Final Results

RNS Number : 6661W

Distribution Finance Cap. Hldgs PLC

19 April 2023

 

19 April 2023

This announcement contains inside information as stipulated under the UK version of the market abuse regulation (EU no. 596/2014) as it forms part of UK law by virtue of the European Union (withdrawal) act 2018 (as amended from time to time).

Distribution Finance Capital Holdings plc

("DF Capital" or the "Company" together with its subsidiaries the "Group")

Audited Results for the year ended 31 December 2022

Scaling the bank delivers maiden full year profit significantly beating original expectations.

Distribution Finance Capital Holdings plc, the specialist bank providing working capital solutions to dealers and manufacturers across the UK, today announces its audited results for the year ended 31 December 2022.

Highlights

	2022	2021	Change
Performance
Loan Book (£m)	439	249	+76%
New loans advanced to customers (£m)	1,001	690	+45%
No of dealer customers	998	805	+24%
Financial
Gross Revenue	26.8	13.6	+97%
Net Interest Income	20.4	11.3	+81%
Cost of Risk (bps)	74	32	42bps
Profit/(Loss) before tax (£m)	1.3	(3.7)	5.0
Net Assets (£m)	96.2	86.1	+12%

• Maiden full year profit before tax of £1.3m, improving significantly on prior year loss of £3.7m and surpassing management expectations.

• Record level of loan origination, totalling over £1bn (2021: £690m), supporting a closing loan book of £439m (2021: £249m).

• Net interest margin (NIM) of 6.5% maintained in excess of 6% target (2021: 6.5%), against a backdrop of rising funding costs.

• Stock turn has slowed to c.120 days, however, continued to run faster than the historical average of 150 days.

• Continued low number of arrears cases demonstrates underlying quality and financial strength of dealer obligors, with cost of risk at 0.74%, well below the through-the-cycle target of 1%.

• Increased deposits during the year by £183m, with over 12.6k savings accounts and £480m of deposits at 31 December 2022.

• Initial £175m ENABLE Guarantee agreed by British Business Bank, which may be increased to £350m and would support up to £150m of additional loan book growth on the existing capital base.

• Accredited by Best Companies as a 2-star company and an "Outstanding Place to Work".

Q1 Trading and Outlook

• Loan origination up c.23% on prior year at c. £270m (Q1 2022: £220m) delivering a c.15% increased loan book to c.£505m with 1,079 dealers (Q1 2022: 858) now being provided with over £900m of facilities (Q1 2022: £682m).

• Stock turn slowed moderately to c.130 days improving loan book returns, with increased loan repayments also positively impacting arrears and credit loss provisions.

• Continuing strong NIM performance in excess of target expected through 2023, influenced by recent movements in the UK base rates. The Group expects to revert to its 6% NIM target with base rate reductions over the medium-term.

• Achieved unaudited profit for the quarter. 

• Pursued adjacent lending opportunities in receivables financing (invoice discounting) and wholesale funding, representing attractive future potential to deepen relationships with manufacturer and dealer partners.

• The Group is exploring non-dilutive Tier 2 capital to further support its product diversification and medium-term growth strategy.

• Board expects financial performance for the full year to be materially ahead of management expectations, targeting a year end loan book for 2023 in the range of £550m-600m, with a continuing trend of rising loan origination and strong net interest margin.

Carl D'Ammassa, Chief Executive, commented : "Achieving our first full year of profitability has been a priority for us since being authorised as a bank. Our capital and retained earnings will now support our ambitious growth plans and the strategic development of the firm.

"We continue to see strong momentum in our core markets and have started to explore adjacent lending opportunities that will underpin our efforts to scale the bank further. 2022 has been a great year for the Group on so many fronts. It's brilliant to hear our colleagues say that DF Capital is an outstanding place to work too."

The Group's full Annual Report and Financial Statements have today been published and are available on its investor website at www.dfcapital-investors.com .   

Annual General Meeting

The Company will hold its Annual General Meeting on 24 May 2023 at the Company's registered office in Manchester.  The Notice of AGM and Form of Proxy will be posted to shareholders in due course and a copy will be available at www.dfcapital-investors.com .

The person responsible for arranging the release of this announcement on behalf of the Company is Karen D'Souza (Company Secretary).

For further information contact:

Distribution Finance Capital Holdings plc
Carl D'Ammassa - Chief Executive Officer	[phone]
Kam Bansil - Head of Investor Relations	[phone]
http://www.dfcapital-investors.com
Investec Bank plc (Nomad and Broker)	[phone]
David Anderson Bruce Garrow Harry Hargreaves Maria Gomez de Olea
Liberum Capital Limited (Joint Broker)	[phone]
Chris Clarke Lauren Kettle Antonia Brown

Chair's Statement

Dear Shareholder

The momentum the firm demonstrated in 2021 continued at pace through 2022. The global pandemic and war in Ukraine are continuing to have an impact on the economy and supply chains worldwide. DF Capital has navigated these uncertainties well and against this backdrop it is pleasing to report the Group's maiden full year profit.

Given the time taken to obtain our bank licence, one of our key priorities has been to reach profitability. The Group was bank-ready for some time, so following our authorisation as a bank we were quickly able to enjoy the full benefits, with access to retail deposits to support our lending operation. That being said, to have reached full year profitability within two years of becoming a bank truly demonstrates the strength of our proposition, and is a credit to the entire DF Capital team. Hitting this milestone is one that many new banks aspire to achieve.

An outstanding place to work

In the Board's opinion, modern sustainable businesses are built on the solid foundation of a positive and inclusive culture across the firm, where all employees work in a collaborative environment, where risk management is taken seriously and where customers' needs are front of everyone's minds. The Board is delighted that DF Capital has been recognised as an "Outstanding place to work" by Best Companies, following a survey of our employees. Being accredited with two stars builds on last year's result and it will be no surprise that the firm has ranked highly in sector and regional league tables also.

Board composition

As a Board, ensuring that we have the right skills and experience to support the Group's ambitions is front of our minds. I am delighted to welcome Sheryl Lawrence and Nicole Coll to the Board, with Sheryl becoming Senior Independent Director and Chair of the Risk Committee, and Nicole becoming our Chair of the Audit Committee.

I would like to thank Carole Machell, who stood down from the Board at last year's Annual General Meeting, for her support not only during my transition to the position of Chair, but also during her four year tenure as a member of the Board. I am grateful to Carole for picking up additional responsibilities whilst we planned Sheryl and Nicole's appointments.

I am confident we have both the breadth and depth of experience across the Group to support the firm's ambitions to further scale our franchise, always underpinned by an appropriate and proportionate corporate governance framework.

A well-capitalised bank

DF Capital is a well-capitalised bank and now with the additional support from the British Business Bank's ENABLE Guarantee scheme we have the capacity to grow the Group's lending further. We remain committed to supporting manufacturers and dealers with our products and services. During 2023 we intend to build on the foundation we have laid by pushing into adjacent markets and exploring other opportunities to use our banking franchise to lend in markets where we feel we can make strong risk adjusted returns.

2022 has been another strong year for the firm and I am delighted with the continued progress the Group is making to deliver sustainable returns for its shareholders over the medium term.

Mark Stephens

Independent Non-Executive Chair

Chief Executive Officer's Report

Dear Shareholder

I am delighted to announce our first full year of profitability. Since receiving our bank licence in September 2020, we have strived to achieve run-rate profitability in a sustainable, responsible way as soon as we possibly could. We have diligently stuck to our business plan and had a cautious eye on good credit risk management throughout. We can confidently now move forward in the knowledge that our capital and retained profits will support increased lending, rather than absorbing trading losses.

2022: significant progress amid continued macroeconomic uncertainty

It's clear that during our relatively short life as a bank, we have craved for what we would describe as more normal times, calibrated against the world as it was pre-pandemic. Obtaining a banking licence during a global pandemic was not an easy task, but the economic uncertainty that has unfolded since, whether that's the tail effects of the pandemic, inflation, the war in Ukraine or disruption to global supply chains and logistics, has really put the team and our business model through its paces. I am delighted with the Group's response, having performed exceptionally well, demonstrating our agility and speed of action in order to best navigate what can only be described as an uncertain world.

We have continued to focus on our strategic pillars:

1.  delivering growth;

2.  putting our customers' needs first; and

3.  acting sustainably.

2022 has been an exceptional year for DF Capital. As well as achieving maiden profitability, we have delivered record levels of new loan origination, exceeding £1bn for the first time; an increase of 45% on the prior year (2021: £690m). The Group's loan book grew significantly by 76% to £439m at 31 December 2022 (2021: £249m), clearly demonstrating the strength of our relationships with dealers and manufacturers.

Throughout the year, we have maintained a highly diversified mix of assets across our core sectors, achieving double-digit percentage growth in all sectors. Our commercial lending (non-leisure assets) comprised 38% of the loan book at the year-end (December 2021: 37%).

Whilst growth in lending enables our ambitions to deliver mid-to-high teens returns, ensuring we continue to achieve at least a 6% net interest margin (NIM) is a critical component of our returns journey. Despite rising retail deposit rates and given the fees we charge our lending customers are directly linked to Bank of England Base Rate, we have effectively balanced pricing and growth through the year, achieving a consistent 6.5% net interest margin (2021: 6.5%).

Supporting a record number of dealers and manufacturers

Our strategy in how we will scale the bank remains unchanged. In our core lending product, we are focused on supporting more manufacturers and dealers, providing them with increasing aggregate credit lines and offering the exceptional levels of service that makes it easy for our borrowers to do business with us. During the period, we have increased our manufacturer and distributor partners to 90 (2021: 78) and now provide facilities to almost 1,000 dealers (2021: 805). Aggregate credit lines hit £817m, up 36% on the prior year (2021: £601m) which underpins the growth we have seen in our loan book.

It is fair to say that across the majority of sectors, dealers have experienced continued strong demand for their products. End-user demand in leisure assets (such as motorhomes, caravans, motorcycles) has remained particularly elevated. As we progressed through the year we saw a modest slowing of sales that has seen our average stock turn extend to c.120 days from c.105 days during 2021, still below our normalised historical average of approximately 150 days. Availability of product, particularly in the transportation sector, has remained challenging through much of 2022, given continuing issues in China and COVID-19 outbreaks. As we closed the year, with supply chain logistics normalising there were significant volumes of light commercial vehicles en-route to the UK, which we expect to flow through to dealers during 2023.

We entered the specialist car market during the year. Whilst this remains a relatively small part of our lending activity today, we have learnt a lot through our early activities that will allow us to develop our proposition and achieve growth in this sector during 2023.

Whilst we are undoubtedly pleased with the loan originations and where our loan book closed the year, we continue to operate in an environment that is fraught with uncertainties and far from normal. Working closely with our manufacturer partners and having deep relationships with our dealer customers allows us to respond quickly to their needs and navigate these unpredictable times.

Maintaining high levels of service

Putting our customers' needs first and providing them with exceptional levels of service is critical to our proposition. Our lending activities are highly digitised coupled with human-touch relationship management. We are relentless in our focus on automation and continuous improvement, to allow accessing finance from us easier for our borrowers. Having explored the benefits of Robotic Process Automation and Optical Character Recognition, these are efficiency and digitalisation techniques that we have adopted and are now very much embedded in the firm. We have invested in resources to help accelerate implementation of continuous improvement projects, which in turn we expect to support our cost-to-income ratio ambitions.

Understanding what delights our customers is important to us. We measure customer satisfaction across a number of touchpoints and this important feedback helps define areas for service improvement. We measure customer satisfaction using Net Promotor Score, and whilst we are delighted to have received another strong result of +41 in our most recent survey (2021:+42), we are not complacent. We recognise that evolving our products and services, whilst making sure we continue to meet customer expectations in a world where technology is continually advancing is critical.

Successful retail deposit capability

Now over two years since we launched our maiden savings products, we are recognised more widely as a quality provider of retail deposits. We offer well-priced savings products across an array of tenors, through a digitised savings platform, backed up by our award-winning in-house customer service team. Given the digital nature of our retail deposit capability, our platform is significantly scalable from where we are today. We believe we offer a uniquely DF Capital experience and that is reflected in our customer satisfaction scores at 4.7 stars (2021: 4.6) as measured by feefo.

Having placed significant focus on existing customer retention, we have built a loyal depositor base. Offering existing customers attractive priced loyalty products as they reach maturity of their fixed rate bonds has seen retention rates of over 70%.

We closed the year with £480m of deposits (2021: £297m). We continue to leverage best buy tables to alert new customers to our rates. The retail deposit market has remained buoyant, and we have found it easy to raise the liquidity to support our lending activities. We have continued to build a well-diversified range of product maturity profiles in both the notice and fixed rate markets.

Growth in core lending

Scaling the bank by growing our lending remains our priority. The routes to growth in the core lending products are many: increasing facility utilisation and active dealers; bringing onboard new dealers; targeting new manufacturers and entering new sectors.

Having a significant pipeline of potential dealers supports much of our ambition for growth, that being said, we are operating in an environment where careful selection of dealers, who meet our credit criteria is important. We continue to validate and refine pipeline and new sector opportunities. Our lending capabilities are transferrable; we see potential to consider new asset classes, have ambitions to support greener products where our inventory and distribution finance solutions could provide secured lending against serialised assets.

Building new product capabilities

We believe entering adjacent markets is a critical component in the delivery of our medium term returns ambitions. We continue to explore both organic and inorganic strategic opportunities. Throughout the year, we have proactively considered business acquisitions that could accelerate our product development ambitions, particularly for "lending beyond the forecourt", such as hire purchase and leasing. The uncertain economic environment and increasing interest rates to combat inflation has made us more cautious in our endeavours. We know what a good acquisition or partnership should look like, the return potential required and accordingly have set a high bar.

Our efforts in this regard have helped frame an organic or self-build growth plan. We are clear on what we would need to invest, in both people and technology, to ensure we could safely and securely lend to end-users, ultimately supporting our dealers and manufacturers to sell more products. There remains strong demand from our existing customers to build a deeper multi-product relationship with us. Accordingly, the development of a retail lending product (such as hire purchase or leasing), aligned to the sectors we support today, feels inevitable, at some point in the near future, when the economic environment best allows us to successfully make the necessary investment. We continue to explore opportunities to partner with other funders to bring our product development ambitions to life.

As a small bank, we find it beneficial to test new lending opportunities in a controlled and small-scale way. These opportunities generally support our own strategic ambitions, allowing us to leverage our banking licence to lend in areas where we achieve our risk adjusted returns objectives, whilst building valuable insight through a "test and learn" approach. We consider types of wholesale funding (ie. lending to non-bank lenders) as an attractive opportunity that could underpin any future strategic partnership in existing or new product types. As a firm we have many opportunities, often presented to us, to build on our banking franchise, leverage our ability to raise deposits and put capital to work, whilst always achieving our target risk adjusted returns.

Our culture, being an outstanding place to work

At the heart of what we do at DF Capital is our culture. We are a bank that strives to do the right thing for its customers, employees, the environment and its communities. We believe this preoccupation about acting sustainably starts with our employees and will ultimately define the quality of shareholder returns.

In October 2022, we participated again in the "Best Companies to Work for" survey. Throughout the year, we have built on the feedback we received from the December 2021 survey. Over 95% of our employees provided their feedback this time around (2021: 98%) on what we do well and where we can make further improvements in how we do things and what we do. It has, therefore, been a personal highlight to see the progress we have made in improving employee satisfaction, being accredited as an Outstanding place to work. Our employees believe the firm operates with sound values and a positive culture that allows them to flourish and be at their best.

The Group now features in the UK's top 5 financial services firms to work for (2021: 13th); top 15 North West companies to work for (2021: 48th); and 14th in the UK's top 75 mid-sized companies to work for (2021: 52nd).

Outlook

We have seen continued momentum in lending during the first quarter, a critical period for dealers to re-stock. New loan origination exceeded £270m, with the Group's loan book reaching £505m as at 31 March 2023, up 15% since the start of the year.

Whilst loan origination levels have continued to be very strong, end-user demand for product has also remained higher than expected, particularly in the motorhome and caravan sectors. A deeper contraction in discretionary spend across a number of sectors had been expected, which in turn would lead to a slowing of stock turn through the period. Whilst stock turn has now reached c.130 days, up from 120 days for FY 2022 (FY2021: 105 days), it remains significantly below seasonal expectations and our historical average of 150 days, leaving scope for further improvement in this area. Across the transportation sector, a catch-up of product delivery at the end of 2022, caused by COVID-19 outbreaks in China, has seen a mismatch of dealer demand for electric vehicles which are now physically in the UK against diesel vehicles that remain in transit. This has slowed loan origination in this sector specifically, which represents approximately 20% of our loan book, but is expected to be rebalanced through the balance of the year.

During the quarter, we have extended our product offering for a key client relationship, providing receivables financing or better known as invoice discounting to support their sales activity. We have also taken the first step to "lend to a lender" or wholesale funding, which could form the basis of an expected future partnership with an asset-based lender who provides hire purchase to businesses. Whilst both lending opportunities remain small in the context of our entire loan book at c2%, they present attractive future potential for the Group as we look to build even deeper relationships with our manufacturer and dealer partners through adjacent lending opportunities, alongside any organic approach to product development and/or business acquisition.

Notwithstanding the uncertain economic backdrop, we feel confident about the year ahead. With the expectation of achieving a loan book in the range of £550m-£600m by the close of 2023 and, in the near-term, net interest margin above our target of 6%, coupled with better-than-expected loss performance and lower arrears in light of the faster loan repayment, the Board believes that full year performance for the financial year ending 31 December 2023 will be materially ahead of management expectations, building on our outperformance in 2022 and a profitable (unaudited) first quarter of 2023.

DF Capital operates in very large diversified markets where we continue to see demand and have opportunities to lend in adjacent markets and, can develop new products and explore tactical transactions that play to our strategic ambitions. Collectively these initiatives underpin our ability to scale the bank. With the support of the British Business Bank's ENABLE Guarantee, our existing Tier 1 capital base and our activities to consider non-dilutive Tier 2 capital, we have the firepower to support our growth ambitions in 2023.

Carl D'Ammassa

Chief Executive Officer

Chief Financial Officer's Report

Dear Shareholder

We are delighted to report a full year pre-tax profit of £1.3m (2021: Loss £3.7m).

Significantly increased gross revenues underpinned by strong yield

Gross revenues, which are predominantly comprised of interest and facility fees, increased by 97% to £26.8m (2021: £13.6m) and reflects the increase in the average loan book during the year.

Gross yield in the year increased to 8.2% (2021: 7.9%), reflecting the impact of increasing Bank of England base rate and pricing on newly originated loans, benefitting from these base rate movements.

The average cost of retail deposits during the year increased to 1.90% (2021:1.16%). This increase reflects the significant increase on new product retail deposit rates during the year driven by the Bank of England base rate increasing from 0.25% as we entered 2022 to 3.5% by the close of the year. Our deposit book is an array of fixed rate tenors and therefore the increasing deposit rates will take time to fully flow through to the deposit book as a whole, as maturing deposits are replaced.

Net Interest Margin (NIM), which is gross yield less interest expense, was stable at 6.5% (2021: 6.5%) reflecting our ability to pass on base rate rises to our dealers as our underlying deposit interest rates increased. This was ahead of our NIM target of 6%.

Strong arrears and impairments performance

We have continued to intensively manage our loan portfolio and arrears position. Despite the macro-economic uncertainty, we have continued to see a low number of arrears cases during the year. However, the total value of arrears increased to 1.6% of the loan book at 31 December 2022 (31 December 2021: 0.4%). This arrears balance includes £4.7m of arrears in respect of one obligor who is in the process of completing a major refinancing of their balance sheet, after which we expect to be fully repaid. The arrears excluding this single obligor would have been 0.6%. We are pleased with the underlying quality and financial strength of our dealer obligors, many of which came out of the pandemic achieving record levels of sales and profitability.

As a percentage of average gross receivables, the Group's cost of risk for the year increased to 0.74% (2021: 0.32%). In 2021, our cost of risk benefitted from a reduction in the level of COVID-19 overlay in our IFRS9 model given the improving economic conditions and outlook for the UK economy at that time. During 2022 the Group has released the remaining COVID-19 provisions and replaced this with a cost-of-living and associated economic uncertainties model overlay.

Summarised Statement of Comprehensive Income	2022 £'000	2021 £'000
Gross revenues	26,842	13,641
Interest expense	(6,411)	(2,338)
Net income	20,431	11,303
Operating expenses	(16,831)	(14,507)
Impairment charges	(2,296)	(556)
Provisions for commitments and other liabilities	0	25
Profit/ (loss) before taxation	1,304	(3,735)
Taxation	8,457	59
Profit/ (loss) after taxation	9,761	(3,676)
Other comprehensive (loss)/income	(79)	(162)
Total comprehensive profit/ (loss)	9,682	(3,838)

Arrears (£'000)

	31-Dec-22	31-Dec-21	31-Dec-20	31-Dec-19
Arrears - principal repayment, fees and interest
1-30 days past due	136	105	27	643
31-60 days past due	1,084	834	22	225
61-90 days past due	25	0	39	87
91 days + past due	5,885	164	132	762
	7,130	1,103	220	1,717
% Loan book	1.6%	0.4%	0.2%	0.8%
Associated principal balance
1-30 days past due	2,016	951	96	5,505
31-60 days past due	1,512	834	7	482
61-90 days past due	214	0	14	226
91 days + past due	16,317	184	259	857
	20,058	1,970	376	7,070
% Loan book	4.6%	0.8%	0.3%	3.4%

The combined stage 1 and 2 impairment allowance at 31 December 2022 as a percentage of gross receivables was 0.46% (2021: 0.52%) which reflects the improved weighted average risk rating of the portfolio, the relatively low number of arrears cases and the estimated impact of the prevailing economic uncertainties on our customer base. These estimates remain higher than we have seen during 2022 but we believe align with broader external economic indicators. The total impairment allowance (comprising stages 1, 2 and 3) at 31 December 2022 as a percentage of gross receivables was 0.84% (2021: 0.69%).

Strong security position

In our core lending product, we provide working capital to UK based dealers secured against their inventory or stock. Loans are advanced, in the main, against the wholesale value of an asset. The value of dealer loans outstanding compared to wholesale value ('loan to value' or 'LTV') at 31 December 2022 was 91% (31 December 2021: 91%). We do not advance funds measured against retail prices, which typically represent a mark-up of approximately 20% on the wholesale invoice price. Accordingly, for our security position to be at risk, and for the Group to incur losses on recovery of an asset in the event of default there would need to be an average reduction of c25% in retail prices across the sectors and asset classes we support.

We often hold additional security, which can mitigate credit losses further, in the form of personal and/or cross company guarantees as well as having manufacturer repurchase or redistribution agreements in place across c65% of our core loan book (2021: c60%).

Unlocking operational leverage

We have continued to unlock the business' operational leverage given our highly digitised client facing processes, with ongoing investment in areas to support growth and scaling of the business, such as API-connections with dealers, robotic process automation (RPA) and character-recognition technologies. We believe we are building further scalability into our operational capabilities and much of the cost we need to support our near-term loan book targets is already embedded.

Headcount increased to 117 at December 2022 (December 2021: 93) reflecting the actions taken to strengthen and widen the reach of our commercial team in addition to bolstering our risk resources. We have carefully managed the inflationary pressures impacting our operating cost base, however, we are mindful of the cost of living pressures faced by a number of our employees. We, therefore, implemented two separate salary increases in April and October 2022 across the majority of our employees. Operating expenses increased by 16% to £16.8m (2021: £14.5m). This increase in operating expenses is considerably lower than the relative increase in net income, meaning our cost to income ratio has reduced significantly to 82% (2021: 128%). We expect to see further reductions in this ratio as we scale the business, underpinning the delivery of our return ambitions.

Recognition of deferred tax asset

The Directors expect profitable growth going forward and therefore believe it is probable the Group will be able to utilise the remaining tax losses in DF Capital Bank Limited. On this basis a deferred tax asset of £8.5m has been recognised. This gives a profit after tax for 2022 of £9.8m (2021: Loss £3.7m).

Well capitalised balance sheet supports lending ambitions

With equity at the year-end of £96.2m (December 2021: £86.1m), this gives us sufficient regulatory capital to support a loan book in excess of £0.5bn.

In January 2023 we agreed an initial £175m ENABLE Guarantee with the British Business Bank, which may also be increased in the future to £350m. This Guarantee commitment provides the Group with incremental capacity to scale its loan book without the need for additional Tier 1 equity capital by up to £75m on the basis of the initial £175m facility and up to £150m if the facility is increased to £350m. The Group continues to explore options to raise non-dilutive Tier 2 capital to further support its product diversification and medium-term growth strategy.

Our CET1 ratio at 31 December 2022 was c.22% (31 December 2021 c38%); well above our regulatory capital minimum limits.

Gavin Morris

Chief Financial Officer

Report of the Directors

The Directors present their Annual Report on the affairs of the Group, together with the consolidated financial statements, company financial statements and auditor's report, for the year ended 31 December 2022.

Details of significant subsequent events are contained in note 39 to these consolidated financial statements. An indication of likely future developments in the business of the Group are included in the Strategic Report section.

Information about the use of financial instruments by the Group is detailed within note 36 to the consolidated financial statements.

Principal activity

The principal activity of the Group is as a specialist personal savings and commercial lending bank group. The Group provides niche working capital funding solutions to dealers and manufacturers across the UK, enabled by competitively priced personal savings products.

Results and dividends

The total comprehensive profit for the year, after taxation, amounted to £9,682,000 (2021: loss £3,838,000).

The Directors do not recommend the payment of a dividend (2021: £nil).

Directors'

The Directors who held office during the year and up to the date of the Directors' report were as follows:

Mark Stephens

Sheryl Lawrence  (appointed 16 May 2022)

Nicole Coll  (appointed 16 May 2022)

Thomas Grathwohl

Haakon Stenrød  

Carl D'Ammassa  

Gavin Morris

Carole Machell  (resigned 15 June 2022)

Directors' shareholdings

As at 31 December 2022, the Directors held the following ordinary shares in the Company:

Director	Position	No. of ordinary shares	Voting rights (%)
Mark Stephens	Independent Board Chair	62,500	0.03%
Thomas Grathwohl	Independent Non-Executive Director	533,312	0.30%
Carl D'Ammassa	Chief Executive Officer	509,591	0.28%
Gavin Morris	Chief Financial Officer	384,026	0.21%

Significant shareholders

As at 31 December 2022, the following parties held greater than 3% of issued share capital in the Company in accordance with the requirements of Rule 5 of the Disclosure Guidance and Transparency Rules:

	No. of ordinary shares	Voting rights (%)
Watrium AS	26,646,093	14.86%
Liontrust Asset Management	23,700,305	13.21%
Davidson Kempner Capital Management	17,599,990	9.81%
Lombard Odier Asset Management	13,583,408	7.57%
BlackRock Investment Management	12,650,000	7.05%
Janus Henderson Investors	8,479,379	4.73%
UBS Securities	7,616,334	4.25%
River & Mercantile Asset Management	7,096,000	3.96%
M&G Investments	5,500,000	3.07%
Allianz Global Investors	5,400,000	3.01%
CRUX Asset Management	5,391,454	3.01%

Political and charitable donations

The Group made charitable donations of £3,569 (2021: £6,933) and no political donations during the year ended 31 December 2022 (2021: £nil).

Annual General Meeting

The Company anticipates holding its Annual General Meeting in May 2023.  The Notice of AGM and Form of Proxy will be posted to shareholders in due course and a copy will be available at www.dfcapital-investors.com. The AGM will be held at the Company's registered office in Manchester.

Directors' insurance and indemnities

The Group has maintained Directors and Officers liability insurance for the benefit of the Group, the Directors, and its officers. The Directors consider the level of cover appropriate for the business and will remain in place for the foreseeable future.

Statement of Going Concern

The Directors have completed a formal assessment of the Group's financial resources. In making this assessment the Directors have considered the Group's current available capital and liquidity resources, the business financial projections and the outcome of stress testing. Based on this review, the Directors believe that the Group is well placed to manage its business risks successfully within the expected economic outlook. See note 1.7 for further details.

Accordingly, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for a period of at least 12 months from the date of approval of the financial statements. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Financial Statements.

Corporate Governance

The Corporate Governance Report on pages 59 to 93 contains information about the Group's corporate governance arrangements.

Subsequent events

Details relating to significant events occurring between 31 December 2022 and the date of approval of the financial statements are detailed further within Note 39 of the consolidated financial statements.

Disclosure of information to the auditor

Each of the persons who is a Director at the date of approval of this annual report confirms that:

§ so far as the Director is aware, there is no relevant audit information of which the Company's auditors are unaware; and

§ the Director has taken all the steps that they ought to have taken as a Director in order to make themself aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006.

Reappointment of auditor

Deloitte LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.

Approved by the Board on 18 April 2023 and signed on its behalf by:

…..

Carl D'Ammassa

Director

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom adopted International Accounting Standards. The financial statements also comply with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). The directors have chosen to prepare the parent Company financial statements on the same basis.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss of the Group for the year.

In preparing these consolidated financial statements and Company financial statements, the Directors are required to:

§ properly select and apply accounting policies;

§ present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

§ provide additional disclosures when compliance with the specific requirements of the financial reporting framework are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

§ make an assessment of the company's ability to continue as a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies Act 2006.  They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the Directors in respect of the annual financial report

Each of the persons who is a Director at the date of approval of this report confirms, to the best of their knowledge, that:

§ the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

§ the Strategic Report/Directors' Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

§ the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Financial Statements

Consolidated Statement of Comprehensive Income

		2022	2021
	Note	£'000	£'000
Interest and similar income	4	25,407	13,259
Interest and similar expenses	6	(6,411)	(2,338)
Net interest income		18,996	10,921
Fee income	7	1,348	466
Net losses on disposal of financial assets at fair value through other comprehensive income	20	(17)	(3)
Net gains from derivatives and other financial instruments at fair value through profit or loss		99	-
Other operating income/(expense)		5	(81)
Total operating income		20,431	11,303
Staff costs	8	(10,848)	(9,121)
Other operating expenses	10	(5,983)	(5,386)
Net impairment loss on financial assets	13	(2,296)	(556)
Provisions	12	-	25
Total operating profit/(loss)		1,304	(3,735)
Profit/(loss) before taxation		1,304	(3,735)
Taxation	15	8,457	59
Profit/(loss) after taxation		9,761	(3,676)
Other comprehensive loss:
Items that may subsequently be transferred to the income statement:
FVOCI debt securities:
Amounts transferred to the income statement	20	17	3
Fair value movements on debt securities	20	(96)	(165)
Total other comprehensive loss for the year, net of tax		(79)	(162)
Total comprehensive income/(loss) for the year		9,682	(3,838)
Earnings per share:		pence	pence
Basic EPS	37	5	(2)
Diluted EPS	37	5	(2)

The notes on pages 114 to 180 are an integral part of these financial statements.

The financial results for all periods are derived entirely from continuing operations.

Consolidated Statement of Financial Position

		As at	As at
		31 December	31 December
		2022	2021
	Note	£'000	£'000
Assets:
Cash and balances at central banks		107,353	-
Loans and advances to banks1	26	3,848	29,597
Debt securities	20	22,964	108,867
Derivatives held for risk management	21	57	-
Loans and advances to customers	19	435,883	247,205
Trade and other receivables1	23	1,524	1,074
Current taxation asset1	24	55	59
Deferred taxation asset	25	8,457	-
Property, plant and equipment	16	1,045	99
Right-of-use assets	17	433	641
Intangible assets	18	877	1,066
Total assets		582,496	388,608
Liabilities:
Customer deposits	33	479,736	296,856
Derivatives held for risk management	21	42	-
Fair value adjustments on hedged liabilities	22	(84)	-
Financial liabilities	34	445	554
Trade and other payables	35	6,041	5,067
Provisions	12	77	73
Total liabilities		486,257	302,550
Equity:
Issued share capital	29	1,793	1,793
Share premium	29	39,273	39,273
Merger relief	29	94,911	94,911
Merger reserve	31	(20,609)	(20,609)
Own shares	30	(364)	(364)
Retained loss		(18,765)	(28,946)
Total equity		96,239	86,058
Total equity and liabilities		582,496	388,608

¹ In these consolidated financial statements, the Group reclassified a number of low value balances within the statement of financial position for the year ended 31 December 2021. See note 1.4 for details of this reclassification.

The notes on pages 114 to 180 are an integral part of these consolidated financial statements.

These financial statements were approved by the Board of Directors and authorised for issue on 18 April 2023.  They were signed on its behalf by:

…

Carl D'Ammassa

Director

18 April 2023

Registered number: 11911574

Consolidated Statement of Changes in Equity

	Issued share capital	Share premium	Merger relief	Merger reserve	Own shares	Retained loss	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 January 2021	1,066	-	94,911	(20,609)	(364)	(24,115)	50,889
Loss after taxation	-	-	-	-	-	(3,676)	(3,676)
Other comprehensive loss	-	-	-	-	-	(162)	(162)
Share based payments	-	-	-	-	-	362	362
Issue of new shares	727	39,273	-	-	-	(1,355)	38,645
Balance at 31 December 2021	1,793	39,273	94,911	(20,609)	(364)	(28,946)	86,058
Profit after taxation	-	-	-	-	-	9,761	9,761
Other comprehensive loss	-	-	-	-	-	(79)	(79)
Share based payments	-	-	-	-	-	499	499
Balance at 31 December 2022	1,793	39,273	94,911	(20,609)	(364)	(18,765)	96,239

The notes on pages 114 to 180 are an integral part of these consolidated financial statements.

Refer to note 29 to 31 for further details on equity movements during the periods.

Consolidated Cash Flow Statement

		2022	2021
	Note	£'000	£'000
Cash flows from operating activities:
Profit/(loss) before taxation		1,304	(3,735)
Adjustments for non-cash items and other adjustments included in the income statement	27	4,664	1,446
Increase in operating assets	27	(193,189)	(136,244)
Increase in operating liabilities	27	183,809	151,711
Taxation received	24	4	-
Net cash (used in)/generated from operating activities		(3,408)	13,178
Cash flows from investing activities:
Purchase of debt securities	20	-	(350,980)
Proceeds from sale and maturity of debt securities	20	85,070	307,958
Interest received on debt securities	20	746	549
Purchase of property, plant and equipment	16,17	(1,041)	(253)
Purchase of intangible assets	18	(193)	(586)
Net cash generated from/(used in) investing activities		84,582	(43,312)
Cash flows from financing activities:
Issue of new shares	29	-	38,645
Repayment of lease liabilities	32	(141)	(147)
Net cash (used in)/generated from financing activities		(141)	38,498
Net increase in cash and cash equivalents		81,033	8,364
Cash and cash equivalents at start of the year		29,597	21,233
Cash and cash equivalents at end of the year	27	110,630	29,597

Notes to the Financial Statements

1. Basis of preparation

1.1  General information

The consolidated financial statements of Distribution Finance Capital Holdings plc (the "Company" or "DFCH plc") include the assets, liabilities, and results of its wholly owned subsidiary, DF Capital Bank Limited (the "Bank"), together form the "Group".

DFCH plc is registered and incorporated in England and Wales whose company registration number is 11911574. The registered office is St James' Building, 61-95 Oxford Street, Manchester, England, M1 6EJ. The Company's ordinary shares are listed on the Alternative Investment Market ("AIM") of the London Stock Exchange.

The principal activity of the Company is that of an investment holding company. The principal activity of the Group is as a specialist personal savings and commercial lending banking group. The Group provides niche working capital funding solutions to dealers and manufacturers across the UK, enabled by competitively priced personal savings products.

These financial statements are presented in pounds sterling, which is the currency of the primary economic environment in which the Group operates, and are rounded to the nearest thousand pounds, unless stated otherwise.

1.2 Basis of preparation

The Group consolidated financial statements and the Company financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the United Kingdom (UK) and interpretations issued by the IFRS Interpretations Committee (IFRS IC).

The consolidated and Company financial statements are prepared on a going concern basis and under the historical cost convention except for the treatment of certain financial instruments, including the revaluation of debt securities held at fair value through other comprehensive income (FVTOCI), and derivative contracts and other financial assets or liabilities held at fair value through profit or loss (FVTPL).

By including the Company financial statements, here together with the Group consolidated financial statements, the Company is taking advantage of the exemption in Section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements.

1.3 Basis of consolidation

The Group accounts include the results of the Company and its subsidiary undertakings. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are deconsolidated from the date that control ceases. Accounting policies of the Company and its subsidiaries are consistent. The Group 'controls' an entity if it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

Upon consolidation, all intra-group transactions, balances, income, and expenses are eliminated within the consolidated financial statements within this Annual Report and Financial Statements. The consolidated financial statements contained in this Annual Report consolidate the statements of total comprehensive income, statements of financial position, cash flow statements, statements of changes in equity and related notes for Distribution Finance Capital Holdings plc and DF Capital Bank Limited, which together form the "Group", which have been prepared in accordance with applicable IFRS accounting standards. Accounting policies have been applied consistently throughout the Group and its subsidiary.

1.4 Reclassification

Taxation

During the year ended 31 December 2022, the Group recognised a deferred tax asset given as it is now reasonably probable that future taxable profits will be available to be utilised against prior taxable losses. In these consolidated financial statements, the Group has enhanced the taxation disclosure to present separately the deferred taxation asset and current taxation asset on the statement of financial position due to materiality. In the year ended 31 December 2021, a current taxation asset of £59,000 was previously recognised within 'trade and other receivables', which has been reclassified to form part of the 'current taxation asset'.

Cash and cash equivalents

During the year ended 31 December 2022, the Group began holding cash and cash equivalents with central banks, in addition to its existing cash and cash equivalent balances held with other banking institutions. These cash balances held with other banks were previously presented as cash and cash equivalents within the statement of financial position.

For the year ended 31 December 2021, the Group has reclassified £29,597,000 from 'cash and cash equivalents' to 'loans and advances to banks'. The cash and cash equivalents amount held within loans and advances to banks is still reflected in the cash flow statement and other supporting notes.

1.5 Adoption of new and revised standards and interpretations

International financial reporting standards issued and adopted for the first time in the year ended 31 December 2022

There were a number of minor amendments to financial reporting standards that are effective for the current year. There has been no material impact on the financial statements of the Group from the adoption of these financial reporting standard amendments and interpretations. The Group will comply with these from the stated effective date:

New Accounting Standard	Description of change	Effective Date	Impact on the Group
Classification of liabilities as current or non-current (IAS 1)	The amendments clarify the requirements for classifying liabilities as current or non-current. More specifically: ➢ The amendments specify that the conditions which exist at the end of the reporting period are those which will be used to determine if a right to defer settlement of a liability exists. ➢ Management expectations about events after the balance sheet date, for example on whether a covenant will be breached, or whether early settlement will take place, are not relevant. The amendments clarify the situations that are considered settlement of a liability.	01 July 2022 - 30 June 2023.	The Group presents its assets and liabilities in order of liquidity in its statement of financial position. This amendment will only affect the disclosures and the Group does not expect this amendment to have a significant impact on the annual financial statements.
Improvements to IFRS (Annual improvements 2016 - 2018)	The IASB issued the Annual improvements to IFRS standards 2016-2018 Cycle. These annual improvements include amendments to the following standards. IFRS 9 - The amendment clarifies that fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other's behalf.	01 July 2022 - 30 June 2023.	The amendments are not expected to have a significant impact on the annual financial statements.

International financial reporting standards issued but not yet effective which are applicable to the Group.

Certain amendments to accounting standards and interpretations that were not effective on 31 December 2022 have not been early adopted by the Group. The adoption of these amendments are not expected to have a material impact on the financial statements of the Group in future periods.

1.6 Principal accounting policies

The principal accounting policies adopted in the preparation of this financial information are set out below. These policies have been applied consistently to all the financial periods presented.

1.7 Going concern

The financial statements are prepared on a going concern basis as the Directors are satisfied that the Group has adequate resources to continue operating for a period of at least 12 months from the date of approval of the financial statements.  In making this assessment the Directors have considered:

· The Group's financial projections;

· The Group's current available capital and liquidity  resources and  surplus  over regulatory and risk appetite requirements;

· The stress testing and capital and liquidity planning performed as a part of the ICAAP and ILAAP  indicate adequate capital and liquidity buffers and the ability to effectively manage stresses and resources. A number of severe and plausible scenarios were considered as part of  the  stress  testing  process including a combination of severe idiosyncratic and macroeconomic scenarios which included the potential impact of the cost of living crisis on our dealers; 

· Recent failures in the banking sector (e.g. Silicon Valley Bank) and any implications for the Group. This included consideration of our deposit base which is made up entirely of retail customers of which 98% are fully covered by the Financial Services Compensation Scheme ('FSCS'). The liquid assets of the Group being predominantly either cash held at the Bank of England or in UK government gilts and treasury bills. The Group's asset and liability maturity profile;

· In respect of climate change, the Board recognises the long-term risks and these are considered as part of the annual ICAAP.

Based on this review, the Directors believe that the Group is well placed to manage its business risks successfully within the expected economic outlook. Accordingly, the Directors have adopted the going concern basis in preparing the financial statements.

Information on the Group's business strategy, performance and outlook are detailed in the Chairman's Statement, Chief Executive Officer's review and Chief Financial Officer's review. The Risk Overview sections further detail the key risks faced by the Group and mitigants and provides an overview of the Group's Risk Management Framework.

1.8 Critical accounting estimates and judgements

In accordance with IFRS, the Directors of the Group are required to make judgements, estimates and assumptions in certain subjective areas whilst preparing these financial statements. The application of these accounting policies may impact the reported amounts of assets, liabilities, income and expenses and actual results may differ from these estimates.

Any estimates and underlying assumptions used within the statutory financial statements are reviewed on an ongoing basis, with revisions recognised in the period in which they are adjusted, and any future periods affected.

Further details can be found in note 3 on the critical accounting estimates and judgements used within these financial statements.

1.9 Foreign currency translation

The financial statements are expressed in Pound Sterling, which is the functional and presentational currency of the Group.

Transactions in foreign currencies are translated to the Group's functional currency at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign exchange differences arising on translation are recognised in the statement of income.

2. Summary of significant accounting policies

2.1 Revenue recognition

Net interest income

Interest income and expense for all financial instruments except for those classified as held for trading or measured or designated as at fair value through profit and loss ("FVTPL") are recognised in "Net interest income" as "Interest income" and "Interest expenses" in the income statement using the effective interest method.

The effective interest rate ("EIR") is the rate that exactly discounts estimated future cash flows of the financial instrument through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. The future cash flows are estimated taking into account all the contractual terms of the instrument.

The calculation of the EIR includes all fees and points paid or received between parties to the contract that are incremental and directly attributable to the specific lending arrangement, transaction costs, and all other premiums or discounts.

In calculating the EIR, management have taken into consideration the behavioural characteristics of the underlying loans in the lending portfolio which includes evaluating the expected duration of loans and any additional behavioural fees.

The EIR is adjusted where there is a movement in the reference interest rate (SONIA, or base rate) affecting portfolios with a variable interest rate which will impact future cash flows.

The interest income/expense is calculated by applying the EIR to the gross carrying amount of non-credit impaired financial assets (that is, to the amortised cost of the financial asset before adjusting for any expected credit loss allowance), or to the amortised cost of financial liabilities.

For credit-impaired financial assets, as defined in the financial instruments accounting policy, the interest income is calculated by applying the EIR to the amortised cost of the credit-impaired financial assets (that is, to the gross carrying amount less the allowance for expected credit losses ("ECLs").

Interest income on debt securities is included in interest and similar income. Interest on derivatives is included in interest and similar income or interest and similar expenses charges following the underlying instrument it is hedging.

Fee income

All fee income relates to fees charged directly to customers based on their credit facility. These fees do not meet the criteria for inclusion within interest income.  The Group satisfies its performance obligations as the services are rendered.  These fees are billed in arrears of the period they relate to.

Fee income is recognised in accordance with IFRS 15 which sets out the principles to follow for revenue recognition which takes into consideration the nature, amount, timing and uncertainty of revenue and cash flows resulting from a contract with a customer. The accounting standard presents a five-step approach to income recognition to enable the Group to recognise the correct amount of income in the corresponding period(s):

· the contract has been approved by the parties to the contract; 

· each party's rights in relation to the goods or services to be transferred can be identified; 

· the payment terms for the goods or services to be transferred can be identified; 

· the contract has commercial substance; and 

· it is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected.

All other income is currently recognised under IFRS 9 under the effective interest rate methodology, however, when new fees are implemented, they will be assessed as to whether they fall under IFRS 9 (EIR) or IFRS 15. IFRS 9 and IFRS 15 have been applied consistently to all the financial periods presented.

Net gains / (losses) from derivatives and other financial instruments at fair value through profit or loss

Net gains/(losses) from derivatives and other financial instruments at fair value through profit or loss relate to non-trading derivatives held for risk management purposes. It includes all realised and unrealised fair value movements, interest and foreign exchange differences.

Other income from financial instruments

Debt securities are measured at fair value through other comprehensive income. The securities are measured at their closing bid prices at the reporting date with any unrealised gain or loss recognised through other comprehensive income. Once the assets have been disposed, the corresponding realised gain or loss is transferred from other comprehensive income into the income statement.

Other operating income/(expense)

Other operating income/(expense) predominantly consists of UK government grant monies (including repayments of previously awarded monies) and other minor income received by the Group.

2.2 Property, plant and equipment

All property, plant and equipment is stated at historical cost (or deemed historical cost) less accumulated depreciation, and less any identified impairment. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. 

Depreciation is provided on all property, plant and equipment at rates calculated to write each asset down to its estimated residual value on a straight-line basis at the following annual rates:

Fixtures & fittings     3 years

Computer equipment  3 years

Telephony & communications  3 years

Leasehold improvements  3 years

Motor vehicles  3 years

Right-of-use assets are depreciated over the shorter period of the lease term and the useful life of the underlying asset. All current lease agreements have a maximum lease term of 5 years. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset.

Useful economic lives and estimated residual values are reviewed annually and adjusted as appropriate.

The gain or loss arising on the disposal of an asset is determined as the difference between the sales proceeds less any costs of disposal and the carrying amount of the asset, which is recognised in the Income Statement.

2.3 Intangible assets

Computer software

Computer software which has been purchased by the Group from third party vendors is measured at initial cost less accumulated amortisation and less any accumulated impairments.

Computer software is estimated to have a useful life of 3 years with no residual value after the period. These assets are amortised on a straight-line basis with the useful economic lives and estimated residual values being reviewed annually and adjusted as appropriate.

Internally generated intangible assets

Internally generated intangible assets are only recognised by the Group when the recognition criteria have been met in accordance with IAS 38: Intangible Assets as follows:

· expenditure can be reliably measured;

· the product or process is technically and commercially feasible;

· future economic benefits are likely to be received;

· intention and ability to complete the development; and

· view to either use or sell the asset in the future.

The Group will only recognise an internally generated asset should it meet all the above criteria. In the event of a development not meeting the criteria it will be recognised within the consolidated income statement in the period incurred.

Capitalised costs include all directly attributable costs to the development of the asset. Internally generated assets are measured at capitalised cost less accumulated amortisation less accumulated impairment losses.

The internally generated asset is amortised at the point the asset is available for use or sale. The asset is amortised on a straight-line basis over the useful economic life with the remaining useful economic life and residual value being assessed annually. The estimated useful economic life of internally generated assets is 3-5 years with no expected residual balance.

Any subsequent expenditure on the internally generated asset is only capitalised if the cost increases the future economic benefits of the related asset. Otherwise, all additional expenditure should be recognised through the income statement in the period it occurs.

2.4 Financial instruments

Initial recognition

Financial assets and financial liabilities are recognised in the statement of financial position when the Group becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value.  Transaction costs that are directly attributable to the acquisition or issue of the financial assets and financial liabilities (other than financial assets and financial liabilities at FVTPL) are respectively added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.  Transaction costs that are not directly attributable to the acquisition of financial assets and financial liabilities at FVTPL are recognised immediately in the consolidated income statement.

Classification

The Group classifies financial instruments based on the business model and the contractual cash flow characteristics of the financial instruments. Under IFRS 9, the Group classifies financial assets into one of three measurement categories:

§ Amortised cost - assets in a business model whose objective is to hold financial assets to collect contractual cash flows, where the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding. The Group classifies non-derivative financial liabilities as measured at amortised cost.

§ Fair value through other comprehensive income (FVOCI) - assets held in a business model whose objective is to collect contractual cash flows and sell financial assets where the contractual terms of the financial assets give rise on specified dates to cash flows that are SPPI on the principal amount outstanding. The Group measures debt securities under this category.

§ Fair value through profit or loss (FVTPL) - assets not measured at amortised cost or FVOCI. The Group measures derivatives under this category.

The Group has no non-derivative financial assets or liabilities classified as held for trading.

The Group reassesses its business models each reporting period.

The Group classifies certain financial instruments as equity where they meet the following conditions:

§ the financial instrument includes no contractual obligation to deliver cash or another financial asset on potentially unfavourable conditions;

§ the financial instrument is a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or

§ the financial instrument is a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

Financial assets - measurement

I.  Financial assets measured at amortised cost

These are initially measured at fair value plus transaction costs that are directly attributable to the financial asset. Subsequently, these are measured at amortised cost using the EIR method. The amortised cost is the amount advanced less principal repayments, plus or minus the cumulative amortisation using the EIR method of any difference between the amount advanced and the maturity amount, less impairment provisions for expected losses. The losses arising from impairment are recognised in the income statement and disclosed with any other similar losses within the line item "Net impairment loss on financial assets". 

Financial assets measured at amortised cost mainly comprise loans and advances to customers, loans and advances to banks, and other receivables.

II.  Fair value through other comprehensive income (FVTOCI)

These are initially measured at fair value plus transaction costs that are directly attributable to the financial asset.

Subsequently, they are measured at fair value based on current, quoted bid prices in active markets for identical assets that the Group can access at the reporting date. Where there is no active market, or the debt securities are unlisted, the fair values are based on valuation techniques including discounted cash flow analysis, with reference to relevant market rates and other commonly used valuation techniques. Interest income is recognised in the income statement using the EIR method. Impairment provisions for expected losses are recognised in the income statement which does not reduce the carrying amount of the investment security but is transferred from the FVOCI reserve in equity. Other fair value movements are recognised in other comprehensive income and presented in the FVOCI reserve in equity. On disposal, the gain or loss accumulated in equity is reclassified to the income statement.

FVTOCI financial assets includes debt securities in the form of UK Treasury Bills and UK Gilts. These assets are not classified as: loans and receivables; held-to-maturity investments; or financial assets at fair value through profit or loss.

Regular purchases and sales of debt securities are recognised on the trade date at which the Group commits to purchase or sell the asset.

III.  Financial assets at fair value through profit or loss (FVTPL)

These are measured both initially and subsequently at fair value with movements in fair value recorded in the income statement. Any costs that are directly attributable to their acquisition are recognised in profit or loss when incurred. The Group only measures derivative financial assets under this classification.

Financial assets - Impairment

The Group recognises loss allowances for expected credit losses ("ECLs") on the following financial instruments that are not measured at FVTPL:

· Financial assets measured at amortised cost;

· Debt securities measured at fair value through other comprehensive income; and

· Loan commitments

IFRS 9 permits entities to apply a 'simplified approach' for trade receivables, contract assets and lease receivables. The simplified approach permits entities to recognise lifetime expected losses on all these assets without the need to identify significant increases in credit risk. The Group has adopted this simplified approach for assessing trade and other receivables balances. The Group confirms these trade and other receivable balances do not contain a significant financing component.

With the exception of purchased or originated credit impaired ("POCI") financial assets (which are considered separately below), ECLs are measured through loss allowances calculated on the following bases.

ECLs are a probability-weighted estimate of the present value of credit losses. The Group measures ECL on an individual basis, or on a collective basis for portfolios of loans that share similar economic risk characteristics. The loss allowance is measured as the difference between the contractual cash flows and the present value of the asset's expected cash flows using the asset's original EIR, regardless of whether it is measured on an individual basis or a collective basis.

A financial asset that gives rise to credit risk, is referred to (and analysed in the notes to this financial information) as being in "Stage 1" provided that since initial recognition (or since the previous reporting date) there has not been a significant increase in credit risk, nor has it has become credit impaired.

For a Stage 1 asset, the loss allowance is the "12-month ECL", that is, the ECL that results from those default events on the financial instrument that are possible within 12 months from the reporting date.

A financial asset that gives rise to credit risk is referred to (and analysed in the notes to this financial information) as being in "Stage 2" if since initial recognition there has been a significant increase in credit risk (SICR) but it is not credit impaired.

For a Stage 2 asset, the loss allowance is the "lifetime ECL", that is, the ECL that results from all possible default events over the life of the financial instrument.

A financial asset that gives rise to credit risk is referred to (and analysed in the notes to this financial information) as being in "Stage 3" if since initial recognition it has become credit impaired.

For a Stage 3 asset, the loss allowance is the difference between the asset's projected exposure at default (EAD) and the present value of estimated future cash flows discounted at an applicable EIR. Further, the recognition of interest income is constrained relative to the amounts that are recognised on Stage 1 and Stage 2 assets, as described in the revenue recognition policy set out above.

If circumstances change sufficiently at subsequent reporting dates, an asset is referred to by its newly appropriate Stage and is re-analysed in the notes to the financial information.

Where an asset is expected to mature in 12 months or less, the "12-month ECL" and the "lifetime ECL" have the same effective meaning and accordingly for such assets the calculated loss allowance will be the same whether such an asset is at Stage 1 or Stage 2. In order to determine the loss allowance for assets with a maturity of 12 months or more, and disclose significant increases in credit risk, the Group nonetheless determines which of its financial assets are in Stages 1 and 2 at each reporting date. 

Significant increase in credit risk - policies and procedures for identifying Stage 2 assets

Whenever any contractual payment is past due, the Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition in order to determine whether credit risk has increased significantly.

See note 36 for further details about how the Group assesses increases in significant credit risk.

Definition of a default

Critical to the determination of significant increases in credit risk (and to the determination of ECLs) is the definition of default. Default is a component of the probability of default (PD), changes in which lead to the identification of a significant increase in credit risk, and PD is then a factor in the measurement of ECLs. 

The Group's definition of default for this purpose is:

· A counterparty defaults on a payment due under a loan agreement and that payment is more than 90 days overdue;

· The collateral that secures, all or in part, the loan agreement has been sold or is otherwise not available for sale and the proceeds have not been paid to the Group; or

· A counterparty commits an event of default under the terms and conditions of the loan agreement which leads the lending company to believe that the borrower's ability to meet its credit obligations to the Group is in doubt.

The definition of default is similarly critical in the determination of whether an asset is credit-impaired (as explained below).

Credit-impaired financial assets - policies and procedures for identifying Stage 3 assets

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. IFRS 9 states that evidence of credit-impairment includes observable data about the following events:

· A counterparty is 90 days past due for one or more of its loan receivables;

· Significant financial difficulty of the borrower or issuer;

· A breach of contract such as a default (as defined above) or past due event, or

· The Group, for economic or contractual reasons relating to the borrower's financial difficulty, having granted to the borrower a concession that the Group would not otherwise consider.

The Group assesses whether debt instruments that are financial assets measured at amortised cost or at FVTOCI are credit-impaired at each reporting date.  When assessing whether there is evidence of credit-impairment, the Group takes into account both qualitative and quantitative indicators relating to both the borrower and to the asset. The information assessed depends on the borrower and the type of the asset.  It may not be possible to identify a single discrete event - instead, the combined effect of several events may have caused financial assets to become credit-impaired.

See note 31 for further details about how the Group identifies credit impaired assets.

Purchased or originated credit-impaired ("POCI") financial assets

POCI financial assets are treated differently because they are in Stage 3 from the point of original recognition.  It is not in the nature of the Group's business to purchase financial assets originated by other lenders, nor has the Group to date originated any loans or advances to borrowers that it would define as credit impaired.

Movements back to stages 1 and 2

Exposures will move out of stage 3 to stage 2 when they no longer meet the criteria for inclusion and have completed a minimum 3-month probation period as set according to the type of lending and default event circumstances. Movement into stage 1 will only occur when the SICR criteria are no longer met.

Presentation of allowance for ECL in the statement of financial position

Loss allowances for ECL are presented in the statement of financial position as follows:

· For financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets; and

· For loan commitments: as a provision.

Revisions to estimated cash flows

Where cash flows are significantly different from the original expectations used to determine EIR, but where this difference does not arise from a modification of the terms of the financial instrument, the Group revises its estimates of receipts and adjusts the gross carrying amount of the financial asset to reflect actual and revised estimated contractual cash flows. The Group recalculates the gross carrying amount of the financial asset as the present value of the estimated future contractual cash flows discounted at the financial instrument's original EIR.

The adjustment is recognised in the consolidated income statement as income or expense.

Modification of financial assets

A modification of a financial asset occurs when the contractual terms governing a financial asset are renegotiated without the original contract being replaced and derecognised.  A modification is accounted for in the same way as a revision to estimated cash flows, and in addition;

· Any fees charged are added to the asset and amortised over the new expected life of the asset, and

· The asset is individually assessed to determine whether there has been a significant increase in credit risk.

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

On derecognition of a financial asset in its entirety, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in the income statement.

On derecognition of a financial asset other than in its entirety (e.g. when the Group retains an option to repurchase part of a transferred asset), the Group allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognised in the consolidated statement of comprehensive income. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts.

Write-offs

Loans and advances are written off when the Group has no reasonable expectation of recovering the financial asset; either in its entirety or a portion of it. This is the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. A write-off constitutes a derecognition event. The Group may apply enforcement activities to financial assets written off. Recoveries resulting from enforcement activities will result in impairment gains.

Forward-looking macroeconomic scenarios

ECLs and SICR take into account forecasts of future economic conditions in addition to current conditions. The Group has developed a macroeconomic model which adjusts the ECLs calculated by the credit models to provide probability weighted numbers based on a number of forward-looking macroeconomic scenarios.

Due to the assumptions and estimates within these forward-looking macroeconomic scenarios, refer to note 3 for further details of the Group's approach.

Financial liabilities

A financial liability is a contractual obligation to deliver cash or another financial asset or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Group or a contract that will or may be settled in the Group's own equity instruments, or a derivative contract over own equity that will or may be settled other than by the exchange of a fixed amount of cash (or another financial asset) for a fixed number of the Group's own equity instruments. Gains or losses on financial liabilities are recognised in the consolidated statement of comprehensive income.

Financial liabilities and equity

Debt and equity instruments that are issued are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

Equity instruments

The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. Where an instrument contains no obligation on the Group to deliver cash or other financial assets, or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Group, or where the instrument will or may be settled in the Group's own equity instruments but includes no obligation to deliver a variable number of the Group's own equity instruments, then it is treated as an equity instrument. Accordingly, the Group's share capital are presented as components of equity and any dividends, interest or other distributions on capital instruments are also recognised in equity. Any related tax is accounted for in accordance with IAS 12.

Financial liabilities - measurement

Financial liabilities are classified as either financial liabilities measured at amortised cost  or financial liabilities at FVTPL.

I.  Financial liabilities measured at amortised cost

Financial liabilities at amortised cost are recognised initially at fair value net of transaction costs incurred. They are subsequently measured at amortised cost. Any difference between the fair value and the redemption value is recognised in the income statement over the period of the borrowings using the EIR method.

Interest bearing loans and borrowings are measured at amortised cost using the effective interest rate method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the effective interest rate method (EIR) amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in "Interest and similar expenses" in the Income Statement.

II.  Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss may include financial liabilities held for trading. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term.

During the periods presented the Group has held no financial liabilities for trading, nor designated any financial liabilities upon initial rec ognition as at fair value through profit or loss.

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or they expire.

Impairment of non-financial assets

The carrying amounts of the Group's non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets ('the cash-generating unit').

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit ("CGU") exceeds its estimated recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of CGUs are allocated to reduce the carrying amounts of assets in the unit (or group of units) on a pro rata basis.

An impairment loss is reversed if and only if the reasons for the impairment have ceased to apply.

Impairment losses recognised in prior periods are assessed at each reporting date for any indication that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

2.5 Derivative financial instruments

The Group uses derivative financial instruments (interest rate swaps) to manage its exposure to interest rate risk. In accordance with the Group Treasury Policy, the Group does not hold or issue derivative financial instruments for proprietary trading.

Derivative financial instruments are recognised at their fair value with changes in their fair value taken to profit or loss. Fair values are calculated by discounting cash flows at the prevailing interest rates. All derivatives are classified as assets when their fair value is positive and as liabilities when their fair value is negative. If a derivative is cancelled, it is derecognised from the Consolidated Statement of Financial Position. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not due to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.

2.6 Hedge accounting

Due to the simplistic nature of the Group's hedging activities, the Group has adopted to apply IFRS 9 for portfolio assets and liabilities being hedged by applying fair value hedge accounting.

The Group designates certain derivatives held for risk management as hedging instruments in qualifying hedging relationships. On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and hedged items, including the risk management objective, the strategy in undertaking the hedge and the method that will be used to assess the effectiveness of the hedging relationship.

The Group makes an assessment, both at the inception of the hedge relationship, as well as on an ongoing basis, as to whether the hedging instruments are expected to be highly effective in offsetting the movements in the fair value of the respective hedged items during the period for which the hedge is designated.

Where there is an effective hedge relationship for fair value hedges, the Group recognises the change in fair value of each hedged item in profit or loss with the cumulative movement in their value being shown separately in the Consolidated Statement of Financial Position as fair value adjustments on hedged assets and liabilities. The fair value changes of both the derivative and the hedge substantially offset each other to reduce profit volatility.

The Group discontinues hedge accounting when the derivative ceases through expiry, when the derivative is cancelled or the underlying hedged item matures, is sold or is repaid.

If a derivative no longer meets the criteria for hedge accounting or is cancelled whilst still effective, the fair value adjustment relating to the hedged assets or liabilities within the hedge relationship prior to the derivative becoming ineffective or being cancelled remains on the Consolidated Statement of Financial Position and is amortised over the remaining life of the hedged assets or liabilities. The rate of amortisation over the remaining life is in line with expected income or cost generated from the hedged assets or liabilities. Each reporting period, the expectation is compared to actual with an accelerated run-off applied where the two diverge by more than set parameters.

Fair value hedge accounting for portfolio hedges of interest rate risk

The Group applies fair value hedge accounting for portfolio hedges of interest rate risk. As part of its risk management process, the Group identifies portfolios whose interest rate risk it wishes to hedge. The portfolios comprise of only liabilities. The Group analyses each portfolio into repricing time periods based on expected repricing dates, by scheduling cash flows into the periods in which they are expected to occur. Using this analysis, the Group designates as the hedged item an amount of the liabilities from each portfolio that it wishes to hedge.

The amount to hedge is determined based on a movement in the present value of the Group's balance sheet under a 200-basis point shift in the yield curve being used to value the instruments to ensure the mismatches in expected repricing buckets are within the limits set by the Board on the sensitivity analysis approach using a hypothetical shift in interest rates.

The Group measures monthly the movements in fair value of the portfolio relating to the interest rate risk that is being hedged. Provided that the hedge has been highly effective, the Group recognises the change in fair value of each hedged item in the income statement with the cumulative movement in their value being shown on the statement of financial position as a separate item, 'Fair value adjustment for portfolio hedged risk', either within assets or liabilities as appropriate.

The Group measures the fair value of each hedging instrument monthly. The value is included in derivatives held for risk management in either assets or liabilities as appropriate, with the change in value recorded in net gains from derivatives and other financial instruments at fair value through profit or loss in the income statement. Any hedge ineffectiveness is recognised in net gains/(losses) from derivatives and other financial instruments at fair value through profit or loss in the income statement as the difference between the change in fair value of the hedged item and the change in fair value of the hedging instrument.

2.7 Current and deferred income tax

Income tax on the result for the period comprises current and deferred income tax. Income tax is recognised in the statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable or receivable on the taxable income for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous periods.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets are recognised to the extent it is probable that taxable profits will be available against which the deductible temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Deferred tax liabilities are recognised for all taxable temporary differences.

The Company and its UK subsidiaries are in the same VAT group.

2.8 Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise cash and non-mandatory deposits held with central banks, mandatory deposits held with central banks in demand accounts and amounts due from banks with an original maturity of less than three months that are available to finance the Group's day-to-day operations.

2.9 Employee benefits - pension costs

A defined contribution plan is a post-employment benefit plan under which the Group pays fixed contributions into a separate entity and will have a legal or constructive obligation to pay further amounts. Contributions to defined contribution schemes are charged to the statement of comprehensive income as they become payable in accordance with the rules of the scheme. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the statement of financial position.

2.10 Share based payments

The Group has a number of long-term incentive share schemes for all employees, including some Directors, whereby they have been granted equity-settled share-based payments in the Group. The share schemes all have vesting conditions with some schemes for senior management being subject to specific performance conditions. All share schemes are equity settled share-based payments.

The fair value of equity settled share-based payment awards are calculated at grant date and recognised over the period in which the employees become unconditionally entitled to the awards (the vesting period). Fair value is measured by use of the Black-Scholes option pricing model. The variables used in the model are adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

The share-based payments are recognised as staff costs in the income statement and expensed on a straight-line basis over the vesting period, based on estimates of the number of shares which may eventually vest. The amount recognised as an expense is adjusted to reflect differences between expected and actual outcomes, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and specific performance conditions at the vesting date. The change in estimations, if any, is recognised in the income statement at the time of the change with a corresponding adjustment in equity through the retained earnings account.

See note 9 for further details on the share schemes.

2.11 Leasing

The Group presently is only a lessee with lease agreements with third-party suppliers. It does not hold any lessor contracts with customers. 

IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer for which these are deemed as right-of-use assets. The lessee is required to recognise a right-of-use asset representing the Group right of use and control over the leased asset. Furthermore, the Group is required to recognise a lease liability representing its obligation to make lease payments over the relevant term of the lease. The Group will recognise both interest expense and depreciation charges, which equate to the finance costs of the leases.

Furthermore, the classification of cash flows will also be affected because operating lease payments under IAS 17 are presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively.

Lease liability

The lease liability is initially measured at the present value of the lease payments that are not paid at that date. The Group assesses on a lease-by-lease payments the contractual terms of the lease and likelihood of the Group enacting on available extension and break clauses within the lease in order to determine the expected applicable term of the lease. Once determined, the Group analyses the expected future payments of the lease over this applicable term, which are discounted. The interest rate used to discount the cashflows is the interest rate implicit to the lease agreement. Where this is not available, the Group has applied their incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Group would have to pay to borrow, over a similar term and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst other variables. The interest expense of the lease liability is calculated under the effective interest rate where the interest expense equates to the lease payments over the remaining term.

Right-of-use asset

The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability.

The cost at initial recognition is calculated as the initial lease liability plus initial direct costs, expected restoration costs and remaining prepayment balances at the commencement date.

The right-of-use asset is subsequently measured at cost, less accumulated depreciation, and any accumulated impairment losses. Any remeasurement of the lease liability results in a corresponding adjustment to the right-of-use asset.

The Company calculates depreciation of the right-of-use asset in accordance with IAS 16 'Property, Plant and Equipment' and is consistent with the depreciation methodology applied to other similar assets. All leases are depreciated on a straight-line basis over the shorter of the lease term and the useful life of the right-of-use asset.

Restoration costs will be estimated at initial application and added to the right-of-use asset and a corresponding provision raised in accordance with IAS 37 'Provisions, contingent liabilities, and contingent assets. Any subsequent change in the measurement of the restoration provision, due to a revised estimation of expected restoration costs, is accounted for as an adjustment of the right-of-use asset.

Short-term leases and leases of low value assets

The Group leases some smaller asset classes, such as computer hardware, which either has a value under £5,000 per annum or has a lease period of 12 months or shorter. For such leases, the Group has elected under IFRS 16 rules to treat these as operating leases and hold off-balance sheet. These leases are charged to the income statement on a straight-line basis over the lease term.

2.12 Provisions for commitments and other liabilities

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (discounted at the Company's weighted average cost of capital when the effect of the time value of money is material).

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset only if it is virtually certain that reimbursement will be received, and the amount of the receivable can be measured reliably.

2.13 Operating segments

IFRS 8 Operating segments requires particular classes of entities (essentially those with publicly traded securities) to disclose information about their operating segments, products and services, the geographical areas in which they operate, and their major customers. Information is based on the Group's internal management reports, both in the identification of operating segments and measurement of disclosed segment information.

The Group's products and the markets to which they are offered are so similar in nature that they are reported as one class of business. All customers are currently UK-based only. As a result, the chief operating decision maker uses only one segment to control resources and assess the performance of the entity, while deciding the strategic direction of the Group.

However, in accordance with IFRS 8, the Group will continue to monitor its activities to ensure any further reportable segments are identified and the appropriate reporting and disclosures are made.

2.14 Earnings per share

In accordance with IAS 33, the Group will present on the face of the statement of comprehensive income basic and diluted EPS for:

-  Profit or loss from continuing operations attributable to the ordinary equity holders of the Company; and

-  Profit or loss attributable to the ordinary equity holders of the Company for the period for each class of ordinary shares that has a different right to share in profit for the period.

Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the period.

Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential ordinary shares.

2.15 Merger relief

Merger relief is relief granted under the Companies Act 2006 section 612 which removes the requirement for the Company to recognise the premium on issued shares to acquire another company within the share premium account. Merger relief is recognised where all the following criteria are satisfied:

§ The Company secures at least a 90% equity holding of all share classes in another company as part of the arrangement; and

§ The Company provides either of the following as consideration for the allotment of shares in the acquired company:

o  Issue or transfer of equity shares in the Company in exchange for equity shares in the acquired company; or

o  The cancellation of any such shares in the acquired company that the Company does not already hold.

2.16 Merger accounting

Business combination and merger accounting

IFRS 3 Business Combinations prescribes the accounting treatment for business combinations, however, the change in control and ownership of a company under common control is outside the scope of IFRS 3 Business Combinations. In the absence of appropriate IFRS, the Directors sought other applicable accounting standards, and elected to apply FRS 102 in the form of Merger Accounting which provides accounting guidance for transactions of this nature.

The principles of merger accounting are as follows:

§ Assets and liabilities of the acquired entity are stated at predecessor carrying values. Fair value measurement is not required;

§ No new goodwill arises in merger accounting; and

§ Any difference between the consideration given and the aggregate book value of the assets and liabilities of the acquired entity at the date of transaction is included in equity in retained earnings or in a separate "Merger Reserve" account.

By way of using the merger accounting methodology for preparing these consolidated financial statements, comparative information will be prepared as if the Group had existed and been formed in prior periods. The Directors agree this will enable informative comparatives to users given the underlying activities and management structure of the Group remain largely unchanged following the formation of the Group.

Merger reserve

Where merger accounting has been applied this prescribes that any difference between the consideration given and the aggregate book value of the assets and liabilities of the acquired entity at the date of transaction is included in equity in retained earnings or in a separate reserve account. Therefore, on consolidation of the Group financial statements, the difference between the consideration paid and the book value of the acquired entity is recognised as a Merger Reserve, in accordance with relevant accounting standards relating to businesses under common control.

2.17 Own Shares

Own equity instruments of the Group which are acquired by it or by any of its subsidiaries (treasury shares) are deducted from equity. Consideration paid or received on the purchase, sale, issue, or cancellation of the Group's own equity instruments is recognised directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue, or cancellation of own equity instruments.

3. Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial information in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses.

The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Judgements

The Group has made the following key judgements in applying the accounting policies:

i.  Expected credit losses loan impairment

Significant increase in credit risk for classification in stage 2

Counterparties are classified into stage 2 where the risk profile of the borrower profile has significantly increased from inception of the exposure. This increase in credit risk is signified by either increases in internal or external credit ratings, the counterparty becoming over 30 days past due, or forbearance measures being applied.

In the year ended 31 December 2021, due to the COVID-19 pandemic, the Group granted payment holidays to assist its customers, whereby in these scenarios this would not be considered a significant increase in credit risk. In 2022, the Group removed all concessions to customers as the economic environment improved, therefore, any extensions or forbearance measures are again considered a trigger of stage 2 classification.

Definition of default

The Group aligns its definition of default to the regulatory definition for default in all periods presented. The Group applies the regulatory guideline of 90+ days in arrears and also uses internal and external information, along with financial and non-financial information, available to the Group to determine whether a default event has either occurred or is perceived to have occurred.

Should a default event occur the Group applies a probationary ("cooling off") period to Stage 3 counterparties before being transferred back to either stage 1 or 2. The probationary period is typically 3 months but is extended up to 12 months for more severe scenarios. During the probationary period the counterparty must no longer meet the criteria for Stage 3 inclusion for the entire applicable period.

Estimates

The Group has made the following estimates in the application of the accounting policies that have a significant risk of material adjustment to the carrying amount of assets and liabilities within the next financial year:

i.  Expected credit losses loan impairment

Probability of default ("PD")

The Group predominantly uses external credit ratings and PD models to estimate the probability of default of counterparties over the following 12-month period or expected lifetime of the exposure. These models are further supplemented by an internal credit rating system to enhance the accuracy of the PD modelling. Typical of PD modelling, these are derived from lagging indicators which are primarily derived from historical data rather than forward looking assumptions, resultantly, the Group uses external and managerial judgements to estimate how probability of defaults may change in the future.

In 2021, the Group applied a macro-economic overlay for the increased uncertainty from the COVID-19 pandemic. The Group released this overlay in the year ended 31 December 2022 to reflect the improved economic environment following the successful vaccine roll-out. In the second half of the year ended 31 December 2022, the UK began experiencing inflationary pressures and market instabilities, resultantly, the Group elected to apply a macro-economic overlay to its PD modelling to reflect this increased risk, although it has not begun materialising in observed default rates yet.

A 100% deterioration in PDs (excluding stage 3 exposures, which are already in default) would result in an additional impairment charge of £1,130,000 at 31 December 2022 (2021: £881,000).

Loss given default ("LGD")

The Group uses an internal LGD model to estimate expected losses on defaulted counterparties based on numerous characteristics of the counterparty and type of lending. These models have been developed by using observed historical loss events, identifying specific drivers of losses, and are regularly tested for accuracy and updated as necessary.

A 10% reduction in the expected discounted cashflows from the collateral held by the Group would result in an additional impairment charge of £2,389,000 (2021: £618,000).

Forward looking macroeconomic scenarios

The Group has adopted an approach which utilises four macroeconomic scenarios within its impairment modelling whereby the Group stresses PD and LGD input variables in accordance with expected macro-economic and managerial outlooks. The scenario ECL impairment allowance is weighted based on the expected probability of the scenario transpiring over the next 12-month period from the reporting date. These models are sensitive to managerial estimates over the scenarios and their associated probability weighting.

The following forward-looking macroeconomic scenarios, together with their probability weighting and key economic variables, were used in calculating the ECLs used for determining impairment provisions:

	Probability Weighting	ECL Impairment	ECL Coverage1
Scenario	%	£'000	%
31 December 2022
Upside	15%	2,427	0.55%
Base	55%	2,823	0.64%
Downside	25%	5,343	1.20%
Severe Downside	5%	9,362	2.11%
Weighted	100%	3,720	0.84%
31 December 2021
Upside	15%	898	0.36%
Base	60%	1,315	0.52%
Downside	20%	2,753	1.10%
Severe Downside	5%	4,868	1.94%
Weighted	100%	1,718	0.68%

¹ ECL Coverage is calculated by dividing the ECL impairment by the Exposure at Default (EAD). EAD is typically higher than the gross loan receivable balance.

The following table details the additional impairment allowance charge/(credit) should one of the macroeconomic scenarios be assigned a 100% probability weighting:

	2022	2021
Scenario	£'000	£'000
Upside	(1,293)	(820)
Base	(897)	(403)
Downside	1,623	1,035
Severe Downside	5,642	3,150

ii.  Deferred taxation asset

The Group has recognised a deferred tax asset in respect of future taxable profits for the first time this year. The Board has recognised the full value of the potential deferred tax asset of £8.5m at December 2022 within the Bank based on the most recently approved financial forecasts through to December 2026 with the deferred tax asset forecast to be fully utilised during 2026.

The forecast is inherently sensitive to the assumptions and estimates which underpin it, including macroeconomic conditions (such as interest rates, inflation and future tax rates), and is dependent on the Group's ability to successfully execute its strategy. As such, the expected utilisation of the deferred tax asset may vary significantly.

The following sensitivities have been modelled to demonstrate the impact of changes in assumptions on the recoverability of deferred tax assets within the Bank:

§ A reduction in the base forecast loan book by 20% each year. 

§ A reduction in the net interest margin in the base forecast by a factor of 10% each year. 

§ An increase in forecast costs of risk by a factor of 50% each year. 

§ A 20% increase above forecast of staff costs and other operating expenses each year. 

In each of the individual sensitivities performed above, the reduction in profitability means the timing of full recovery of the deferred tax asset is delayed, but in all cases it is expected to be fully utilised within 5 years and, therefore, the Board is comfortable that these sensitivities do not impact the level of deferred tax asset to be recognised at 31 December 2022.

The Group has an unrealised deferred tax asset of £0.7m (2021: £7.3m). This unrecognised deferred tax asset as at December 2022 relates entirely to the prior taxable losses in Distribution Finance Capital Holdings plc entity.

4. Interest and similar income

	2022	2021
	£'000	£'000
On loans and advances to customers	24,333	13,296
On loans and advances to banks	1,065	5
On debt securities - measured at FVOCI	9	(42)
Total interest and similar income	25,407	13,259

5. Operating segments

It is the Director's view that the Group's products and the markets to which they are offered are so similar in nature that they are reported as one class of business. All customers are currently UK-based only. As a result, it is considered that the chief operating decision maker uses only one segment to control resources and assess the performance of the entity, while deciding the strategic direction of the Group. For this purpose, the chief operating decision maker of the Group is the Board of Directors.

6.  Interest and similar expenses

The Group is solely funded by customer deposits and Group reserves. See note 33 and 34 for further detail of the movements in customer deposits and financial liabilities during the year.

	2022	2021
	£'000	£'000
On financial liabilities not at fair value through profit or loss:
Customer deposits	6,373	2,338
On financial liabilities at fair value through profit or loss:
Net interest expense on financial instruments hedging liabilities	38	-
Total interest and similar expense	6,411	2,338

7.  Fee income

	2022	2021
	£'000	£'000
Facility-related fees	1,348	466
Total fee income	1,348	466

8.  Staff costs

Analysis of staff costs:

	2022	2021
	£'000	£'000
Wages and salaries	8,651	7,372
Share based payments	499	362
Contractor costs	75	24
Social security costs	1,099	921
Pension costs arising on defined contribution schemes	524	442
Total staff costs	10,848	9,121

Contractor costs are recognised within personnel costs where the work performed would otherwise have been performed by employees. Contractor costs arising from the performance of other services is included within other operating expenses.

Average number of persons employed by the Group (including Directors):

	2022	2021
	No.	No.
Management	12	11
Finance	7	7
Credit & Risk	19	17
Sales & Marketing*	29	21
Operations*	23	23
Technology	13	11
Total average headcount	103	90

*The Group has reclassified the Client Management team from Operations to Sales & Marketing due to changes in their responsibilities and reporting structure at the Group. Client Management became part of the Commercial function during the year ended 31 December 2022, as such, prior year comparatives have been amended to retrospectively apply this reclassification for consistency. In the years ended 31 December 2022 and 31 December 2021, the Client Management team had average employees of 10 and 7 respectively.

Directors' emoluments:

	Fees/basic salary	Bonuses	Employer pension contributions	Benefits in kind	Long term incentive schemes	2022 total	2021 total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Executive Directors:
Carl D'Ammassa	425	356	43	7	-	831	673
Gavin Morris	266	120	26	7	-	419	370
	691	476	69	14	-	1,250	1,043
Non-executive Directors:
Mark Stephens	150	-	-	-	-	150	150
Thomas Grathwohl	75	-	-	-	-	75	100
Nicole Coll1	54	-	-	-	-	54	-
Sheryl Lawrence1	60	-	-	-	-	60	-
Stephen Greene2	-	-	-	-	-	-	-
Haakon Stenrød2	-	-	-	-	-	-	-
Carole Machell3	45	-	-	-	-	45	100
John Baines4	-	-	-	-	-	-	133
	384	-	-	-	-	384	483
Total Director remuneration	1,075	476	69	14	-	1,634	1,526

¹ Nicole Coll and Sheryl Lawrence were appointed as Non-executive Directors on 16 May 2022.

² Stephen Greene and Haakon Stenrød hold their position as Non-Executive Directors by virtue of major shareholders (Arrowgrass Master Fund Ltd and Watrium AS, respectively) exercising their rights to appoint Directors under their Relationship Agreements. They are compensated by these respective shareholders. Stephen Greene resigned on 17 December 2021.

³ Carole Machell resigned on 15 June 2022.

⁴ John Baines resigned on 19 May 2021.

The pension for the year ended 31 December 2022 to Carl D'Ammassa and Gavin Morris of £43,000 (2021:£43,000) and £26,000 (2021:£24,000) respectively is the sum of payments made to these individuals in lieu of Group pension contributions.

Carl D'Ammassa and Gavin Morris have received share options as part of long-term incentive schemes - further details of these share option schemes can be found in note 9.

Carl D'Ammassa is the highest paid Director with total remuneration of £831,000 (2021: £673,000) in the year ended 31 December 2022. Carl D'Ammassa has been awarded share options of which none have vested as at 31 December 2022 (2021: nil). Refer to note 9 for further details of these awards.

9. Share based payments

The Group has the following share options scheme for employees which have been granted and remain outstanding at 31 December 2022: 

Plan	No. of options outstanding 31 December 2022	Options outstanding value 31 December 2022 £'000	Grant dates	Vesting dates	Exercise price	Performance conditions attached	Settlement method	Charge for year ended 31 December 2022 £'000
General Award 2020	222,500	68	Jun-20	Jun-23	Nil	No	Equity	16
General Award 2021	160,248	48	Jun-21	Jun-24	Nil	No	Equity	27
General Award 2022	385,511	23	May-22	May-25	Nil	No	Equity	23
Manager CSOP Award	384,298	29	Aug-20	Jun-21 Jun-22 Jun-23	40.5p	No	Equity	8
Manager PSP Award	853,334	346	Aug-20	Aug-20 Jun-21 Jun-22	Nil	No	Equity	19
CEO Recruitment Award	900,000	282	Jun-20	Jun-23	Nil	Yes	Equity	95
Senior Manager Award 2020	885,000	198	Jun-20	Jun-23	Nil	Yes	Equity	142
Senior Manager Award 2021	144,370	55	Jun-21	Sep-22 Jun-24	Nil	No	Equity	36
Senior Manager Award 2022	1,765,000	111	May-22 Sep-22	May-25 Sep-25	Nil	Yes	Equity	111
Leader & High Performer Award 2022	201,022	12	May-22	May-25	Nil	No	Equity	12
Sharesave Scheme	1,068,212	10	Jan-22 Aug-22	Jan-22 Aug-25	46.3p 30p	No	Equity	10
Total	6,969,495	1,182						499

All awards are equity-settled, and the shares awarded for all schemes are Distribution Finance Capital Holdings plc over ordinary shares of 0.01 each of the current share capital of the Company which are listed on the Alternative Investment Market (AIM). The awards were granted to employees and Directors within the Group with the majority of the employees being employed by DF Capital Bank Limited.

During the year ended 31 December 2022, the movements in share options granted, forfeited, and exercised were as follows:

	Options outstanding at start of year	Options granted during the year	Options forfeited during the year	Options exercised during the year	Options outstanding at end of the year	Options exercisable at end of the year
Plan	No.	No.	No.	No.	No.	No.
Year ended 31 December 2022
General Award 2020	287,500	-	(65,000)	-	222,500	-
General Award 2021	216,000	3,000	(58,752)	-	160,248	-
General Award 2022	-	450,000	(64,489)	-	385,511	-
Manager CSOP Award	385,298	-	(1,000)	-	384,298	-
Manager PSP Award	853,334	-	-	-	853,334	853,334
CEO Recruitment Award	900,000	-	-	-	900,000	-
Senior Manager Award 2020	885,000	-	-	-	885,000	-
Senior Manager Award 2021	114,370	30,000	-	-	144,370	39,370
Senior Manager Award 2022	-	1,765,000	-	-	1,765,000	-
Leader & High Performer Award 2022	-	220,000	(18,978)	-	201,022	-
Sharesave scheme	-	1,693,596	(625,384)	-	1,068,212	-
Total	3,641,502	4,161,596	(833,603)	-	6,969,495	892,704
Year ended 31 December 2021
General Award 2020	320,000	-	(32,500)	-	287,500	-
General Award 2021	-	240,000	(24,000)	-	216,000	-
Manager CSOP Award	385,298	-	-	-	385,298	-
Manager PSP Award	853,334	-	-	-	853,334	377,481
CEO Recruitment Award	900,000	-	-	-	900,000	-
Senior Manager Award 2020	985,000	-	(100,000)		885,000	-
Senior Manager Award 2021	-	114,370	-		114,370	-
Total	3,443,632	354,370	(156,500)	-	3,641,502	377,481

The fair value at grant date is calculated by taking into consideration any restrictive vesting criteria, including any market and/or non-market performance conditions. The below table summarises the share schemes including the weighted average remaining contractual years and the weighted average fair value at grant date:

	2022			2021
Plan	Options outstanding at end of the year	Weighted average remaining contractual life (years)	Weighted average fair value at grant date	Options outstanding at end of the year	Weighted average remaining contractual life (years)	Weighted average fair value at grant date
General Award 2020	222,500	0.5	37.50	287,500	1.5	37.50
General Award 2021	160,248	1.4	61.00	216,000	2.4	61.00
General Award 2022	385,511	2.4	37.00	-	-	-
Manager CSOP Award	384,298	0.4	8.00	385,298	1.4	8.00
Manager PSP Award	853,334	-	40.50	853,334	0.2	40.50
CEO Recruitment Award	900,000	0.5	37.50	900,000	1.5	37.50
Senior Manager Award 2020	885,000	0.5	37.50	885,000	1.5	37.50
Senior Manager Award 2021	144,370	1.1	60.27	114,370	1.8	61.00
Senior Manager Award 2022	1,765,000	2.4	36.12	-	-	-
Leader & High Performer Award 2022	201,022	2.4	37.00	-	-	-
Sharesave Scheme	1,068,212	2.5	44.35	-	-	-
	6,969,495	1.4	38.63	3,641,502	1.3	37.38

The terms of the individual schemes are as follows:

General Award

In the year ended 31 December 2022, nil cost options over ordinary shares of 0.01 each of the current share capital of the Company were granted to all employees (excluding Directors). These options vest over a 3-year period and are not subject to specific performance conditions.

Manager PSP and CSOP Award

As part of a Group reorganisation of its existing share capital and employee loan agreements in the year ended 31 December 2020, managers and former managers were awarded share options so that they were not disadvantaged by this exercise. PSP scheme nil cost options and Company Share Option Scheme shares ("CSOP") were issued over ordinary shares of 0.01 each of the share capital of the Company. The CSOP Options have an exercise price per share of 40.5p equal to the market value of Ordinary Shares as at the time of grant and the PSP Options are nil cost options. The PSP and CSOP Options will become exercisable on the same timeline, and in the same proportions, that the corresponding original Ordinary Shares would have become freely transferable on the terms on which they were held. The Options are not subject to the satisfaction of performance conditions. The fair value of the CSOP was measured at the grant date using the Black-Scholes model.

No further awards under this scheme were granted in the years ended 31 December 2022 and 31 December 2021.

CEO Recruitment Award

On his appointment on 9 March 2020, Carl D'Ammassa was granted 900,000 nil cost options by way of a Recruitment Award.  In the year ended 31 December 2021, the Group's Remuneration Committee agreed that the final performance conditions relating to 400,000 shares have been satisfied in full and the entire share award shall vest in June 2023, subject to service conditions being met.

Senior Manager Award

Nil cost options over ordinary shares of 0.01 each of the current share capital of the Company were granted to certain senior managers.  All of these share awards have been granted in line with our PSP rules and have performance conditions aligned to financial performance, risk management and cultural objectives.

· In the year ended 31 December 2022, Senior Managers were granted additional awards based on either promotion, recruitment incentives, or performance. Performance conditions are included for 1,090,000 options of the 1,765,000 awards granted, and all awards vest over a period of 3 years subject to service conditions being met.

Leader & High Performer Award

In the year ended 31 December 2022, the Group awarded nil cost options over ordinary shares of 0.01 each of the current share capital of the Company to non-senior managers of the Group. This scheme does not include performance conditions and vest over a period of 3 years subject to service conditions being met.

Sharesave Scheme

In the year ended 31 December 2022, the Group introduced a 'Save As You Earn' scheme ('SAYE' or 'Sharesave Scheme') which is available to all UK-based employees. This is a HMRC-approved share scheme, whereby the scheme allows employees to purchase options by saving a fixed amount of between £10 and £500 per month over a period of three years at the end of which the options, subject to leaver provisions, are usually exercisable. If not exercised, the amount saved is returned to the employee. During the year ended 31 December 2022, the Group has offered this scheme twice with grant dates of 1 January 2022 and 1 August 2022. The option price is calculated using the closing bid-market price of a Distribution Finance Capital Holdings plc ordinary share over the five dealing days prior to the Invitation Date and applying a discount of 20%.

Director share awards:

The below table summarises share options which have been awarded to Directors as part of long-term incentive schemes:

	Options outstanding at start of year	Options granted during the year	Options forfeited during the year	Options exercised during the year	Options outstanding at end of the year	Options exercisable at end of the year
Plan	No.	No.	No.	No.	No.	No.
Year ended 31 December 2022
Carl D'Ammassa:
General Award 2020	5,000	-	-	-	5,000	-
CEO Recruitment Award	900,000	-	-	-	900,000	-
Senior Manager Award 2022	-	400,000	-	-	400,000	-
Sharesave Scheme	-	60,000	-	-	60,000	-
	905,000	460,000	-	-	1,365,000	-
Gavin Morris:
General Award 2020	5,000	-	-	-	5,000	-
Manager CSOP Award	74,074	-	-	-	74,074	-
Manager PSP Award	19,733	-	-	-	19,733	19,733
Senior Manager Award 2020	200,000	-	-	-	200,000	-
Senior Manager Award 2022	-	200,000	-	-	200,000	-
Sharesave Scheme	-	60,000	-	-	60,000	-
	298,807	260,000	-	-	558,807	19,733
Total Director awards	1,203,807	720,000	-	-	1,923,807	19,733
Year ended 31 December 2021
Carl D'Ammassa:
General Award 2020	5,000	-	-	-	5,000	-
CEO Recruitment Award	900,000	-	-	-	900,000	-
	905,000	-	-	-	905,000	-
Gavin Morris:
General Award 2020	5,000	-	-	-	5,000	-
Manager CSOP Award	74,074	-	-	-	74,074	-
Manager PSP Award	19,733	-	-	-	19,733	-
Senior Manager Award 2020	200,000	-	-	-	200,000	-
	298,807	-	-	-	298,807	-
Total Director awards	1,203,807	-	-	-	1,203,807	-

See above section within this note for further details of the schemes, including the fair value (market price) at grant date. Performance conditions are attached to the Senior Manager Award 2022 for both Carl D'Ammassa and Gavin Morris. All awards are subject to service conditions being met over the vesting period.

10.  Other operating expenses

		2022	2021
	Note	£'000	£'000
Finance costs	11	21	19
Depreciation	16,17	318	259
Amortisation of intangible assets	18	382	314
Loss on disposal of fixed assets	16	-	3
Professional services expenses		1,831	1,858
IT-related expenses		1,862	1,688
Other operating expenses		1,569	1,245
Total other operating expenses		5,983	5,386

11.  Finance costs

	2022	2021
	£'000	£'000
Interest on lease liabilities	21	19
Total finance costs	21	19

12.  Provisions

Analysis for movements in other provisions:

	Leasehold dilapidations	Onerous supplier contracts	Total
	£'000	£'000	£'000
Year ended 31 December 2022
At start of year	73	-	73
Additions	-	-	-
Utilisation of provision	-	-	-
Unused amounts reversed	-	-	-
Unwinding of discount	4	-	4
At end of year	77	-	77
Year ended 31 December 2021
At start of year	58	25	83
Additions	70	-	70
Utilisation of provision	(29)	(16)	(45)
Unused amounts reversed	(29)	(9)	(38)
Unwinding of discount	3	-	3
At end of year	73	-	73

13. Net impairment loss on financial assets

	2022	2021
	£'000	£'000
Movement in impairment allowance in the year	2,028	384
Write-offs	268	173
Write-back of amounts written-off	-	(1)
Total net impairment losses on financial assets	2,296	556

See note 19 on further analysis of the movement in impairment allowances on loans and advances to customers.

Analysis of write-offs:

		2022	2021
	Note	£'000	£'000
Realised losses on loan receivables	19	186	98
Realised losses on trade receivables	23	19	54
Recovery transaction costs		63	39
Bad debt VAT relief		-	(18)
Total write-offs		268	173

14.  Profit/(Loss) before taxation

Profit/(Loss) before taxation is stated after charging:

	2022	2021
	£'000	£'000
Depreciation of property, plant and equipment	95	105
Depreciation of right-of-use assets	223	154
Amortisation of intangible assets	382	314
Loss on disposal of property, plant and equipment	-	3
Loss on disposal of intangible assets	-	-
Allowance for credit impaired assets	2,028	384
Staff costs	10,848	9,121
Auditor's remuneration	290	253
	13,866	10,334

Analysis of auditor's remuneration:

	2022	2021
	£'000	£'000
Audit services:
Fees payable to the Company's auditor for the audit of the Company's annual accounts	58	50
Fees payable to the Company's auditor for the audit of its subsidiaries	177	153
Fees paid to the Company's auditors relating to prior periods	1	-
Total audit services fees	236	203
Assurance services:
Interim review	54	50
Total assurance services fees	54	50
Total auditor's remuneration	290	253

15.  Taxation

Analysis of tax charge recognised in the period:

	2022	2021
	£'000	£'000
Current taxation charge/(credit):
UK corporation tax on profit/(loss) for the current period	586	-
Adjustments in respect of prior years	-	-
SME R&D tax relief	-	(59)
Total taxation charge/(credit)	586	(59)
Deferred taxation (credit)/charge:
Current year	(9,043)	-
Adjustments in respect of prior years	-	-
Total deferred taxation (credit)/charge	(9,043)	-
Total taxation (credit)/charge	(8,457)	(59)

Reconciliation of profit/(loss) before taxation to total tax credit recognised:

	2022	2021
	£'000	£'000
Profit/(Loss) on ordinary activities before taxation	1,304	(3,735)
Taxation on profit/(loss) on ordinary activities at standard corporation tax rate of 19% (2021:19%)	248	(710)
Effects of:
Disallowable expenses	118	50
Other short-term timing differences for which no deferred tax asset has been recognised	1	50
Current year losses for which no deferred tax asset has been recognised	219	610
Recognition of deferred taxation asset	(9,043)	-
Total tax (credit)/charge	(8,457)	-

Current tax on profits reflects UK corporation tax levied at a rate of 19% for the year ended 31 December 2022 (31 December 2021: 19%) and the banking surcharge levied at a rate of 8% on the profits of banking companies chargeable to corporation tax after an allowance of £25 million per annum.

Expenses that are not deductible in determining taxable profits/losses include impairment losses, amortisation of intangible assets, depreciation of fixed assets, client and staff entertainment costs, and professional fees which are capital in nature.

On 17 October 2022, the Chancellor of the Exchequer confirmed that the UK corporation tax rate will increase to 25% from 1 April 2023. On 17 November 2022 it was confirmed that the previously enacted reduction in Banking Surcharge to 3%, with an allowance of £100m, would proceed, also from 1 April 2023. These enacted tax rates have been used to determine the deferred tax balances at 31 December 2022.

A deferred tax asset is only recognised to the extent the Group finds it probable that the prior taxable losses can be utilised against future taxable profits. As at 31 December 2022, the Group has an estimated unrecognised deferred tax asset of £0.7m (31 December 2021: £7.3m) from prior taxable losses.

In the year ended 31 December 2022, the Group has recognised a deferred tax asset in respect of future taxable profits. Further detail on the deferred tax is provided in note 25.

16.  Property, plant and equipment

	Leasehold Improvements	Furniture, Fixtures & Fittings	Computer Hardware	Telephony & Communications	Motor Vehicles	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Cost:
As at 1 January 2021	26	137	247	6	-	416
Additions	10	24	34	-	-	68
Disposals and write offs	(3)	(9)	(5)	-	-	(17)
As at 31 December 2021	33	152	276	6	-	467
Additions	-	-	87	-	954	1,041
Disposals and write offs	(23)	(128)	(204)	(6)	-	(361)
As at 31 December 2022	10	24	159	-	954	1,147
Accumulated depreciation:
As at 1 January 2021	20	99	152	6	-	277
Charge for the year	6	34	65	-	-	105
Disposals and write offs	(2)	(9)	(3)	-	-	(14)
As at 31 December 2021	24	124	214	6	-	368
Charge for the year	4	16	59	-	16	95
Disposals and write offs	(23)	(128)	(204)	(6)	-	(361)
As at 31 December 2022	5	12	69	-	16	102
Carrying amount:
At 31 December 2021	9	28	62	-	-	99
At 31 December 2022	5	12	90	-	938	1,045

In the year ended 31 December 2022, the Group wrote off fully depreciated assets of £361,000. During the year ended 31 December 2021, the Group wrote off £17,000 of assets with a disposal value of £3,000.

17.  Right-of-use assets

	Buildings
	£'000
Cost:
As at 1 January 2021	407
Additions	789
Disposals and write offs	-
Lease modifications	(58)
As at 31 December 2021	1,138
Additions	4
Disposals and write offs	-
Lease modifications	11
As at 31 December 2022	1,153
Accumulated depreciation:
At 1 January 2021	343
Charge for the year	154
Disposals and write offs	-
At 31 December 2021	497
Charge for the year	223
Disposals and write offs	-
At 31 December 2022	720
Carrying amount:
At 31 December 2021	641
At 31 December 2022	433

During the year ended 31 December 2022, the Group is engaged in leasing agreements for office premises, motor vehicles and IT equipment. IT equipment leases are low in value and the Motor Vehicles are leased for a term of less than 12 months, resultantly, the Group have opted not to classify these leases as right-of-use assets.

During the year ended 31 December 2022, a lease modification of £11,000 was recognised due changes in rental payments due to inflationary price increases and an extension of 1-month for the Group's London Office, for which the lease agreement terminated on 31 January 2023.

The maturity analysis of lease liabilities is presented in note 32.

Amounts recognised in the income statement:

	2022	2021
	£'000	£'000
Depreciation expense on right-of-use assets	223	154
Interest expense on lease liabilities	21	19
Expense relating to short-term leases	44	-
Expense relating to leases of low value assets	6	6
Expenses relating to variable lease payments not included in measurement of lease liability	90	92
Total amounts recognised in the income statement	384	271

Some of the property leases in which the Group is the lessee contain variable lease payment terms relating to service charges and insurance costs which are included within the contractual terms of the lease agreement. The breakdown of the lease payments for these property leases are as follows:

	2022	2021
	£'000	£'000
Buildings:
Fixed payments	141	147
Variable payments	98	73
Total lease payments	239	220

1 8 . Intangible assets

	Computer Software
	£'000
Cost:
At 1 January 2021	1,189
Additions from internal development	280
Additions from separate acquisitions	306
Disposals and write offs	-
At 31 December 2021	1,775
Additions from internal development	193
Additions from separate acquisitions	-
Disposals and write offs	(27)
At 31 December 2022	1,941
Accumulated amortisation:
At 1 January 2021	395
Charge for the year	314
Disposals and write offs	-
At 31 December 2021	709
Charge for the year	382
Disposals and write offs	(27)
At 31 December 2022	1,064
Carrying amount:
At 31 December 2021	1,066
At 31 December 2022	877

In the year ended 31 December 2022, the Group capitalised £172,000 (2021: £152,000) of consultancy costs, £nil of third-party purchased software (2021: £35,000) and £21,000 (2021: £93,000) of employee costs in relation to the development of software platforms aimed at improving the commercial lending processes, customer journey for commercial clients and development of retail customer deposits platform. The amortisation period for these software costs is within a range of 3-5 years following an individual assessment of the asset's expected life. The Group performed an impairment review at 31 December 2022 and concluded an impairment of £nil (2021: £nil).

In the year ended 31 December 2022, the Group wrote off fully depreciated intangible assets of £27,000 (2021: £Nil).

19. Loans and advances to customers

	2022	2021
	£'000	£'000
Gross carrying amount	441,284	249,454
Less: impairment allowance	(3,720)	(1,718)
Less: effective interest rate adjustment	(1,681)	(531)
Total loans and advances to customers	435,883	247,205

Refer to note 36 for details on the expected maturity analysis of the gross loans receivable balance.

Refer to note 13 and 36 for further details on the impairment losses recognised in the periods.

Ageing analysis of gross loan receivables:

	2022	2021
	£'000	£'000
Not in default:
Not yet past due	422,845	247,974
Past due: 1 - 30 days	136	105
Past due: 31 - 60 days	1,074	834
Past due: 61 - 90 days	25	-
Past due: 90+ days	-	-
	424,080	248,913
Defaulted:
Not yet past due and past due 1 - 90 days	11,319	377
Past due 90+ days	5,885	164
	17,204	541
Total gross loan receivables	441,284	249,454

Analysis of gross loans and advances to customers:

	Stage 1	Stage 2	Stage 3	Total
	£'000	£'000	£'000	£'000
As at 1 January 2022	239,327	9,585	542	249,454
Transfer to Stage 1	6,920	(6,597)	(323)	-
Transfer to Stage 2	(29,077)	29,081	(4)	-
Transfer to Stage 3	(1,731)	(16,739)	18,470	-
Net lending/(repayment)	195,333	(2,007)	(1,310)	192,016
Write-offs	(16)	-	(170)	(186)
Total movement in gross loan receivables	171,429	3,738	16,663	191,830
As at 31 December 2022	410,756	13,323	17,205	441,284
Loss allowance coverage at 31 December 2022	0.47%	0.63%	9.84%	0.84%

	Stage 1	Stage 2	Stage 3	Total
	£'000	£'000	£'000	£'000
As at 1 January 2021	103,823	8,726	710	113,259
Transfer to Stage 1	2,038	(2,038)	-	-
Transfer to Stage 2	(19,388)	19,388	-	-
Transfer to Stage 3	(134)	(569)	703	-
Net lending/(repayment)	152,993	(15,922)	(778)	136,293
Write-offs	(5)	-	(93)	(98)
Total movement in gross loan receivables	135,504	859	(168)	136,195
As at 31 December 2021	239,327	9,585	542	249,454
Loss allowance coverage at 31 December 2021	0.48%	1.62%	77.68%	0.69%

Analysis of impairment losses on loans and advances to customers:

	Stage 1	Stage 2	Stage 3	Total
	£'000	£'000	£'000	£'000
As at 1 January 2022	1,142	155	421	1,718
Transfer to Stage 1	76	(73)	(3)	-
Transfer to Stage 2	(146)	146	-	-
Transfer to Stage 3	(13)	(421)	434	-
Remeasurement of impairment allowance	(24)	143	1,028	1,147
Net lending/(repayment)	908	134	(17)	1,025
Write-offs	-	-	(170)	(170)
Total movement in loss allowance	801	(71)	1,272	2,002
As at 31 December 2022	1,943	84	1,693	3,720

	Stage 1	Stage 2	Stage 3	Total
	£'000	£'000	£'000	£'000
As at 1 January 2021	645	49	594	1,288
Transfer to Stage 1	20	(20)	-	-
Transfer to Stage 2	(139)	139	-	-
Transfer to Stage 3	-	(1)	1	-
Remeasurement of impairment allowance	(13)	93	77	157
Net lending/(repayment)	629	(105)	(175)	349
Write-offs	-	-	(76)	(76)
Total movement in loss allowance	497	106	(173)	430
As at 31 December 2021	1,142	155	421	1,718

20.  Debt securities

	2022	2021
	£'000	£'000
FVOCI debt securities:
Treasury bills	-	53,085
UK government gilts	22,964	55,782
Total FVOCI debt securities	22,964	108,867
Analysis of movements during the year:
At 1 January	108,867	66,601
Purchased debt securities	-	350,980
Proceeds from sold or maturing securities	(85,070)	(307,955)
Coupons received	(746)	(549)
Interest income	9	(42)
Realised gains/losses	(17)	(3)
Unrealised losses	(96)	(165)
Amounts transferred to the income statement	17	-
At 31 December	22,964	108,867
Maturity profile of debt securities:
Within 12 months	22,964	24,602
Over 12 months	-	84,265

The securities are valued at fair value through other comprehensive income ("FVTOCI") using closing bid prices at the reporting date.

In accordance with IFRS 9, all debt securities were assessed for impairment and treated as Stage 1 assets in both reporting periods.

Refer to note 36 for details of the maturity profile of these securities.

21.  Derivatives

The table below reconciles the gross amount of derivative contracts to the carrying balance shown in the Consolidated statement of financial position:

	Gross amount of recognised financial assets / (liabilities)	Net amount of financial assets / (liabilities) presented in the Statement of Financial Position	Cash collateral paid / (received) not offset in the Statement of Financial Position	Net amount
	£'000	£'000	£'000	£'000
31 December 2022
Derivative assets:
Interest rate risk hedging	57	57	(28)	29
Derivative liabilities:
Interest rate risk hedging	(42)	(42)	98	56

In the year ended 31 December 2021, the Group entered into an International Swaps and Derivatives Association (ISDA) agreement with a broker to enable the Group to transact in derivative instruments for managing interest rate risk. However, no swap agreements were executed until 2022, resultantly, there is no comparatives presented for the year ended 31 December 2021.

All derivative instruments which have been entered into are transacted against SONIA.

Derivative assets and liabilities include a variation margin of £70,000 with swap counterparties. Further, the Group holds £500,000 of independent collateral with banks for the swap facility, which is not included within the above table. See note 26 for the balance of cash collateral held with banks.

The table below profiles the maturity of nominal amounts for interest rate risk hedging derivatives based on contractual maturity:

	Total nominal amount	Less than 3 months	3 - 12 months	1 - 5 years	More than 5 years
	£'000	£'000	£'000	£'000	£'000
31 December 2022
Derivative assets	70,000	-	30,000	40,000	-
Derivative liabilities	20,000	5,000	-	15,000	-
	90,000	5,000	30,000	55,000	-

The Group has 6 (2021: Nil) derivative contracts with an average fixed rate of 4.21% (2021: n.a).

22.  Hedge Accounting

	2022	2021
	£'000	£'000
Hedged liabilities:
Current hedge relationships	(77)	-
Swap inception adjustment	(7)	-
Fair value adjustments on hedged liabilities	(84)	-

As at the year ended 31 December 2022, the Group presently only hedges liabilities in the form of its customer deposits. The Group does not hedge its loans and advances to customers given these assets are expected to reprice within a short time frame. Refer to note 36 for further details on the Group's interest rate risk management.

The swap inception adjustment relates to hedge accounting adjustments arising when hedge accounting commences, primarily on derivative instruments previously taken out against new retail deposits.

At present, the Group expects its hedging relationships to be highly effective as the Group hedges fixed term deposit accounts for which the fair value movements between the hedged item and hedging instrument are expected to be highly correlated. Further, the Group does not anticipate having to rebalance the relationship once entered into due to the contractual terms of the fixed term deposits with depositors. In the year ended 31 December 2022, there has been no cancelled or de-designated hedge relationships due to failed hedge accounting relationships.

The tables below analyse the Group's portfolio hedge accounting for fixed rate amounts owed to retail depositors:

	2022		2021
	Hedged item	Hedging instrument	Hedged item	Hedging instrument
	£'000	£'000	£'000	£'000
Customer deposits:
Carrying amount of hedged item/nominal value of hedging instrument	90,505	90,000	-	-
Cumulative fair value adjustments	(84)	-	-	-
Fair value adjustments for the period	(84)	-	-	-

In the Consolidated Statement of Financial Position, £57,000 (2021: £nil) of hedging instruments were recognised within derivative assets; and £42,000 (2021: £nil) within derivative liabilities.

23.  Trade and other receivables

	2022	2021
	£'000	£'000
Trade receivables	850	355
Impairment allowance	(101)	(75)
	749	280
Other debtors	273	278
Accrued Income	94	192
Prepayments	408	324
	775	794
Total trade and other receivables	1,524	1,074

All trade receivables are due within one year, refer to note 36 for the expected maturity profile.

The trade receivable balances are assessed for expected credit losses (ECL) under the 'simplified approach', which requires the Group to assess all balances for lifetime ECLs and is not required to assess significant increases in credit risk.

Ageing analysis of trade receivables:

	2022	2021
	£'000	£'000
Not in default:
Not yet past due	563	276
Past due: 1 - 30 days	27	7
Past due: 31 - 60 days	2	1
Past due: 61 - 90 days	-	-
Past due: 90+ days	-	-
	592	284
Defaulted:
Not yet past due and past due 1 - 90 days	194	10
Past due 90+ days	64	61
	258	71
Total gross trade receivables	850	355

Analysis of movement of impairment losses on trade receivables:

	2022	2021
	£'000	£'000
Balance at 1 January	75	121
Amounts written off	(19)	(26)
Amounts recovered	-	-
Change in loss allowance due to new trade and other receivables originated net of those derecognised due to settlement	45	(20)
Balance at 31 December	101	75

24.  Current taxation asset

	2022	2021
	£'000	£'000
At 1 January	59	-
(Charge)/credit to profit and loss account	(586)	59
Repayments	4	-
Adjustments in respect of prior years	-	-
Utilisation of deferred taxation asset	586	-
At 31 December	55	59

As detailed in note 1.4 of these consolidated financial statements, the Group elected to reclassify a taxation asset of £59,000 in the year ended 31 December 2021 from trade and other receivables into current taxation asset within the statement of financial position.

Refer to note 25 for further details of the deferred taxation asset.

25.  Deferred taxation asset

Deferred tax assets and liabilities are recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is determined using tax rates and legislation in force at the balance sheet date and is expected to apply when the deferred tax asset is realised, or the deferred tax liability is settled.

Refer to note 3 of these consolidated financial statements for critical accounting judgements in regards to the recognition of a deferred taxation asset.

The table below shows the movement in net deferred tax assets:

	2022	2021
	£'000	£'000
At 1 January	-	-
Credit/(charge) to profit and loss account	8,457	-
Adjustments in respect of prior years	-	-
At 31 December	8,457	-

See below for an analysis of the deferred taxation asset balance:

	2022	2021
	£'000	£'000
Losses	8,730	-
Short term timing differences	8	-
Fixed assets	(281)	-
Deferred taxation asset	8,457	-

The Group has recognised a deferred tax asset in relation to tax losses carried forward of £35m, short term timing difference of £30,000, and a deferred tax liability in relation to tangible fixed assets of £1.1m.

The Group has an unrecognised deferred tax asset value of £0.7m (2021:£7.3m) which is not expected to be utilised for the foreseeable future.

On 17 October 2022, the Chancellor of the Exchequer confirmed that the UK corporation tax rate will increase to 25% from 1 April 2023. On 17 November 2022 it was confirmed that the previously enacted reduction in Banking Surcharge to 3%, with an allowance of £100m, would proceed, also from 1 April 2023. These enacted tax rates have been used to determine the deferred tax balances at 31 December 2022.

26.  Loans and advances to banks

	2022	2021
	£'000	£'000
Included in cash and cash equivalents: balances with less than three months to maturity at inception	3,277	29,597
Cash collateral on derivatives placed with banks	571	-
Total loans and advances to banks	3,848	29,597

As detailed in note 1.4 of these consolidated financial statements, the Group elected to reclassify cash and cash equivalents of £29,597,000 in the year ended 31 December 2021 from cash and cash equivalents into loans and advances to banks within the statement of financial position. This change is prompted by the Group having cash and balances at central banks.

The cash and cash equivalents balances are included in the consolidated cash flow statement as detailed further in note 27.

In the year ended 31 December 2022, the Group began transacting in derivative instruments to manage interest rate risk for which the cash collateral on derivatives placed with banks solely relates to. The cash collateral on derivatives placed with banks is recognised on a net basis. Refer to note 21 for further details on derivative instruments.

27.  Notes to the cash flow statement

See below for reconciliation of balances classified as cash and cash equivalents, which are recognised within the consolidated cash flow statement:

	2022	2021
	£'000	£'000
Cash and balances at central banks	107,353	-
Loans and advances to banks	3,277	29,597
Total cash and cash equivalents	110,630	29,597

Adjustments for non-cash items and other adjustments included in the income statement:

		2022	2021
	Note	£'000	£'000
Depreciation of property, plant and equipment	16	95	105
Depreciation of right-of-use assets	17	223	154
Loss on disposal of property, plant and equipment	16	-	3
Amortisation of intangible assets	18	382	314
Loss on disposal of intangible assets	18	-	-
Share based payments	9	499	362
Impairment allowances on receivables	13	2,296	556
Movement in other provisions	12	4	(10)
Interest income on debt securities	20	(9)	42
Finance costs	11	21	19
Unwind of discount	12	4	3
Interest in suspense		1,149	(102)
Total non-cash items and other adjustments		4,664	1,446

Net change in operating assets:

		2022	2021
		£'000	£'000
Increase in loans and advances to customers		(190,709)	(136,202)
Derivative financial instruments		(57)	-
Increase in other assets		(2,423)	(42)
Increase in operating assets		(193,189)	(136,244)

Net change in operating liabilities:

		2022	2021
		£'000	£'000
Increase in customer deposits		182,879	150,874
Derivative financial instruments		42	-
Fair value adjustments for portfolio hedged risk		(84)	-
Increase in other liabilities		972	837
Repayment of financial liabilities		-	-
Increase in operating liabilities		183,809	151,711

Changes in liabilities arising from financing activities:

The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group's consolidated cash flow statement as cash flows from financing activities.

	2022		2021
	Lease liabilities		Lease liabilities
	(see note 32)	Total	(see note 32)	Total
	£'000	£'000	£'000	£'000
At 1 January	504	504	57	57
Financing cash flows:
Interest payments	(141)	(141)	(147)	(147)
Non-cash movements:
Recognition of lease liabilities	-	-	604	604
Interest expense on lease liabilities	21	21	19	19
Lease modification	11	11	(29)	(29)
At 31 December 2022	395	395	504	504

28. Investment in subsidiaries

Subsidiary	Principal Activity	Shareholding %	Class of shareholding	Country of incorporation	Registered Address
DF Capital Bank Limited	Financial Services	100%	Ordinary	UK	St James' Building, 61-95 Oxford St, Manchester, M1 6EJ

During the year ended 31 December 2022, there were no changes to the ownership of subsidiaries of the Group (2021: none).

29. Equity

	2022	2021	2022	2021
	No.	No.	£'000	£'000
Authorised:
Ordinary shares of 1p each	179,369,199	179,369,199	1,793	1,793
Allotted, issued and fully paid: Ordinary shares of 1p each	179,369,199	179,369,199	1,793	1,793

Analysis of the movements in equity:

	Date	No. of shares	Issue Price	Share Capital	Share Premium	Merger Relief	Total
		#	£	£'000	£'000	£'000	£'000
At 1 January 2021		106,641,926		1,066	-	94,911	95,977
Issue of new shares	22-Feb-21	72,727,273	0.55	727	39,273	-	40,000
At 31 December 2021		179,369,199		1,793	39,273	94,911	135,977
No movements in the year
At 31 December 2022		179,369,199		1,793	39,273	94,911	135,977

30.  Own shares

At 31 December 2022 the Group's Employee Benefit Trust held 2,963,283 (2021: 2,963,283) ordinary shares in Distribution Finance Capital Holdings plc to meet obligations under the Company's share and share option plans. The shares are stated at cost and their market value at 31 December 2022 was £992,700 (2021: £1,452,009).

	2022	2021
	£'000	£'000
At 1 January	(364)	(364)
Employee Benefit Trust	-	-
At 31 December	(364)	(364)

31.  Merger reserve

There were no movements relating to the merger reserve account during years ended 31 December 2022 and 31 December 2021.

32.  Lease liabilities

	2022	2021
	£'000	£'000
At 1 January	504	57
Initial recognition	-	604
Interest expense	21	19
Interest payments	(141)	(147)
Lease modification	11	(29)
At 31 December	395	504

During the year ended 31 December 2022, a lease modification of £11,000 was recognised due changes in rental payments due to inflationary price increases and an extension of 1-month for the Group's London Office, for which the lease agreement terminated on 31 January 2023.

The fair value of the Group's lease obligations as at 31 December 2021 is estimated to be £394,681 (2021: £503,816) using a 5% discount rate. The 5% discount rate is equivalent to the Group's incremental borrowing rate which would be incurred for the financing of a similar asset under similar terms as the lease arrangement.

The Group does not face a significant liquidity risk with regard to its lease liabilities. Lease liabilities are monitored within the Group's treasury function.

All lease obligations are denominated in currency units.

The maturity analysis of lease liabilities is as follows:

	2022	2021
	£'000	£'000
Analysed as:
Non-current	145	109
Current	250	395
	395	504
Maturity analysis:
Year 1	162	131
Year 2	184	161
Year 3	79	184
Year 4	-	79
Year 5	-	-
Onwards	-	-
	425	555
Less: unearned interest	(30)	(51)
Total lease liabilities	395	504

33.  Customer deposits

	2022	2021
	£'000	£'000
Retail deposits	479,736	296,856
Total customer deposits	479,736	296,856
Amounts repayable within one year	364,674	249,930
Amounts repayable after one year	115,062	46,926
	479,736	296,856

Refer to note 36 for the maturity profile of the customer deposit balances.

34.  Financial liabilities

	2022	2021
	£'000	£'000
Lease liabilities	395	504
Preference Shares	50	50
Total financial liabilities	445	554

Lease liabilities:

See note 32 for further details on the lease liabilities of the Group.

Preference shares:

In April 2019, a sole member decision was granted the allocation of 50,000 non-voting paid up redeemable preference shares of £1.00 each. The preference shares have no attached interest rate, dividends or return on capital. These preference shares are deemed as paid in full with the Director undertaking to pay the consideration of the preference shares by 1 April 2024. The preference shares have no contractual maturity date but will be redeemed in the future out of the proceeds of any issue of new ordinary shares by the Company or when it has available distributable profits. Given these characteristics the preference shares are recognised as a non-current liability with no equity component.

The maturity profile of the financial liabilities are as follows:

	2022	2021
	£'000	£'000
Current liabilities	145	109
Non-current liabilities	300	445
Total financial liabilities	445	554

Reconciliation of movement in financial liabilities:

	Preference shares	Lease liabilities	Total
	£'000	£'000	£'000
Balance at 1 January 2021	50	57	107
Financing cash flows:
Repayment of lease liabilities	-	(147)	(147)
	-	(147)	(147)
Non-cash movements:
Additions	-	604	604
Interest expense	-	19	19
Lease modifications	-	(29)	(29)
	-	594	594
Balance at 31 December 2021	50	504	554
Financing cash flows:
Repayment of lease liabilities	-	(141)	(141)
	-	(141)	(141)
Non-cash movements:
Interest expense	-	21	21
Lease modifications	-	11	11
	-	32	32
Balance at 31 December 2022	50	395	445

35.  Trade and other payables

	2022	2021
	£'000	£'000
Current liabilities:
Trade payables	218	282
Social security and other taxes	360	275
Other creditors	2,993	2,422
Accruals	2,446	2,032
Total current liabilities	6,017	5,010
Non-current liabilities:
Social security and other taxes	24	57
Total non-current liabilities	24	57
Total trade and other payables	6,041	5,067

36. Financial instruments

The Directors have performed an assessment of the risks affecting the Group through its use of financial instruments and believe the principal risks to be: Treasury (covering capital management, liquidity and interest rate risk); and Credit risk.

This note describes the Group's objectives, policies and processes for managing the material risks and the methods used to measure them. The significant accounting policies regarding financial instruments are disclosed in note 2.

Capital management

The Group manages its capital to ensure that it will be able to continue as a going concern while providing an adequate return to shareholders.

The capital structure of the Group consists of financial liabilities (see note 34) and equity (comprising issued capital, merger relief, reserves, own shares and retained earnings - see notes 29 to 31).

As a regulated banking Group, the Group is required by the Prudential Regulation Authority (PRA) to hold sufficient regulatory capital. The Group is required by the PRA to conduct an Internal Capital Adequacy Assessment Process ("ICAAP") to assess the appropriate amount of regulatory capital to be held by the Group as a measure of its risk weighted assets ("RWAs"), in accordance with the Group's risk management framework. The ICAAP identifies all key risks to the Bank and how the Group manages these risks. The document outlines the capital resources of the Group, its perceived capital requirements, and capital adequacy over a 3-year period. Within this process the Group conducts a stress testing process to identify key risks, the potential capital requirements and whether the Group has sufficient capital buffers to sustain such events. The Group uses the Standardised Approach (SA) for calculating the capital requirements for credit risk, and Counterparty Credit Risk (SA-CCR) and the Basic Indicator Approach (BIA) for operational risk. The ICAAP is approved by the Group Board at least annually.

The regulatory capital resources of the Group were as follows:

	2022	2021
	£'000	£'000
CET1 capital: instruments and reserves
Called up share capital	1,793	1,793
Share premium accounts	39,273	39,273
Retained earnings account	(28,447)	(28,946)
Accumulated other comprehensive income & other reserves	83,620	73,939
CET1 capital before regulatory adjustments	96,239	86,059
CET1 capital: regulatory adjustments
Intangible assets	(877)	(1,066)
Investment in own shares	(2,303)	(2,303)
Prudent valuation adjustment	(23)	-
Deferred tax asset	(8,457)	-
CET1 capital	84,579	82,690
T1 capital	84,579	82,690
Total regulatory capital	84,579	82,690

The return on assets of the Group (calculated as profit/(loss) after taxation divided by average total assets) was 2.2% (2021: -1%).

Information disclosure under Pillar 3 of the Capital Requirements Directive is published on the Group's website at www.dfcapital-investors.com

Principal financial instruments

The principal financial instruments to which the Group is party, and from which financial instrument risk arises, are as follows:

· Cash and balances at central banks, which are considered risk free;

· Loans and advances to banks, which can be a source of credit risk but are primarily liquid assets available to further business objectives or to settle liabilities as necessary;

· Loans and advances to customers, primarily credit risk, interest rate risk, and liquidity risk;

· Debt securities, source of interest rate risk;

· Derivative instruments, credit and liquidity risk;

· Trade receivables, primarily credit risk and liquidity risk;

· Trade and other payables, primarily credit risk and liquidity risk;

· Customer deposits, primarily interest rate risk and liquidity risk;

Summary of financial assets and liabilities:

Below is a summary of the financial assets and liabilities held on the Group's statement of financial position at the reporting dates. These values are reflected at their carrying amounts at the respective reporting date:

	Amortised cost	Fair value through other comprehensive income	Fair value through profit or loss	Total
31 December 2022	£'000	£'000	£'000	£'000
Financial assets:
Cash and balances at central banks	107,353	-	-	107,353
Loans and advances to banks	3,848	-	-	3,848
Debt securities	-	22,964	-	22,964
Derivative assets	-	-	57	57
Loans and advances to customers	435,883	-	-	435,883
Trade receivables	749	-	-	749
Other receivables	273	-	-	273
Total financial assets	548,106	22,964	57	571,127
31 December 2022
Financial liabilities:
Customer deposits	479,736	-	-	479,736
Derivative liabilities	-	-	42	42
Other financial liabilities	395	-	-	395
Trade payables	218	-	-	218
Other payables	3,377	-	-	3,377
Preference shares	50	-	-	50
Total financial liabilities	483,776	-	42	483,818

	Amortised Cost	Fair value through other comprehensive income	Fair value through profit or loss	Total
31 December 2021	£'000	£'000	£'000	£'000
Financial assets:
Loans and advances to banks	29,597	-	-	29,597
Debt securities	-	108,867	-	108,867
Loans and advances to customers	247,205	-	-	247,205
Trade receivables	280	-	-	280
Other receivables	337	-	-	337
Total financial assets	277,419	108,867	-	386,286
31 December 2021
Financial liabilities:
Customer deposits	296,856	-	-	296,856
Other financial liabilities	504	-	-	504
Trade payables	282	-	-	282
Other payables	2,753	-	-	2,753
Preference shares	50	-	-	50
Total financial liabilities	300,445	-	-	300,445

Analysis of financial instruments by valuation model

The Group measures fair values using the following hierarchy of methods:

· Level 1 - Quoted market price in an active market for an identical instrument

· Level 2 - Valuation techniques based on observable inputs. This category includes instruments valued using quoted market prices in active markets for similar instruments, quoted prices for similar instruments that are considered less than active, or other valuation techniques where all significant inputs are directly or indirectly observable from market data

· Level 3 - Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs). 

Financial assets and liabilities that are not measured at fair value:

	Carrying amount		Fair value		Level 1	Level 2			Level 3
31 December 2022	£'000		£'000		£'000	£'000			£'000
Financial assets not
measured at fair value:
Cash and balances at central banks	107,353		107,353		107,353	-			-
Loans and advances to banks	3,848		3,848		3,848	-			-
Loans and advances to customers	435,883		435,883		-	-			435,883
Trade receivables	749		749		-	-			749
Other receivables	273		273		-	-			273
	548,106		548,106		111,201	-			436,905
31 December 2022
Financial liabilities not
measured at fair value:
Customer deposits	479,736		478,800		-	-			478,800
Other financial liabilities	395		395		-	-			395
Trade payables	218		218		-	-			218
Other payables	3,377		3,377		-	-			3,377
Preference shares	50		50		-	-			50
	483,776		482,840		-	-			482,840
		Carrying amount		Fair value	Level 1		Level 2	Level 3
31 December 2021		£'000		£'000	£'000		£'000	£'000
Financial assets not
measured at fair value:
Loans and advances to banks		29,597		29,597	29,597		-	-
Loans and advances to customers		247,205		247,205	-		-	247,205
Trade receivables		280		280	-		-	280
Other receivables		337		337	-		-	337
		277,419		277,419	29,597		-	247,822
31 December 2021
Financial liabilities not
measured at fair value:
Preference shares		50		50	-		-	50
Customer deposits		296,856		296,856	-		-	296,856
Other financial liabilities		504		504	-		-	504
Trade payables		282		282	-		-	282
Other payables		2,753		2,753	-		-	2,753
		300,445		300,445	-		-	300,445

Fair values for level 3 assets were calculated using a discounted cash flow model and the Directors consider that the carrying amounts of financial assets and liabilities recorded at amortised cost are approximate to their fair values.

Cash and balances at central banks

This represents cash held at central banks where fair value is considered to be equal to carrying value.

Loans and advances to banks

This mainly represents the Group's working capital current accounts with other banks with an original maturity of less than three months. Fair value is not considered to be materially different to carrying value.

Loans and advances to customers

Due to the short-term nature of loans and advances to customers, their carrying value is considered to be approximately equal to their fair value. These items are short term in nature such that the impact of the choice of discount rate would not make a material difference to the calculations.

Trade and other receivables, other borrowings and other liabilities

These represent short-term receivables and payables and as such their carrying value is considered to be equal to their fair value.

Financial assets and liabilities included in the statement of financial position that are measured at fair value:

	Carrying Amount	Principal Amount	Level 1	Level 2	Level 3
31 December 2022	£'000	£'000	£'000	£'000	£'000
Financial assets
measured at fair value:
Debt securities	22,964	23,000	22,964	-	-
Derivative assets	57	70,000	-	57	-
	23,021	93,000	22,964	57	-
Financial liabilities
measured at fair value:
Derivative liabilities	42	20,000	-	42	-
	42	20,000	-	42	-

	Carrying Amount	Principal Amount	Level 1	Level 2	Level 3
31 December 2021	£'000	£'000	£'000	£'000	£'000
Financial assets
measured at fair value:
Debt securities	108,867	108,085	108,867	-	-
	108,867	108,085	108,867	-	-

Debt securities

The debt securities carried at fair value by the Company are treasury bills and government gilts. Treasury bills and government gilts are traded in active markets and fair values are based on quoted market prices. 

There were no transfers between levels during the periods, all debt securities have been measured at level 1 from acquisition.

Derivatives

Derivative instruments fair values are provided by a third party and are based on the market values of similar financial instruments. The fair value of investment securities held at FVTPL is measured using a discounted cash flow model.

Financial risk management

The Group's activities and the existence of the above financial instruments expose it to a variety of financial risks.

The Board has overall responsibility for the determination of the Group's risk management objectives and policies. The overall objective of the Board is to set policies that seek to reduce ongoing risk as far as possible without unduly affecting the Group's competitiveness and flexibility. 

The Group is exposed to the following financial risks:

· Credit risk

· Liquidity risk

· Interest rate risk

Further details regarding these policies are set out below.

Credit risk

Credit risk is the risk that a customer or counterparty will default on its contractual obligations resulting in financial loss to the Group. One of the Group's main income generating activities is lending to customers and therefore credit risk is a principal risk.  Credit risk mainly arises from loans and advances to customers.  The Group considers all elements of credit risk exposure such as counterparty default risk, geographical risk and sector risk for risk management purposes.

Credit risk management

The Group has a dedicated credit risk function, which is responsible for individual credit assessment, portfolio management, collections and recoveries.  Furthermore, it manages the Group's credit risk by:

· Ensuring that the Group has appropriate credit risk practices, including an effective system of internal control;

· Identifying, assessing and measuring credit risks across the Group from an individual instrument to a portfolio level;

· Creating relevant policies to protect the Group against the identified risks including the requirements to obtain collateral from borrowers, to perform robust ongoing credit assessment of borrowers and to continually monitor exposures against internal risk limits;

· Limiting concentrations of exposure by type of asset, counterparty, industry, credit rating, geographic location;

· Establishing a robust control framework regarding the authorisation structure for the approval and renewal of credit facilities;

· Established practises to identify and manage risks within the portfolio;

· Developing and maintaining the Group's risk grading to categorise exposures according to the degree of risk default. Risk grades are subject to regular reviews; and

· Developing and maintaining the Group's processes for measuring Expected Credit Loss (ECL) including monitoring of credit risk, incorporation of forward-looking information and the method used to measure ECL.

Significant increase in credit risk

The Group continuously monitors all assets subject to Expected Credit Loss as to whether there has been a significant increase in credit risk since initial recognition, either through a significant increase in Probability of Default ("PD") or in Loss Given Default ("LGD").

The following is based on the procedures adopted by the Group for the year ended 31 December 2022:

Granting of credit

The commercial team prepare a Credit Application which sets out the rationale and the pricing for the proposed loan facility, and confirms that it meets the Group's product, manufacturer programme and pricing policies. The Application will include the proposed counterparty's latest financial information and any other relevant information but as a minimum:

· Details of the limit requirement e.g. product, amount, tenor, repayment plan etc,

· Facility purpose or reason for increase,

· Counterparty details, background, management, financials and ratios (actuals and forecast),

· Key risks and mitigants for the application,

· Conditions, covenants & information (and monitoring proposals) and security (including comments on valuation),

· Pricing,

· Confirmation that the proposed exposure falls within risk appetite,

· Clear indication where the application falls outside of risk appetite.

Other information which can be considered includes (where necessary and available):

· Existing counterparty which has met all obligations in time and in accordance with loan agreements,

· Counterparty known to credit personnel who can confirm positive experience,

· Additional security, either tangible or personal guarantees where there is verifiable evidence of personal net worth,

· A commercial rationale for approving the application, although this mitigant will generally be in addition to at least one of the other mitigants. 

The credit risk function will analyse the financial information, obtain reports from a credit reference agency, allocate a risk rating, and make a decision on the application. The process may require further dialogue with the Business Development Team to ascertain additional information or clarification.

Each mandate holder is authorised to approve loans up to agreed financial limits and provided that the risk rating of the counterparty is within agreed parameters. If the financial limit requested is higher than the credit authority of the first reviewer of the loan facility request, the application is sent to the next credit authority level with a recommendation.

Transactional Credit Committee considers all applications that are outside the credit approval mandate of the Director - Credit due to the financial limit requested. There is an agreed further escalation to the Board Risk Committee for the largest transactions which fall outside of the Transactional Credit Committee.

Identifying significant increases in credit risk

The short tenor of the current loan facilities reduces the possible adverse effect of changes in economic conditions and/or the credit risk profile of the counterparty.

The Group nonetheless measures a change in a counterparty's credit risk mainly on payment performance and end of contract repayment behaviour. The regular collateral audit process and interim reviews may highlight other changes in a counterparty's risk profile, such as the security asset no longer being under the control of the borrower.  The Group views a significant increase in credit risk as:

· A two-notch reduction in the Company's counterparty's risk rating, as notified through the credit rating agency alert system.

· a presumption that an account which is more than 30 days past due has suffered a significant increase in credit risk. IFRS 9 allows this presumption to be rebutted, but the Group believes that more than 30 days past due to be an appropriate back stop measure and therefore has not rebutted the presumption.

· A counterparty defaults on a payment due under a loan agreement.

· Late contractual payments which although cured, re-occur on a regular basis.

· Counterparty confirmation that it has sold Group financed assets but delays in processing payments.

· Evidence of a reduction in a counterparty's working capital facilities which has had an adverse effect on its liquidity.

· Evidence of actual or attempted sales out of trust or of double financing, of assets funded by the Group.

An increase in significant credit risk is identified when any of the above events happen after the date of initial recognition.

Identifying loans and advances in default and credit impaired

The Group's definition of default for this purpose is:

· A counterparty defaults on a payment due under a loan agreement and that payment is more than 90 days overdue;

· A counterparty commits an event of default under the terms and conditions of the loan agreement which leads the lending company to believe that the borrower's ability to meet its credit obligations to the lending company is in doubt; or

· The Group is made aware of a severe deterioration of the credit profile of the customer which is likely to impede the customers' ability to satisfy future payment obligations.

In the normal course of economic cyclicality, the short tenor of the loans extended by the Group means that significant economic events are unlikely to influence counterparties' ability to meet their obligations to the Group.

Exposure at default (EAD)

Exposure at default ("EAD") is the expected loan balance at the point of default. Where a receivable is not classified as being in default at the reporting date, the Group have included reasonable assumptions to add unaccrued interest and fees up to the receivable becoming 91 days past due, which is considered to be the point of default.

Expected credit losses (ECL)

The ECL on an individual loan is based on the credit losses expected to arise over the life of the loan, being defined as the difference between all the contractual cash flows that are due to the Group and the cash flows that it expects to receive.  This difference is then discounted at the original effective interest rate on the loan to reflect the disposal period of such assets underlying the original contract.

Regardless of the loan status stage, the aggregated ECL is the value that the Group expects to lose on its current loan book having assessed each loan individually.

To calculate the ECL on a loan, the Group considers:

1.  Counterparty PD; and

2.  LGD on the asset

whereby: ECL = EAD x PD x LGD

Forward looking information

In its ECL models, the Group applies sensitivity analysis of forward-looking economic inputs. When formulating the economic scenarios, the Group considers both macro-economic factors and other specific drivers which may trigger a certain stress scenario. The impact of movements in these macro-economic factors are assessed on a 12-month basis from the reporting date (31 December).

Maximum exposure to credit risk:

	2022	2021
	£'000	£'000
Loans and advances to banks	3,848	29,597
Derivative assets	57	-
Loans and advances to customers	435,883	247,205
Trade and other receivables	1,022	617
	440,810	277,419

Collateral held as security:

	2022	2021
	£'000	£'000
Fully collateralised:
Loan-to-value* ratio:
Less than 50%	2,798	1,698
51% to 70%	36,764	13,106
71% to 80%	63,239	29,724
81% to 90%	69,499	29,302
91% to 100%	264,118	175,125
	436,418	248,955
Partially collateralised (loans over 100% loan-to-value)	-	-
Unsecured lending	4,866	499

* Calculated using wholesale collateral values. Wholesale collateral values represent the invoice total (including applicable VAT) from the invoice received from the supplier of the product. The wholesale amount is less than the recommended retail price (RRP) of the product.

The Group's lending activities are asset based so it expects that the majority of its exposure is secured by the collateral value of the asset that has been funded under the loan agreement. The Group has title to the collateral which is funded under loan agreements. The collateral includes boats, motorcycles, recreational vehicles, caravans, light commercial vehicles, industrial and agricultural equipment. The collateral has low depreciation and is not subject to rapid technological changes or redundancy. There has been no change in the Group's assessment of collateral and its underlying value in the reporting period.

The assets are generally in the counterparty's possession, but this is controlled and managed by the asset audit process.  The audit process checks on a periodic basis that the asset is in the counterparty's possession and has not been sold out of trust or is otherwise not in the counterparty's control.  The frequency of the audits is initially determined by the risk rating assessed at the time that the borrowing facility is first approved and is assessed on an ongoing basis.

Additional security may also be taken to further secure the counterparty's obligations and further mitigate risk. Further to this, in many cases, the Group is often granted, by the counterparty, an option to sell-back the underlying collateral.

Based on the Group's current principal products, the counterparty repays its obligation under a loan agreement with the Group at or before the point that it sells the asset. If the asset is not sold and the loan agreement reaches maturity, the counterparty is required to pay the amount due under the loan agreement plus any other amounts due. In the event that the counterparty does not pay on the due date, the Group's customer management process will maintain frequent contact with the counterparty to establish the reason for the delay and agree a timescale for payment. Senior Management will review actions on a regular basis to ensure that the Group's position is not being prejudiced by delays.

In the event the Group determines that payment will not be made voluntarily, it will enforce the terms of its loan agreement and recover the asset, initiating legal proceedings for delivery, if necessary. If there is a shortfall between the net sales proceeds from the sale of the asset and the counterparty's obligations under the loan agreement, the shortfall is payable by the counterparty on demand.  

Concentration of credit risk

The Group maintains policies and procedures to manage concentrations of credit at the counterparty level and industry level to achieve a diversified loan portfolio.

Credit quality

The Risk Rating is an internal rating system of counterparty credit risk whereby the Group will allocate a rating from 1 to 9, 1 being the highest level of credit quality and 9 being the lowest level of credit quality. The Group uses Experian Delphi scores to set Risk Ratings which in turn determine the probability of default for each Counterparty. In the majority of cases, the Experian Delphi score will be used without management override adjustments. However, where the Delphi score differs from the Group's assessment of credit risk and / or where a Delphi score cannot be derived such as in the case of sole traders or unincorporated partnerships, either a Delphi score uplift or a Delphi score equivalent is utilised to calculate DFC's internal risk rating. The Risk Rating for each counterparty is reviewed on an ongoing basis and recorded as at the reporting date.

An analysis of the Group's credit risk exposure for loan and advances to customers, internal rating and "stage" is provided in the following tables.  A description of the meanings of Stages 1, 2 and 3 was given in the accounting policies set out above. See below table of gross loan receivables by Risk Rating and IFRS 9 stage allocation:

	Stage 1	Stage 2	Stage 3	2022 Total
31 December 2022	£'000	£'000	£'000	£'000
Credit rating:
Above average (Risk rating 1-2)	267,000	6,629	-	273,629
Average (Risk rating 3-5)	110,818	5,433	14,757	131,008
Below average (Risk rating 6+)	32,938	1,261	2,448	36,647
Gross carrying amount	410,756	13,323	17,205	441,284
Loss allowance	(1,943)	(84)	(1,693)	(3,720)
Carrying amount	408,813	13,239	15,512	437,564

	Stage 1	Stage 2	Stage 3	2021 Total
31 December 2021	£'000	£'000	£'000	£'000
Credit rating:
Above average (Risk rating 1-2)	142,119	-	-	142,119
Average (Risk rating 3-5)	77,286	8,758	-	86,044
Below average (Risk rating 6+)	19,922	827	542	21,291
Gross carrying amount	239,327	9,585	542	249,454
Loss allowance	(1,142)	(155)	(421)	(1,718)
Carrying amount	238,185	9,430	121	247,736

See note 19 for analysis of the movements in gross loan receivables and impairment allowances in terms of IFRS 9 staging.

Analysis of credit quality of trade receivables:

	2022	2021
	£'000	£'000
Status at balance sheet date:
Not past due, nor impaired	563	276
Past due but not impaired	29	8
Impaired	258	71
Total gross carrying amount	850	355
Loss allowance	(101)	(75)
Carrying amount	749	280

See note 23 for analysis of the movements in gross trade receivables and impairment allowances in terms of IFRS 9 staging.

Amounts written off

The contractual amount outstanding on financial assets that were written off during the reporting period and are still subject to enforcement activity is £nil at 31 December 2022 (31 December 2021: £49,000).

Liquidity risk

Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due or will have to do so at an excessive cost. This risk arises from mismatches in the timing of cash flows which is inherent in all finance operations and can be affected by a range of Group-specific and market-wide events.

Liquidity risk management

The Group has in place a policy and control framework for managing liquidity risk. The Group's Asset and Liability Management Committee (ALCO) is responsible for managing the liquidity risk via a combination of policy formation, review and governance, analysis, stress testing, limit setting and monitoring. The ALCO meets on a monthly basis to review the liquidity position and risks.

The Bank has a comprehensive suite of liquidity management processes in place, which allow the Bank to monitor liquidity risk on a daily basis. Daily liquidity reporting is supplemented by Early Warning Indicators and a Liquidity Contingency Plan.

Liquidity stress testing

Stress Testing is a key risk management tool for the Bank and is used to inform the setting of risk appetite limits and required buffers.

A range of liquidity stress scenarios has been conducted (as detailed in the Internal Liquidity Adequacy Assessment Process "ILAAP" document), which demonstrates that the Group's liquidity profile is sufficient to withstand a severe stress.

Maturity analysis for financial assets: 

The following maturity analysis is based on expected gross cash flows:

	Carrying amount	Gross nominal inflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2022	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Cash and balances at central banks	107,353	107,353	107,353	-	-	-	-
Loans and advances to banks	3,848	3,848	3,277	75	(58)	554	-
Debt securities	22,964	23,233	13,008	113	10,112	-	-
Derivative assets	57	20	-	-	39	(19)	-
Loans and advances to customers	435,883	439,282	58,593	138,833	219,829	22,027	-
Trade receivables	749	850	850	-	-	-	-
Other receivables	273	273	1	-	8	154	110
	571,127	574,859	183,082	139,021	229,930	22,716	110

	Carrying amount	Gross nominal inflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2021	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Loans and advances to banks	29,597	29,597	29,597	-	-	-	-
Loans and advances to customers	247,205	249,240	24,953	56,140	128,226	39,921	-
Debt securities	108,867	108,085	24,600	38,000	22,485	23,000	-
Trade receivables	280	355	355	-	-	-	-
Other receivables	337	337	9	59	9	260	-
	386,286	387,614	79,514	94,199	150,720	63,181	-

Maturity analysis for financial liabilities:

The following maturity analysis is based on contractual gross cash flows:

	Carrying amount	Gross nominal outflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2022	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Customer deposits	479,736	491,911	47,861	43,564	278,483	122,003	-
Derivative liabilities	42	68	51	-	-	17	-
Other financial liabilities	395	425	-	23	139	263	-
Trade payables	218	218	218	-	-	-	-
Other payables	3,377	3,249	3,212	-	(33)	70	-
Preference shares	50	50	-	-	-	50	-
	483,818	495,921	51,342	43,587	278,589	122,403	-
Loan commitments	-	10,663	10,663	-	-	-	-

	Carrying amount	Gross nominal outflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2021	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Customer deposits	296,856	299,371	4,684	29,798	217,159	47,730	-
Other financial liabilities	504	555	4	31	96	424	-
Trade payables	282	282	282	-	-	-	-
Other payables	2,753	2,864	2,666	-	35	163	-
Preference shares	50	50	-	-	-	50	-
	300,445	303,122	7,636	29,829	217,290	48,367	-
Loan commitments	-	3,892	3,892	-	-	-	-

Market risk

Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices will reduce the Group's income or the value of its assets.

The principal market risk to which the Group is exposed is interest rate risk.

Interest rate risk management

The Group is exposed to the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of the change in market interest rates.

The Group's borrowings are either fixed rate, or administered, (being products where the rate is set at the DFC's discretion).  The Group has no exposure to LIBOR.  These borrowings fund loans and advances to customers at fixed rate. 

The limited average duration of the loan and deposit book provide a natural mitigant against interest rate risk.  Additionally, during 2022 interest rate swap lines were incepted which allow the Bank to use interest rate swaps as a further mitigation tool for interest rate risk.

The Bank evaluates changes in the economic value of equity calculated under the following six supervisory shock scenarios referred to in Rule 9.7 of the ICAA Part of the PRA Rulebook as issued by the Prudential Regulation Authority (PRA).

The impact of changes in interest rates has been assessed in terms of economic value of equity (EVE) and profit or loss. Economic value of equity (EVE) is a cash flow calculation that takes the present value of all asset cash flows and subtracts the present value of all liability cash flows.  This is a long-term economic measure used to assess the degree of interest rate risk exposure.

The estimate that a 200bps upward and downward movement in interest rates would have impacted the economic value of equity (EVE) is as follows:

	2022	2021
	£'000	£'000
Change in interest rate (basis points):
Sensitivity of EVE +200bps	658	15
Sensitivity of EVE -200bps	(681)	6

The estimate of the effect on the next 12 months net interest income using a 200bps upward and 200bps downward movement in interest rates is as follows:

	2022	2021
	£'000	£'000
Change in interest rate (basis points):
Sensitivity of profit +200bps	1,868	2,998
Sensitivity of profit -200bps	(2,522)	147

In preparing the sensitivity analyses above, the Group makes certain assumptions consistent with the expected and contractual re-pricing behaviour as well as behavioural repayment profiles under the two interest rate scenarios.

37. Earnings per share

Analysis of number of shares in the periods:

	2022	2021
	No.	No.
Number of shares:
At period end	179,369,199	179,369,199
Basic:
Weighted average number of shares in issue in the year	179,369,199	168,808,800
Diluted:
Effect of weighted average number of options outstanding for the year	-	-
Diluted weighted average number of shares and options for the year	179,369,199	168,808,800

Earnings attributable to equity holders:

	2022	2021
	£'000	£'000
Earnings attributable to ordinary shareholders:
Profit/(loss) after tax attributable to the shareholders	9,761	(3,676)

Earnings per share calculation:

	2022	2021
	pence	pence
Earnings per share:
Basic	5	(2)
Diluted	5	(2)

38. Related party disclosures

In the year ended 31 December 2022, Directors were awarded share based payments, refer to note 9 for further details.

Directors' emoluments are disclosed in note 8 of these consolidated financial statements.

39. Subsequent events

In January 2023, the Bank agreed an initial £175m ENABLE Guarantee with the British Business Bank, which may also be increased in the future to £350m. As a regulated bank, this scheme enables the Bank to benefit from a zero risk-weighted HM Government guarantee on a fixed percentage of credit losses in excess of an agreed first loss threshold on the loan portfolio originated under the Guarantee.  This zero-risk weighting of assets above this threshold provides the Group with incremental capacity to scale its loan book without the need for additional Tier 1 equity capital.  The Bank commenced using the Guarantee effective from 31 March 2023.

The Company Statement of Financial Position

		As at	As at
		31 December	31 December
		2022	2021
	Note	£'000	£'000
Assets:
Loans and advances to banks1	5	146	530
Trade and other receivables	7	155	119
Investment in subsidiaries	8	134,213	134,213
Total assets		134,514	134,862
Liabilities:
Amounts payable to Group Undertakings	9	5,522	5,110
Trade and other payables	10	700	545
Financial liabilities	11	50	50
Total liabilities		6,272	5,705
Equity:
Issued share capital	12	1,793	1,793
Share premium	12	39,273	39,273
Merger relief	12	94,911	94,911
Retained loss		(7,371)	(6,456)
Own shares		(364)	(364)
Total equity		128,242	129,157
Total equity and liabilities		134,514	134,862

¹ During the year ended 31 December 2022, the Company reclassified 'cash and cash equivalents' to 'loans and advances to banks' in the statement of financial position to be consistent with the consolidated financial statements. See note 1.4 of the consolidated financial statements for details of this reclassification.

The notes on pages 184 to 189 are an integral part of these financial statements.

Distribution Finance Capital Holdings plc recorded loss after taxation for the year ended 31 December 2022 of £1,414,000 (2021: loss of £868,000). These financial results are derived entirely from continuing operations.

These financial statements were approved by the Board of Directors and authorised for issue on 18 April 2023.  They were signed on its behalf by:

…

Carl D'Ammassa

Director

18 April 2023

Registered number: 11911574

The Company Cash Flow Statement

		2022	2021
	Note	£'000	£'000
Cash flows from operating activities:
Loss before taxation	4	(1,414)	(868)
Adjustments for non-cash items and other adjustments included in the income statement	6	(1,029)	(1,366)
Decrease in operating assets		(34)	35
Increase in operating liabilities		155	282
Taxation paid		-	-
Net cash used in operating activities		(2,322)	(1,917)
Cash flows from financing activities:
Issue of new shares	12	-	38,645
Acquisition of shares in DF Capital Bank Limited	8	-	(38,600)
Proceeds from intercompany loan		1,938	2,199
Net cash from financing activities		1,938	2,244
Net increase in cash and cash equivalents		(384)	327
Cash and cash equivalents at start of the year		530	203
Cash and cash equivalents at end of the year	6	146	530

The Company Statement of Changes in Equity

	Issued share capital	Share premium	Merger relief	Retained loss	Own shares	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 January 2021	1,066	-	94,911	(4,595)	(364)	91,018
Loss after taxation	-	-	-	(868)	-	(868)
Employee Benefit Trust	-	-	-	-	-	-
Share based payments	-	-	-	362	-	362
Issue of new shares	727	39,273	-	(1,355)	-	38,645
Balance at 31 December 2021	1,793	39,273	94,911	(6,456)	(364)	129,157
Loss after taxation	-	-	-	(1,414)	-	(1,414)
Share based payments	-	-	-	499	-	499
Issue of new shares	-	-	-	-	-	-
Balance at 31 December 2022	1,793	39,273	94,911	(7,371)	(364)	128,242

Notes to the Company Financial Statements

Basis of preparation

1.1 Accounting basis

These standalone financial statements for Distribution Finance Capital Holdings plc (the "Company") have been prepared and approved by the Directors in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the United Kingdom (UK) and interpretations issued by the IFRS Interpretations Committee (IFRS IC).

1.2 Going concern

As detailed in note 1 to the consolidated financial statements, the Directors have performed an assessment of the appropriateness of the going concern basis. The Directors consider that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

1.3 Income statement

Under Section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own income statement.

2. Summary of significant accounting policies

These financial statements have been prepared using the significant accounting policies as set out in note 2 to the consolidated financial statements. Any further accounting policies provided below are solely applicable to the Company financial statements.

2.1 Investment in subsidiaries

In accordance with IAS 27 Separate Financial Statements the Company has elected to account for an investment in subsidiary at cost. The Company performs an impairment assessment on the investment in subsidiary at each reporting date to assess whether the cost basis reflects an accurate value of the investment at the reporting date.

3. Critical accounting judgements and key sources of estimation uncertainty

In the financial statements for the year ended 31 December 2022, the Company has not made any critical accounting judgements and key sources of estimation which are considered to be material in value or significance to the performance of the Company.

4. Net loss attributable to equity shareholders of the Company

	2022	2021
	£'000	£'000
Net loss attributable to equity shareholder of the Company	(1,414)	(868)

5. Loans and advances to banks

	2022	2021
	£'000	£'000
Included in cash and cash equivalents: balances with less than three months to maturity at inception	146	530
Total loans and advances to banks	146	530

As detailed in note 1.4 of the consolidated financial statements, the Group reclassified cash and cash equivalents of £530,000 in the year ended 31 December 2021 from 'cash and cash equivalents' into 'loans and advances to banks' within the statement of financial position. This change has been reflected in the Company financial statements to remain consistent with the consolidated financial statements.

6. Notes to the cash flow statement

See below for reconciliation of balances classified as cash and cash equivalents, which are recognised within the cash flow statement:

	2022	2021
	£'000	£'000
Loans and advances to banks	146	530
Total cash and cash equivalents	146	530

Adjustments for non-cash items and other adjustments included in the income statement:

		2022	2021
		£'000	£'000
Management fee recharge		(1,205)	(1,502)
Movement in other provisions		-	-
Share based payments		176	136
Total non-cash items and other adjustments		(1,029)	(1,366)

Changes in liabilities arising from financing activities:

The Company had no changes in the Company's liabilities arising from financing activities, including both cash and non-cash changes, for the years ended 31 December 2022 and 31 December 2021.

7. Trade and other receivables

	2022	2021
	£'000	£'000
Other debtors	50	50
Indirect taxes	4	2
Prepayments	101	67
Total trade and other receivables	155	119

8. Investment in subsidiaries

Subsidiary	Principal Activity	Shareholding %	Class of shareholding	Country of incorporation	Registered Address
DF Capital Bank Limited	Financial Services	100%	Ordinary	UK	St James' Building, 61-95 Oxford St, Manchester, M1 6EJ

In the years ended 31 December 2022, there was no changes to investment in subsidiaries.

In February 2021, the Company undertook a placing of new ordinary shares rais ing £40.0 million of additional capital before expenses and approximately £38.6 million after expenses.   Following the placing, DF Capital Bank Limited, a wholly owned subsidiary of the Group, issued 38,600,000 ordinary shares of £1.00 nominal value each to Distribution Finance Capital Holdings plc at a price of £1.00 per share giving an aggregate sub-scription price of £38 .6 million

For the year ended 31 December 2022, the Company conducted an impairment assessment of the investment in subsidiaries and concluded that there is no impairment required (2021:£nil).

9. Amounts payable to Group undertakings

	2022	2021
	£'000	£'000
Amounts payable to DF Capital Bank Limited	5,522	5,110
Total amounts payable to Group undertakings	5,522	5,110

10. Trade and other payables

	2022	2021
	£'000	£'000
Trade payables	-	21
Accruals	654	488
Social security taxes	46	36
Total trade and other payables	700	545

11. Financial liabilities

	2022	2021
	£'000	£'000
Preference shares	50	50
Total financial liabilities	50	50

Reconciliation of movements in financial liabilities:

	Preference Shares
	£'000
Balance at 1 January 2021	50
No transactions in the year	-
Balance at 31 December 2021	50
No transactions in the year	-
Balance at 31 December 2022	50

12. Share capital

	2022	2021	2022	2021
	No.	No.	£'000	£'000
Authorised:
Ordinary shares of 1p each	179,369,199	179,369,199	1,793	1,793
Allotted, issued and fully paid: Ordinary shares of 1p each	179,369,199	179,369,199	1,793	1,793

	Date	No. of shares	Issue Price	Share Capital	Share Premium	Merger Relief	Total
		#	£	£'000	£'000	£'000	£'000
Balance at 1 January 2021		106,641,926		1,066	-	94,911	95,977
Issue of new shares	22-Feb-21	72,727,273	0.55	727	39,273	-	40,000
Balance at 31 December 2021		179,369,199		1,793	39,273	94,911	135,977
No transactions in the year		-	-	-	-	-	-
Balance at 31 December 2022		179,369,199		1,793	39,273	94,911	135,977

13. Financial instruments

The Group monitors and manages risk management at a group-level and, therefore, the Risk Management Framework stipulated in note 36 of the consolidated financial statements encompasses the Company risk management environment.

The Company and Directors believe the principal risks of the Company to be credit risk and liquidity risk. The Directors have evaluated the following risks to either not be relevant to the Company or of immaterial significance: market risk, interest rate risk and exchange rate risk.

See note 36 of the consolidated financial statements for further details on how the Company defines and manages credit risk and liquidity risk.

Financial assets and financial liabilities included in the statement of financial position that are not measured at fair value:

	Carrying amount	Fair value	Level 1	Level 2	Level 3
31 December 2022	£'000	£'000	£'000	£'000	£'000
Financial assets not
measured at fair value:
Loans and advances to banks	146	146	146	-	-
Other receivables	54	54	-	-	54
	200	200	146	-	54
31 December 2022
Financial liabilities not
measured at fair value:
Amounts payable to Group Undertakings	5,522	5,522	-	-	5,522
Trade payables	-	-	-	-	-
Other payables	46	46	-	-	46
Preference shares	50	50	-	-	50
	5,618	5,618	-	-	5,618

	Carrying amount	Fair value	Level 1	Level 2	Level 3
31 December 2021	£'000	£'000	£'000	£'000	£'000
Financial assets not
measured at fair value:
Loans and advances to banks	530	530	530	-	-
Other receivables	52	52	-	-	52
	582	582	530	-	52
31 December 2021
Financial liabilities not
measured at fair value:
Amounts payable to Group Undertakings	5,110	5,110	-	-	5,110
Trade payables	21	21	-	-	21
Other payables	36	36	-	-	36
Preference shares	50	50	-	-	50
	5,217	5,217	-	-	5,217

Maximum exposure to credit risk:

	2022	2021
	£'000	£'000
Loans and advances to banks	146	530
Trade and other receivables	54	52
	200	582

Maturity analysis for financial assets 

The following maturity analysis is based on expected gross cash flows:

	Carrying amount	Gross nominal inflow	Less than 1 months	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2022	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Loans and advances to banks	146	146	146	-	-	-	-
Other receivables	54	54	4	-	-	50	-
	200	200	150	-	-	50	-

	Carrying amount	Gross nominal inflow	Less than 1 months	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2021	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Loans and advances to banks	530	530	530	-	-	-	-
Other receivables	52	52	2	-	-	50	-
	582	582	532	-	-	50	-

Maturity analysis for financial liabilities

The following maturity analysis is based on contractual gross cash flows:

	Carrying amount	Gross nominal outflow	Less than 1 months	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2022	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Amounts payable to Group Undertakings	5,522	5,522	-	-	5,522	-	-
Other payables	46	80	1	-	51	28	-
Preference shares	50	50	-	-	-	50	-
	5,618	5,652	1	-	5,573	78	-

	Carrying amount	Gross nominal outflow	Less than 1 months	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2021	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Amounts payable to Group Undertakings	5,110	5,110	-	-	5,110	-	-
Trade payables	21	21	21	-	-	-	-
Other payables	36	82	-	-	1	81	-
Preference shares	50	50	-	-	-	50	-
	5,217	5,263	21	-	5,111	131	-

14. Subsequent events

There have been no subsequent events between 31 December 2022 and the date of this report which would have a material impact on the financial position of the Company.

 

END

 

 

FR SFMESAEDSESL