PCF.L Regulatory News (PCF)

31 May 2022

PCF Group plc

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

Annual Report and Anticipated Lifting of Suspension

Publication of Annual Report and Accounts and Notice of Results

The Company announces that its Annual Report and Financial Statements for the financial year ended 30 September 2021 (Annual Report) has been published today. The Annual Report is available on the Company's website at https://pcf.bank/investors. Printed copies of the Annual Report will be posted to shareholders in early June 2022.

Business and Financial Highlights for the 12 months to 30 September 2021.  The Group reports:

Business and financial performance significantly impacted by remediation of legacy governance and control issues (Legacy issues 1)

• Statutory loss before tax of £(3.1) million (2020: loss of £5.1 million) 2.

• Adjusted profit before tax 3 of £0.7 million (2020: loss of £3.3 million) 2.

• Net operating income increased by 1% to £26.8 million (2020: £26.5 million) 2.

• Net interest margin 3 reduced to 6.6% (2020: 6.8%)2 reflecting the focus on higher quality lending.

• Net loans and advances decreased by 15% to £364 million (2020: £427 million)2, although average gross loan balances increased by 4%, which reduced the impact on net interest income.

• Staff and operating expenses increased 56% to £21.2 million (2020: £13.6 million), due to increased headcount and professional services costs, which included £3.6 million of expenses related to the remediation of legacy issues.

• Cost: income ratio 3 increased to 85.8% (2020: 58.1%).

• Credit impairment charges reduced to £6.7 million (2020: £14.4 million) mainly due to the non-recurrence of a £6 million provision increase on defaulted receivables in 2020, and also reflecting lower COVID-19 related provisions and a smaller overall loan portfolio.

• New loan origination totalled £187 million (2020: £272 million) and net loans and advances to customers reduced to £364 million (2020: £427 million) 2. Included within new loan origination is Azule Limited brokered 4 lending of £30 million (2020: £26 million).

• Retail deposits of £327 million remained stable in the period (2020: £342 million) 2.

• Statutory return on average equity 3 of (6.1)% (2020: (11.4)%) 2.

• Adjusted return on average equity 3 of 0.7% (2020: (8.2)%) 2.

• Loss per share of (1.2) pence (2020: (2.6) pence) 2.

Balance sheet strength underpinned by prudent capital and liquidity management

• Common equity tier 1 ratio 6 of 15.6% (2020: 14.7%) 2.

• Total capital ratio of 17.5% (2020: 16.4%) 2.

• Leverage ratio 5 of 11.1% (2020: 11.1%) 2.

• Liquidity coverage ratio of 904% (2020: 673%).

• Net stable funding ratio of 159% (2020: 145%).

Notes

1 Refer to the 2020 Annual Report and Financial Statements for more detail of 'legacy issues'. Also, refer to 'Remediation Activities' section on page 10 in the Annual Report for a brief overview.

2. The prior period balances have been restated or represented for the financial year. Refer to note 1.7 in the Annual Report for further details.

3 Refer to section non-IFRS performance measures on page 21 in the Annual Report for further details of the definition of this non-IFRS performance measure.

4 Azule brokered lending is not included on our balance sheet, but generates commission income in our profit and loss statement

5 Leverage ratio - using a transitional definition of Tier 1 capital.

6 Ratios are disclosed on a transition arrangement basis. Refer to page 84 in the Annual Report for regulatory capital and leverage ratios presented on a fully loaded basis.

Appointment of Chief Executive Officer

The Group is pleased to confirm the appointment of Garry Stran as its Chief Executive Officer with effect from 5 May 2022, following 12 months as Interim CEO. Garry Stran has led PCF Group through the remediation process and has been critical in driving through the necessary cultural and operational changes to put the bank on solid foundations for the future.

Anticipated Lifting of Suspension on Share Trading

The suspension of trading in the Group's shares on 1 April 2022 followed the delay in the publication of the 2021 Annual Report and Accounts. With their publication the suspension is expected to be lifted, allowing trading in the Group's shares to recommence today.

Investor Engagement

The Group takes it responsibility to communicate with shareholders extremely seriously. Following the publication of the 2021 full year results, it is anticipated that the Group will now move to a regular reporting timetable, with the 2022 interim results scheduled for the end of June. The executive team will host an 'Investor Meet Company' online meeting, as it has done previously, shortly after the announcement of those interim results to outline future plans for the business and to answer questions directly from investors. Further details of the exact timing of the event will be announced nearer to the time.

Quote from Simon Moore, Chair of the PCF Group Board:

"Though the 2021 financial year was a difficult one for the PCF Group, with significant events and subsequent change taking place in the business, I am pleased to report that since the end of this reporting period, amidst a challenging social and economic backdrop, the Group has achieved major milestones in its recovery programme".

"With strong progress made against our remediation and enhancement objectives, the Board and Executive Team can once again begin to focus on driving increased levels of automation and exploring product development to diversify and develop our franchise."

"I am pleased that Garry has now been appointed as CEO of the Company. Garry and the Executive team will continue the work started in the previous year, making PCF Bank ready for both the challenges and opportunities that lie ahead. His appointment provides the certainty and stability that are needed at the Group going forward."

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For further information, please visit https://pcf.bank/ or contact:

About PCF Group plc (www.pcf.bank)

Established in 1994, PCF Group plc is the AIM quoted parent of the specialist bank, PCF Bank Limited. Since commencing operations as a bank in 2017. The Group continues to focus on portfolio quality and lending to the prime segments of its existing markets. The Group will continue to identify opportunities to diversify its lending products and asset classes by setting up new organic operations or through acquisition.

PCF Bank currently offers retail savings products for individuals and then deploys those funds through its four lending divisions:

• Business asset finance which provides finance for vehicles, plant and equipment to SMEs;

• Consumer motor finance which provides finance for motor vehicles to consumers;

• Azule which provides finance to the broadcast and media industry; and

• Property bridging finance which provides loans to companies and sole traders investing in residential and commercial property.

Extracts from the Annual report

Chair's Statement

For the year ended 30 September 2021

Overview

My first statement as Chair comes as the UK and the world emerge from the extraordinary times brought about by the COVID-19 pandemic, which has impacted all our lives.

Though the 2021 financial year was a difficult one for the PCF Group, with significant events and subsequent change taking place in the business, I am pleased to report that since the end of this reporting period, amidst a challenging social and economic backdrop, the Group has achieved major milestones in its recovery programme.

The Group's financial performance reflects the challenges that were faced. While losses fell substantially when compared with 2020, we generated a loss before tax of £(3.1) million, which reflects an increase in expenses incurred from the Group's focus on delivering its remediation activities and the impact of a lower net interest margin.

The loan book reduced by 15% as a result of prudent management of origination levels to ensure the Group maintained an appropriate level of capital, above the regulatory requirement, throughout the period.

Implementation of corporate governance, control and cultural change

In the Annual Report & Financial Statements 2020 the circumstances that led to the suspension of trading in the PCF Group's shares in May 2021 were set out in detail. I am now pleased to report the following developments.

During the financial year a significant amount of time was spent remediating legacy governance and control issues. These control improvements have continued, with good progress on the financial control framework, and the completion of the core finance remediation activities.

We have continued to develop the Group's Risk Management Framework (RMF) and control environment, reflecting the recommendations of the external review of the RMF during the year. Since the year end this has included the hiring of colleagues to fill key second line of defence roles, enhancement of the Group's stress testing and credit analytics capabilities, and redevelopment of the Group's IFRS 9 and credit risk models. Further detail on this work is set out in the Board Risk Committee report on pages 63 to 65.

During the reporting year PCF Group appointed Garry Stran as the interim Chief Executive Officer and Caroline Richardson as Chief Financial Officer, both critical appointments to ensure the Group has a suitably experienced management team. These were followed by new hires in the key roles of Chief Risk Officer, Chief Operating Officer, General Counsel, and Chief of Staff.

Culture

Culture is at the heart of PCF Group's change; we believe in doing the right thing, in the right way for our customers, colleagues, owners and all other stakeholders. This is a bank where ideas are actively sought and welcomed from everyone. Every member of the team can bring fresh thinking and new observations, which may be used to enhance the changes in control and governance within the Group that are well underway. To be effective now and into the future, our change will be underpinned by a robust and positive culture.

In September 2021, the Board approved a new mission, purpose and values for the Group, which outline 'our risk culture', an approach that makes risk everyone's responsibility. These were developed by the new Executive Team in consultation with the Culture Working Group, which comprises colleagues from across the business.

Taking on board the findings from the legacy issues, the Board instigated a cultural change programme, focusing on understanding personal responsibility for risk, active listening and speaking up. The Group aims for colleagues to be risk aware and to strike the right balance between delivering on objectives, individual accountability and maintaining a safe and secure business.

We are a simple business and our new purpose and mission reflect this:

Our purpose

To create value for our stakeholders in a sustainable way.

Our mission

To be the go-to provider in our chosen markets and segments, offering great value products and outstanding service, while acting with integrity and sustainability in everything we do.

Our values

Our T.R.U.S.T. values reflect the standards we expect of all our colleagues and are fully incorporated into our reinvigorated performance management process.

Our risk culture statement

Everyone at PCF manages risk and takes decisions in the best interests of our stakeholders. We proactively raise awareness and take personal responsibility for managing risk, speaking up and doing the right thing.

Summary

It is in learning the lessons of the past, together, that we will ensure our success in the future. We have a resilient and able group of colleagues who have worked tirelessly over these difficult times to ensure the future success of PCF. It is through them that our new culture is being embedded, the progress of which is monitored at every Board meeting.

Balance sheet strength and financial performance

We provide a detailed analysis of the financial performance of the Group on pages 14 to 15. In addition, I wanted to take a moment to share some of my own key observations.

The cost of implementing the remediation programme and change across the Bank has had a significant impact on profitability and loan growth for the 2021 financial year. This has meant recruiting experienced staff into our control and finance functions and using the services of external specialists to support the remediation programmes.

Additionally, the Group has prudently managed its loan origination levels to ensure it maintained sufficient levels of capital and liquidity throughout the period. It is during times of heightened risk that suitable levels of capital and liquidity are particularly important for protecting the overall financial health of the Group. To this end, the total capital ratio at 30 September 2021 was 17.5% and the liquidity coverage ratio was 904%.

As a result of the management of loan origination levels, the net loan book reduced to £364 million (2020: £427 million). Furthermore, the Group's net interest margin has seen a reduction, particularly as a result of a high concentration of new loans in our top four credit grades.

These factors have contributed to an overall statutory loss before tax of £(3.1) million.

Events since 30 September 2021

To strengthen the board further, in addition to my appointment, PCF Group has also appointed Mark Sismey-Durrant to the role of senior independent director. A search is underway for the replacement of Marian Martin, chair of Board Risk Committee, who resigned from the board on 23 December 2021.

The progress made on the finance remediation resulted in a comprehensive reworking of the Financial Position and Prospects Procedures (FPPP), publication of our March 2021 interim financial statements and the lifting of the share trading suspension, which was announced on 25 January 2022. Regrettably, the historically overdue reporting has caused an unavoidable delay in the publication of this Annual Report & Financial Statements 2021, which has led to the shares being suspended from trading on Alternative Investment Market (AIM) again on 1 April 2022. We anticipate that this suspension will be removed upon the publication of this Annual Report & Financial Statements 2021. Following all the work we have done during the year in strengthening our control environment and finance department, we will resume to a more normal reporting cycle in conformity with our listed reporting requirements.

At the same date of publishing this report we have also issued a RNS and the context to this is: The combined impact of: (i) the significant remediation costs increasing our cost base; (ii) the reduced margin of our loan book as a result of COVID19 related decisions to restrict business to higher quality lending (with the resulting lower yield impacting on net interest margin); and (iii) the capital required to support a growing balance sheet, has resulted in projected regulatory capital constraints which in turn limits the volume of new lending we can originate. Limiting our lending volumes is not a satisfactory position and prevents us from generating sufficient profits to grow capital organically. As a result of all of these factors we have updated our short-term plan, which has led to revisions on certain key accounting judgments 7 and additional losses, that have further impacted our full year loss and capital position. Therefore, 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 8 over the next two months; at the same time, we are investigating our strategic opportunities including business combinations, with the Group having received an approach and entered into discussions with one party on these matters, as set out in the aforementioned RNS. This decision was taken, at a time when our shares were suspended from trading on AIM, acting in the best interests of all of our stakeholders and with the anticipation of the AIM suspension being lifted on the publication of this report.

7 See Board Audit Committee report for further details of changes in key accounting judgements relating to impairment of intangible assets impacting on our results for 2021 and 2020.

8 An open offer to allow all shareholders to participate is expected to follow in due course

Strategic vision

In the months since I joined the Group in January 2022, I have worked closely with the Executive Team to define the Group's strategic vision. In my role as Chair, I will ensure that the Board sets an appropriate strategy which the Executive Team will deliver in a way that is consistent with the values and culture of the Bank, and the interests of all stakeholders. This work will consider all strategic opportunities as set out above.

The work required to complete the key restorative actions has been the primary focus of the Board and Executive Team, consuming a significant amount of their time. We are now able to look forward once again.

With a number of key milestones achieved and strong progress made against our remediation and enhancement objectives, the Board and Executive Team can once again begin to focus on driving increased levels of automation and exploring product development to diversify and develop our franchise alongside reviewing strategic opportunities as set out above. Together we are supporting a strategy centred around an enhanced, more robust Risk Management Framework underpinned by a data driven, automated and digitalised approach to delivering products and services to our customers.

Achieving these strategic objectives will allow us to maximise the value we create, by adopting a modern approach to leveraging the Group's core competencies of originating and servicing loans whether as part of a standalone group or part of a business combination should we follow that route.

You can read more about the Group's strategic priorities in the Chief Executive Officer's Review on pages 9 to 12.

Whilst challenges remain, PCF Group has achieved many things over its 28-year history, and this period marks the beginning of a new chapter, one in which I am delighted to be involved.

I am confident that we have the right team in place, and I look forward to working with my colleagues at all levels within PCF Group and with our stakeholders, to create a modern, dynamic and differentiated business that can leverage its historical expertise and experience through a robust platform for growth.

Simon Moore

Chair

31 May 2022

Chief Executive Officer's Review

for the year ended 30 September 2021

My statement for this financial year comes only five months after we shared our Annual Report & Financial Statements 2020. Our journey towards a return to a normal reporting timeline continues with the publication of our March 2022 Interim Financial Statements scheduled for June 2022. Whilst only five months have passed there has been considerable geopolitical change across the world feeding into the macroeconomic backdrop which impacts on our business. Overshadowing this, has been the human cost of recent events which brings a sense of perspective to all that we do. 

Once again, I apologise on behalf of the Board for the legacy issues and the impact of this on shareholders. I would like to convey my thanks to customers and shareholders for their continued patience, and to my colleagues at PCF Group along with our external partners for their continued support.

The 12 months to September 2021 proved a difficult and challenging period for both people and businesses in the UK due to the continuing social and economic impacts of the COVID-19 pandemic. As we emerge from this time of uncertainty into another there will be new challenges for our customers. Inflation has risen substantially above the government's long-term goal and the geopolitical situation compounds this situation. As a result, there will almost certainly be further increases in interest rates as the Bank of England attempts to bring inflation under control. Against this backdrop we will continue to support our customers, some of whom may experience payment difficulties, whilst continuing to offer good value products.

In his statement on pages 5 to 8, our new Chair Simon Moore discussed the improvements to the Group's governance and culture, and I will further expand on our strategic vision and priorities below. Before that, I would like to share some key points about our financial performance for the year.

Summary of Group's performance

The Group's financial performance for the period reflected the challenges of both the external environment and the significant events and change that occurred within the Group. At a headline level, the Group generated a statutory loss before tax of £(3.1) million.

This loss was driven by a 56% increase in staff and operating expenses as a result of our remediation activity in respect of legacy issues and the need to invest in the operating model of the business which drove increased staffing and professional services costs.

 Following a reassessment of goodwill, the Group recognised an additional £1.1 million impairment, writing off the balance to nil. This was partially offset by £0.9 million profit on the sale of credit impaired loans.

Furthermore, the Group's net interest income was 1% higher than prior year, as increased average loan balances broadly offset the reduction in net interest margin. The net interest margin reduced to 6.6% (2020: 6.8%), primarily as a result of the decision at the outset of the COVID-19 pandemic to originate lending in our top four credit grades. This change was designed to protect the Group from the potential effects of the economic downturn on arrears and defaults. This has proven successful, however, it has had a detrimental impact on margin due to the lower rates associated with these assets, and the runoff of pre-pandemic higher yielding loans.

The Group has since reverted to a more balanced risk profile for new business to allow us extract higher margins, which we expect to result in an improvement in overall net interest margin over time. Moreover, we expect that we will have further opportunities to increase margin compared to the Group's historical experience, as our improved pricing for risk capability is complemented by the enhancements made to our arrears management processes.

Whilst the average gross loan book over the course of 2021 was 4% up on the 2020 average, we saw a material reduction over the second half of the year as we prudently managed loan originations to ensure we maintained an appropriate level of capital. Net loans and advances to customers fell to £364 million (2020: £427 million) as a result.

The credit impairment charge for the year reduced to £6.7 million, mainly due to the nonrecurrence of a £6 million provision increase on defaulted receivables in 2020, but also lower COVID-19 related provisions and the overall reduction in the Group's loan portfolio.

On an adjusted basis 9, the profit before tax for the year was £0.7 million, compared with a loss of £(3.3) million in 2020 reflecting the above factors.

9 See Review of Group's Performance for details of adjustments

On a statutory basis, the loss before tax for the year was £(3.1)million, compared with a loss of £(5.1)million in 2020.

As a result of our approach to capital management and loan originations, our total capital ratio remained consistently in excess of regulatory requirements and on 30 September 2021 was 17.5% (2020: 16.4%). As we move through the 2022 financial year, capital will be impacted by elevated operating expenses, and the effect on the Group's net interest margin, reflecting the decision to focus on higher quality lending at the start of the COVID-19 pandemic, and the runoff of pre-pandemic higher yielding loans. Our prudent management of origination levels and capital has continued, and we expect new originations in 2022 to be broadly similar to 2021 though we expect the second half of the year to be stronger than the first half as we deploy capital released through redemptions and focus on establishing momentum in our new business opportunities.

The continuation of losses is unsatisfactory; however, it is also unavoidable as we seek to establish a firm foundation for future growth. I reiterate that we are committed to doing everything possible to position the Group to exploit the undoubted opportunities that exist in our chosen markets to deliver strong and sustainable returns for shareholders. To achieve this aim, it has been imperative to invest in the business for the future whilst at the same time addressing our legacy issues.

Further details of the performance by Business segment and our regulatory capital position is set out below in the 'Review of Group Performance' section.

Remediation activities

I updated shareholders earlier in the year of the actions we have taken to improve our core finance processes which resulted in a comprehensive refresh to the Group's FPPP memorandum, a major milestone in the Group's recovery programme. The further control improvements undertaken in Finance together with a reassessment of the carrying value of intangible assets have resulted in restatements which are set out in detail in Note 1.7. It is disappointing that we still have legacy adjustments from prior periods though also reassuring, with the embedding of our Risk Management, and development of the Financial Control Frameworks, additional resourcing, and with our new auditors in place, that we can now have firmer finance foundations for the future.

We have also commenced an extensive cultural improvement programme to ensure our colleagues feel comfortable and empowered to speak up and challenge decisions should they have concerns. In many ways this reluctance to challenge was a key driver of many of the issues that we have faced, and the significant effort put into cultural change is intended to ensure that there is never a repeat of these events.

In addition, longer term transformation and enhancement programmes have been mobilised. These will embed the enhanced comprehensive Risk Management Framework across the Group, delivering further finance transformation that is focused on controls and more effective utilisation of data. They will also include a continuation of the investment in our IT system, to develop a modern digital operating system that works on the principle of data driven strategies delivered through automated processes and decision making.

Progress against 2021 strategic objectives

In my statement in the Annual Report & Financial Statements 2020, I outlined that our objectives for 2021 were to maintain and stabilise the business following the pandemic, to maintain credit quality and to continue to invest in our IT infrastructure.

Progress against our strategic initiatives has been impacted by the amount of management time and focus that has been directed to the legacy issues and their remediation. Nevertheless, we have remained focused on managing the quality of our lending and have continued to invest in our IT infrastructure.

I am very encouraged that we have continued to make progress against many of the initiatives that we launched in 2020, in particular the work to improve the levels of automation and self-service. In the period up to the publication of this report, our successes include:

• The completion of an automated collections process and a customer self-service platform on the Bank's website, and an increased proportion of automated affordability assessments.

• Revised strategies for the management of our accounts in arrears including the introduction of a strategy for the sale of non-performing loans, thus enabling certainty in respect of loss rates and the effective use of capital and operating resources.

• Investment in further developing complaint systems and processes with a focus on root cause analysis to drive improvements and further enhance the customer's experience.

• Achieving Platinum in the 'Feefo' Trusted Service Awards, for our services to savings customers.

• The introduction of data science into the business through the establishment of operational data teams.

• This has enabled insights to develop and execute against our aim to be a totally data driven business in respect of decision making.

• The commencement of diversification of our Azule subsidiary into general brokerage to leverage their skill set and market position whilst not detracting from their specialist positioning in the Broadcast and Media sector.

• Enhanced performance management and appraisal processes for our colleagues, supporting the change in culture to one of transparency, speaking up, and taking responsibility for risk management at a personal level. This is the first step on our journey to transition to a group of colleagues operating as a high performing collective where personal responsibility, empowerment and accountability is embedded in everything we do.

These successes are an encouraging start on our journey towards achieving our strategic vision.

Journey to 'remarkable' - the Group's strategic vision

Internally we have been using the term 'repair to remarkable' to define our strategic journey. With good progress made on the key remediation activities, and the improvements to culture, governance and controls and technology, more of our time and effort is now focused on the transformation and enhancements required to become 'remarkable'.

I define remarkable as a business which has the following characteristics:

• A great place for great people to work.

• A brand that is trusted as a good corporate citizen, operating in a compliant and sustainable manner that does the right things and a culture which reflects this.

• Has a zero marginal cost operating model.

• Is a data driven business with customers at the heart of it.

• Has human interventions in processes only where it demonstrably adds value.

• Has strong product and market diversification.

• Has certainty over recurring revenues.

• Is financially and morally sound.

We are striving to create a business that has all these characteristics. To achieve this, our major focus areas for 2022 are:

• A continued focus on strong and prudent capital management that will be flexible to adapt to a range of outcomes.

• To support a growing business, we will look to execute capital raising or other strategic opportunities as outlined by in the Chair's report, all in the best interests of our stakeholders.

• Completion of our remediation and key enhancement activities by the end of 2023.

• Continually improving customer proposition focused on speed of decisioning, 'no fuss' processes and excellent service.

• Continued investment in the IT infrastructure, including a significant focus on data engineering and implementing further opportunities for the use of cloud data.

• Embedding of our new culture in the business and in all stages of our colleague's development within the Group.

• Further development of our new performance management system for colleagues supporting our revised risk culture and a clear alignment of performance to remuneration.

• The development of our strategy to create a diversified range of distribution channels and new products.

I look forward to sharing a progress update on these initiatives in future reporting periods.

Outlook

Forward looking guidance in respect of the 2022 financial year:

• Remediation related costs in 2022 are expected to be at a similar level to 2021.

• The Group is actively exploring capital raise and strategic opportunities (as set out in the Chair's report) that will allow us to accelerate our lending aspirations, though we will continue to carefully manage origination levels in the near term as part of our capital management strategy.

• New origination levels are expected to be higher in the second half of the year compared with the first half, and broadly similar for 2022 compared with 2021.

• The Group's margin will continue to see compression in the near term as a result of the concentration of new lending in the top four credit grades during the COVID-19 pandemic. As we return to a normal risk appetite margin will improve.

• The combination of these factors will give rise to a loss for the year which is anticipated to be significantly in excess of the loss for period ending 30 September 2021.

In driving the business forward, it is important to acknowledge the following challenges: Whilst we have made substantial progress in our remediation journey, the scope of the remediation required to meet the standards of a regulated business is significant in terms of time, cost and effort. In limiting the volume of new lending due to of capital constraints (as explained in the Chair's statement), we also limit our ability to generate operating income and profits to provide the growth capital necessary to increase the size of our balance sheet to exploit economies of scale. The Board and management remain confident of the Group's potential to leverage its core strengths in origination and servicing of loans to generate value for shareholders but subject to the ability to generate or obtain capital to support growth

It has been a challenging year but the quality of my colleagues and their dedication to dealing with the challenges we have faced has been inspirational. Against the most difficult of backdrops, they have been magnificent, and I look forward to delivering the next phase in our strategic journey with them.

Garry Stran

Chief Executive Officer

31 May 2022

Independent Auditor Report

Independent Auditor Report to the Members of PCF Group plc

For the purpose of this report, the terms "we" and "our" denote MHA MacIntyre Hudson in relation to UK legal, professional and regulatory responsibilities and reporting obligations to the members of PCF Group plc. For the purposes of the table on pages xx to xx that sets out the key audit matters and how our audit addressed the key audit matters, the terms "we" and "our" refer to MHA MacIntyre Hudson. The "Parent Company" or "Company" is defined as PCF Group plc. The relevant legislation governing the Parent Company is the United Kingdom Companies Act 2006 ("Companies Act 2006").

Qualified Opinion

We have audited the financial statements of PCF Group plc and its subsidiaries (together the "Group" or "PCF Group") for the year ended 30 September 2021. The financial statements that we have audited comprise:

• The Consolidated Income Statement for the year then ended.

• Consolidated Statement of Comprehensive Income for the year then ended.

• Consolidated Balance sheet as at 30 September 2021.

• Company Balance sheet as at 30 September 2021.

• Consolidated Statement of Changes in Equity for the year then ended.

• Company Statement of Changes in Equity for the year then ended.

• Consolidated Statement of Cash flows for the year then ended.

• Notes 1 to 35 of the financial statements, including the accounting policies.

The financial reporting framework that has been applied in the preparation of the Parent Company's and Group's financial statements is applicable law and International Financial Reporting Standards as adopted in the United Kingdom ("UK adopted IFRS").

In our opinion, except for the effects of the matter described in the Basis of Qualified Opinion section, the financial statements:

• give a true and fair view of the state of the Group's and Parent Company's affairs as at 30 September 2021 and its loss for the year then ended;

• have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted in the United Kingdom; and

• have been properly prepared in accordance with the requirements of Companies Act 2006.

Our opinion is consistent with our reporting to the Audit Committee.

Basis for qualified opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. 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 are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed public interest entities, and we have fulfilled our ethical responsibilities in accordance with those requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.

The matter set out below is material to the financial statements, leading to our qualified opinion on the financial statements.

Opening balances for the period ended 30 September 2021 - Expected Credit Losses

We performed specific audit procedures on the opening balances in accordance with the requirements of International Auditing Standard 510 Initial Engagements - Opening Balances. In performing these procedures, our objective was limited to those matters that would relate to our audit of the financial statements for the year ended 30 September 2021.

We were not able to perform all the procedures required to obtain sufficient appropriate audit evidence in relation to Expected Credit Losses as at 30 September 2020. As such we are unable to determine whether adjustments might have been necessary in respect of the Expected Credit Losses as at 30 September 2020 and the impact that these might have had on the results for the year ended 30 September 2021.

Material uncertainty relating to going concern

We draw your attention to Note 1.2 to the financial statements and the going concern statement in the Directors report which indicate that management has assessed that there are material risks which have an impact on its medium-term plan. These material risks include increased remediation costs alongside a consideration of capital, funding, and liquidity requirements. This indicates that a material uncertainty exists that may cast significant doubt upon the Company's ability to continue as a going concern.

Our opinion is not modified in respect of these matters.

In auditing the financial statements, we have concluded that the Directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

PCF Bank Limited is a wholly subsidiary of PCF Group plc, and the main operating entity of the PCF Group. The Directors of the PCF Group have prepared a going concern assessment and a medium-term plan which has a high degree of management judgement. Key to the medium-term plan is the ability of the PCF Group to raise capital and fund future balance sheet growth. The material risks associated with this plan are set out in Note 1.2 to the financial statements. For further details, refer to the Strategic Report on page 25 and Directors report on page 68.

Our evaluation of the Management's assessment of the PCF Group's and Parent Company's ability to continue to adopt the going concern basis of accounting included:

• Using our knowledge of the strategic objectives of the PCF Group, including its material subsidiaries, the financial services industry, the financial services regulatory environment and the general economic environment to identify inherent risks in the business model and how such risks might affect the financial resources or ability to continue operations over the going concern period.

• Understanding and evaluating the current and forecast financial position, regulatory capital adequacy and liquidity, including internal stress tests performed on these.

• Evaluation of the strategic plans of the Group, and the supporting financial forecasts.

• Obtaining and reading correspondence between the Company and its UK regulators, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

• Obtaining and reading reports issued in connection with the remediation activities of the Group.

• Obtaining and reading minutes of meetings of those charged with governance.

• Making enquiries with management to understand the steps taken so far in respect of the planned capital raise.

• Obtaining confirmation from the Directors of Somers Limited in respect of their intention to invest capital in PCF Group plc and inspection of the term sheet in place between the PCF Group plc and Somers Limited.

• Making enquiries of the Directors of the Group to understand the period of assessment considered by them, the assumptions they considered and the implication of those when assessing the Group's and Parent Company's future financial performance.

• Assessing the sufficiency of the Group's capital and liquidity and evaluating the results of management stress testing, including consideration of principal and emerging risks on liquidity and regulatory capital.

• Testing the mathematical accuracy and appropriateness of the model used to prepare the forecasts.

• Reading and evaluating the adequacy of the disclosures made in the financial statements in relation to going concern and the material uncertainty connected to going concern.

We concur with management, that the Group has adequate capital resources and their conclusion on the use of the going concern basis of accounting as appropriate. We also concur with management that a material uncertainty risk exists in respect of the medium-term plan which has an impact on going concern.

Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report.

Overview of our audit approach

Key Audit Matter

The key audit matter(s) we identified in the current year were:

• Risk of misstatement of expected credit losses on loans and advances to customers.

• Impact of opening balances on the year ended 30 September 2021.

Materiality

Overall materiality for the Group financial statements was £246,000 which was determined based on 0.525% of adjusted net assets

Performance Materiality was set at 60% of materiality.

First year transition

This is the first year we have been appointed as auditor to the Group and Parent Company. We undertook the following transitional procedures:

• Held meetings with senior management to gain an understanding of the Group and Parent Company's operations and strategic objectives.

• We held meetings with the predecessor auditor, including reviewing their audit working papers for the prior financial period to gain an understanding of the Group and Parent Company's processes, their audit risk assessment, and the design of their audit approach for the year ended 30 September 2020.

• Held meetings with and reviewed correspondence between the regulated entities of the Group and their UK regulators, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

• Read the reports issued in connection with the remediation activities of the PCF Group.

The results of these procedures were used to inform our audit planning and risk assessment for our audit for the year ended 30 September 2021.

Due to the disclaimer of opinion issued by the predecessor auditor on the financial statements for the year ended 30 September 2020, we could not obtain sufficient appropriate audit evidence regarding the opening balances from review of the predecessor auditor working papers in respect of their audit for the year ended 30 September 2020. We therefore performed specific audit procedures on the opening balances in accordance with the requirements of International Auditing Standard 510 Initial Engagements - Opening Balances. We considered this to be a key audit matter. See key audit matter number 2 below.

Group audit scope

We identified significant components based on their significance to the Group balance sheet and operations. We performed full scope audit work on the Parent Company and significant components. 

The components not covered by our audit scope were subject to analytical procedures to confirm our conclusion that there were no significant risks of material misstatement in the aggregated financial information.

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 and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those matters which had the greatest effect on:

• the overall audit strategy;

• the allocation of resources in the audit;

• and directing the efforts of the engagement team and, as required for public interest entities, our results from those procedures.

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. We have determined the matters described below to be the key audit matters to be communicated in our report.

1. Risk of misstatement of expected credit losses ("ECL") on loans and advances to customers

Key audit matter description

Loans and advances to customers net of ECL: £363,992,000 (2020: £427,003,000). Expected credit losses recognised on loans and advances to customers: £12,370,000 (2020: £18,632,000).

The determination of expected credit loss under IFRS 9 is an inherently judgmental area due to the use of subjective assumptions and a high degree of estimation. Management uses a model to determine ECL. The key areas of judgement are:

• Staging - Qualitative and quantitative criteria applied to effectively identify significant increase in credit risk and determination of a default.

• Assumptions in relation to the probability of default (PD), Loss given default (LGD) and Exposure at default (EAD) models for computing ECL. Appropriateness of the data used in relation to these models for computing ECL.

• Management overlays to take into account macroeconomic factors that have an impact in the calculation of the ECL

• Post model adjustments or overlays to capture matters that are not covered by the IFRS 9 model.

The Company's accounting policy on ECL is set out in Note 1.5.2 of the financial statements.

How the scope of our audit responded to the key audit matter. We performed the following procedures:

Validation of design of controls around the ECL model.

• We performed a walkthrough of the design of the Group's processes in relation to provisioning. We noted that the ECL model and the governance processes around it had been significantly revised over the course of the period a result of the overall remediation program being undertaken by the PCF Group. As such we adopted a fully substantive approach.

Model validation

• We tested the design of the ECL model for compliance with IFRS 9 requirements, including ITGCS operating within the Group that are relevant to the determination of ECL.

• Tested the appropriateness of the Group's impairment policy against the requirements of IFRS 9. We have also assessed the appropriateness of the Significant Increase in the Credit Risk (SICR) criteria determined by management in relation to loans and advances to customers.

• Tested the completeness of data input into the IFRS 9 model. This included evaluation of the data quality by agreeing data points used in ECL calculation to relevant source systems.

• We confirmed that the output of the model, specifically any ECL charge or reversal was correctly reflected in the general ledger and ultimately the financial statements.

Test of details

• For sample of exposures, we tested the appropriateness of the staging of the exposure by testing the correct application of SICR criteria. Our work in this regard including validating the payment history of the exposure to ensure that the exposure has been correctly classified as either stage 1, 2 or 3.

• We tested the process of allocation of customer loan repayments and identification of missed payments. This included testing on a sample basis that receipts are allocated to the correct loan accounts and missed payments are identified on a timely basis and appropriately reported. 

Use of modelling and credit specialist

• We engaged with and instructed independent modelling and credit risk specialists to test the assumptions, inputs and formulae used in relation to models used for computing ECL provision. This work included evaluation of economic scenarios considered by management and comparing these to other scenarios from a variety of external sources.

• Performed a sensitivity analysis in relation to key management assumptions and judgements to assess the impact of these on the ECL provisions as at year end.

• Tested the appropriateness of the staging of exposures including the determination of the PD, EAD and LGD considered by management in the calculation of ECL.

• Tested post model adjustments and overlays. This included assessing the completeness and appropriateness of these adjustments.

Disclosures

• We have assessed the appropriateness of the disclosures in the financial statements for the year ended 30 September 2021.

Key observations

We found the approach taken in respect of ECL to be consistent with the requirements of IFRS 9 and that the assumptions and judgements made by management in the application of the ECL model were reasonable and supportable. 

2. Opening balances for the year ended 30 September 2021

Key audit matter description

Due to the disclaimer of opinion issued by the predecessor auditor on the financial statements for the year ended 30 September 2020, we could not obtain sufficient appropriate audit evidence regarding the opening balances from the review of the predecessor auditor's working papers in respect of their audit for the year ended 30 September 2020.

We performed specific audit procedures on the opening balances in accordance with the requirements of International Auditing Standard 510 Initial Engagements - Opening Balances. In performing these procedures, our objective was limited to those matters that relate to our audit of the financial statements for the year ended 30 September 2021 and should not be viewed as connected to the audit work completed by the predecessor auditor on the financial statements for the year ended 30 September 2020.

How the scope of our audit responded to the key audit matter

We performed the following procedures:

• Obtained from management the closing trial balance, consolidation workings and related working papers used to prepare the financial statements for the year ended 30 September 2020. We reconciled these to the published financial statements of the Group and Parent Company for the year ended 30 September 2020.

• Obtained and checked the balance sheet substantiation reconciliations performed by management in respect of the balances as at 30 September 2020.

• Corroborated to third party evidence on a sample basis for balances held as at 30 September 2020. This included agreeing bank balances to third party bank statements.

• Reviewed key judgements and estimates, mainly focusing on the judgments made in respect of the determination of the valuation of investment in subsidiary and recognition of the deferred tax asset as at 30 September 2020.

• Made enquiries of management, those charged with governance and obtaining explanations which we deemed to be necessary for completion of our procedures.

• Obtained and read correspondence between the Group and its UK regulators, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

• Obtained and read reports issued in connection with the remediation activities of the PCF Group.

Key observations

The results of these procedures were used to inform our audit planning and risk assessment for our audit for the year ended 30 September 2021.

The significant findings arising from our work are:

• We were not able to perform all the procedures required to obtain sufficient appropriate audit evidence in relation to Expected Credit Losses as at 30 September 2020.

The impact of these matters is stated in the Basis of Qualified Opinion section of our report. We did not identify any other matters that impacted our audit work for the year ended 30 September 2021.

Our application of materiality

Our definition of materiality considers the value of error or omission on the financial statements that, individually or in aggregate, would change or influence the economic decision of a reasonably knowledgeable user of those financial statements. Misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Materiality is used in planning the scope of our work, executing that work and evaluating the results.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Overall Materiality £246,000

Basis of determining overall materiality

We determined materiality based on 0.525% of adjusted net assets of the Company.

The shares of the Parent Company are currently suspended for trading on the London AIM. We have considered the primary users of the financial statements to be shareholders of the Parent Company, customers of the PCF Bank Limited and the UK regulators (FCA and PRA).

In the period ended 30 September 2021 and subsequent months, the PCF Group has been implementing changes to remediate issues that led to the delay in the publication of the 30 September 2020 financial statements of the PCF Group. This has resulted in operational changes that have an impact on the financial performance of the PCF Group, in view of this we have concluded that the key area of focus of the users of the financial statements would be whether Group has adequate capital resources. We have therefore considered net assets as an approximation of capital resources of Group.

We selected adjusted net assets to exclude those balances that we determined in our professional judgement not to have an impact on our audit sampling.

Performance materiality £147,600

Basis of determining overall performance materiality

We determined performance materiality based on 60% of overall materiality.

Performance materiality is the application of materiality at the individual account or balance level, set at an amount to reduce, to an appropriately low level, the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

In determining performance materiality, we considered the several factors including the following:

• That the current period is the first financial period of our appointment as auditor of the Group and Parent Company.

• Matters that led to the delay in the publication of the 30 September 2020 financial statements.

• Our understanding of the control environment of the Group and Parent Company at this stage.

Error reporting threshold

We agreed to report any corrected or uncorrected adjustments exceeding £12,300 to the Audit Committee as well as differences below this threshold that in our view warranted reporting on qualitative grounds.

The scope of our audit

Our audit was scoped by obtaining an understanding of the Group and Parent Company and its environment, including the system of internal control, and assessing the risks of material misstatement in the financial statements. We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias on significant accounting judgments and accounting estimates by the Directors that may have represented a risk of material misstatement.

We considered the matters that led to the delay in publication of the financial statements for the year ended 30 September 2020, and the remediation activities undertaken by the PCF Group. We noted that the control environment has continued to evolve during the period and subsequent to period end as those charged with governance continue to implement the remediation plan. Therefore, we did not seek to rely on controls and our audit approach was fully substantive.

Other information

The other information comprises the information included in the annual report other than the financial statements and our auditor's report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements, or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. 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.

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

• the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

• the Strategic Report and the Directors' Report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors' Report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us 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 by branches not visited by us; or

• the financial statements are not in agreement with the accounting records and returns; or

• certain disclosures of directors' remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

Corporate governance statement

We have reviewed the directors' statement in relation to going concern, longer term viability and that part of the Corporate Governance Statement relating to the entity's voluntary compliance with the provisions of the UK Corporate Governance Code.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit:

• Directors' statement with regards the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on page 68;

• Directors' explanation as to their assessment of the group's prospects, the period this assessment covers and why the period is appropriate set out on page 68;

• Director's statement on whether it has a reasonable expectation that the group will be able to continue in operation and meets its liabilities set out on page 68;

• Directors' statement on fair, balanced and understandable set out on page 70;

• Board's confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 69;

• Section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on page 69; and;

• Section describing the work of the audit committee set out on page 56.

Responsibilities of the Directors

As explained more fully in the Directors' responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, 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 Company'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 Company or to cease operations, or have no realistic alternative but to do so.

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 (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and 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 these financial statements.

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud.

Because of the inherent limitations of an audit, there is a risk that we will not detect all irregularities, including those leading to a material misstatement in the financial statements or non-compliance with regulation. This risk increases the more that compliance with a law or regulation is removed from the events and transactions reflected in the financial statements, as we will be less likely to become aware of instances of non-compliance. The risk is also greater regarding irregularities occurring due to fraud rather than error, as fraud involves intentional concealment, forgery, collusion, omission or misrepresentation.

The specific procedures for this engagement and the extent to which these are capable of detecting irregularities, including fraud is detailed below:

• Obtaining an understanding of the legal and regulatory frameworks that the Group and Parent Company operates in, focusing on those laws and regulations that had a direct effect on the financial statements. The key laws and regulations we considered in this context included the Companies Act 2006, regulations and supervisory requirements of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) and UK tax legislation.

• Reviewing key correspondence with regulatory authorities including the PRA, FCA and HMRC.

• Enquiry of management to identify any instances of non-compliance with laws and regulations.

• Reviewing financial statement disclosures and testing to supporting documentation to assess compliance with applicable laws and regulations.

• Enquiry of management around actual and potential litigation and claims.

• Enquiry of management to identify any instances of known or suspected instances of fraud.

• Discussing among the engagement team regarding how and where fraud might occur in the financial statements and any potential indicators of fraud.

• Reviewing minutes of meetings of those charged with governance.

• Reviewing internal audit reports of the Company.

• Performing audit work over the risk of management override of controls, including testing of journal entries and other adjustments for appropriateness, evaluating the business rationale of significant transactions outside the normal course of business, and reviewing accounting estimates for bias.

• Challenging assumptions and judgements made by management in their significant accounting estimates, in particular with respect to provisions for impairment of loans and amounts advanced to customers.

• Obtained and read reports issued in connection with the remediation activities of the PCF Group and the Company. We considered the results of these reports in our audit planning and risk assessment. Our audit work was not designed to test the design and implementation of the remediation plan nor its operating effectiveness.

There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. The engagement team includes audit partners and staff who have extensive experience of working with listed companies and with those in the banking sector, and this experience was relevant to the discussion about where the risk of irregularities, including fraud may arise.

A further description of our responsibilities for the financial statements is located on the FRC's website at:

www.frc.org.uk/auditorsresponisbilities

Other requirements

We were appointed by the Directors on 23 December 2021 to audit the financial statements of the Group and Parent Company for the year ended 30 September 2021 and subsequent financial periods. The period of total uninterrupted engagement is accordingly one year.

We did not provide any non-audit services which are prohibited by the FRC's Ethical Standard to the Company, and we remain independent of the company in conducting our audit.

Use of our report

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Rakesh Shaunak FCA

Senior Statutory Auditor

for and on behalf of MHA MacIntyre Hudson

Statutory Auditor

London

31 May 2022

Consolidated Income Statement

 For the year ended 30 September 2021

Consolidated Statement of Comprehensive Income

For the year ended 30 September 2021

The accounting policies and notes on pages 90 to 154 form part of, and should be read in conjunction with, these financial statements. All activities in the current and prior year relate to continuing operations.

*The prior period balances have been restated or represented for the financial year. Refer to note 1.7 for further details

*The prior period balances have been restated or re-presented for the financial year. Refer to note 1.7 for further details.

The Company reported a profit for the financial year ended 30 September 2021 of £237,000 (2020: profit of £46,000).

The financial statements were approved and authorised for issue by the Board on 31 May 2022.

On behalf of the Board

GG Stran C Richardson

Director Director

The accounting policies and notes on pages 91 to 160 form part of, and should be read in conjunction with, these financial statements.

Consolidated Statement of Cash Flows

For the year ended 30 September 2021

*The prior period balances have been restated or re-presented for the financial year. Refer to note 1.7 for further details.

Notes to the Financial Statements

For the year ended 30 September 2021

1 Basis of preparation and significant accounting policies

1.1  Corporate information

PCF Group plc (the Company) is a public company limited by shares, registered in England and domiciled in the UK together with its subsidiaries (collectively, the 'Group'). The Company's ordinary shares are listed on the Alternative Investment Market (AIM) of the London Stock Exchange. The Company's registered office is at Pinners Hall, 105-108 Old Broad Street, London EC2N 1ER.

The wholly owned subsidiary, PCF Bank Limited (the 'Bank'), is a specialist bank, offering retail savings products for individuals and lending products for consumers and businesses to finance the purchase of motor vehicles, plant, bridging finance, equipment, and property.

1.2 Basis of preparation

The consolidated Financial Statements of the Group and the separate Financial Statements of the Company have been prepared on a historical cost basis, except for debt financial instruments measured at Fair Value through Other Comprehensive Income (FVOCI), and derivatives measured at fair value through profit or loss (FVTPL). They are presented in the Group and the Company's functional currency pound sterling (£) and all values are rounded to the nearest thousand (£'000), except where otherwise indicated. No Income Statement is presented for the Company as permitted by section 408 of the Companies Act 2006.

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. 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 are set out in the Financial Statements and updated in the Strategic Report and Risk Management Report. The Group's policies and processes for managing its Risks are described in the Strategic Report and the Risk Management Report.

In undertaking a going concern review the Directors have reviewed the short-term financial plan to November 2023 (the Review Period). These financial projections form part of the Group's strategic plan (the Plan) which contains both a base case and downside scenarios which involved stressing various assumptions to the Plan. In all 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 and the associated capital raising risks may be further exacerbated by the current geopolitical situation.

To mitigate the regulatory capital risks and the restriction on business lending, 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 over the next two months and at the same time we are also investigating other strategic opportunities as outlined in the Chair's statement.

Should the Group not be successful in achieving its capital raising nor 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 are 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 of the Group's ability to continue as a going concern. The Board is confident 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 31 May 2023 being at least the next twelve months from the date of approval on the annual report and financial statements. On this basis the Directors continue to adopt the going concern basis in preparing these accounts.

1.7 Prior period adjustments

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 Statement of financial position extract as at 30 September 2020

Consolidated statement of cashflows extracts as at 30 September 2020

Consolidated income statement extracts as at 30 September 2020

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 2020 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 in 2018. The error impacted the 2020 profit and loss account with overstated income of £0.3 (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 income recognised in 2021. There is no net impact on retained earnings as at 30th 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 now in 2021, deferred tax assets in respect of future taxable profits have not been recognised 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 therefore comparatives have been restated accordingly.

Representation:

• Amounts in the Balance sheet for Due to customers have been reclassified with the recognition of Due to customers of £0.26million and a corresponding adjustment in other liabilities for the same amount.

• Costs and accumulated depreciation amount for intangible assets note 18 have been represented according to those intangible assets that were 'in-use' or 'under development' at 30 September 2020 to be consistent with the current year disclosure.

• Amount in the cashflow for the Proceeds from sale of motor vehicle have been reclassified with the recognition of sale of motor vehicles of £0.04 million and a corresponding adjustment in the Purchase of office equipment and motor vehicle.