Interim Results

24 January 2022

PCF Group plc

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

Interim Results

Six months to 31 March 2021

PCF Group plc, the AIM-listed specialist bank, today announces its interim results for the six-months ended 31 March 2021.

The following summary of the consolidated interim financial statements should be read in conjunction with PCF Group plc's Annual Report & Financial Statements 2020, notably the emerging risks and uncertainties outlined in the Risk Overview.

Garry Stran, Interim Chief Executive Officer, commented:

'The Group delivered a statutory profit after tax of £1.0 million. The reduction on the prior year (2020: £2.0 million) predominantly reflects higher operating expenses as a result of the focus on remediation activities and the need to invest in order to ensure that the business can support automation and future growth. New business origination was lower in the period and net loans reduced slightly as a result.

The first six months of the 2021 financial year were challenging as a result of the general ongoing pandemic related difficulties facing all businesses and individuals and the specific difficulties that the Group has experienced.

The suspension of trading in the Group's shares on 19 May 2021 followed the identification of accounting errors and misstatements as well as a failure to properly report certain exposures under the Prudential Regulation Authority's Large Exposure reporting framework between December 2018 and June 2019 as set out in the Group's announcement on 28 June 2021. I am pleased to announce that the suspension is expected to be lifted today, allowing trading in the Group's shares to recommence.

Once again, I thank all my colleagues for their commitment and support during this difficult period. It's through their efforts and diligence that we have been able to continue to operate in an effective manner and I am confident we will return to our strategy of controlled and prudent growth, having learned the lessons from this period, as soon as possible.

Whilst the necessary actions have been taken to remediate our core Finance processes, which culminated in an update to the Group's FPPP (Financial Position and Prospects Procedures) memorandum, further work will continue to enhance our processes and develop the foundations to support the future strategy of the Group which will be centred around an enhanced, more robust risk management framework and underpinned by higher levels of automation and self-service.

I look forward to sharing more updates in the future about the status of these activities and the progress towards delivering our strategic priorities.'

Business Highlights:

1 Top four credit grades refer to internal credit grades 1 to 4. Refer to the Risk Management Report in the PCF Group Annual Report & Financial Statements 2020 for further details.

Financial Highlights:

2 Cost to income ratio excludes impairment of goodwill and impairment losses on financial assets.

3 Leverage ratio - transition definition of Tier 1 capital.

Interim Chief Executive Officer's statement for the six months ended 31 March 2021

I begin by acknowledging the uncertainty and concern that the delayed publication of our financial results has caused for our stakeholders, and thanking you all for your patience and understanding during this challenging time.

As announced in our Annual Report & Financial Statements 2020, accounting errors and misstatements were identified, which resulted in trading in the Group's shares being suspended on 19 May 2021. In response to these events, the Group is progressing with a number of restorative actions. These actions are focused on significant improvements to culture, governance and controls, and technology.

Culture, governance and controls, and technology

During the period, PCF was delighted to welcome Caroline Richardson to the executive team as Chief Financial Officer. Caroline brings with her a wealth of experience and has been instrumental in implementing our strengthened control environment.

As part of the Group's wider assessment of culture and governance, an extensive culture improvement programme has been launched within the Bank where everybody understands their personal responsibility for risk. The programme will also ensure colleagues feel comfortable to speak up and challenge if they have concerns.

One of the key areas of focus for the Group is continuing our investment in IT systems and infrastructure to develop a technologically advanced, digital, and modern operating platform where we can leverage economies of scale and move towards our ultimate goal of a zero marginal cost operating model.

Economic environment and COVID-19

The first half of the 2021 financial year has been significantly impacted by the ongoing social and economic effects of COVID-19. We have continued to support customers and colleagues and remained focused on the strength of our balance sheet.

Throughout the various lockdowns and restrictions we continued to receive requests for COVID-19 related payment deferrals and other requests for assistance. We have accommodated customers' requests wherever possible, and whilst we continued to receive these requests the percentage of customers benefitting from these plans has reduced significantly since the initial earlier stage of the COVID-19 pandemic.

Business and financial performance

New business origination in the period was lower at £122.9 million (2020: £153.3 million). Origination levels were impacted by the pandemic, particularly in the Business Finance Division where demand remained low as sole traders and small businesses deferred investment decisions and continued to make use of the Government's support schemes.

Origination increased in the Consumer Finance Division, as demand for used vehicles remained robust although we adopted a cautious approach to origination levels given the unusual dynamics witnessed in respect of the pricing of used vehicles as a result of the shortage of supply of new vehicles. The Group's continued diversification into Bridging Finance has been successful, with significantly higher originations in the first half of the 2021 financial year.

The quality of new business increased with 93% of lending written in our top four credit grades. This compares favourably with 80% in the first half of 2020.

Net operating income increased 4% to £14.7 million in the period largely driven by a 12% increase in net interest income which reflects a broadly stable margin of 6.7% (2020: 6.8%) on a higher average balance sheet.

Operating expenses, excluding impairment of goodwill and credit impairment charges, increased to £9.8 million (2020: £7.0 million) as we continued to scale to support remediation and capability enhancements to our operating and governance models.

The Group's cost to income ratio increased to 66.3% (2020: 49.2%), with the higher expenses more than offsetting the increased net operating income.

The credit impairment charge of £3.8 million (2020: £4.7 million) includes an additional £3.2 million provision increase for defaulted receivables (receivables that were either seriously in arrears or where the asset which acted as security for the receivable had been sold and a balance of the receivable remained outstanding), resulting from revisions to recovery expectations against those exposures. Besides this, the incremental credit impairment charge in the first half of 2021 was lower than in 2020, reflecting the broadly flat gross loan book in the six months to March 2021.

The Group generated a profit after tax of £1.0 million (2020: £2.0 million) which represents a return on equity of 3.6% (2020: 6.8%) and an earnings per share of 0.4 pence (2020: 0.8 pence).

Capital, funding and liquidity management

The Group remains extremely focused on ensuring it maintains sufficient levels of capital and liquidity. At 31 March 2021, the Group had a total capital ratio of 16.7% (September 2020: 16.8%) and a liquidity coverage ratio of 488% (September 2020: 673%).

The Group's diversified funding model comprises both retail deposits, wholesale funding and drawings from the Bank of England's Term Funding Schemes. At 31 March 2021, we held £338.3 million in deposits and had drawings of £59.6 million against the Term Funding Schemes. This is in addition to the £7.2 million of Tier 2 capital from the facility that we have with British Business Investments Limited.

Changes to the Board

As announced on 23 December 2021, the Group's Chairman Tim Franklin has notified the Board that he will retire as director and Chairman, effective no later than 31 January 2022. Marian Martin has also resigned as a director. Tim and Marian were both valued members of the Board.

As Chairman, Tim oversaw significant change in the business during his tenure and in recent months provided calm and considered leadership against what was an extremely challenging backdrop. His contribution to the Group has been significant and I thank him for his contributions and wish him the very best for the future.

We announced on 10 January 2022 that following a thorough search process, Simon Moore and Mark Sismey-Durrant were appointed as non-executive directors to the Board with effect from 9 January 2022.

Subject to regulatory approvals, Simon Moore will take up the role of the Chair of the Board and Board Nominations Committee and Mark Sismey-Durrant will take up the role of Senior Independent Director and interim Chair of the Board Risk Committee. Both bring a wealth of executive and non- executive experience, including within financial services, and we are extremely pleased to be welcoming them to PCF.

Financial targets

Published financial targets were withdrawn in June 2020 in response to the uncertainty caused by COVID-19. We are determined to return to providing targets and we now believe the most suitable time to reintroduce these will be with, or shortly after, the publication of our Annual Report & Financial Statements 2021. At this stage, our new auditor Macintyre Hudson will have completed their first annual audit and we will have more certainty in respect of performance for the first six months of the 2022 financial year; given this we anticipate being in a position to share details of our full year forecast for the 2022 financial year and how we expect profitability and the size of the balance sheet to develop over the duration of our planning horizon.

Outlook

Financial performance of the Group in the period was impacted by the ongoing economic and social effects of the pandemic, the initial costs associated with the commencement of remediation activity and our IT investment.

Furthermore, in the second half of the 2021 financial year the Group continued with the remediation and enhancement activities discussed herein. We will manage new business volumes to ensure the Group remains well capitalised throughout but before we return to normalised origination levels it is anticipated that there will be a temporary reduction in the overall size of the Group's loan book. Although these factors will continue to have a negative impact on capital generation and profitability in the near-term, it is absolutely necessary that we invest and manage the business appropriately for the future success of the Group.

The Board is confident that this investment coupled with the improvements in culture, governance and controls, and technology will allow the Group to overcome the current challenges and prepare the business to execute against its growth strategy which will be underpinned by a data-driven and digitalised approach to lending and loan origination. I will share more details of our future plans in the Annual Report & Financial Statements 2021.

GG Stran

Interim Chief Executive Officer

24 January 2022

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED BALANCE SHEET

The interim financial statements were approved and authorised for issue by the Board on 24 January 2022.

On behalf of the Board

GG Stran C Richardson

Director Director

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

NOTES TO THE INTERIM REPORT

1. Basis of preparation

The consolidated interim financial statements for the half-year to 31 March 2021 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 2020 (hereinafter referred to as the 'Annual Report & Financial Statements 2020') 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 did not express an opinion on the financial statements of PCF Group plc (disclaimer of opinion) 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 2020. In particular this going concern statement should be read in conjunction with the Emerging risks and uncertainties section of the Strategic Report which sets out those risks and mitigations.

The financial position of the Group, its cash flows, liquidity position and borrowing facilities at 30 September 2020 are set out in the Annual Report & Financial Statements 2020 and updated in the consolidated interim financial statements for the half-year to 31 March 2021.

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least the next twelve months. Accordingly, they continue to adopt the going concern basis in preparing these consolidated interim financial statements.

The directors have assessed the appropriateness of the going concern assumption taking into account all matters set out in the Strategic Report section of the Annual Report & Financial Statements 2020 and a detailed review of the Group's medium-term plan which includes increased remediation costs alongside a consideration of capital, funding and liquidity requirements. This consideration also included other business and emerging risks.

The Group made a £(4.8) million statutory loss before tax for the year ended 30 September 2020 and a £1.2 million profit before tax for the half-year to 31 March 2021. The Board has approved a medium-term plan in which the Group returns to profitability, but this is dependent on building scale to support an increased cost base. Remediation costs are expected to be incurred for at least the next twelve months. The growth in the medium-term plan requires capital to be raised. However, given the delay to the Annual Report & Financial Statements 2020, the disclaimer of auditor opinion and the temporary suspension of trading in the Group's shares, there are risks associated with our ability to raise capital and fund the planned future balance sheet growth.

Group performance, and the return to profitability in the medium-term plan, is underpinned by a number of key inputs and assumptions which cover:

This indicates that the Group's ability to operate as a going concern is subject to material uncertainties. As with any medium-term planning process, there is a risk that these assumptions do not materialise. As part of the review of the medium-term plan, the Board was presented with a severe but plausible downside scenario in which the Group is unable to raise external capital, and a number of sensitivities to the medium-term plan in which the Group's net interest margin, impairment losses and business volumes were subject to materially adverse performance. Even under the severe but plausible scenario it was demonstrated that the Group would continue to operate and meet current regulatory requirements for at least the next twelve months, albeit at the expense of balance sheet growth.

The Board has concluded based on the items below that the going concern basis of accounting was deemed appropriate:

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 2021 are consistent with those disclosed in the Annual Report & Financial Statements 2020.

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 are those relating to impairment losses on financial assets, effective interest rate and goodwill impairment. These significant accounting judgements, estimates and assumptions are referenced in note 1.7 of the Annual Report & Financial Statements 2020. Estimation uncertainty has been affected by the COVID-19 pandemic. Management's consideration of this source of uncertainty is outlined in the relevant sections of the Annual Report & Financial Statements 2020.

 Information used for significant estimates

The COVID-19 pandemic has continued to cause significant economic and social disruption. Key financial estimates are based on a range of anticipated future economic conditions described by internally developed scenarios. Measurement of expected credit losses, effective interest rate and goodwill are highly sensitive to reasonably possible changes in those anticipated conditions. Other reasonably possible assumptions about the future include a prolonged financial effect of the COVID-19 pandemic on the economy of the UK and other countries. 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 2020.

3. Standards issued but not yet effective

Minor amendments to IFRSs effective for the Group from 1 October 2020 have been issued by the International Accounting Standards Board (IASB). These amendments are expected to have no or an immaterial impact on the Group's financial statements.

4. Amendments to prior year comparatives

4.1 Fee income on credit impaired accounts

Amendments to the previously reported 2020 disclosures have been made relating to the treatment of other account charges and income on termination, in respect of defaulted agreements.

Amounts in the profit and loss account have been reclassified with the recognition of other fees and commissions of £1.5 million and a corresponding increase in impairment losses on financial assets for the same amount. Amounts on the balance sheet have been reclassified with a reduction in loans and advances to customers of £1.2 million and a corresponding reduction in allowance for impairment losses for the expected non-recoverable amount of fees outstanding as at the reporting period charged and capitalised on credit impaired accounts. These adjustments have no impact on the previously reported profit before or after tax, or on the net assets of the Group for the half-year to, and at, 31 March 2020.

4.2 Cash flows arising on debt instruments at FVOCI

Amendments to the previously reported 2020 Consolidated statement of cash flows have been made relating to the treatment of unrealised losses on debt instruments at FVOCI.

Amounts in the cash flow statement within Other non-cash items included in profit / (loss) before tax relating to the net change in FVOCI financial instruments of £(460,000) have been reclassified to Investing activities as net purchase of debt instruments at FVOCI. These adjustments have no impact on the previously reported Cash and cash equivalents of the Group at 31 March 2020.

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.

Segmental allocations were revised for the year ended 30 September 2020. Comparatives for the half-year to, and at, 31 March 2020 have been re-presented in accordance with IFRS 8, paragraph 29.

Segment Information

Segment Information (continued)

6. Interest income calculated using the effective interest method

7. Interest expense calculated using the effective interest method

8. Net fees and commission income

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 were as follows.

10. Income tax

The income tax rate is 21% (31 March 2020: 20%), representing the best estimate of the annual effective tax rate applied to operating profit before tax for the six months period ended 31 March 2021.

11. Loans and advances to customers

A reconciliation of the allowance for impairment losses for loans and advances, by class, is as follows:

12. Investment in subsidiary undertakings

The consolidated financial statements include the financial statements of the Company and its subsidiary

undertakings. The Company does not have any joint ventures or associates. Subsidiaries of the Company were as follows.

*Held by a subsidiary of the Company

The registered office of all subsidiaries incorporated in the United Kingdom is Pinners Hall, 105-108 Old Broad Street, London EC2N 1ER.

The registered office of Azule Finance Limited is Suite 104, 4/5 Burton Hall Road, Sandyford, Dublin 18.

The registered office of Azule Finance GMBH is Kirchtruderinger Straße 17, 81829 München, Germany.

All companies have an accounting reference date of 30 September except for Azule Finance GMBH which is 31 December.

Azule Limited, which owns 100% of Azule Finance Limited and Azule Finance GMBH was acquired by PCF Bank Limited on 5 November 2018.

13. Goodwill and other intangibles assets

Goodwill relates partly to the Group's Consumer Finance Division which arises from the acquisition of a subsidiary company, TMV Finance Limited ('TMV'), in November 2000, and the remainder from the acquisition of Azule Limited ('Azule') on 5 November 2018.

In performing the bi-annual impairment test, the Group assesses the economic performance of acquisitions, the future of the business acquired and their useful economic lives. The assessment ensures that growth and profitability are at least the same value as the amount that was paid in excess of the fair value of the assets and liabilities acquired. To assess this, the Board approved forecast (adjusted by the Board's current view of the impact of COVID-19 on the Group) has been used and discounted back to present value.

Both of the cash generating units ('CGUs') acquired are expected to continue to perform, but forecasting is only over the next 5 years. There is, therefore, requirement to capture expected growth and cash flows beyond these dates. To complete this there is a terminal valuation that is required to be performed to assess whether goodwill has been impaired or not. Terminal value often comprises a large percentage of the total assessed value.

The recoverable amount of the TMV and Azule CGU's at 31 March 2021 has been determined based on a value-in-use calculation using cash flow projections from financial budgets approved by the Board covering a five year period, and a terminal valuation based on the previous year's adjusted forecast. The projected cash flows have been updated to reflect the increased business over this current year which is aligned with recent demand and future expected growth in its products and services. The pre-tax discount rate applied to cash flow projections is 12.97% per annum over a five-year period and, for the period beyond, a terminal growth rate of 1% is used, being the expected long-term average growth rate for the Group within the economies in which it operates. It has been concluded that the values in use for TMV and Azule exceed their carrying value in use and the goodwill at 31 March 2021 remains appropriate for the carrying value for the TMV and Azule acquisitions.

The key assumptions used in the value in use calculations and the sensitivity to changes in assumptions are set out in the Annual Report & Financial Statements 2020 note 17.

Other intangible assets

The Group's other intangible assets consist solely of computer software and capitalised expenses incurred in the project regarding the Company's application to become a bank.

14. Financial instruments

14.1 Valuation techniques

The following table summarises the classification of the carrying amounts of the Group's financial assets and liabilities.

The Group holds certain financial assets at fair value grouped into Levels 1 to 3 of the fair value hierarchy, as explained below.

Level 1 - The most reliable fair values of financial instruments are quoted market prices in an actively traded market. The Group's Level 1 portfolio mainly comprises gilts, fixed rate bonds and floating rate notes for which traded prices are readily available.

Level 2 - These are valuation techniques for which all significant inputs are taken from observable market data. These include valuation models used to calculate the present value of expected future cash flows and may be employed when no active market exists, and quoted prices are available for similar instruments in active markets.

Level 3 - These are valuation techniques for which one or more significant inputs are not based on observable market data. Valuation techniques include net present value by way of discounted cash flow models. Assumptions and market observable inputs used in valuation techniques include risk-free and benchmark interest rates, similar market products, foreign currency exchange rates and equity index prices. Critical judgement is applied by management in utilising unobservable inputs including expected price volatilities and prepayment rates, based on industry practice or historical observation. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by market participants acting at arm's length.

The following table shows an analysis of financial instruments recorded at amortised cost by level of the fair value hierarchy.

The following table shows an analysis of financial instruments recorded at FVTPL by level of the fair value hierarchy:

14.2 Impairment allowance for loans and advances to customers

The table below shows the credit quality and the maximum exposure to credit risk based on the Bank's internal credit rating system and stage classification. The amounts presented are gross of impairment allowances.

At 31 March 2021 (unaudited)

At 30 September 2020 (audited)

An analysis of changes in the gross carrying amount and the corresponding expected credit losses ('ECLs') is, as follows: