the Annual Report & Financial Statements 2021.

Significant accounting judgements, estimates and assumptions

The judgements and assumptions that are considered to be the most important to the portrayal of the Group's financial condition at 31 March 2022 are those relating to impairment losses on financial assets and effective interest rate. These significant accounting judgements, estimates and assumptions are referenced in note 1.6 of the Annual Report & Financial Statements 2021. Management's consideration of this source of uncertainty is outlined in the relevant sections of the Annual Report & Financial Statements 2021.

 Information used for significant estimates

Key financial estimates are based on a range of anticipated future economic conditions described by internally developed scenarios. Measurement of expected credit losses and effective interest rate are highly sensitive to reasonably possible changes in those anticipated conditions. Changes in judgements and assumptions could result in a material adjustment to those estimates in the next reporting periods. Refer to the Emerging risks and uncertainties section in the Annual Report & Financial Statements 2021.

3. Standards issued but not yet effective

Minor amendments to IFRSs effective for the Group from 1 October 2021 have been issued by the International Accounting Standards Board. These amendments are expected to have no or an immaterial impact on the Group's financial statements.

4. Amendments to prior year comparatives

The Group's financial statements for prior years have been restated in these financial statements to reflect the prior period misstatements including errors and classification changes as detailed below:

Consolidated income statement extract as at 31 March 2021

Consolidated Statement of financial position extract as at 30 September 2020

Consolidated Statement of financial position extract as at 31 March 2021

Consolidated statement of cashflows extracts as at 31 March 2021

Restatement and representation explanation

There have been adjustments to prior year financial results in respect of restatements and representations which are set our below.

· The 2020 profit, and hence the 1 October 2020 opening retained earnings have been restated for a historical accounting error in relation to timing of recognition of Interest income calculated using the effective interest method. This related to the calculation of the Effective Interest Rate on a legacy system acquired with the purchase of Azule Limited in 2018. The error impacted the 2020 profit and loss account with overstated income of £0.3 million (pre-tax) and loans and advances understated by the same amount. After tax the net impact on shareholders' funds is a reduction of £0.2 million. The impact of this error is to reduce the interest income recognised in 2020 and increase the interest income recognised in 2021. There is no net impact on retained earnings as at 30 September 2021. The error was identified as part of the improvement in financial controls including a deep dive of balances of this legacy system on which no new trades have been booked since May 2021, and which is therefore in runoff.

· Deferred Tax asset: Given the disclosure of a material uncertainty in relation to going concern in both the Annual Report and Financial Statements in 2020 and 2021, deferred tax assets in respect of future taxable profits were derecognised in the 2021 Annual Report & Financial Statements. Accordingly, management have judged it appropriate to also derecognise the deferred tax asset of £1.8 million previously recognised in the 2020 Annual Report & Financial Statements and the Interim Report 2021 for the six months ended 31 March 2021 and therefore comparatives have been restated accordingly.

Re-presentation:

· Costs and accumulated depreciation amount for intangible assets, Note 13, have been re-presented according to those intangible assets that were 'in-use' or 'under development' at 31 March 2021 to be consistent with the current year disclosure.

· Amounts in the Income statement for Impairment losses have been reclassified with the reversal of Impairment losses of £0.3 million and a corresponding adjustment in Fees and commission income for the same amount.

5. Segment information

The Group operates in the principal areas of Consumer Finance for motor vehicles and Business Finance for vehicles, plant and equipment, specialist funding in the broadcast and media industry and Bridging Finance.

For management purposes, the Group has been organised into four operating segments based on products and services: Consumer Finance; Business Finance; Azule Finance; and Bridging Finance.

The following table presents income and profit and certain asset and liability information for the Group's operating segments. All of the operating segments are materially based in the UK. Non-UK based operations are not considered material to the Group and therefore no additional geographical information is disclosed.

Segment Information

\* The prior period balances have been restated or re-presented for the financial year. Refer to note 4 for further details.

6. Interest income calculated using the effective interest method

\* The prior period balances have been restated or re-presented for the financial year. Refer to note 4 for further details.

7. Interest expense calculated using the effective interest method

8. Net fees and commission income

\* The prior period balances have been restated or re-presented for the financial year. Refer to note 4 for further details.

9. Impairment losses on financial assets

Impairment losses on financial assets relates to impairment losses on loans and advances to customers. The charge during the six month periods was as follows.