PCF.L Regulatory News (PCF)

23 December 2021

PCF Group plc

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

Annual Results

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 2020 (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 January 2022.

Financial and Business summary Following the Group's prior announcements on the restatement of the 2020 preliminary results, the Group reports:

· Underlying loss before tax1 of £ (3.1) million (2019 - profit of £8.0 million).

· Underlying profit reduction driven by credit impairment charges of £14.4 million (2019 - £3.3 million), including the incremental cost of potential pandemic related credit losses.

· Statutory loss before tax was £ (4.8) million (2019 - profit of £8.0 million), including a partial impairment of goodwill arising on the acquisition of Azule Limited2 £1.75 million.

· Focus on portfolio quality with 85% (2019 - 73%) of year to 30 September 2020 originations in the highest quality segments3 of the Group's credit grades.

· Net Loan book increased to £427 million (2019 - £339 million).

· Portfolio forbearance has reduced since the early stages of the pandemic and as at 30 September 2020 only 9% of balances were in forbearance. The improving trend has continued into 2021.

· Operating income increased by 15% to £26.7 million (2019 - £23.3 million).

· Net interest margin reduced to 6.9% (2019 - 7.8%) reflecting the focus on higher quality lending partially offset by a cheaper cost of funds.

· Cost to income ratio4 increased to 57.5% (2019 - 51.6%).

· £272 million (2019 - £276 million) of new business originations comprising:

o New business origination for 'own portfolio' increasing by 11% to £246 million (2019 - £222 million).

o £26 million (2019 - £54 million) of brokered Azule new business origination, generating commission income.

o Bridging finance lending of £61 million in first full year of operation (2019 - 9 months - £14 million).

· Total deposits of £342 million (2019 - £267 million) with over 7,950 retail deposit customers (2019 - over 6,100).

· Drawings of £62.4 million (2019 - £25.0 million) under the Bank of England's Term Funding Scheme ('TFS') and Term Funding Scheme with additional incentives for small and medium sized entities ('TFSME').

· Earnings per share of (1.7)p (2019 - 2.7p).

· Underlying return on equity5 of (4.5)% (2019 - 12.6%).

· Statutory return on equity of (7.6)% (2019 - 12.6%).

· CET1 capital ratio of 15.1% (2019 - 18.0%).

· Liquidity coverage ratio of 673% (2019 - 715%).

· Leverage ratio6 of 11.5% (2019 - 14.8%)

· Total capital ratio of 16.8% (2019 - 18%)

· Given the statutory loss, the Board is recommending that no dividend be paid in respect of the year.

· Ernst & Young LLP (EY) as the auditor do not express an opinion on the financial statements and the basis for this disclaimer of opinion is detailed in the Independent Auditor's report section of the Annual Report.

· Having now completed their audit and having previously indicated a prior intention to do so, EY will be resigning as auditors subject to completing the formalities required of them to do so and, having undertaken a prior tender exercise, upon that resignation the directors will appoint MacIntyre Hudson LLP to be the Group's new auditor.

Notes to summary points

1 [Underlying loss before tax is before the deduction of impairment to goodwill of £1.75 million

2 Azule was acquired in November 2018 and therefore 2019 comparative figures relating to Azule Limited represent 11 months to 30 September 2019.

3 Highest quality credit grades refer to internal rating grades 1 to 4. Refer to the Risk Management Report for further details

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

5 Underlying return on equity adds back the impairment of goodwill of £1.75 million

6 Leverage ratio - transitional definition of Tier 1 capital]

PCF's shares remain suspended from trading and it will provide a further update in due course on this and the publication of the half-year results for the six months ending 31 March 2021.

Quote from Tim Franklin, Chairman of PCF Group:

"The past nine months have been difficult for the Group, its stakeholders and shareholders. I would like to take this opportunity to once again apologise on behalf of the Board and thank stakeholders for their patience".

"The publication of the Annual Report and Accounts for the financial year ended 30 September 2020 is an important first step for the Group as it looks to move forward on stronger foundations in 2022 and continue to focus on our remediation activities and preparing for growth whilst seeking to obtain the removal of the suspension of trading in Group shares"

"The Board are confident that the steps that have been taken under the remediation plan so far will place the Group in a stronger position for the future."

- end -

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 & Financial Statements

Strategic Report

The Strategic Report provides a holistic view of PCF Group plc's ('the Group') business model, strategy and performance in the year ended 30 September 2020 along with its future prospects.

The Group issued its Preliminary Results for 2020 on 9 December 2020. As disclosed on 21 October 2021, a number of items have caused a reduction to profit before tax of approximately £7 million for the twelve months to 30 September 2020, compared with the preliminary results published in December 2020.

This was driven predominantly by an approximate £6 million revision to the impairment methodology for defaulted receivables, adjustments principally from the financial controls review, increased cost of the 2020 audit and audit adjustments as disclosed in the Regulatory News Service ('RNS') published on 11 March 2021.

Business and Financial highlights

· Underlying loss before tax1 of £(3.1) million (2019 - profit of £8.0 million).

· Underlying profit reduction driven by credit impairment charges of £14.4 million (2019 - £3.3 million), including the incremental cost of potential pandemic related credit losses.

· Statutory loss before tax was £(4.8) million (2019 - profit of £8.0 million), including a partial impairment of goodwill arising on the acquisition of Azule Limited2 £1.75 million.

· Focus on portfolio quality with 85% (2019 - 73%) of year to 30 September 2020 originations in the highest quality segments3 of the Group's credit grades.

· Net Loan book increased to £427 million (2019 - £339 million).

· Portfolio forbearance has reduced since the early stages of the pandemic and as at 30 September 2020 only 9% of balances were in forbearance. The improving trend has continued into 2021.

· Operating income increased by 15% to £26.7 million (2019 - £23.3 million).

· Net interest margin reduced to 6.9% (2019 - 7.8%) reflecting the focus on higher quality lending partially offset by a cheaper cost of funds.

· Cost to income ratio4 increased to 57.5% (2019 - 51.6%).

· £272 million (2019 - £276 million) of new business originations comprising:

o New business origination for 'own portfolio' increasing by 11% to £246 million (2019 - £222 million).

o £26 million (2019 - £54 million) of brokered Azule new business origination, generating commission income.

o Bridging finance lending of £61 million in first full year of operation (2019 - 9 months - £14 million).

· Total deposits of £342 million (2019 - £267 million) with over 7,950 retail deposit customers (2019 - over 6,100).

· Drawings of £62.4 million (2019 - £25.0 million) under the Bank of England's Term Funding Scheme ('TFS') and Term Funding Scheme with additional incentives for small and medium sized entities ('TFSME').

· Earnings per share of (1.7)p (2019 - 2.7p).

· Underlying return on equity5 of (4.5)% (2019 - 12.6%).

· Statutory return on equity of (7.6)% (2019 - 12.6%).

· CET1 capital ratio of 15.1% (2019 - 18.0%).

· Liquidity coverage ratio of 673% (2019 - 715%).

· Leverage ratio6 of 11.5% (2019 - 14.8%)

· Total capital ratio of 16.8% (2019 - 18%) .

1 Underlying loss before tax is before the deduction of impairment to goodwill of £1.75 million

2 Azule was acquired in November 2018 and therefore 2019 comparative figures relating to Azule represent 11 months to 30 September 2019.

3 Highest quality credit grades refer to internal rating grades 1 to 4. Refer to the Risk Management Report ('RMF') for further details

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

5 Underlying return on equity adds back the impairment of goodwill of £1.75 million

6 Leverage ratio - transitional definition of Tier 1 capital

Chairman's Statement

For the year ended 30 September 2020

Before commenting on the financial year ended 30 September 2020, I begin my statement with an apology on behalf of the Group and the Board to all stakeholders and shareholders in particular for the delay in publishing this report and for the reporting, control and governance shortcomings that caused this delay and the continuing suspension of trading in the Group's shares on AIM.

Post 30 September 2020 events

Accounting errors and misstatements, initially identified by the Group's new Chief Financial Officer as a result of audit enquiries, resulted in trading in the Group's shares being suspended on 19 May 2021 after discussions with the Group's nominated adviser (NOMAD).

This situation has been deeply concerning, unsatisfactory and a huge disappointment to your Board. For further details please refer to the Audit & Risk Committee Report.

Putting it right

Since the discovery of and in response to these events the Board has taken, and is in the progress of taking, the following actions:

1) Discovery and Investigation;

· Commissioned PricewaterhouseCoopers LLP ('PwC') to conduct independent forensic investigations into accounting errors and misstatements.

· The Group's Finance team then reviewed the output of the PwC investigations and also performed a further detailed review of the Group's balance sheet. Details of this finance review, overseen by the CFO is set out in the Audit & Risk Committee report.

· Appointed Garry Stran as interim Chief Executive Officer to lead the Group and the remediation programme.

2) Short-term mitigation;

· New executive appointments in the key roles of Chief Risk Officer, Chief Operating Officer, General Counsel, and Chief of Staff, provide significant industry knowledge and experience.

· Strengthen the Risk, Finance and Change functions to deliver the short-term 'repair' activity, whilst supporting the longer-term, more efficient, sustainable solutions.

· Instigated cultural change initiatives in advance of a wider culture programme, focusing on understanding personal responsibility for risk, active listening and speaking up. This includes clear and open communications to all our stakeholders whilst adhering to market rules.

· Initiating longer-term programmes to deliver the required changes in Corporate Governance, financial control and Culture that will underpin the Group now and into the future.

3) Longer-term sustainable solutions;

· Deliver and embed a culture programme across the Group as part of building back our reputation with key stakeholders.

· Deliver and embed a comprehensive RMF, embedding this across the Group, in conjunction with the planned appointment of a Senior Independent Director to the Board.

· Deliver the Finance transformation programme focused on financial controls and the provision of timely and accurate data.

· Continue our investment in IT systems to develop a technologically advanced digital and modern operating platform replacing residual manual processes.

The discovery and investigation phase is complete, with short-term mitigation actions in place. We are mobilising the programmes to deliver sustainable solutions, demonstrating our long-term commitment to change.

Lifting the suspension of share trading

The remediation phases required to enable the lifting of the suspension of trading in the Group's shares are well underway, and the Board and Executive Team continue to work closely with the Group's NOMAD with the goal of achieving the lifting of that suspension as soon as possible.

Moreover, we are in the process of updating our Financial Position and Prospects Procedures memorandum ('FPPP') which will be completed following publication of this Annual Report & Financial Statements.

Following publication of this Annual Report & Financial Statements, we will further communicate progress in lifting the suspension of trading in the Group's shares once we have more certainty on its timing towards the end of January 2022.

It should be noted by the shareholders that the London Stock Exchange can apply and/ or provide derogations to the AIM Rules at their discretion, including in respect of the suspension of trading in the Group's shares and its continued listing on AIM. The Group, through its NOMAD, remains in an ongoing dialogue with the Exchange on these matters.

Business' performance for the year ended 30 September 2020

Turning to the Group's business performance for the year ended 30 September 2020, the pandemic was completely unforeseen and has presented individuals, families, businesses and economies with challenges not seen in living memory. However, with significant effort and support from all colleagues, the business remained operational throughout, whilst maintaining customer and colleague wellbeing.

I therefore thank all my colleagues for their efforts and dedication to serving the Group's customers through a hugely challenging period for everyone.

Profitability, balance sheet strength and the effect of the pandemic

Net operating income increased by 15% in the twelve months driven by strong loan growth which more than offset the reduction in the net interest margin which reflected a particular focus on a tightening of the Group's credit risk appetite throughout the pandemic. Lending in Consumer finance and Bridging finance was strong, while Business finance experienced lower demand due to competing Government support schemes such as the Coronavirus Business Interruption Loan Scheme ('CBILS'). The continuing presence of similar schemes will restrict growth in this segment.

Operating expenses, excluding the impairment of goodwill and credit impairment charges, were well managed but increased to support the growth of the business. As a result, profit before tax, excluding the impairment of goodwill and credit impairment charges, increased to £11.4 million (2019 - £11.3 million), demonstrating that the core business performed well.

The Group's credit impairment charge increased significantly in 2020 to £14.4 million (2019 - £3.3 million), reflecting the impact of COVID-19, a more cautious economic outlook on future expected losses and significant items of £8.5 million set out below. Under IFRS 9, credit impairment charges cover the potential future losses which would arise from the effects of COVID-19 on the performance of the loan book. The charge for the year also includes the previously announced £6 million increase to impairments on defaulted receivables2, resulting from revisions to recovery expectations against those exposures. There are also additional specific provision increases related to forbearance and COVID-19 provisions (£1.1 million) and customer specific provisions (£1.4 million).

This resulted in the Group generating an underlying loss before tax of £(3.1) million1 (2019 - profit of £8.0 million) for the twelve months to 30 September 2020.

In addition, the Group impaired the value of goodwill in respect of the purchase of Azule Limited by £1.75 million, which meant that on statutory basis, the Group generated a loss before tax of £(4.8) million (2019 - profit of £8.0 million). The loss after tax was £(4.3) million (2019 - a profit of £6.4 million), equivalent to a return on equity of (7.6)% (2019 - 12.6%) and earnings per share of (1.7)p (2019 - 2.7p).

The Group's net assets decreased to £53.9 million (2019 - £58.8 million). At 30 September 2020, the Group's total capital ratio of 16.8% (2019 - 18.0%) remain comfortably above the regulatory requirement. Liquidity was managed in excess of risk appetite and regulatory requirements throughout the period.

Given the financial performance for the year and to maintain our capital position, the Board is not recommending a dividend in respect of the twelve months to 30 September 2020.

1 Underlying loss before tax is before the deduction of impairment to goodwill of £1.75 million

2 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

Governance and culture

The discovery of reporting, control and governance shortcomings is hugely disappointing. The management team is absolutely focused on building the tactical initiatives already undertaken into a full cultural programme of change alongside RMF.

The commitment of colleagues continues to be one of the Group's greatest strengths. The Board and management have supported and will continue to support colleagues with a safe, healthy working environment and with increased communications, training and development to enable each of them to achieve their potential. The Board is determined that the Group, alongside cultural change, will drive programmes around governance and financial control. This will provide a fit for purpose, long term and sustainable platform to build long-term value for stakeholders.

Outlook

This outlook should be read in conjunction with the emerging risks and uncertainties section.

The Group has a well-established business model, which gives the Board confidence that the business will overcome the current challenges and return to growth over the medium-term.

Given the current credit environment, including the potential impact of COVID-19 on impairment losses, and the level of remediation actions and change underway in the Group, bringing with it substantial short-term costs, the Board does not believe that it is appropriate to provide firm guidance on future performance. Therefore, the Group's previous operating targets remain withdrawn. The Group will seek to re-establish guidance once its remediation activity is more fully complete

Moreover, increased operating costs are expected as the Group significantly increases headcount and the investment in IT to improve and embed the new reporting controls and systems. In addition, the Group expects to continue to incur high remediation costs while it addresses the issues identified and implements the required remediation actions.

Conclusion

In conclusion, since my last statement the Group has faced substantial difficulties, your Board is confident that the business is on the path to recovery from these challenges, after which all colleagues will be able to turn their full focus to the delivery of sustainable profits and long-term value for all stakeholders.

T A Franklin

Chairman

22 December 2021

Chief Executive Officer's Review

for the year ended 30 September 2020

This is my first report as your CEO following my appointment in May 2021. The circumstances that led to my appointment have created many challenges for the business in addition to those already in existence due to the COVID-19 pandemic, and these challenges have dominated my time in the role to date.

I regret that the time since my appointment has been an uncertain one for shareholders, but it was absolutely essential that my team and I focused on carrying out the review of the Group's financial controls and processes to ensure that the Group could plan for the future with confidence. The issues facing us were inter-linked and complex and have taken time to resolve. For further details please refer to 50 to 53 of the Audit & Risk Committee Report.

I am fully aware that during this period of uncertainty some shareholders may have been disappointed with the frequency and granularity of the information that we have supplied. However, I can assure you that at all times the interests of shareholders were front of mind for both the executive team and the Board, but the need to take account of a number of regulatory and legal issues had an impact on the timing, content and our ability to make these disclosures.

Moreover, I thank all my colleagues who make up the PCF team for their commitment and support during a difficult period. Many of them are long serving and have been devastated by the discovery of the issues that have so consumed us over the last few months. This, combined with the challenges of the pandemic, including working remotely for 18 months, has undoubtedly resulted in many colleagues experiencing circumstances in their work and personal lives that they would never wish to see repeated. Their commitment and desire to see PCF repair its reputation is clear to me and the executive team.

Turning to business performance, taking account of the pandemic impacts and before the higher one-off impairment charges the underlying business performance of our core business was resilient.

Response to the pandemic

The second half of the financial year to September 2020 was disrupted by the operational and economic impacts of the pandemic. The business acted swiftly to deploy home working and, supported by our technology team, our entire team was working from home within days without business interruption.

Throughout the pandemic period, our focus has been on protecting our core assets - our people, our customers and our balance sheet. These have been challenging times for both our colleagues and our customers and of particular importance to us was our effort to support colleague well-being and to assist customers who may have suffered hardship through no fault of their own.

In respect of our colleagues, we have put in place support mechanisms and new ways of working which have enabled them to have the flexibility to continue to contribute fully to our business whilst ensuring that they are able to dedicate time to take care of themselves and their loved ones. We are proud of the way they have risen to the challenges they have faced.

Where our customers have approached us to assist them, we have met our regulatory obligations. At 30 September 2020, 9% of our total loan book was in forbearance or COVID-19 related payment deferral plans. This has reduced since the early stages of the pandemic and the improving trend has continued into 2021.

Trading and profitability

In the twelve months to 30 September 2020, the Group incurred an underlying loss before tax of £(3.1) million (2019 - profit of £8.0 million). This was driven by a significant increase in credit impairment charges which more than offset the increase in net operating income.

Net operating income of £26.7 million increased 15% in the year (2019 - £23.3 million) and was sup-ported by loan growth, particularly in consumer and Bridging finance. Net loans and advances to customers increased to £427 million (2019 - £339 million). The quality of new business improved, with 85% of business written in our highest credit grades, compared to 73% in 2019. Whilst this improved the overall quality of the loan book, it has led to some compression to the Group's net interest margin which fell to 6.9% (2019 - 7.8%).

Operating expenses, excluding the impairment of goodwill and credit impairment charges, increased to £15.4 million from £12.0 million in 2019. The Group's cost:income1 ratio increased to 57.5% (2019 - 51.6%).

Profit before tax, excluding the impairment of goodwill and credit impairment charges, increased to £11.4 million (2019 - £11.3 million).

The Group's credit impairment charge increased significantly in 2020 to £14.4 million (2019 - £3.3 million), reflecting the impact of COVID-19 and a more cautious economic outlook on future expected losses. Under IFRS 9, credit impairment charges cover the potential future losses which would arise from the effects of COVID-19 on the performance of the loan book. The charge for the year also includes the previously announced £6 million increase to impairments on '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. There are also additional specific provision increases related to forbearance and COVID-19 provisions (£1.1 million) and client specific provisions (£1.4 million).

The Group's impairment charge for the year, as a percentage of average gross loan balances was 3.6% (2019 - 1.1%). The IFRS 9 expected credit loss provision on the balance sheet, as a percentage of gross loan balances, increased to 4.2% (2019 - 2.0%).

As a result, the Group generated an underlying loss before tax of £(3.1) million (2019 - profit of £8.0 million) for the year.

The Group partially impaired the goodwill paid on the acquisition of Azule, the broadcast and media specialist finance business acquired in 2018, by £1.75 million. This impairment of goodwill was driven by the likelihood of reduced profitability in the near-term, as a result of the impact of COVID-19 and lower new business originations on the future expected cash-flows relating to the Azule business.

On a statutory basis, therefore, the Group generated a loss before tax of £(4.8) million (2019 - profit of £8.0 million). This represents a return on equity of (7.6)% (2019 - 12.6%) and an earnings per share of (1.7)p (2019 - 2.7p).

Business lines and portfolio quality

New business origination in the year fell slightly to £272 million (2019 - £276 million) which is a strong performance in the context of the pandemic with the diversification into Bridging finance contributing to that success. The quality of new business origination continued to improve with 85% of originations in our highest credit grades, compared to 73% in the previous year.

The total gross loan book grew to £446 million (2019 - £345 million) and the overall quality of the loan book improved, with 78% of the portfolio in our highest credit grades (2019 - 68%).

The Group continued to be cash generative through all trading months by way of a combination of the embedded recurring cashflows from our loan book and a continued focus on cost control.

Segmental business review

Consumer finance division

The used motor vehicle finance market has proved resilient throughout the period. After an initial fall in demand following lockdown in March 2020, new business origination picked up in May 2020 and further increased when dealerships re-opened on 1 June 2020. This is consistent with data on used car sales and used car asset values. The leisure market has also been buoyant, in particular for motorhome finance, as a greater number of people took holidays in the UK.

New business originations in the year were £91 million (2019 - £73 million), an increase of 24%, and the loan book grew by 31% to £172 million (2019 - £131 million). Credit quality was strong with 93% of originations in our highest credit grades (2019 - 80%), and we have maintained cautious underwriting terms in respect of loan to values.

Levels of forbearance and COVID-19 related payment deferrals in this portfolio are relatively low at less than 4% of balances at 30 September 2020. The impairment charge for the year was £4.9 million (2019 - £1.0 million).

1 Cost:income ratio calculated excluding impairment of goodwill and credit impairment losses on financial assets.

Business finance division

New business origination in this division has been more noticeably affected by lower demand. Sole traders and small companies understandably deferred investment decisions and, where working capital can be accessed through one of the Government's support schemes at preferential terms, our asset finance products have become less competitive. We remain focused on prudent underwriting as the difficult trading conditions for most small and medium-sized enterprises ('SME') raises questions about the long-term sustainability of SME financial commitments.

New business originations in the year were £81 million (2019 - £120 million), a decrease of 33%. However, the gross loan book grew to £190 million (2019 - £181 million) with 78% of origination in our highest credit grades (2019 - 71%).

Levels of forbearance and COVID-19 related payment deferrals have been high in this portfolio but had reduced to 13% of balances at 30 September 2020. The impairment charge for the year was £8.4 million (2019 - £2.2 million).

Azule

Azule Limited, PCF's specialist broker of funding for the broadcast and media sector, has been particularly affected by the lockdown with TV, film, sports, and live events all severely impacted. In the second half of the year the division focused its activity on assisting customers with applications under the UK Government's CBILS scheme. The business has more recently seen increased activity as the sector returns to business as usual.

Despite the goodwill impairment for this division, we expect it to recover over time as the need for content to support on-demand streaming services drives investment in new equipment.

New business originations in the year were £39 million (2019 - £69 million), a decrease of 43%, and the loan book in relation to the broadcast and media sector stands at £23 million (2019 - £20 million).

The impairment charge for the year was £0.6 million (2019 - £nil).

Azule was acquired in November 2018 and therefore 2019 comparative figures relating to Azule represent 11 months to 30 September 2019.

Bridging finance

This division has seen strong demand. The Group took advantage of several non-bank competitors withdrawing from the market in the early months of the pandemic and this has allowed us to build relationships with new introducers. We are pleased with the quality and terms of business in this market and encouraged by the performance and outlook for this sector.

Originations in the year were £61 million (2019 9 months - £14 million) and from a small base this division has been a key contributor to the Group's asset growth with a gross loan book of £61 million (2019 - £13 million). We lend primarily on residential property with first charge security and conservative loan to values.

While the portfolio experienced no actual losses in the year, the IFRS 9 Expected Credit Loss provision for potential future losses was £0.5 million (2019 - £nil).

Savings

We continued to offer a range of good value savings products through the year, increasing savings balances to £342 million (2019 - £267 million) demonstrating our ability to raise funds as required at rates which facilitate our business objectives. The Group offers a range of fixed term and notice accounts that are designed to offer good value to our retail customers whilst meeting our need to manage the liquidity and interest rate risks associated with our loan books. Savings customer numbers grew to over 7,950 in 2020, from just over 6,100 in 2019.

Capital management and treasury

The Group entered the pandemic period with a diversified funding model utilising retail deposits, wholesale debt and drawings from the Bank of England's Term Funding Schemes. At 30 September 2020, we had drawn £62.4 million (2019 - £25 million) from TFS and TFSME and held £342 million in retail deposits (2019 - £267 million). Our retail deposits have been relatively consistent, with an average balance of £42,500 (2019 - £42,200).

The Group's cost of funding fell to 1.7% (2019 - 2.2%) and we retain a strong liquidity position with a Liquidity Coverage Ratio of 673% at 30 September 2020 (2019 - 715%).

The Group had a total capital ratio of 16.8% (2019 - 18.0%) which exceeds our regulatory minimum total capital requirement. The Group has utilised its Tier 2 capital facility, issuing a total of £7 million of subordinated notes to British Business Investments Limited (BBI) between November 2019 and May 2020 (2019 - £nil). Prudent management of capital resources has been a particular focus since the start of the pandemic.

Regulatory capital and ratios are set out in the Risk Management Report.

2021 strategic objectives, current trading and outlook  

This outlook should be read in conjunction with the emerging risks and uncertainties section.

The 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. Events have overtaken a significant part of our strategic objectives and whilst we have remained focused on the credit quality of our lending and continued investment in our IT infrastructure, a significant amount of management time has inevitably been directed to the remediation activities highlighted elsewhere in this report.

As a result of the current position in respect of our controls framework and the pandemic, we have taken the decision to manage our lending volumes carefully to ensure that the next stage of our development is built on firm governance, culture, systems and controls, and we continue to focus on maintaining credit quality.

However, once our planned remedial actions have been completed, we will be well placed to return to a strategy of controlled and prudent growth.

Delayed interim financial report and completion of the Annual Report & Financial Statements

The Chairman's report sets out the steps that led to the share trading suspension and a RNS detailing the initial findings was issued on 28 June 2021. The work undertaken is set out in more detail in the Audit & Risk Committee (ARC) Report which highlights how these developments have delayed the finalisation of these Annual Report & Financial Statements as well as impacting the issuance of our interim results for the current year.

Since my appointment as Interim Chief Executive Officer in May 2021, my immediate focus has been to develop a remediation plan to address the issues set out above and start its implementation.

Implementation of the remediation plan

I anticipate the implementation of our remediation plan by the executive team will take a further 18-24 months to fully complete.

The aim of this plan is to build firm foundations for the future growth of the business, restore confidence with our investors and our regulators and following the suspension of the trading of our shares on 19 May 2021, move as quickly as possible to meet the requirements for this suspension to be lifted.

The Group's transformation programme started with experienced financial services hires joining my executive team including a General Counsel, a Chief Risk Officer, and Chief of Staff, and a replacement Chief Operating Officer. This strengthened executive team is already making significant change.

Conclusion

Despite the challenges, the core competencies within our customer-facing business remain strong and we have long established relationships with our customers and intermediaries.

Our core operating platform and balance sheet are robust and through utilisation of an increased headcount, assistance from our external advisers, and close governance, we will successfully deliver the transformation required. Combining this with a new progressive ethos, the underlying strength of the business model and the direction that the executive team will give will make the Group unrecognisable when compared to the past. This will be supported by a data driven, automated and digitalised operating platform providing remarkable service and products to drive shareholder value.

We remain confident that the opportunity for growth will return once our remediation is complete. We have relatively small shares of our chosen lending markets and the potential to grow them and to develop new products remains unchanged.

I am proud to be leading the PCF team towards a brighter future and thank all my colleagues at PCF and our investors, regulators, and all stakeholders for the patience they have shown during these difficult times. Finally, I join the Chairman in apologising once again for the legacy challenges faced by the business and the impact on shareholders and other stakeholders.

GG Stran

Interim Chief Executive Officer

22 December 2021

Consolidated Income Statement

for the year ended 30 September 2020

*Comparatives for the recoverable amount of fees charged on credit impaired accounts have been re-presented from Impairment

losses on financial assets to Fees and commission income to make the Income statement more relevant following a review of

the disclosures and accounting policies applied (please see note 1.9).

The accounting policies and notes on pages 93 to 158 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.

Consolidated Statement of Comprehensive Income

The accounting policies and notes on pages 93 to 158 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.

Consolidated Balance Sheet

at 30 September 2020

The financial statements were approved and authorised for issue by the Board on 22 December 2021.

On behalf of the Board

The accounting policies and notes on pages 93 to 158 form part of, and should be read in conjunction with, these financial statements.

Consolidated Statement of Changes in Equity

For the year ended 30 September 2020

Group

The accounting policies and notes on pages 93 to 158 form part of, and should be read in conjunction with, these financial statements.

Consolidated Statement of Changes in Equity (Cont'd)

Company

The accounting policies and notes on pages 93 to 158 form part of, and should be read in conjunction with, these financial statements.

Consolidated Statement of Cash Flows

for the year ended 30 September 2020

1. Comparatives for the recoverable amount of fees charged on credit impaired accounts have been re-presented from Allowance for Impairment losses to Loans and advances to make the Loans and advances to customers note more relevant following a review of the disclosure and accounting policies applied (please see note 1.9).