REG - Distribution Finance - Final Results
21 April 2021
Distribution Finance Capital Holdings plc
("DF Capital" or the "Company" together with its subsidiaries the "Group")
Audited Results for the year ended 31 December 2020
and
Q1 2021 Trading Update
Distribution Finance Capital Holdings plc, a newly authorised bank providing working capital solutions to dealers and manufacturers across the UK, today announces its audited results for the 12 months ended 31 December 2020 and a Q1 2021 trading update.
Performance Highlights
2020
2019
Change %
Loan Book (£m)
113
209
(46)
New loans advanced to customers (£m)
253
490
(48)
No of dealer customers
623
747
(17)
Gross Revenue
11.5
12.7
(9)
Net Interest Income
2.3
4.4
(47)
Cost of Risk (%)
0.86
0.99
(13)
Loss before tax (£m)
(13.6)
(13.5)
1
Net Assets (£m)
51
65
(21)
Operational Highlights
• DF Capital Bank Ltd, the Group's subsidiary, received full authorisation as a bank in September 2020.
• Loan book growth was constrained during the year; since receiving the bank licence, momentum was rebuilt, ending up 36% by 31 December 2020 at £113m from a low point of £83m in October 2020.
• The loan book was carefully managed through the pandemic achieving results better than periods prior to COVID-19; at 31 December 2020, arrears represented 0.2% of the loan book.
• The Group successfully launched a range of retail savings products, raising over £145m in the 12 weeks to 31 December 2020, which enabled the early repayment of expensive wholesale funding and other debt.
Post period end highlights and Q1 trading update
• The Group started 2021 entirely funded by retail deposits, which has transformed its net interest margin from less than 2% to approximately 6%.
• The loan book has had a strong start to 2021 exceeding £193m at 31 March 2021, up 70% from 31 December 2020.
• The loan book has continued to perform well and the arrears trend from the year end has continued throughout the first quarter of 2021.
• The Group has recently launched new 15 and 18 month fixed rate savings products, in addition to a 2 year fixed rate.
• The Group completed a £40m fundraise in February 2021 increasing its capital base, providing the necessary funding to support its strategic plan in the short term.
Carl D'Ammassa, Chief Executive, commented: "The impact of the global pandemic made 2020 a challenging year for the Group. However, we start 2021 in an enviable position and on more solid foundations having navigated the impact of COVID-19 well. We have no pandemic related legacy and have protected our lending franchise throughout the year. Receiving full authorisation as a bank will be transformational for the Group's profitability. We've seen strong momentum since authorisation that has continued well into the current year, which gives us confidence in the demand for our products and services as well as the delivery of our strategic plan.
"The Group is currently performing in line with the Board's expectations. Whilst the economic environment remains uncertain, the strong start in Q1 2021 gives us early confidence in achieving run-rate profitability during Q4 2021."
The Group's full Annual Report and Financial Statements are available on its Investor website www.dfcapital-investors.com.
AGM
The Company announces that its AGM will take place at 12.00 p.m. on 19 May 2021. The Notice of AGM and Form of Proxy will be posted to shareholders on 23 April and a copy will be available at www.dfcapital-investors.com. Our preference had been to welcome shareholders in person to our 2021 AGM particularly given the constraints we faced in 2020 due to the COVID-19 pandemic. At present, however, in light of the ongoing pandemic and the UK Government's guidance currently in place, it is anticipated that the AGM will take place as a closed meeting and shareholders will not be able to attend in person. If it becomes necessary or appropriate to revise the current arrangements for the Annual General Meeting, further information will be published on the Company's website at www.dfcapital-investors.com, by RIS announcement and by any other means legally required at that time.
For further information contact:
Distribution Finance Capital Holdings plc
Carl D'Ammassa - Chief Executive Officer
+44 (0) 161 413 3391
Kam Bansil - Head of Investor Relations
+44 (0) 7779 229508
Investec Bank plc (Nomad and Broker)
+44 (0) 207 597 5970
David Anderson
Bruce Garrow
Harry Hargreaves
Maria Gomez de Olea
Chairman's Statement
Dear Shareholder
2020 was undoubtedly a challenging year following the global disruption caused by COVID-19. However, it is pleasing for me to start this year's annual report confirming that the Group received full authorisation as a bank from the Prudential Regulation Authority ("PRA") on 29 September 2020. This has been the Group's ambition for much of its short life, having started lending in 2017 and completed the demerger from TruFin plc in May 2019 as part of the application process.
Being a bank unlocks the strategic ambition we shared at the time of the IPO and gives us the solid foundation on which to grow, building on the inventory finance lending proposition that we have proven resonates with our customers.
2020 - A challenging year
The Group was presented with a number of challenges during the year, which impacted the financial performance and slowed the runway to profitability. Throughout this challenging period, the management team has worked diligently through its action plan to protect the firm, which we shared fuller details of in June 2020. They successfully navigated the many twists and turns presented to them along the way, carefully managed the loan book whilst protecting the lending franchise, despite the constraint on wholesale funding seen for most of the year. All this was going on whilst we worked with regulators to progress the bank licence application. It is clear to the Board that management has worked hard to support the wider employee base, our customers and the community in which we work. As a Board we are delighted, in the context of this global pandemic, with the outturn for the year.
Transition to a bank
The transition to being a bank on authorisation has been reasonably straightforward for us. We have been, in our view, bank-ready for some time, and made the deliberate choice to operate the Group as if we were already a bank since submitting our first licence application. All of the frameworks, policies and procedures have been in place for some time, and we have continued to evolve those in line with our increasing maturity, the economic environment and changes in the regulatory environment. Most importantly our deposit raising capacity was well tested and ready to go on receiving the bank licence, the results of which have been well received.
Positive outlook and well-capitalised for growth
As the UK's COVID-19 vaccine program continues successfully, and as manufacturer supply chains begin to normalise, the pent-up demand experienced by our dealers across all sectors, indicates a sizeable runway for growth ahead. That near-term demand and our positive outlook prompted the capital raise the Group concluded in February 2021, raising £40m of new capital, and broadening our shareholder base. We were delighted with the support we received for the firm's growth plan from both new and existing shareholders. The Group is well capitalised and has sufficient regulatory capital to enable growth in our loan book up to approximately £550m, a milestone we hope to achieve by the end of 2022.
Whilst we are buoyed by the positive signs we are seeing across the markets in which we operate, it is undoubted that the economic environment remains uncertain. We expect to maintain a cautious approach to lending as dealers and manufacturers continue to work their way through the worst of this pandemic and the new administrative burden following Brexit.
Stable board
We announced changes to the Board in May 2020, welcoming on-board two shareholder representative directors and Carl D'Ammassa, on his appointment as Chief Executive. The composition of the Board continues to demonstrate balance of independence of oversight and decision making, which falls in line with regulatory expectations. The Board has benefited from stability of membership throughout the pandemic which has helped guide our response to the public health crisis whilst also progressing the banking licence application. Board members have been responsive to the needs of the firm and regulators, committing many hours to support the management team through these unprecedented times.
Having completed our first Board Effectiveness Review, independently assessed by Grant Thornton, I am delighted with the report's comments in relation to the positive dynamic within the Board, the level of skill, capability and expertise Board members bring to the firm, and the degree of engagement.
I would like to extend my appreciation to the entire Board for their commitment and counsel throughout these difficult times, it is undoubted that the Group has benefited significantly.
Our people have made the difference
As you read this annual report, I am confident you will feel as I and the Board do, that the firm's response to the pandemic has been exceptional; we feel lucky to have had strength of leadership within the firm and a management team which has worked tirelessly throughout this unprecedented period.
Whilst our proposition is highly digitised much of our business is generated on the back of the strength of relationships we have with our customers and the quality of service we offer. The entire DF Capital team has remained true to our values, going the extra mile to do the right thing for our customers, whilst looking out for each other from a wellbeing perspective. I am very proud of the entire DF Capital team and the culture which has been built within the firm.
Looking to the future
As we look forward, 2021 is about re-building our loan book and capitalising on the strong demand we see for our lending products. The impact of the pandemic has created a number of unknowns such as the impact of increased stock turn resulting from the high demand for leisure assets in particularly and the later knock on as we return to normalised levels of product demand. We remain well connected with our customers, understanding their pipeline and borrowing needs, which are the basis of our internal growth forecasts.
As a bank, with retail deposits as our sole source of funding and sufficient capital to support our growth, the Board believes the Group has all the ingredients to unlock many of the growth ambitions laid out at the time of the IPO.
We can now focus our efforts on creating a successful and stable franchise for the bank, reaching profitability, and delivering strong shareholder returns over the medium term.
John Baines
Independent Chairman
Chief Executive Officer's Report
Dear Shareholder
We start 2021 in an enviable position. We have navigated the challenges of COVID-19 well; we have no pandemic related legacy credit issues in our portfolio; we have protected our lending franchise; and we received full authorisation as a bank so have now transformed our cost of funding.
Whilst it feels, certainly on a relative basis that we are on solid ground, it is undoubted that 2020 was a tough year and we continued to make a financial loss. Pursuing a bank licence is a significant task alone, however, the additional challenge driven by the constraints imposed on our wholesale funding facilities whilst also doing what we could to support our customers was a difficult balancing act. Add to that the need to lead DF Capital's team on a remote basis, as a newly appointed Chief Executive at the start of the first lockdown in March 2020, these challenges were materially amplified.
Looking back on the impact of COVID-19
Whilst we enter 2021 as a bank, it is hard not to look back at 2020 and recognise it was a challenging year for the Group. The global pandemic has had a devastating effect not only on businesses but also on our collective wellbeing and personal lives. The Group itself was neither insulated nor immune from the far-reaching impact of the health crisis. You will remember, however, we previously laid out a comprehensive impact assessment and associated action plan that would help navigate the difficult months of lockdown. We expected, back in June 2020, that the impact would be felt through to the final quarter of the year, although that view is significantly out-dated as we still find ourselves in a period of lockdown albeit seeing light at the end of the tunnel as the UK's vaccine programme kicks in at pace.
At the time of the first lockdown we were quick to implement working from home, with all members of the team having access to the required technology that allowed them to continue to provide services to our customers. The majority of our employees have operated throughout the pandemic on a remote basis.
The momentum the firm had built immediately prior to the first lockdown was significantly curtailed, which in
turn had an adverse impact on the financial performance of the Group throughout the year. The Group's loan book peaked at £213m on 30 January 2020 and at that time we saw significant opportunity to grow lending - constrained only by the available capacity in our wholesale funding lines. As the extent of COVID-19 became clear, the Group faced extensive restrictions on its wholesale funding imposed by its lenders as a market wide reaction to the pandemic.
Many of our dealers and manufacturers were closed throughout the first lockdown to 15 June 2020 and that presented them with many challenges. As restrictions were eased, our dealer customers experienced significant increases in sales, particularly in the leisure related sectors we lend to; the trend towards "staycation" saw motorhome, caravan and lodge sales boom. The reluctance to use public transport resulted in strong demand for motorcycles and electric bikes. This high consumer demand for new products, coupled with the levels of replenishment stock available to dealers and the restrictions placed on our wholesale funding facilities, significantly impacted the firm's ability to grow its loan book, which reached a low point in mid-October 2020.
I am extremely proud of the DF Capital team, not only for the rising to the challenge of COVID-19 but also showing compassion for each other, looking out for their colleagues, whilst also offering the best support possible to our customers. In our inaugural annual report in June 2020, I noted that I felt the team had some unique characteristics and they are what makes the difference for our customers. The team has remained true to its values throughout the pandemic: Straightforward, Expert and Flexible.
Successful transition to a bank
2020 saw a number of significant milestones for the Group. In addition to our loan book reaching a peak of £213m prior to the first lockdown, the Group's cumulative lending since the first loan was made in 2017 exceeded £1bn in December 2020. Our most significant accolade, felt by everyone in the firm, was receipt of the bank licence in September 2020.
Prior to the award of a bank licence, throughout the pandemic we continued to develop the business and our banking capabilities. We continued to operate as if we were a bank, with all of the risk management disciplines and cultural elements fully operational. We invested in DF Check, our technology-based remote auditing tool, and further enhanced our deposit raising capabilities so we would be 'ready to go' should the bank licence be granted. Since the transition to a bank we haven't looked back, many of the pandemic driven challenges feel far behind us.
Stable low-cost funding in place
Unsurprisingly, once we received notification of full authorisation as a bank, we were quick to raise deposits. We built up the expected regulatory liquidity buffers and raised over £145m in the 12 weeks to 31 December 2020, however, £130m was raised within six weeks of launch in mid-October 2020. Our highly digitised online account opening process worked well and received strong positive feedback from our depositor customers, which also saw us recognised with a feefo Trusted Service Award in January 2021 with a satisfaction score of 4.3 out of 5. During the 12 weeks to 31 December 2020, we had launched seven fixed rate personal savings products and a 90-day notice account. We have built, in a short space of time, a solid product maturity profile which means we will not face significant spikes of deposit withdrawals as products mature and accordingly need to raise significant amounts of new deposits to replace them.
The success of the deposit raising allowed us to repay all of our expensive wholesale funding and a loan from the Group's former parent, TruFin plc, earlier than anticipated. Starting 2021 funded by retail deposits and our own capital transforms the Group's net interest margin ('NIM') and underpins our roadmap to profitability. The Group's NIM is projected to increase to c6% in 2021, from c2% in 2020 when the firm was entirely funded by expensive wholesale finance.
Despite good progress and strong support from the British Business Bank ("BBB") for the Group to participate in its Enable Funding Scheme, an alternative wholesale funding facility, we decided to postpone any near-term diversification of our funding model until such time as we have reached greater scale. We still believe that our current funding model unlocks our growth plans more rapidly and offers the most flexibility to support lending and product development, whilst also delivering stronger financial returns given the lower cost of funding through deposits. We have not ruled out participating in Bank of England schemes (such as TFSME) once we have the required infrastructure in place.
Financial performance aligned to loan book
As a specialist lender, operating in a niche market, our financial performance is predominantly aligned to the size and shape of our loan book. Without doubt, the financial outturn for 2020 was not what we expected when we started the year. Restrictions on our wholesale funding lines, strong sales for dealers throughout the summer following the end of the first lockdown, and minimal availability of new stock to finance saw our loan book reach a low-point of £83m in mid-October 2020. Accordingly we remain a loss-making business. However, having repaid all wholesale funding and fully restarted lending on 4 November 2020, we have seen a significant bounce back of the loan book, which reached £113m at 31 December 2020 and now exceeded £193m at 31 March 2021 (up 70% versus 31 December 2020). This is in line with our expected growth plan for 2021 and our anticipated roadmap to hit monthly profitability during Q4 2021 once our loan book exceeds approximately £270m.
We have worked tirelessly to manage the arrears and default performance of the loan book throughout the year. This led to an improvement in arrears performance as a percentage of loan book to 0.2% at 31 December 2020 (2019: 0.8%). We have also carefully managed costs throughout the year, right sizing our team to align to our growth plan and furloughing a small number of colleagues during the first lockdown. Unfortunately we were unable to protect those roles permanently. Whilst we received support from the government's Job Retention Scheme of £89k during the period, this has been repaid in full.
Strong underlying performance across most sectors
Our lending products support the working capital requirements of dealers and manufacturers by enabling finished goods to be shipped from manufacturers to dealers' forecourts. The trend for "staycations" through the year, and the rise in focus for many consumers on their leisure time, saw demand for leisure assets significantly increase, with many dealers reporting record levels of sales, hindered only by the availability of replenishment assets.
Whilst replenishment units are now flowing, many dealers, particularly in the motorhome, caravan, lodge, and marine space, forecast similar levels of demand through 2021, with seasonal spikes in sales as seen over Easter 2021 and expected during the summer months. Likewise, a reluctance to use public transport, also aided by greater focus on hobbies and leisure activities, has seen strong sales of motorcycles and electric bikes, particularly at the entry and mid-price value end of the product range. We expect strong demand for our lending outside of these seasonal windows, over the autumn and winter months, as dealers replenish their forecourts.
Our commercial or non-leisure sectors, which includes transport, agriculture, plant and machinery, generally see a more consistent performance over the year with lower seasonal variances. As we look forward, these sectors are expected to mitigate some of the seasonal variance likely across the leisure products. Transport, in particular, is seen as a growth sector for us given the demand for light commercial vehicles and electric vans to support increased home deliveries. We also anticipate increased demand in plant and machinery benefiting from significant infrastructure investment projects such as HS2.
Whilst Brexit presented some logistical challenges for manufacturers and distributors in bringing product or components into the UK, largely hindered by new import processes and additional levels of documentation and administration during the winter of 2020, these have eased significantly which has normalised product flow. In some sectors, manufacturers are still trying to play catch-up but expect their operations to be back on track as we progress through 2021.
The pandemic has changed many of the conventional market dynamics and accordingly we expect stock to sit with dealers for shorter times, given the extent of demand and pre-ordering across a number of asset classes. However, our loan book projections are sophisticated and take into account sector specific seasonality and facility utilisation rates, as well as conversion of pipeline opportunities and growth initiatives within the sectors that we currently operate.
Outlook and growth plan
Much of the drive to complete the £40m capital raise in February 2021 was as a result of the significant pipeline of lending facilities. At 12 January 2021, we saw a pipeline of potential facilities totalling some £850m, which has increased further to £900m as at 31 March 2021. The capital raise gives us the regulatory capital to support this growth opportunity over the next 18 to 24 months, lending more to existing customers and supporting more dealers and manufacturers in our current sectors of focus. Converting this pipeline could unlock a loan book up to £550m, when adjusting for seasonal utilisation rates. The client need for our working capital lending products is clear.
We have cleansed our pipeline in light of the pandemic, refreshed the credit assessment of our dealers and have rationalised the number of dealers we have credit appetite to support from 747 at 31 December 2019 to 623. We support c65 manufacturers, which gives us access to over 1,700 dealers. Our efforts as we start 2021 are focused on converting more of those dealers and other prospects in our pipeline into DF Capital customers, thus significantly growing our market share.
Whilst we see significant capacity to grow our current inventory finance lending product, we remain committed to building a multi-product SME focused lending franchise. We believe many SME's remain poorly served by incumbent lenders. Whilst Government intervention in the form of various Coronavirus related loans has been an important catalyst that has supported SME lending through the pandemic, we do believe that once these schemes are withdrawn the significant funding gap for small and medium sized businesses will widen. Our ambitions to diversify our lending capability into adjacent products will allow us to play a bigger role in the UK SME lending space. We will be focused on products that resonate with our dealers and manufacturers as obligors or partners in the distribution of finance, such as short-term working capital, invoice discounting, asset finance and leasing. We have not ruled out product development through inorganic routes as a way to further accelerate our business plan.
Applauding our people
Working entirely remotely has not been easy. We have had to find new ways of working effectively and doing our best for our customer base. Our technology has been robust throughout and the entire team has had the equipment they need to fulfil their roles, alongside additional financial support to cover incremental costs of working remotely. We have worked hard to keep the team connected and morale high, with a focus on wellbeing and mental health. I am pleased with the resilience the team has shown throughout the pandemic, however, I know everyone is looking forward to more normal times and returning to the office. Our business model is built on the premise of strong customer service and deep relationships with our customers - the DF Capital team has excelled and have proven they are great at what they do.
I do believe that the Group has achieved amazing things since it first started lending in 2017. That being said, 2021 feels, certainly to me, as the start of the most exciting chapter of our journey to date. We will truly be able to bring to life many of the ambitions laid out at the time of our IPO now that we are a bank, and well-capitalised for the next phase of our growth.
Whilst the economic environment remains uncertain, the strong performance we have seen so far this year gives us early confidence about the achievability of our 2021 plan. The Group is currently performing in line with expectations.
I would like to take this opportunity to thank our shareholders, many of whom have been on this journey with us for an extended period of time, for their patience, support and commitment throughout. We are building a great bank together.
Carl D'Ammassa
Chief Executive Officer
Chief Financial Officer's Report
Dear Shareholder
Navigating the loan book through the pandemic
The Group's financial performance is intrinsically linked to the size of the firm's loan book and the fees and interest we charge to our borrowers. We entered 2020 with a loan book of £209m, which peaked at £213m at the end of January 2020, constrained only by the available capacity in our wholesale funding.
As the COVID-19 pandemic unfolded, there were clear impacts on dealers. During the first lockdown they were forced to close and once lockdown restrictions were lifted many saw record sales and demand for their products, that led to our loans being repaid. As manufacturers were closed through this period and due to the knock-on impact of their supply chains, lower levels of new stock was available to dealers to replenish their forecasts, against which the Group could secure our lending products. These dynamics coupled with restrictions imposed by the Group's lenders on the availability of wholesale funding led to reductions in our loan book which reached a low point of £83m in mid-October 2020. In light of these challenges, the Group remained loss-making, reporting a statutory loss of £13.6m for the year ended 31 December 2020.
Since receiving the bank licence, raising deposits and accordingly fully reopening for new lending, we have seen the loan book grow to £113m by the end of 2020, an increase of 36% from the low-point in mid-October 2020. We have seen the supply chains of our manufacturer partners stabilise and as a result new assets are flowing more freely to dealers.
Reduced gross revenues with stable yield
Throughout the pandemic we have worked hard to be a supportive lender to our dealers. We waived facility fees for all customers from March 2020, reintroducing them during December 2020. Our approach to pricing otherwise has not changed which has delivered a stable gross yield at 7.7% (2019:7.8%). The significant reduction in loan book during 2020 meant the average loan book during the year was below that of 2019, resulting in gross revenues (which are predominantly comprised of interest and facility fees) reducing by 9% to £11.5m.
Funding profile transformation
Net Interest Income (which is gross yield less interest expense) decreased during the year to 1.5% (2019: 2.8%). This reduction was predominantly due to higher wholesale funding costs largely driven by the more expensive senior mezzanine facility being in place for the majority of 2020. The mezzanine facility was originally put in place in 2019 as a short-term measure to facilitate further loan book growth at a time the Group expected its banking licence to be granted in the near term. Following receipt of the bank licence on 29 September 2020, the Group started deposit raising on 14 October 2020. £145m was raised by the end of 2020 across a range of product maturity profiles (90-day notice and fixed products with terms of 1 year, 2 year, 15 months and 18 months).
The success of this deposit raising enabled both the wholesale funding and a loan from TruFin Plc to be fully repaid in November 2020 ahead of schedule; as a result, since that time, the Group is now funded solely by deposits and equity.
Going forward, this will be transformational for the Net Interest Margin ('NIM') of the Group; retail deposits raised in the last quarter of 2020 following the launch of our deposit taking operations was raised at rates of less than 1.25% versus a blended cost of over 6% for our previous wholesale funding, senior mezzanine facility and TruFin loan. This should see our NIM increase to c6% in FY21 (2020: c2%).
Summarised Statement of Comprehensive Income
2020
£'000
2019
£'000
Gross revenues
11,511
12,655
Interest expense
(9,174)
(8,207)
Net income
2,337
4,448
Operating expenses
(15,063)
(14,080)
Impairment charges
(1,294)
(1,582)
Provisions for commitments and other liabilities
417
(165)
Exceptional items
-
(2,125)
Loss before taxation
(13,603)
(13,504)
Taxation
-
-
Loss after taxation
(13,603)
(13,504)
Other comprehensive (loss)/income
(22)
4
Total comprehensive loss
(13,625)
(13,500)
Strong arrears and impairments performance
We have continued to intensively manage arrears, whilst supporting our dealers through the pandemic. During the first lockdown we provided modest levels of forbearance to dealers (less than 2% of the loan book by value) and rescheduled principal repayments where required, to help during the period their businesses remained closed. There have been minimal forbearance requests since the first lockdown ended.
Our approach has delivered significant reductions in arrears balances which are now materially lower than pre-pandemic levels. We enter 2021 with "no pandemic related legacy" issues in the loan book. Whilst this out-turn is positive, we are not complacent and recognise that we remain in a period of economic uncertainty with a number of government backed support schemes due to come to an end over the coming months, which could impact our arrears performance from these extraordinary low levels.
Impairment charges and provisions for the period reached £1.3m (2019: £1.6m). The year-on-year reduction largely reflects the reducing size of the loan book through the year with a related fall in loan provisioning. As a percentage of average gross receivables, the Group's loss rate for 2020 was 0.86% (2019: 0.99%). The impairment allowance at 31 December 2020 as a percentage of gross receivables was 1.14% (December 2019: 0.67%), an increase that reflects the estimated impact of the pandemic on the UK economy and our customer base. These estimates are higher than we have actually seen during 2020 but we believe align with broader economic indicators.
31 December
202031 December
2019Arrears (£'000) - principal repayment, fees
and interest
1-30 days past due
27
643
31-60 days past due
22
225
61-90 days past due
39
87
91 days + past due
132
762
220
1,717
Total % of loan book
0.2%
0.8%
Associated principal balance (£'000)
1-30 days past due
96
5,505
31-60 days past due
7
482
61-90 days past due
14
226
91 days + past due
259
857
376
7,070
Total % of loan book
0.3%
3.4%
Strong security position
As a niche lender, we provide working capital to UK based dealers secured against their inventory or stock. We advance funds to them at a discount to the wholesale invoice price charged by the manufacturer. The value of dealer loans outstanding compared to wholesale value ("loan to value") at 31 December 2020 was 80% (December 2019: 84%).
We do not advance 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 c32% in retail prices across the sectors and asset classes we support. We hold additional security in the form of debentures, personal and directors' guarantees as well as having manufacturer repurchase or redistribution agreements in place across c50% of our loan book.
Leveraging our infrastructure following receipt of bank licence
Prior to receiving our bank licence, we had made the conscious decision to operate as if we were a bank, which required enhanced operating structures, governance frameworks and risk management procedures.
The absence of a bank licence effectively meant all of the costs of being a bank were absorbed by the Group without the benefit of significantly reduced cost of funds. Having received the bank licence during the year, we expect a significant improvement in net interest margin in FY21 and as a result start to see the net benefit of the investments we have made to support a bank-ready infrastructure.
Whilst the Group did take action to reduce the cost base at the start of the first lockdown with these benefits flowing through the balance of the year, given the pandemic related reductions in our loan book, we have continued to operate inefficiently. Our cost to income ratio closed the year at 641% (2019: 317%).
Despite the cost actions taken in March 2020 and our headcount ending the year at 74, down from 90 at year end 2019, operating expenses increased during the period to £15.1m (2019: £14.1m excluding exceptional items). This increase largely reflected recurring operating expenditure and specific recruitment decisions made during the second half of 2019 for which a full year's cost has been recognised in 2020.
As a firm focused on growth, with a highly digitised client facing processes, much of the cost we need to support our near-term loan book targets is already embedded. We expect to become more efficient over time as the loan book grows and will see significant reductions in our cost to income ratio. We believe we have adequate people resources and a cost profile that will support our roadmap to a monthly profitable run-rate.
Resilient capital base
Our CET1 ratio at the end of 2020 was c.50%; well above our regulatory capital minimum limits. With equity at the year-end of £50.9m (2019: £64.6m), this capital excess would allow the Group's loan book to exceed £270m. Having further strengthened our capital base by raising £40m in February 2021, we estimate that we have sufficient regulatory capital to support a loan book of in the region of £550m.
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 2020.
Details of significant events since the balance sheet date are contained in note 35 to these consolidated financial statements. An indication of likely future developments in the business of the Group are included in the Strategic Review section.
Information about the use of financial instruments by the Group is detailed within note 32 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 loss for the year, after taxation, amounted to £13,625,000 (2019: loss £13,500,000).
The Directors do not recommend the payment of a dividend (2019: £nil).
Directors
The Directors who held office during the year and up to the date of the Directors' report were as follows:
John Baines
Carl D'Ammassa (appointed 9 March 2020)
Gavin Morris
Mark Stephens
Carole Machell
Thomas Grathwohl
Stephen Greene (appointed 13 May 2020)
Haakon Stenrød (appointed 13 May 2020)
Simon Henry Kenner (resigned 13 May 2020)
James van den Bergh (resigned 13 May 2020)
Directors' shareholdings
As at 31 December 2020, the Directors held the following ordinary shares in the Company:
No. of ordinary shares
Voting rights (%)John Baines - Independent Chairman
297,222
0.28%
Carl D'Ammassa - Chief Executive Officer
154,531
0.14%
Gavin Morris - Chief Financial Officer
213,433
0.20%
Carole Machell - Independent Non-executive Director
83,333
0.08%
Purchase of own shares
On 8 September 2020, following shareholder approval the Company authorised the issue and allotment of 4,906,776 new Ordinary Shares at 1p per share, the proceeds of which enabled the Company to buy back 4,906,776 existing Ordinary 1p shares. The issued share capital of the Company was the same before and after this transaction. The structure of this transaction meant that all loans that had either directly or indirectly funded the acquisition of the Company's Ordinary Shares were repaid (other than loans made to the Employee Benefit Trust) and all Ordinary Shares that had been directly or indirectly funded were cancelled and an equivalent number of new Ordinary Shares were issued.
Significant shareholders
As at 31 December 2020, the following parties held greater than 3% of issued share capital in the Company:
No. of ordinary shares
Voting rights (%)Arrowgrass Master Fund Ltd
52,448,082
49.18%
Watrium AS
16,373,366
15.35%
Liontrust Asset Management
7,574,509
7.10%
Premier Milton Investors
4,912,771
4.61%
Political and charitable donations
The Group made no political or charitable donations during the twelve month period ended 31 December 2020 (2019: nil).
Annual General Meeting
The Company's Annual General Meeting will be held at St James' Building, 61-95 Oxford Street, Manchester, M1 6EJ on 19 May 2021 at 12 p.m.
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. This stress testing has considered the potential impact of COVID-19 on our dealers, in particular in respect of credit losses, together with potential supply chain issues arising from Brexit. 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 a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. 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 46 to 78 contains information about the Group's corporate governance arrangements.
Post balance sheet events
There have been no significant events between 31 December 2020 and the date of approval of the financial statements which would require change to the financial statements. Note 35 provides information in respect of post balance sheet events.
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 he/she ought to have taken as a Director in order to make himself/herself 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 20 April 2021 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 financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law).
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 of the profit or loss of the Group for that period. In preparing these consolidated financial statements, International Accounting Standard 1 requires that Directors:
• select appropriate accounting policies and apply them consistently;
• 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 in IFRSs 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 Group'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 also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
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.
Financial Statements
Consolidated Statement of Comprehensive Income
Note2020
£'000
2019
£'000
Interest and similar income
4
11,233
12,230
Interest and similar expenses
6
(9,174)
(8,207)
Net interest income
2,059
4,023
Fee income
7
168
358
Net gains on disposal of financial assets at fair value through other comprehensive income
21
15
67
Other operating income
95
-
Total operating income
2,337
4,448
Staff costs
8
(9,805)
(9,854)
Other operating expenses1
10
(5,182)
(4,226)
Provisions
13
417
(165)
Other losses
(76)
-
Exceptional items
12
-
(2,125)
Total operating loss before impairment losses
(12,309)
(11,922)
Net impairment loss on financial assets
14
(1,294)
(1,582)
Loss before taxation
(13,603)
(13,504)
Taxation
16
-
-
Loss after taxation - attributable to equity holders of the Group
(13,603)
(13,504)
Other comprehensive (loss)/income:
Items that may subsequently be transferred to the income statement:
Fair value movements on debt securities
21
(22)
4
Total other comprehensive (loss)/income for the year, net of tax
(22)
4
Total comprehensive loss for the year attributable to equity holders
(13,625)
(13,500)
Earnings per share:
pence
penceBasic EPS
33
(13)
(18)
Diluted EPS
33
(13)
(18)
The notes on pages 95 to 145 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
NoteAs at
31 December 2020£'000
As at
31 December 2019£'000
Assets
Cash and cash equivalents
23
21,233
14,122
Debt securities
21
66,601
7,994
Loans and advances to customers
20
111,337
207,636
Trade and other receivables
22
1,154
3,506
Property, plant and equipment
17
139
242
Right-of-use assets
18
64
638
Intangible assets
19
794
862
Total Assets
201,322
235,000
Liabilities
Customer deposits
29
145,982
-
Financial liabilities
30
107
164,663
Trade and other payables
31
4,261
5,248
Provisions
13
83
533
Total Liabilities
150,433
170,444
Equity
Issued share capital
25
1,066
1,066
Share premium
25
-
-
Merger relief
25
94,911
94,911
Merger reserve
27
(20,609)
(20,609)
Own shares
26
(364)
-
Retained (loss)
(24,115)
(10,812)
Total Equity
50,889
64,556
Total Equity and Liabilities
201,322
235,000
The notes on pages 95 to 145 are an integral part of these consolidated financial statements.
These financial statements were approved by the Board of Directors and authorised for issue on 20 April 2021. They were signed on its behalf by:
Carl D'Ammassa
Director
20 April 2021
Registered number: 11911574
Consolidated Statement of Changes in Equity
Issued share
capital£'000
Share
premium£'000
Merger relief£'000
Merger
reserve£'000
Own shares£'000
Retained (loss)
£'000
Total£'000
Balance at 1 January 2019
17
35,994
-
-
-
18,541
54,552
Loss after taxation
-
-
-
(3,220)
(10,284)
(13,504)
Other comprehensive income
-
-
-
-
-
4
4
Preference shares redemption
-
-
-
-
-
(964)
(964)
Issue of new shares - DFC Ltd
7
24,993
-
-
-
-
25,000
Arising on consolidation
(24)
(60,987)
-
(17,389)
-
(17,577)
(95,977)
Issue of new shares - DFCH plc
1,066
-
94,911
-
-
(532)
95,445
Balance at 31 December 2019
1,066
-
94,911
(20,609)
-
(10,812)
64,556
Loss after taxation
-
-
-
-
-
(13,603)
(13,603)
Other comprehensive income
-
-
-
-
-
(22)
(22)
Share based payments
-
-
-
-
-
322
322
Employee Benefit Trust loan
-
-
-
-
(364)
-
(364)
Balance at 31 December 2020
1,066
-
94,911
(20,609)
(364)
(24,115)
50,889
The notes on pages 95 to 145 are an integral part of these consolidated financial statements.
Refer to note 25 and 26 for further details on equity movements during the periods.
Consolidated Cash Flow Statement
Note2020
£'000
2019
£'000
Cash flows from operating activities:
Loss before taxation
(13,603)
(13,504)
Adjustments for non-cash items and other adjustments included in the income statement
23
2,059
1,711
(Increase)/decrease in operating assets
23
96,764
(95,015)
Increase/(decrease) in operating liabilities
23
(19,073)
92,034
Taxation paid
16
-
-
Net cash from/ (used in) operating activities
66,147
(14,774)
Cash flows from investing activities:
Purchase of debt securities
21
(120,721)
(92,045)
Proceeds from sale and maturity of debt securities
21
62,107
89,116
Purchase of property, plant and equipment
17
(32)
(152)
Purchase of intangible assets
19
(226)
(397)
Net cash used in investing activities
(58,872)
(3,478)
Cash flows from financing activities:
Issue of new shares
25
-
25,000
Repayment of lease liabilities
23
(164)
(182)
Net cash (used in )/ from financing activities
(164)
24,818
Net increase in cash and cash equivalents
7,111
6,566
Cash and cash equivalents at start of the year
14,122
7,556
Cash and cash equivalents at end of the period
23
21,233
14,122
In comparison to the previous year financial statements, the Group revised its presentation of the consolidated cash flow statement for the year ended 31 December 2020. The new format provides a simplified cash flow statement with further details disclosed within note 23 of these consolidated financial statements.
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".
DF Capital Bank Limited was granted its banking licence in September 2020, after which the Company renamed from Distribution Finance Capital Ltd ("DFC Ltd") to DF Capital Bank Limited (the "Bank").
DFCH plc is registered and incorporated in England and Wales whose company registration number is 11911574. The registered office is 196 Deansgate, Manchester, M3 3WF. 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 bank 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
Both the consolidated financial statements and the Company financial statements included in this Annual Report and Financial Statements has been prepared in accordance with the United Kingdom Generally Accepted Accounting Practice (UK GAAP), International Financial Reporting Standards (IFRSs) and the IFRS Interpretations Committee (formerly the International Financial Reporting Interpretations Committee (IFRIC)) interpretations.
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.
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. Subsidiaries are consolidated from the date on which control is transferred to the Group. Accounting policies have been applied consistently throughout the Group and its subsidiary.
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 Adoption of new and revised standards and interpretations
During the year ended 31 December 2020, the Group did not adopt any new standards and amendments to existing standards which were effective for accounting periods starting on or after 1 January 2020. A number of other new and revised standards issued by the International Accounting Standards Board, also came into effect on 1 January 2020, but they do not have a material effect on the Group's financial statements and are not further disclosed. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
The Group assessed the following new standards, amendments and interpretations which have had no material impact on the financial statements as follows:
a. Amendments to IAS 12 'Income taxes': 'Income Tax Consequences of Payments on Instruments Classified as Equity'
b. 'Interest Rate Benchmark Reform': Amendments to IFRS 9 'Financial Instruments', IAS 39 'Financial Instruments: Recognition and Measurement' and IFRS 7 'Financial Instruments: Disclosures'
c. Amendment to IFRS 16: COVID-19 rent concessions
1.4 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.
1.5 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 in the foreseeable future. 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. This stress testing has considered the potential impact of COVID-19 on our dealers, in particular in respect of credit losses, together with potential supply chain issues arising from Brexit. Based on this review, the Directors believe that the Group is well placed to manage its business risks successfully within the expected economic outlook.
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.
1.6 Foreign currencies
The financial statements are expressed in Pounds 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 balance sheet 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.
1.7 New accounting standards issued but not yet effective
The Group assesses on an ongoing basis the impact of new accounting standards which are not yet effective at the reporting date and the likely impact of the new accounting standard on the financial statements. At 31 December 2020, the Group has applied all new IFRS standards and foresees no additional standards with a likely material impact to consider at this time.
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 expense" 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 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").
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.
Other income from financial instruments
For financial instruments that are classified as FVTPL, any interest or fee income is included in the profit and loss account within the fair value gain or loss.
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 deposed, the corresponding realised gain or loss is transferred from other comprehensive income into the income statement.
The Group presently holds no financial instruments for trading or hedging purposes, nor has it designated any items as FVTPL.
Other operating income
Other operating income consists of UK government grant monies which have been claimed by the Group.
2.2 Other expense from financial instruments
Any interest or fees incurred in servicing liabilities carried at FVTPL are included in the profit and loss account within "Net gain/(loss) from financial instruments at FVTPL".
2.3 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
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.
2.4 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 has 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.
Internally-generated assets are amortised on a straight-line basis over a period of 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.
2.5 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 directly attributable to the acquisition of financial assets and financial liabilities at FVTPL are recognised immediately in the consolidated income statement.
Financial assets
Classification and reclassification of financial assets
Recognised financial assets within the scope of IFRS 9 are required to be classified as subsequently measured at amortised cost, fair value through other comprehensive income (FVTOCI) or fair value through profit or loss (FVTPL) on the basis of both the Group's business model for managing the financial assets and the contractual cash flow characteristics of the financial assets.
Financial assets are reclassified if, and only if, the business model under which they are held is changed. There has been no such change in the allocation of assets to business models in the periods under review.
I. Loans and advances to customers
Loans and advances to customers are held within a business model whose objective is to hold those financial assets in order to collect contractual cash flows. Further, the contractual terms of the loan agreements give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Accordingly, loans and advances to customers are subsequently measured at amortised cost. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method (EIR), less impairment. 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 income in the income statement. The losses arising from impairment are recognised in the income statement and disclosed with any other similar losses within the line item "Net impairment losses on financial assets".
II. Fair value through other comprehensive income (FVTOCI)
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. Trade receivables
Trade receivables do not contain any significant financing component and accordingly are recognised initially at transaction price, and subsequently measured at amortised cost less accumulated impairment allowance.
IV. Other receivables
Other receivables are held only to collect contractually due payments of principal (and exceptionally interest charges due on late settlement). Where the fair value of these transactions is materially similar to the transaction price, each is recognised initially at the contracted amount, and subsequently measured at amortised cost less accumulated impairment allowance.
V. Cash and cash equivalents
Cash and cash equivalents comprise cash balances and demand deposits with a maturity date of less than three months from recognition. These balances are readily convertible into cash and subject to an insignificant risk of changes in value. Cash and cash equivalents are measured at amortised cost less accumulated impairment allowance.
Impairment
The Group recognises loss allowances for expected credit losses ("ECLs") on the following financial instruments that are not measured at FVTPL:
• Loans and advances to customers
• Other receivables*
• Trade receivables*, 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. These are measured as the present value of the difference between the cash flows due to the Group under the contract and the cash flows that Distribution Finance Capital expects to receive arising from the weighting of future economic scenarios, discounted at the asset's EIR.
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 32 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; or
• 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 lending company; 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 lending company 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
• Distribution Finance Capital, for economic or contractual reasons relating to the borrower's financial difficulty, having granted to the borrower a concession that Distribution Finance Capital 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 32 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.
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.
Financial liabilities
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.
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.
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 and Additional Tier 1 capital securities are presented as components of equity. 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
Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities.
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 recognition as at fair value through profit or loss.
Other financial liabilities - loans and borrowings
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 profit and loss account.
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.
2.6 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 balance sheet 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 balance sheet date.
The carrying amount of deferred tax assets is reviewed at each balance sheet 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.
2.7 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.
2.8 Share based payments
The Group has introduced 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.
2.9 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 lease 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.
2.10 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 balance sheet 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 Distribution Finance Capital'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.
2.11 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.
2.12 Alternative performance measures (APMs)
Financial measures or metrics used in these financial statements which are not defined by IFRS are alternative performance measures. The Group uses such measures for performance analysis because they provide additional useful information on the performance and position of the Group. Since the Group defines its own alternative performance measures, these might not be directly comparable with other companies' alternative performance measures. These measures are not intended to be a substitute for, or superior to, IFRS measurements.
2.13 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.
Alternative performance measures
Adjusted basic earnings per share is calculated using the basic loss per share calculation excluding exceptional items as recorded in the income statement. This provides a consistent measure of operating performance excluding distortions caused by exceptional items resulting from the initial public offering of the Company. The number of shares is calculated by adjusting the shares in issue at the beginning of the period by the number of shares bought back or issued during the period, multiplied by a time-weighting factor. Contingently issuable shares are included in the basic EPS denominator when the contingency has been met.
Adjusted diluted earnings per share is calculated after adjusting the weighted average number of shares used in the adjusted basic earnings per share calculation to assume the conversion of all potentially dilutive shares.
There are no adjustments to account for in any of the periods presented and therefore the adjusted earnings per share is determined to be the same as the basic and diluted earnings per share.
2.14 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 granted should a company satisfy all the following criteria:
• 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.
2.15 Merger accounting
Business combination and merger accounting
In the year ended 31 December 2019, the Group assessed the transactions which resulted in the newly formed Group in May 2019. The Group reached the conclusion that although there was a change in control and ownership of the Group, the transactions executed represented a combination of businesses under common control. Resultantly, the transactions are not within the scope of IFRS 3 Business Combinations and the Group must consider other applicable accounting standards.
FRS 102 provides accounting guidance for transactions of this nature and provides prescriptive guidance in the form of Merger Accounting and in particular using the book value accounting method in order to prepare the consolidated financial statement for the Group.
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. Therefore, these consolidated financial statements reflect for the year ended 31 December 2019 the entire twelve month period despite the Group being formed in May 2019.
Merger reserve
Following the initial public offering of the Company in May 2019, the Company is now the ultimate controlling party of the Group. The Board of Directors elected to account for the transaction using merger accounting which 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 (proceeds from the initial public offering) and the book value of DF Capital Bank Limited (formerly Distribution Finance Capital Ltd) is recognised as a Merger Reserve, in accordance with relevant accounting standards relating to businesses under common control.
2.16 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.
2.17 Exceptional items
The Group has classified items of income or expense as exceptional in the consolidated statement of comprehensive income if the amounts are material and the Directors do not expect to incur costs of a similar nature in the future. The Directors of the Group have highlighted these numbers as exceptional as they are not considered as normal operating costs of the business but represent a material portion of the overall consolidated statement of comprehensive income.
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.
The judgements and estimates that have a significant effect on the amounts recognised in the historical financial information noted below.
3.1 Critical accounting judgements
Leases - recognition of lease term
At initial recognition of a lease agreement in accordance with IFRS 16, the Group assesses the expected term and payment profile of the lease which is used to calculate the right-of-use asset and lease liability on the Group's balance sheet. The Group determines the lease term by taking into consideration the non-cancellable lease term and any exercise options to trigger a renewal or break clause in the lease agreement.
When determining the likely term of the lease at initial recognition, the Group primarily uses management judgment and business forecasts to determine the expected term of the lease. After initial recognition, the Group continually assesses the expected remaining term throughout the life of the lease. Should the expected remaining term be amended due to changes in circumstances or a significant event, the Group will adjust the right-of-use asset and lease liability in accordance with the treatment of a lease modification.
During the year ended 31 December 2020, the Group exercised break clause options for both property leases. Further details can be found in note 18.
3.2 Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period, that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below:
Expected credit losses loan impairment
The Group applies a number of assumptions and estimations within its impairment loss model to calculate the expected credit losses of its loan portfolio. Although these assumptions and estimates are validated against historical performance where possible, the Group is acutely aware that IFRS 9 is a forward-looking process which should not be driven solely by past performance. Consequently, the Group is required to make informed decisions in regards to expected credit losses and impairment allowances over the foreseeable future.
Although there are many factors which impact the Group's impairment modelling, the following areas are deemed to have a material impact on the financial statements:
Definition of default
Prior to becoming a newly approved bank, the Group aligned 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.
Probability of default (PD)
The majority of the Group's loan portfolio has an expected behavioural term of less than 12 months. As such, there is not a material difference between the 12-month PD for stage 1 exposures and the lifetime PD for stage 2 exposures. The Group's impairment model uses both external Delphi credit ratings and internal credit risk ratings to assess the PD of each counterparty at the reporting date.
Due to the wider economic impact of the COVID-19 pandemic and the impact of restrictive measures by the UK government on our customers, the Group has revised its PD assumptions to reflect the increase in credit risk to the Group. Furthermore, the Group has conducted a thorough validation process of its PD model against historical default data, including data obtained during the pandemic, to assess the reasonableness of its PD assumptions. Nevertheless, the economic outlook for the UK and the impact of the Group's counterparties remain uncertain and, as a result, actual dealer defaults could differ from the Group's estimate.
A 100% deterioration in PDs (excluding stage 3 exposures, which are already in default) would result in an additional impairment charge of £540,000 (2019: £261,000).
Loss given default (LGD)
As a collateralised lender, the Group is impacted the most by changes in LGD so it ensures that its LGD model assumptions are robust, the most sensitive assumption being collateral haircuts to reflect forced sale discounts, sales out of trust and costs to sell. In response to the COVID-19 pandemic, the Group increased its collateral haircut assumptions to reflect the impact of the pandemic on its counterparties. The Group is satisfied that its LGD modelling is reasonable in comparison to past recoverability performance, including data obtained during the pandemic. Nevertheless, the economic outlook for the UK and, in particular, the behaviour of the Group's counterparties once government support ends remain uncertain and, as a result, actual losses could differ from the Group's estimate.
A 10% reduction in the expected discounted cashflows from the collateral held by the Group would result in an additional impairment charge of £400,000 (2019: £431,000).
Multiple economic scenarios
The Group considers four economic scenarios within its impairment modelling whereby the Group stresses PD and LGD inputs in accordance with expected macro-economic and managerial outlooks. This provides an ECL impairment allowance for each scenario which is multiplied by the likelihood of occurrence over the next 12-month period from the balance sheet date to give a probability weighted ECL. Due to COVID-19, the Group has amended its baseline assumptions which in turn resulted in the Group revising its multiple economic scenarios and the probabilities attached to each scenario.
When formulating the multiple economic scenarios, the Group considers both macro-economic factors and other specific drivers which may trigger a certain stress scenario. After which, the Group applies managerial judgment supported by external reputable research publications to assess the impact these factors will have upon PD, LGD and the likeliness of these events occurring over the following 12-month period. In these financial statements, the Group has reflected the impact of the COVID-19 pandemic and the uncertainty over the likely economic recovery at this time although the economic outlook is beginning to look more positive than earlier in the year.
See below for the Group's multiple economic scenarios as at 31 December 2020, which includes the impairment allowance (increase)/decrease if a 100% probability is applied to the respective scenario:
Scenario
Probability weighting
(%)
ECL impairment
(£'000)
ECL coverage
(%)
Decrease/(increase) in impairment allowance
(£'000)
Improved
30%
874
0.77%
414
Baseline
40%
1,131
0.99%
157
Poor
20%
1,679
1.47%
(391)
Severe
10%
2,380
2.09%
(1,091)
4. Interest and similar income
2020
£'000
2019
£'000
On loans and advances to customers
11,206
12,144
On loans and advances to banks
17
75
On employee loan agreements
10
11
Total interest and similar income
11,233
12,230
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.
6. Interest and similar expenses
2020
£'0002019
£'000
Customer deposits
279
-
Interest paid to related parties
913
812
Wholesale funding interest
7,982
7,602
Preference shares
-
(207)
Total interest and similar expense
9,174
8,207
DF Capital Bank Limited was granted its banking licence in September 2020 and began offering its savings products to customers in October 2020. The Group used the funds raised from customer deposits to settle in full its financial liabilities held by TruFin Holdings Limited and its wholesale funders before the end of 2020. The Group is now solely financed by customer deposits with no other financial liabilities. See note 29 and 30 for further detail of the movements in customer deposits and financial liabilities during the year.
7. Fee income
2020
£'000
2019
£'000
Facility-related fees
168
358
Total fee income
168
358
In light of the COVID-19 pandemic and the impact upon our commercial customers, the Group waived facility fee billing from March to November 2020 totalling c.£0.2m as a gesture of goodwill to our clients during this difficult time.
8. Staff costs
Analysis of staff costs:
2020
£'000
2019
£'000
Wages and salaries
7,959
8,050
Share based payments
322
-
Contractor costs
75
238
Social security costs
1,054
1,295
Pension costs arising on defined contribution schemes
395
271
Total staff costs
9,805
9,854
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):
2020
No.
2019
No.
Management
12
13
Finance
7
6
Risk
13
6
Sales & Marketing
15
16
Operations
30
29
Technology
11
10
Total average headcount
88
80
Directors' emoluments:
Fees/basic Salary
£'000
Benefits in kind
£'000
Bonuses£'000
Employer pension
contributions£'000
Long term
incentive schemes£'000
2020 Total£'000
2019 Total£'000
Executive Directors:
Carl D'Ammassa
547
5
-
35
188
775
-
Gavin Morris
245
7
-
23
-
275
438
Henry Kenner1
210
-
-
-
-
210
59
1,002
12
-
58
188
1,260
497
Non-Executive Directors:
John Baines
200
-
-
-
-
200
172
Mark Stephens
150
-
-
-
-
150
129
James Van den Bergh1
61
-
-
-
-
61
-
Carole Machell
100
-
-
-
-
100
93
Thomas Grathwohl
100
-
-
-
-
100
93
Stephen Greene2
-
-
-
-
-
-
-
Haakon Stenrød2
-
-
-
-
-
-
-
611
-
-
-
-
611
487
Total Directors Remuneration
1,613
12
-
58
188
1,871
984
Carl D'Ammassa was appointed CEO on 9 March 2020. To enable him to join the firm earlier than his contractual notice, he was compensated for an incentive award he would forgo in resigning, just before the incentive payment fell due for payment, from his position of Chief Executive at White Oak UK. This compensation payment amounted to £200,000 and is reflected within fees/basic salary figure of £547,000 above. His annual basic salary is £425,000.
The long-term incentive scheme amount of £188,000 for Carl D'Ammassa relates to the award of 500,000 nil cost options under a Recruitment Award that were subject to receiving full authorisation as a bank, which was achieved in September 2020. These options vest subject to on-going employment in June 2023. Further details are given in note 9.
The pension for the year ended 31 December 2020 to Carl D'Ammassa and Gavin Morris of £35,000 and £23,000 respectively is the amount 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 of which none of these options have vested as at 31 December 2020. Further details of these share option schemes can be found in note 9 and 34.
1 Henry Kenner and James van den Bergh resigned on 13 May 2020
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.
9. Share based payments
The Group has the following share options scheme for employees which have been granted and remain outstanding at 31 December 2020:
No.
of options outstanding31 December 2020
Options outstanding value
31 December 2020
£'000
Grant dates
Vesting dates
Exercise price (pence)
Performance conditions attached
Settlement method
Charge for current year
£'000
General Award
320,000
17
Jun-20
Jun-23
Nil
No
Equity
17
Senior
Manager Award985,000
53
Jun-20
Jun-23
Nil
Yes
Equity
53
Recruitment Award
900,000
53
Jun-20
Jun-23
Nil
Yes
Equity
53
Manager PSP Award
853,334
188
Aug-20
Aug-20
Jun-21
Jun-22Nil
No
Equity
188
Manager CSOP Award
385,298
11
Aug-20
Jun-21
Jun-22
Jun-2340.5p
No
Equity
11
Total
3,443,632
322
322
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.
All share options issued by the Group, as detailed above, were issued in the 12-month period ended 31 December 2020. The Group did not have any share options prior to this period. During the year none of the share options were exercised or expired, and 35,000 share options were forfeited. All forfeited share options were from the General Award and the monetary impact was negligible.
Based on the fair value of the options at their respective grant date, taking into consideration any restrictive vesting criteria, including performance conditions, the estimated weighted average fair value at the grant date for the different schemes is as follows:
Plan
Weighted average fair value price at grant date
(pence)General Award
37.50
Senior Manager Award
37.50
Recruitment Award
37.50
Manager PSP Award
40.50
Manager CSOP Award
8.00
Average weighted fair value at grant date
34.97
The terms of the individual schemes are as follows:
General Award
Nil cost options over ordinary shares of £0.01 each of the current share capital of the Company were granted to all employees. These options vest over a 3-year period and are not subject to specific performance conditions.
Under this General Award Carl D'Ammassa and Gavin Morris both received 5,000 nil cost options each.
Recruitment Award
Carl D'Ammassa was appointed CEO on 9 March 2020. On appointment, he was granted 900,000 nil-cost options over ordinary shares of £0.01 each of the current share capital of the Company by way of a Recruitment Award. These vest subject to on-going employment in June 2023 with 500,000 nil cost options subject to receiving full authorisation as a bank and the remaining 400,000 nil cost options subject to performance conditions aligned to financial performance, risk management and cultural objectives.
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 vesting in June 2023.
Under this Senior Manager Award Gavin Morris received 200,000 nil cost options.
Manager PSP and CSOP Award
The Group announced on 7 August 2020 that as part of the ongoing bank licence application process it had taken steps to reorganise its existing share capital. This reorganisation involved the buy-back and cancellation of certain existing shares held by managers and former managers of the Group. The reorganisation steps enabled the managers to repay loans to the Group, entered in to prior to the IPO, that predominantly related to tax payable on initial receipt of the shares.
The Remuneration Committee determined that the managers should not be disadvantaged as a result of the reorganisation (after repayment of the loans and the impact of differing personal tax situations). Accordingly, 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.
One Director, Gavin Morris, was affected as a result of this reorganisation who received 19,733 PSP nil cost options and 74,074 CSOP Options.
The fair value of the CSOP was measured at the grant date using the Black-Scholes model. The inputs were as follows:
Grant Date
20 August 2020
Share price at grant date
40.5p
Exercise price
40.5p
Shares under option
385,298
Vesting period
35 months
Expected volatility
30%
Expected life
35 months
Risk free rate
0.2%
Expected dividends
nil
Fair value per model at grant date
8p
Since the Group has only been listed on AIM since May 2019 insufficient time has elapsed to calculate historic volatility for the Group shares, therefore historic volatility of similar size banking company shares has been used to estimate the expected volatility. The risk-free rate is based on UK Government bonds.
10. Other operating expenses
Note
2020
£'000
2019
£'000
Finance costs
11
17
29
Depreciation
17,18
290
304
Amortisation of intangible assets
19
237
155
Loss on disposal of fixed assets
17
3
22
Loss on disposal of intangible assets
19
57
-
Other operating expenses
4,578
3,716
Total other operating expenses
5,182
4,226
11. Finance costs
2020
£'000
2019
£'000
Interest on lease liabilities
17
29
Total finance costs
17
29
12. Exceptional items
2020
£'000
2019
£'000
Initial public offering transaction costs
-
2,125
Total exceptional items
-
2,125
The Directors do not consider any of the costs incurred in the year ended 31 December 2020 to be exceptional in nature.
13. Provisions
Analysis for movements in other provisions:
At 31
December 2019£'000
Additions£'000
Utilisation of provision£'000
Unused amounts reversed
£'000
At 31
December 2020£'000
Social security and levies on share schemes
105
-
-
(105)
-
Severance payments
337
1
(338)
-
-
Leasehold dilapidations
91
-
(26)
(7)
58
Onerous supplier contracts
-
25
-
-
25
533
26
(364)
(112)
83
Social security payments
The Group was holding a provision for a tax liability on consultancy fee payments following professional advice these payments should be treated under IR35 so give rise to PAYE tax and national insurance contributions (NIC). The Group made a voluntary disclosure to HMRC which in the year ended 31 December 2020 received confirmation from HMRC that the Group was not legally obliged, under IR35, to deduct PAYE from the payments made direct to another limited company.
Severance payments
During the year ended 31 December 2020, the Group satisfied its remaining severance payments in full with a minor adjustment due to the estimated employers NIC payments against actual expense.
Leasehold dilapidations
A provision for leasehold dilapidations of £91,000 has been recognised in accordance with IFRS 16 Leases whereby the estimated restoration costs for office premises leased by the Group have been added to the right-of-use asset at initial recognition. The Group gave notice on its London office which resulted in actual dilapidation costs of £26,000 and the Group released £7,000 of unused provision held. The Group has also given notice on its office premises at 196 Deansgate, Manchester, M3 3WF and has assessed its current provision of £58,000 should remain unchanged.
Onerous supplier contracts
The Group assessed at 31 December 2020 a supplier contract to have no further benefit to the Group. The contract has been cancelled in 2021 and the Group recognised the remaining contractual payments as an onerous provision.
14. Net impairment loss on financial assets
2020
£'000
2019
£'000
Movement in impairment allowance in the year
(107)
1,336
Write-offs
1,403
246
Write-back of amounts written-off
(2)
-
Total net impairment losses on financial assets
1,294
1,582
Analysis of write-offs are as follows:
Note
2020
£'000
2019
£'000
Realised losses on loan receivables
20
1,206
59
Realised losses on trade receivables
22
6
7
Realised losses on other receivables
20
-
Loss on disposal of assets held for sale
-
74
Recovery transaction costs
200
114
Bad debt VAT relief
(29)
(8)
Total write-offs
1,403
246
15. Loss before taxation
Loss before taxation is stated after charging:
2020
£'000
2019
£'000
Depreciation of property, plant and equipment
132
118
Depreciation of right-of-use assets
158
185
Amortisation of intangible assets
237
155
Loss on disposal of property, plant and equipment
3
22
Loss on disposal of intangible assets
58
-
Allowance for credit impaired assets
(107)
1,336
Staff costs
9,805
9,854
Auditor's remuneration
316
764
10,602
12,434
Analysis of auditor's remuneration:
2020
£'000
2019
£'000
Audit services
Fees payable to the Company's auditor for the audit of the Company's annual accounts
46
99
Fees payable to the Company's auditor for the audit of its subsidiaries
139
20
Fees paid to the Company's auditors relating to prior periods
83
-
Total audit services fees
268
119
Assurance services
IPO due diligence work
-
561
Interim review
48
45
Regulatory assurance work
-
39
Total assurance services fees
48
645
Total auditor's remuneration
316
764
16. Taxation
Analysis of tax charge recognised in the period:
2020
£'000
2019
£'000
Current tax charge/ (credit)
-
-
Deferred tax charge/ (credit)
-
-
Total tax charge/(credit)
-
-
Reconciliation of loss before tax to total tax credit recognised:
2020
£'000
2019
£'000
Loss before taxation
(13,625)
(13,500)
Loss before taxation multiplied by the standard rate of corporation tax in the UK of 19% (2019: 19%)
(2,589)
(2,565)
Adjustments:
Disallowable expenses
57
700
Depreciation & amortisation
100
52
Capital allowances
(53)
(60)
Capital items expensed
60
24
Other short-term timing differences
(69)
7
Current year losses for which no deferred tax asset has been recognised
2,494
1,842
Total tax credit
-
-
Current tax on profits reflects UK corporation tax levied at a rate of 19% for the year ended 31 December 2020 (31 December 2019: 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 £25.0 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.
In the March 2020 Budget, it was announced that the cuts in corporation tax rate to 18% and then to 17% previously enacted would not occur with the corporation tax rate held at 19%. On 3 March 2021, the government announced that the corporation tax rate will increase from 19% to 25% from 1 April 2023. This rate change was not substantively enacted at the balance sheet date and so has not been reflected in these financial statements. The government has also acknowledged that this increase in the main rate will result in an uncompetitive position for UK banks which are also subject to the 8% Bank Surcharge, and so has also announced a review of the Bank Surcharge will take place in Autumn 2021.
A deferred tax asset is only recognised to the extent the Group finds it probable that future taxable profits will be available against which to be utilised against prior taxable losses. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. The Group has not recognised a deferred tax asset in the period given the uncertainty in relation to generating future taxable profits which can be offset against unused taxable losses. As at 31 December 2020, the Group has estimated £7.05 million (31 December 2019: £3.55 million) of unused tax credits for which a deferred tax asset has not been recognised against.
17. Property, plant and equipment
Leasehold
Improvements£'000
Furniture,
Fixtures & Fittings£'000
Computer Hardware£'000
Telephony &
Communications£'000
Total£'000
Cost
As at 1 January 2019
23
104
167
6
300
Additions
3
33
116
-
152
Disposals
-
-
(54)
-
(54)
As at 31 December 2019
26
137
229
6
398
Additions
-
-
32
-
32
Disposals
-
-
(14)
-
(14)
As at 31 December 2020
26
137
247
6
416
Depreciation
As at 1 January 2019
3
18
46
3
70
Charge for the year
8
38
70
2
118
Eliminated on disposals
-
-
(32)
-
(32)
As at 31 December 2019
11
56
84
5
156
Charge for the year
9
43
79
1
132
Eliminated on disposals
-
-
(11)
-
(11)
As at 31 December 2020
20
99
152
6
277
Carrying Amount
At 31 December 2019
15
81
145
1
242
At 31 December 2020
6
38
95
-
139
18. Right-of-use assets
Buildings
£'000
Cost
As at 1 January 2019
-
Adoption of IFRS 16
823
Restated balance as at 1 January 2019
823
Additions
-
Disposals
-
Lease modifications
-
As at 31 December 2019
823
Additions
-
Disposals
-
Lease modifications
(416)
As at 31 December 2020
407
Depreciation
At 1 January 2019
-
Charge for the year
185
Eliminated on disposals
-
At 31 December 2019
185
Charge for the year
158
Eliminated on disposals
-
At 31 December 2020
343
Carrying Amount
At 1 January 2019
-
At 1 January 2019 restated
823
At 31 December 2019
638
At 31 December 2020
64
During the year ended 31 December 2020 the Group is engaged in leasing agreements for office premises and IT equipment. The IT equipment leases fall below the USD 5,000 IFRS 16 threshold and, resultantly, the Group have opted not to classify these leases as right-of-use assets.
For property leases which qualify for right-of-use asset recognition, the average lease term is typically 5 years (2019: 5 years). In response to the COVID-19 pandemic the Group exited its London office premises in October 2020 and moved its headquarters to its existing Manchester office. Following this, the Company gave notice on its Manchester office in December 2020 and has subsequently signed new office leases after the reporting date - see note 35 for further details. Due to the shortening of the lease term from initial recognition, this has resulted in the following modification to the right-of-use asset as follows:
London office
Manchester office
Lease start date (IFRS 16 adoption date)
Jan-19
Jan-19
Original lease end date
Apr-23
Jul-23
Revised lease end date
Oct-20
Jul-21
Lease modification date
May-20
Dec-20
£'000
£'000
Right-of-use asset value pre-modification
201
304
Right-of-use asset value post-modification
21
68
Decrease in right-of-use asset from lease modification
(180)
(236)
The Group has applied an average weighted incremental borrowing rate of 5% in order to calculate the present value of expected cash out flows. The Group has a reasonable expectation that it will pay restoration costs at either the date the contract expires, or the lease is cancelled. At 31 December 2020, the Group recognised restoration costs of £58,000 (31 December 2019: £91,000) which have been added to the right-of-use asset at initial recognition and also recognised in accordance with IAS 37 'Provisions, contingent liabilities and contingent assets' - refer to note 13 for further details on the corresponding provision recognised.
The maturity analysis of lease liabilities is presented in note 28.
Amounts recognised in the income statement:
2020
£'000
2019
£'000
Depreciation expense on right-of-use assets
158
185
Interest expense on lease liabilities
17
29
Expense relating to short-term leases
-
-
Expense relating to leases of low value assets
5
4
Expenses relating to variable lease payments not included in measurement of lease liability
55
58
Total amounts recognised in the income statement
235
276
Some of the property leases in which the Group is the lessee contain variable lease payment terms relating to service charge 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:
2020
£'000
2019
£'000
Buildings
Fixed payments
164
182
Variable payments
54
62
Total lease payments
218
244
19. Intangible assets
Computer Software
£'000
Cost
At 1 January 2019
669
Additions from internal development
393
Additions from separate acquisitions
4
Disposals
-
At 31 December 2019
1,066
Additions from internal development
226
Additions from separate acquisitions
-
Disposals
(103)
At 31 December 2020
1,189
Amortisation
At 1 January 2019
49
Charge for the year
155
Eliminated on disposals
-
At 31 December 2019
204
Charge for the year
237
Eliminated on disposals
(46)
At 31 December 2020
395
Carrying Amount
At 31 December 2019
862
At 31 December 2020
794
In the year ended 31 December 2020, the Group capitalised £130,000 (31 December 2019: £312,000) of consultancy costs and £95,500 (31 December 2019: £81,500) 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 2020 and concluded an impairment of £57,000 (31 December 2019: £nil).
20. Loans and advances to customers
2020
£'000
2019
£'000
Gross carrying amount
113,259
209,449
Less: impairment allowance
(1,288)
(1,409)
Less: effective interest rate adjustment
(634)
(404)
Total loans and advances to customers
111,337
207,636
Refer to note 32 for details on the expected maturity analysis of the gross loans receivable balance.
Refer to note 14 and 32 for further details on the impairment losses recognised in the periods.
Ageing analysis of gross loan receivables:
2020
£'000
2019
£'000
Unimpaired:
Not yet past due
112,510
206,000
Past due: 1 - 30 days
21
404
Past due: 31 - 60 days
5
128
Past due: 61 - 90 days
14
46
Past due: 90+ days
-
-
Total unimpaired
112,550
206,578
Impaired:
Impaired, not yet past due and past due 1 - 90 days
578
2,117
Impaired, past due 90+ days
131
754
Total impaired
709
2,871
Total gross loan receivables
113,259
209,449
Analysis of gross loans and advances to customers:
Stage 1
£'000
Stage 2
£'000
Stage 3
£'000
Total
£'000
As at 1 January 2020
201,993
4,585
2,871
209,449
Transfer to Stage 1
3,639
(2,597)
(1,042)
-
Transfer to Stage 2
(36,584)
38,725
(2,141)
-
Transfer to Stage 3
(3,152)
(2,418)
5,570
-
Net lending/(repayment)
(62,048)
(29,569)
(3,367)
(94,984)
Write-offs
(25)
-
(1,181)
(1,206)
(98,170)
4,141
(2,161)
(96,190)
As at 31 December 2020
103,823
8,726
710
113,259
Loss allowance coverage at 31 December 2020
0.62%
0.56%
83.66%
1.14%
Stage 1
£'000
Stage 2
£'000
Stage 3
£'000
Total
£'000
As at 1 January 2019
91,359
22,620
134
114,113
Changes in IFRS 9 model & parameters
13,549
(14,449)
900
-
Transfer to Stage 1
8,591
(5,541)
(3,050)
-
Transfer to Stage 2
(17,466)
17,518
(52)
-
Transfer to Stage 3
(11,649)
(1,478)
13,127
-
Net lending/(repayment)
117,609
(14,085)
(8,129)
95,395
Write-offs
-
-
(59)
(59)
110,634
(18,035)
2,737
95,336
As at 31 December 2019
201,993
4,585
2,871
209,449
Loss allowance coverage at 31 December 2019
0.17%
0.89%
35.81%
0.67%
Analysis of impairment losses on loans and advances to customers:
Stage 1
£'000
Stage 2
£'000
Stage 3
£'000
Total
£'000
As at 1 January 2020
340
41
1,028
1,409
Transfer to Stage 1
309
(57)
(252)
-
Transfer to Stage 2
(80)
89
(9)
-
Transfer to Stage 3
(97)
(16)
113
-
Remeasurement of impairment allowance
408
247
884
1,539
Net lending/(repayment)
(224)
(255)
(6)
(485)
Write-offs
(11)
-
(1,164)
(1,175)
Total movement in loss allowance
305
8
(434)
(121)
As at 31 December 2020
645
49
594
1,288
Stage 1
£'000
Stage 2
£'000
Stage 3
£'000
Total
£'000
As at 1 January 2019
88
32
49
169
Changes in IFRS 9 model & parameters
54
(9)
(23)
22
Transfer to Stage 1
121
(9)
(112)
-
Transfer to Stage 2
(23)
30
(7)
-
Transfer to Stage 3
(13)
(30)
43
-
Change in impairment allowance
877
49
1,430
2,356
Repayments
(764)
(22)
(295)
(1,081)
Write-offs
-
-
(57)
(57)
Total movement in loss allowance
252
9
979
1,240
As at 31 December 2019
340
41
1,028
1,409
21. Debt securities
2020
£'000
2019
£'000
FVOCI debt securities:
Treasury bills
49,011
7,994
UK government gilts
17,590
-
Total FVOCI debt securities
66,601
7,994
Analysis of movements during the year:
At 1 January
7,994
4,994
Purchased debt securities
120,721
92,045
Realised gains
15
67
Unrealised gains
(22)
4
Proceeds from maturing securities
(62,107)
(89,116)
At 31 December
66,601
7,994
Maturity profile of debt securities:
Within 12 months
49,011
7,994
Over 12 months
17,590
-
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. The Group recognised no expected credit losses in respect of the debt securities as at 31 December 2020 (31 December 2019: £nil).
Refer to note 32 for details of the maturity profile of these securities.
22. Trade and other receivables
2020
£'000
2019
£'000
Trade receivables
261
248
Impairment allowance
(121)
(107)
140
141
Other debtors
207
576
Employee loans
-
723
Accrued income
63
441
Prepayments
744
1,625
1,014
3,365
Total trade and other receivables
1,154
3,506
All trade receivables are due within one year, refer to note 32 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:
2020
£'000
2019
£'000
Unimpaired:
Not yet past due
106
109
Past due: 1 - 30 days
15
10
Past due: 31 - 60 days
11
6
Past due: 61 - 90 days
13
20
Past due: 90+ days
-
-
145
145
Impaired:
Impaired, not yet past due and past due 1 - 90 days
45
3
Impaired, past due 90+ days
71
100
116
103
Total gross trade receivables
261
248
Analysis of movement of impairment losses on trade receivables:
2020
£'000
2019
£'000
Balance at 1 January
107
11
Changes in IFRS 9 model & parameters
-
15
Amounts written off
(6)
(7)
Amounts recovered
-
-
Change in loss allowance due to new trade and other receivables
originated net of those derecognised due to settlement20
88
Balance at 31 December
121
107
23. Notes to the cash flow statement
Cash and cash equivalents:
2020
£'000
2019
£'000
Cash held at bank
21,233
14,122
Total cash and cash equivalents
21,233
14,122
The Group has assessed the expected credit losses (ECL) on cash balances held at banks, which concluded all receivable balances are classified as stage 1 under IFRS 9 with no material impairment required.
Adjustments for non-cash items and other adjustments included in the income statement:
Note
2020
£'000
2019
£'000
Depreciation of property, plant and equipment
17
132
118
Depreciation of right-of-use assets
18
158
185
Loss on disposal of property, plant and equipment
17
3
22
Amortisation of intangible assets
19
237
155
Loss on disposal of intangible assets
19
57
-
Share based payments
9
322
-
Impairment allowances on receivables
14
1,294
1,582
Movement in other provisions
13
(450)
(313)
Interest income on debt securities
21
(15)
(67)
Finance costs
11
17
29
Lease modifications
76
-
Interest in suspense
228
-
Total non-cash items and other adjustments
2,059
1,711
Net change in operating assets:
2020
£'000
2019
£'000
Decrease/(increase) in loans and advances to customers
94,321
(95,178)
Decrease in other assets
2,443
163
Decrease / (increase) in operating assets
96,764
(95,015)
Net change in operating liabilities:
2020
£'000
2019
£'000
Increase in customer deposits
145,982
-
Increase/(decrease) in other liabilities
(1,332)
1,192
Increase in financial liabilities
12,283
99,272
Repayment of financial liabilities
(176,006)
(8,430)
Increase/(decrease) in operating liabilities
(19,073)
92,034
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.
1 January 2020
£'000Financing cash flows
£'000Recognition
of lease
liabilities
£'000Interest expense
on lease liabilities
£'000Lease
modification£'000
31
December 2020
£'000Lease liabilities
(see note 28)537
(164)
-
18
(334)
57
Total liabilities from financing activities
537
(164)
-
18
(334)
57
1 January 2019
£'000Financing cash flows
£'000Recognition of lease liabilities
£'000
Interest expense
on lease liabilities
£'00031
December 2019
£'000Lease liabilities
(see note 28)-
(182)
690
29
537
Total liabilities from financing activities
-
(182)
690
29
537
24. Investment in subsidiaries
SubsidiaryPrincipal
Activity
Shareholding %Class of
shareholdingCountry of
incorporationRegistered
AddressDF Capital Bank Limited
(formerly, Distribution Finance Capital Ltd)
Financial Services
100%
Ordinary
UK
196 Deansgate, Manchester,
M3 3WF
DF Capital Bank Limited (formerly named Distribution Finance Capital Ltd) was granted its banking licence by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) in September 2020. The wholly owned subsidiary subsequently changed its name to DF Capital Bank Limited. In October 2020, the Group began raising customer deposits in sufficient quantity that it could settle its financial liabilities with existing wholesale funders. The Group fully repaid its wholesale funders by November 2020 after which, DFC Funding No.1 Limited, a special purchase vehicle under the Group's control but held no ownership, was placed into liquidation in December 2020.
25. Equity
2020
No.
2019
No.
2020
£'000
2019
£'000
Authorised:
Ordinary shares of 1p each
106,641,926
106,641,926
1,066
1,066
Allotted, issued and fully paid: Ordinary shares of 1p each
106,641,926
106,641,926
1,066
1,066
Analysis of the movements in equity:
DateNo. of shares
#
Issue
Price£
Share
Capital£'000
Share
Premium£'000
Merger Relief
£'000
Total£'000
Balance at 1 January 2019
17,240,000
17
35,994
-
36,011
Issue of new shares - DFC Ltd
07-May-19
6,530,303
3.83
7
24,993
-
25,000
Employee shares - DFC Ltd
08-May-19
173,244
0.001
-
-
-
-
Arising on consolidation
09-May-19
(23,943,547)
-
(24)
(60,987)
-
(61,011)
Issue of new shares - DFCH Plc
09-May-19
106,641,926
0.90
1,066
-
94,911
95,977
Balance at 31 December 2019
106,641,926
1,066
-
94,911
95,977
Issue of new shares
08-Sep-20
4,906,776
0.01
49
-
-
49
Buy back of shares
08-Sep-20
(4,906,776)
0.01
(49)
-
-
(49)
Balance at 31 December 2020
106,641,926
1,066
-
94,911
95,977
On 8 September 2020, following shareholder approval the Company authorised the issue and allotment of 4,906,776 new Ordinary Shares at 1p per share, the proceeds of which enabled the Company to buy back 4,906,776 existing Ordinary 1p shares. The issued share capital of the Company was the same before and after this transaction. The structure of this transaction meant that all loans that had either directly or indirectly funded the acquisition of the Company's Ordinary Shares were repaid (other than loans made to the Employee Benefit Trust) and all Ordinary Shares that had been directly or indirectly funded were cancelled and an equivalent number of new Ordinary Shares were issued.
26. Own shares
At 31 December 2020 the Group's Employee Benefit Trust held 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 2020 was £1,896,501.
2020
£'000
2019
£'000
At 1 January
-
-
Employee Benefit Trust
(364)
-
At 31 December
(364)
-
27. Merger reserve
2020
£'000
2019
£'000
At 1 January
20,609
-
Consideration from initial public offering
-
95,977
Net assets of subsidiary at acquisition date
-
(75,368)
At 31 December
20,609
20,609
28. Lease liabilities
2020
£'000
2019
£'000
At 1 January
537
-
At 1 January restated
537
690
Interest expense
18
29
Interest payments
(164)
(182)
Lease modification
(334)
-
At 31 December
57
537
At the start of the year ended 31 December 2020, the Group recognised two leases for its London and Manchester offices. During the year ended 31 December 2020, the Group has given notice on both of these offices, enacting the break clauses for each. At the year-end reporting date, the London office had been fully exited and the Manchester office serving its notice period up to July 2021. See note 18 for further details on the lease modifications.
The Group has not agreed a new lease at the reporting date for its new Manchester office so is yet to recognise a corresponding lease liability. After the reporting date the Group signed a new lease for office premises, see note 35 for further details.
The fair value of the Group's lease obligations as at 31 December 2020 is estimated to be £57,056 (2019: £537,145) 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:
2020
£'000
2019
£'000
Analysed as:
Non-current
-
378
Current
57
159
57
537
Maturity Analysis:
Year 1
58
182
Year 2
-
182
Year 3
-
182
Year 4
-
39
Year 5
-
-
Onwards
-
-
58
585
Less: unearned interest
(1)
(48)
Total lease liabilities
57
537
29. Customer deposits
2020
£'000
2019
£'000
Retail deposits
145,982
-
Total customer deposits
145,982
-
Amounts repayable within one year
60,132
-
Amounts repayable after one year
85,850
-
145,982
-
Refer to note 32 for the maturity profile of the customer deposit balances.
30. Financial liabilities
2020
£'000
2019
£'000
Loans with related parties
-
13,925
Wholesale funding
-
150,151
Lease liabilities
57
537
Preference shares
50
50
Total financial liabilities
107
164,663
Loans with related parties:
During the year ended 31 December 2020, the Group made an initial repayment to TruFin Holdings Limited of £5 million plus accrued interest of £348,000. In response to the impact of COVID-19, the Group renegotiated the existing facility in August 2020 at which time the facility had principal outstanding of £8.9 million. The new facility had the option for the Group to repay either on 4 January 2021 or by nine equal monthly instalments throughout 2021. Following the granting of the banking licence, the Group had sufficient liquidity to repay the facility in full in December 2020.
Wholesale funding:
Shortly after DF Capital Bank Limited was granted its banking licence in September 2020, the Group raised sufficient customer deposits to fully repay its wholesale funders by November 2020. The Group is now primarily financed through customer deposits.
Lease liabilities:
See note 28 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 31 December 2022. 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:
2020
£'000
2019
£'000
Current liabilities
57
164,236
Non-current liabilities
50
427
Total financial liabilities
107
164,663
Reconciliation of movement in financial liabilities:
Loans with related
parties£'000
Wholesale funding£'000
Preference shares£'000
Lease
liabilities£'000
Total£'000
Balance at 1 January 2019
10,293
59,041
3,111
-
72,445
Financing cashflows:
Wholesale funding drawdowns
-
94,272
-
-
94,272
Wholesale funding repayments
-
(3,430)
-
-
(3,430)
Amounts received from related parties
5,000
-
-
-
5,000
Amounts repaid to related parties
(5,000)
-
-
-
(5,000)
Interest paid
(1,048)
(7,334)
-
-
(8,382)
Repayment of lease liabilities
-
-
-
(182)
(182)
(1,048)
83,508
-
(182)
82,278
Non-cash changes:
Incorporating shareholder debtor
-
-
50
-
50
Preference shares
3,868
-
(2,903)
-
965
Initial recognition of lease liabilities
-
-
-
690
690
Interest expense
812
7,602
(208)
29
8,235
4,680
7,602
(3,061)
719
9,940
Balance at 31 December 2019
13,925
150,151
50
537
164,663
Financing cashflows:
Wholesale funding drawdowns
-
12,283
-
-
12,283
Wholesale funding repayments
-
(162,051)
-
-
(162,051)
Amounts received from related parties
-
-
-
-
-
Amounts repaid to related parties
(13,955)
-
-
-
(13,955)
Interest paid
(883)
(8,365)
-
-
(9,248)
Repayment of lease liabilities
-
-
-
(164)
(164)
(14,838)
(158,133)
-
(164)
(173,135)
Non-cash changes:
Lease modifications
-
-
-
(334)
(334)
Interest expense
913
7,982
-
18
8,913
913
7,982
-
(316)
8,579
Balance at 31 December 2020
-
-
50
57
107
31. Trade and other payables
2020
£'000
2019
£'000
Current liabilities
Trade payables
624
651
Social security and other taxes
2,044
2,401
Other creditors
778
1,410
Pension contributions
32
36
Accruals
709
750
Total current liabilities
4,187
5,248
Non-current liabilities
Social security and other taxes
74
-
Total non-current liabilities
74
-
Total trade and other payables
4,261
5,248
32. 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 30) and equity (comprising issued capital, merger relief, reserves, own shares and retained earnings - see notes 25 to 27).
As a newly formed bank during the year ended 31 December 2020, the Group is required by the Prudential Regulation Authority (PRA) to hold sufficient regulatory capital. In preparation of the banking licence the Group has been monitoring and managing its regulatory capital as if it had already been granted the banking licence so the changes since have been minimal.
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 in regards to its risk weighted assets ("RWAs") and 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 for calculating the capital requirements for credit risk and the Basic Indicator Approach for operational risk. The ICAAP is approved by the Group Board at least annually.
The regulatory capital resources of the Group were as follows:
2020
£'000
2019
£'000
Tier 1 Capital
Ordinary share capital
1,066
-
Share premium
-
-
Other reserves recognised for CET1 capital
74,302
Own shares
(364)
-
Retained loss
(24,115)
-
Other
(2,303)
-
Intangible assets
(794)
-
Common Equity Tier 1 (CET1) capital
47,792
-
Tier 2 capital
-
-
Total regulatory capital
47,792
-
After the reporting date the Group raised additional capital through a £40 million placing which materially increased its regulatory capital position. Refer to note 35 for further details.
The return on assets of the Group (calculated as Loss after taxation divided by average Total Assets) was -7%.
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:
• Loans and advances to customers, primarily credit risk, interest rate risk, and liquidity risk;
• Debt securities, source of credit risk, liquidity risk and interest rate risk;
• Trade receivables, primarily credit risk, and liquidity risk;
• Cash and cash equivalents, which can be a source of credit risk but are primarily liquid assets available to further business objectives or to settle liabilities as necessary;
• Trade and other payables, primarily credit risk;
• Customer deposits, primarily interest rate risk and liquidity risk;
• Financial liabilities which are used as sources of funds and to manage liquidity risk but also creates interest rate 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:
Loans and
receivables£'000
Fair value through
other
comprehensive income£'000
Liabilities at amortised cost£'000
Total£'000
31 December 2020
Assets
Cash and equivalents
21,233
-
-
21,233
Loans and advances to customers
111,337
-
-
111,337
Debt securities
-
66,601
-
66,601
Trade receivables
140
-
-
140
Other receivables
207
-
-
207
Total financial assets
132,917
66,601
-
199,518
Non-financial assets
-
-
-
1,804
Total assets
132,917
66,601
-
201,322
31 December 2020
Liabilities
Preference shares
-
-
50
50
Customer deposits
-
-
145,982
145,982
Other financial liabilities
-
-
57
57
Trade payables
-
-
624
624
Other payables
-
-
2,928
2,928
Total financial liabilities
-
-
149,641
149,641
Non-financial liabilities
-
-
-
792
Total liabilities
-
-
149,641
150,433
Loans and
receivables£'000
Fair value through
other
comprehensive income£'000
Liabilities at amortised cost£'000
Total£'000
31 December 2019
Assets
Cash and equivalents
14,122
-
-
14,122
Loans and advances to customers
207,636
-
-
207,636
Debt securities
-
7,994
-
7,994
Trade receivables
141
-
-
141
Other receivables
1,299
-
-
1,299
Total financial assets
223,198
7,994
-
231,192
Non-financial assets
-
-
-
3,808
Total assets
223,198
7,994
-
235,000
31 December 2019
Liabilities
Preference shares
-
-
50
50
Other financial liabilities
-
-
164,613
164,613
Trade payables
-
-
651
651
Other payables
-
-
3,847
3,847
Total financial liabilities
-
-
169,161
169,161
Non-financial liabilities
-
-
-
1,283
Total liabilities
-
-
169,161
170,444
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
£'000
Fair value£'000
Level 1£'000
Level 2£'000
Level 3£'000
31 December 2020
Financial assets not
measured at fair value
Loans and advances to customers
111,337
111,337
-
-
111,337
Trade receivables
140
140
-
-
140
Other receivables
207
207
-
-
207
Cash and equivalents
21,233
21,233
21,233
-
-
132,917
132,917
21,233
-
111,684
31 December 2020
Financial liabilities not
measured at fair value
Preference shares
50
50
-
-
50
Customer deposits
145,982
145,982
-
-
145,982
Other financial liabilities
57
57
-
-
57
Trade payables
624
624
-
-
624
Other payables
2,928
2,928
-
-
2,928
149,641
149,641
-
-
149,641
Carrying amount
£'000
Fair value£'000
Level 1£'000
Level 2£'000
Level 3£'000
31 December 2019
Financial assets not
measured at fair value
Loans and advances to customers
207,636
207,636
-
-
207,636
Trade receivables
141
141
-
-
141
Other receivables
1,299
1,299
-
-
1,299
Cash and equivalents
14,122
14,122
14,122
-
-
223,198
223,198
14,122
-
209,076
31 December 2019
Financial liabilities not
measured at fair value
Preference shares
50
50
-
-
50
Other financial liabilities
164,613
164,613
-
-
164,613
Trade payables
651
651
-
-
651
Other payables
3,847
3,847
-
-
3,847
169,161
169,161
-
-
169,161
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.
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.
There are no financial liabilities included in the statement of financial position that are measured at fair value.
Financial assets and liabilities included in the statement of financial position that are measured at fair value:
Level 1
£'000
Level 2
£'000
Level 3
£'000
31 December 2020
Financial assets measured at fair value
Debt securities
66,601
-
-
66,601
-
-
Level 1
£'000
Level 2
£'000
Level 3
£'000
31 December 2019
Financial assets measured at fair value
Debt securities
7,994
-
-
7,994
-
-
Debt securities
The debt securities carried at fair value by the Company are treasury bills. Treasury bills 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.
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 credit 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, geography location;
• Establishing a robust control framework regarding the authorisation structure for the approval and renewal of credit facilities;
• 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 2020:
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.
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 commercial 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.
The CRO reviews all applications that are outside the credit approval mandate of the Head of Credit due to the financial limit requested or if the risk rating is outside of policy but there is a rationale and/or mitigation for considering the loan on an exceptional basis and there is an agreed further escalation to the Board Risk Committee for the largest transactions.
Applications where the counterparty has a large relative overall size (for ratings 1-5), or where the counterparty has a medium relative size (for ratings 6 and above) are also escalated to the CRO for a review and approval decision based on a positive recommendation from Credit Risk department. Where a limited company has such a risk rating, the firm will consider the following mitigating factors:
• 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.
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. COVID-19 has presented unique challenges for most SME lenders and the Group has assessed these new challenges and its impacts on customers' ability to meet their obligations within the Strategic Report of this Annual Report.
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 balance sheet date (31 December).
Maximum exposure to credit risk:
2020
£'000
2019
£'000
Cash and equivalents
21,233
14,122
Loans and advances to customers
111,337
207,636
Trade and other receivables
347
1,440
132,917
223,198
Collateral held as security:
2020
£'000
2019
£'000
Fully collateralised
Loan-to-value* ratio:
Less than 50%
3,285
5,800
51% to 70%
9,166
12,793
71% to 80%
20,269
55,059
81% to 90%
27,143
41,446
91% to 100%
52,804
93,507
112,667
208,605
Partially collateralised (loans over 100% loan-to-value)
68
255
Unsecured lending
524
589
* 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 comprises boats, motorcycles, recreational vehicles, caravans and 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 principle 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
An analysis of the Group's credit risk exposure for loan and advances per class of financial asset, 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.
31 December 2020
Credit ratingStage 1
£'000
Stage 2
£'000
Stage 3
£'000
2020 Total
£'000
Above average (Risk rating 1-2)
52,978
-
-
52,978
Average (Risk rating 3-5)
42,271
8,092
-
50,363
Below average (Risk rating 6+)
8,574
634
710
9,918
Gross carrying amount
103,823
8,726
710
113,259
Loss allowance
(645)
(49)
(594)
(1,288)
Carrying amount
103,178
8,677
116
111,971
31 December 2019
Credit ratingStage 1
£'000
Stage 2
£'000
Stage 3
£'000
2019 Total
£'000
Above average (Risk rating 1-2)
97,787
55
15
97,857
Average (Risk rating 3-5)
78,976
3,241
1,013
83,230
Below average (Risk rating 6+)
25,230
1,289
1,843
28,362
Gross carrying amount
201,993
4,585
2,871
209,449
Loss allowance
(340)
(41)
(1,028)
(1,409)
Carrying amount
201,653
4,544
1,843
208,040
See note 20 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:
2020
£'000
2019
£'000
Status at balance sheet date
Not past due, nor impaired
106
109
Past due but not impaired
39
36
Impaired
116
103
Total gross carrying amount
261
248
Loss allowance
(121)
(107)
Carrying amount
140
141
See note 22 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 £931,000 at 31 December 2020 (31 December 2019: £132,000).
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 process 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"), 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:
31 December 2020Financial assets
Carrying amount£'000
Gross nominal inflow
£'000
Less than 1 months£'000
1 - 3 months£'000
3 months to 1 year£'000
1 - 5 years£'000
>5 years£'000
Cash and equivalents
21,233
21,233
21,233
-
-
-
-
Loans and advances
111,337
113,259
28,315
37,163
44,194
3,587
-
Debt securities
66,601
66,000
-
15,000
34,000
17,000
-
Trade receivables
140
261
261
-
-
-
-
Other receivables
207
207
20
1
36
150
-
199,518
200,960
49,829
52,164
78,230
20,737
-
31 December 2019Financial assets
Carrying amount£'000
Gross nominal inflow
£'000
Less than 1 months£'000
1 - 3 months£'000
3 months to 1 year£'000
1 - 5 years£'000
>5 years£'000
Cash and equivalents
14,122
14,122
14,122
-
-
-
-
Loans and advances
207,636
209,449
52,363
68,726
81,727
6,633
-
Debt securities
7,994
8,000
2,500
5,500
-
-
-
Trade receivables
141
248
74
124
50
-
-
Other receivables
1,299
1,299
23
-
7
1,269
-
231,192
233,118
69,082
74,350
81,784
7,902
-
Maturity analysis for financial liabilities
The following maturity analysis is based on contractual gross cash flows:
31 December 2020Financial liabilities
Carrying amount£'000
Gross nominal outflow
£'000
Less than 1 months£'000
1 - 3 months£'000
3 months to 1 year£'000
1 - 5 years£'000
>5 years£'000
Preference shares
50
50
-
-
-
50
-
Customer deposits
145,982
147,982
-
663
59,793
87,526
-
Other financial
liabilities57
58
-
29
29
-
-
Trade payables
624
624
624
-
-
-
-
Other payables
2,928
3,135
1,893
959
-
283
-
149,641
151,849
2,517
1,651
59,822
87,859
-
Loan commitments
-
3,766
3,766
-
-
-
-
31 December 2019Financial liabilities
Carrying amount£'000
Gross nominal outflow
£'000
Less than 1 months£'000
1 - 3 months£'000
3 months to 1 year£'000
1 - 5 years£'000
>5 years£'000
Preference shares
50
50
-
-
-
50
-
Other financial
liabilities164,613
174,202
790
1,575
171,253
584
-
Trade payables
651
651
651
-
-
-
-
Other payables
3,847
3,847
2,628
1,219
-
-
-
169,161
178,750
4,069
2,794
171,253
634
-
Loan commitments
-
4,656
4,656
-
-
-
-
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, DFC are in the process of setting up swap lines, which will allow the Bank to use interest rate swaps as a further mitigation tool for interest rate risk.
The portfolio sensitivity to interest rate shocks is tested against a range of scenarios including the six prescribed scenarios per the European Bank Authority ("EBA") guidelines on the management of interest rate risk arising from non-trading book activities.
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:
2020
£'000
2019
£'000
Change in interest rate (basis points)
Sensitivity of EVE +200bps
982
(853)
Sensitivity of EVE -200bps
(1,047)
875
The estimate of the effect of the same two interest rate shocks applied on the next 12 months net interest income using a 200bps upward and 200bps downward movement in interest rates is as follows:
2020
£'000
2019
£'000
Change in interest rate (basis points)
Sensitivity of profit +200bps
1,680
1,625
Sensitivity of profit -200bps (floored at 0%)
(84)
227
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.
33. Earnings per share
Analysis of number of shares in the periods:
2020
No.
2019
No.Number of shares
At period end
106,641,926
106,641,926
Basic
Weighted average number of shares in issue in the year
106,641,926
75,553,320
Diluted
Effect of weighted average number of options outstanding for the year
-
-
Diluted weighted average number of shares and options for the year
106,641,926
75,553,320
Earnings attributable to equity holders:
Earnings attributable to ordinary shareholders2020
£'000
2019
£'000
Loss after tax attributable to the shareholders
(13,603)
(13,504)
Adjusted loss
(13,603)
(11,379)
Earnings per share calculation:
Earnings per share2020
pence
2019
pence
Basic
(13)
(18)
Diluted
(13)
(18)
Adjusted*
(13)
(15)
*The adjusted loss has been included as an alternative performance measure (APM) to provide further useful information. The adjusted loss is calculated as the consolidated loss after taxation less the exceptional costs incurred in the period (see note 12 for further details). The adjusted EPS has been calculated by using the adjusted loss and the basic weighted average of shares in the period. See below calculation of adjusted loss:
2020
£'000
2019
£'000
Loss after tax attributable to the shareholders
(13,603)
(13,504)
Less: exceptional items
-
2,125
Adjusted loss
(13,603)
(11,379)
34. Related party disclosures
Directors' emoluments are disclosed in note 8 of these financial statements.
Counterparty
Description of transaction
Amounts of transactions
TruFin
As detailed in note 30, the Group amended its existing loan agreement with TruFin Holdings Limited and made payments throughout the year ended 31 December 2020.
During the year ended 31 December 2020, the Group made a £5 million principal plus £348,000 of accrued interest payment to TruFin Holdings in June 2020. In response to the COVID-19 pandemic and stresses on the Group's liquidity, the loan agreement was renegotiated in August 2020. In December 2020, the Group settled the full liability to TruFin Holdings Limited comprising £8.9 million of principal, £443,000 of accrued interest and an arrangement fee of £180,000.
TruFin
Interest expense recognised within the period in accordance with the signed loan agreements with the TruFin Group.
In the year ended 31 December 2020, the Group recorded interest expense in relation to the loan agreements held with TruFin of £913,000 (2019:£813,000). At 31 December 2020, the Group had no outstanding liabilities.
Watrium
In August 2020, the Group conducted a share capital reorganisation to assist in the banking licence application with the PRA. Within this series of transactions, Watrium, a significant shareholder in the Group purchased shares from certain employees, including Directors of the Group.
Watrium bought shares at 38.5p from certain employees and the Company and also sold shares back to certain employees and the Company at 38.5p. The overall result of this transaction was that Watrium acquired an additional 1,023,882 Ordinary Shares in the Company for £394,123.
Director and Key Management Personnel
Share transactions relating to share capital reorganisation
In August 2020, the Group conducted a share capital reorganisation to assist in the banking licence application with the PRA. This reorganisation involved the buy-back and cancellation of certain existing shares and issuance of new shares held by managers and former managers. The reorganisation steps enabled the managers to repay loans, provided by the Company and entered in to prior to the IPO, that enabled the acquisition of their long-term incentive shares.
Given the share restructure related to a technical matter, RemCo determined that the managers should not be disadvantaged on a net basis (after repayment of the loans and impact of differing personal taxation rules).
Gavin Morris sold 201,609 shares at 38.5p and acquired 116,202 shares at 38.5p. The net proceeds of this transaction were used to fully repay a loan from the Group of £32,882. Gavin Morris received 19,733 nil cost options (representing approximately 0.02% of the share capital of the Company at the time) under a Manager PSP Award and 74,074 options (representing approximately 0.07% of the share capital of the Company at the time) with an exercise price of 40.5p under a Manager CSOP Award.
Key Management Personnel (excluding Directors) sold 1,326,355 shares at 38.5p and acquired 557,689 shares at 38.5p. The net proceeds of this transaction were used to fully repay loans from the Group totalling £295,936. Key Management Personnel received 814,018 nil cost options (representing approximately 0.76% of the share capital of the Company at the time) under a Manager PSP Award and 148,148 options (representing approximately 0.14% of the share capital of the Company at the time) with an exercise price of 40.5p under a Manager CSOP Award
Director
Director share transactions
In accordance with the terms of the Distribution Finance Capital Holdings plc Performance Share Plan (the "PSP"), Carl D'Ammassa and Gavin Morris, have been granted nil-cost options over ordinary shares in the capital of the Company.
Carl D'Ammassa was granted nil-cost options over 900,000 ordinary shares of £0.01 each ("Shares"), representing approximately 0.84% of the share capital of the Company at the time. This grant was made in connection with Carl D'Ammassa's recruitment as Chief Executive Officer.
Gavin Morris was granted nil-cost options over 200,000 Shares, representing approximately 0.19% of the share capital of the Company at the time. This grant has been made as an ordinary course award under the terms of the PSP.
Further details of the conditions relating to these options is given in note 9.
Director
Some Directors invested in the personal savings products offered by the Bank. All deposits were aligned to the products and rates offered to the general market.
Not applicable
Key Management Personnel
Key Management Personnel share transactions
In accordance with the terms of the Distribution Finance Capital Holdings plc Performance Share Plan (the "PSP"), Key Management Personnel have been granted nil-cost options over ordinary shares in the capital of the Company.Key Management Personnel were granted nil-cost options over 20,000 Shares, approximately 0.02% of the share capital of the Company at the time.
These options have been granted as part of a grant of options to all permanent employees of the Company and will be subject to vesting over a three year period. Further details are set out in note 9.
Key Management Personnel
Key Management Personnel share transactions
In accordance with the terms of the Distribution Finance Capital Holdings plc Performance Share Plan (the "PSP"), Key Management Personnel have been granted nil-cost options over ordinary shares in the capital of the Company.
Key Management Personnel were granted nil-cost options over 485,000 Shares, representing approximately 0.45% of the share capital of the Company at the time. This grant was made as an ordinary course award under the terms of the PSP.
Further details of the conditions relating to these options is given in note 9.
Key Management Personnel
Certain Key Management Personnel invested in the personal savings products offered by the Bank. All deposits were aligned to the products and rates offered to the general market.
Not applicable
35. Post balance sheet events
Placing of new ordinary shares
In February 2021 the Group announced a conditional placing of new ordinary shares with certain new and existing institutional and other investors which entered into a direct subscription agreement in respect of 72,727,273 new ordinary shares of one penny each ("Ordinary Shares") in Distribution Finance Capital Holdings plc at a price of 55 pence per placing share. The placing raised £40.0 million of additional capital before expenses and approximately £38.6 million after expenses. The placing was subject to shareholder approval at a general meeting on 22 February 2021 by which all of the Resolutions were duly passed on a poll at the General Meeting. Upon Admission, the enlarged share capital is comprised of 179,369,199 ordinary shares with one voting right per share.
A number of the Directors of the Group conditionally agreed to subscribe for an aggregate of 381,464 ordinary shares through the placing.
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 subscription price of £38,600,000.
New office premise lease agreement
The Company signed a new lease agreement, effective from 1st April 2021, for office premises for the new Manchester headquarters. The lease agreement has a contractual term end date of August 2030 and a contractual break date of August 2025. The new office will support the Company to meet its growth ambitions over the forthcoming years as outlined within the Strategic Review section of this annual report.
The Company Statement of Financial Position
NoteAs at
31 December
2020
£'000
As at
31 December
2019
£'000
Assets
Cash and cash equivalents
5
203
20
Investment in subsidiaries
7
95,613
95,977
Trade and other receivables
6
154
617
Total Assets
95,970
96,614
Liabilities
Amounts payable to Group undertakings
8
4,639
4,269
Trade and other payables
9
263
194
Financial liabilities
10
50
50
Other provisions
11
-
337
Total Liabilities
4,952
4,850
Equity
Issued share capital
12
1,066
1,066
Merger relief
12
94,911
94,911
Retained (loss)
(4,595)
(4,213)
Own shares
(364)
-
Total Equity
91,018
91,764
Total Equity and Liabilities
95,970
96,614
The notes on pages 149 to 155 are an integral part of these financial statements.
Distribution Finance Capital Holdings plc recorded loss after taxation for the year ended 31 December 2020 of £704,000 (2019: £3.68 million). These financial results are derived entirely from continuing operations.
These financial statements were approved by the Board of Directors and authorised for issue on 20 April 2021. They were signed on its behalf by:
Carl D'Ammassa
Director
20 April 2021
Registered number: 11911574
The Company Cash Flow Statement
Note
2020£'000
2019£'000
Cash flows from operating activities:
Loss before taxation
4
(704)
(3,681)
Adjustments for non-cash items and other adjustments included in the income statement
5
(2,243)
(196)
(Increase)/decrease in operating assets
460
(566)
Increase in operating liabilities
69
194
Taxation paid
-
-
Net cash used in operating activities
(2,418)
(4,249)
Cash flows from financing activities:
Proceeds from intercompany loan
2,601
4,269
Net cash from financing activities
2,601
4,269
Net increase in cash and cash equivalents
183
20
Cash and cash equivalents at start of the year
20
-
Cash and cash equivalents at end of the period
4
203
20
The Company Statement of Changes in Equity
Issued share capital£'000
Merger relief£'000
Retained (loss) /
earnings£'000
Own shares
£'000
Total£'000
Balance at 28 March 2019 - at incorporation
-
-
-
-
-
(Loss) after taxation
-
-
(3,681)
-
(3,681)
Consideration from initial public offering
1,066
94,911
(532)
-
95,445
Balance at 31 December 2019
1,066
94,911
(4,213)
-
91,764
(Loss) after taxation
-
-
(704)
-
(704)
Employee Benefit Trust
-
-
-
(364)
(364)
Share based payments
-
-
322
-
322
Balance at 31 December 2020
1,066
94,911
(4,595)
(364)
91,018
Notes to the Company Financial Statements
1. 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 issued by the International Accounting Standards Board ("IASB") in accordance with United Kingdom Generally Accepted Accounting Practice ("UK GAAP").
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 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 2020, 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
2020
£'000
2019
£'000
Net (loss) attributable to equity shareholders of the Company
(704)
(3,681)
5. Notes to the cash flow statement
Cash and cash equivalents:
2020
£'000
2019
£'000
Cash held at bank
203
20
Total cash and cash equivalents
203
20
Adjustments for non-cash items and other adjustments included in the income statement:
Note
2020£'000
2019£'000
Management fee recharge
(1,973)
-
Transaction costs on equity raising recognised in retained earnings account
-
(533)
Movement in other provisions
11
(337)
337
Share based payments
67
-
Total non-cash items and other adjustments
(2,243)
(196)
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 year ended 31 December 2020.
6. Trade and other receivables
2020
£'000
2019
£'000
Other debtors
50
50
Employee loans
-
461
Social security and other taxes
13
34
Prepayments
91
72
Total trade and other receivables
154
617
7. Investment in subsidiaries
£'000
Balance at 28 March 2019 - at incorporation
-
Consideration from initial public offering
95,977
Balance at 31 December 2019
95,977
Dividend received from DF Capital Bank Limited
(364)
Balance at 31 December 2020
95,613
8. Amounts payable to Group undertakings
2020
£'000
2019
£'000
Amounts payable to DF Capital Bank Limited
4,639
4,269
Total amounts payable to Group undertakings
4,639
4,269
9. Trade and other payables
2020
£'000
2019
£'000
Trade payables
97
1
Accruals
150
193
Social security taxes
16
-
Total trade and other payables
263
194
10. Financial liabilities
2020
£'000
2019
£'000
Preference shares
50
50
Total financial liabilities
50
50
Reconciliation of movements in financial liabilities:
Preference Shares
£'000
Balance at 28 March 2019 - at incorporation
-
Non-cash changes:
Incorporating shareholder
50
Balance at 31 December 2019
50
No transactions in the year
-
Balance at 31 December 2020
50
11. Other provisions
At 31
December 2019£'000
Additions£'000
Utilisation of provision£'000
Unused amounts
reversed£'000
At 31
December 2020£'000
Severance payments
337
2
(339)
-
-
337
2
(339)
-
-
At 28 March 2019
£'000
Additions£'000
Utilisation of provision£'000
Unused amounts
reversed£'000
At 31
December 2019£'000
Severance payments
-
377
(40)
-
337
-
377
(40)
-
337
Further details regarding the severance payments onerous provision can be found in note 13 of the consolidated financial statements.
12. Share capital
2020
No.
2020
£'000
2019
No.
2019
£'000
Authorised:
Ordinary shares of 1p each
106,641,927
1,066
106,641,927
1,066
Allotted, issued and fully paid: Ordinary shares of 1p each
106,641,927
1,066
106,641,927
1,066
DateNo. of
shares#
Issue
price£
Share
capital£'000
Merger
relief£'000
Total£'000
Balance at 28 March 2019
- at incorporation28-Mar-19
1
0.01
-
-
-
Initial public offering
09-May-19
106,641,926
0.90
1,066
94,911
95,978
Balance at 31 December 2019
106,641,927
1,066
94,911
95,978
Issue of new shares
08-Sep-20
4,906,776
0.01
49
-
49
Buy back of shares
08-Sep-20
(4,906,776)
0.01
(49)
-
(49)
Balance at 31 December 2020
106,641,927
1,066
94,911
95,978
Refer to note 25 of the consolidated financial statements for further details on the share transaction during the year ended 31 December 2020.
13. Financial instruments
The Group monitors and manages risk management at a group-level and, therefore, the Risk Management Framework stipulated in note 32 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 32 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
£'000
Fair value£'000
Level 1£'000
Level 2£'000
Level 3£'000
31 December 2020
Financial assets not
measured at fair value
Trade receivables
-
-
-
-
-
Other receivables
63
63
-
-
63
Cash and equivalents
203
203
203
-
-
266
266
203
-
63
31 December 2020
Financial liabilities not
measured at fair value
Preference shares
50
50
-
-
50
Amounts payable to Group undertakings
4,639
4,639
-
-
4,639
Trade payables
97
97
-
-
97
Other payables
16
16
-
-
16
4,802
4,802
-
-
4,802
Carrying amount
£'000
Fair value£'000
Level 1£'000
Level 2£'000
Level 3£'000
31 December 2019
Financial assets not
measured at fair value
Trade receivables
-
-
-
-
-
Other receivables
546
546
-
-
546
Cash and equivalents
20
20
20
-
-
566
566
20
-
546
31 December 2019
Financial liabilities not
measured at fair value
Preference shares
50
50
-
-
50
Amounts payable to Group undertakings
4,269
4,269
-
-
4,269
Trade payables
1
1
-
-
1
Other payables
-
-
-
-
-
4,320
4,320
-
-
4,320
Maximum exposure to credit risk:
2020
£'000
2019
£'000
Cash and equivalents
203
20
Trade and other receivables
63
546
266
566
Maturity analysis for financial assets
The following maturity analysis is based on expected gross cash flows:
Carrying amount£'000
Gross
nominal inflow£'000
Less
than 1 months£'000
1 - 3
months£'000
3 months
to 1 year£'000
1 - 5 years£'000
>5 years£'000
31 December 2020
Financial assets
Cash and equivalents
203
203
203
-
-
-
-
Trade receivables
-
-
-
-
-
-
-
Other receivables
63
63
13
-
-
50
-
266
266
216
-
-
50
-
Carrying amount£'000
Gross
nominal inflow£'000
Less
than 1 months£'000
1 - 3
months£'000
3 months
to 1 year£'000
1 - 5 years£'000
>5 years£'000
31 December 2019
Financial assets
Cash and equivalents
20
20
20
-
-
-
-
Trade receivables
-
-
-
-
-
-
-
Other receivables
546
546
-
-
34
512
-
566
566
20
-
34
512
-
Maturity analysis for financial liabilities
The following maturity analysis is based on contractual gross cash flows:
Carrying amount£'000
Gross
nominal outflow£'000
Less
than 1 months£'000
1 - 3
months£'000
3 months
to 1 year£'000
1 - 5 years£'000
>5 years£'000
31 December 2020
Financial liabilities
Preference shares
50
50
-
-
-
50
-
Amounts payable to Group undertakings
4,639
4,639
-
-
4,639
-
-
Trade payables
97
97
97
-
-
-
-
Other payables
16
102
-
-
-
102
-
4,802
4,888
97
-
4,639
152
-
Carrying amount£'000
Gross
nominal outflow£'000
Less
than 1 months£'000
1 - 3
months£'000
3 months
to 1 year£'000
1 - 5 years£'000
>5 years£'000
31 December 2019
Financial liabilities
Preference shares
50
50
-
-
-
50
-
Amounts payable to Group undertakings
4,269
4,269
-
-
-
4,269
-
Trade payables
1
1
1
-
-
-
-
4,320
4,320
1
-
-
4,319
-
14. Post balance sheet events
Placing of new ordinary shares
In February 2021 the Group announced a conditional placing of new ordinary shares with certain new and existing institutional and other investors which entered into a direct subscription agreement in respect of 72,727,273 new ordinary shares of one penny each ("Ordinary Shares") in Distribution Finance Capital Holdings plc at a price of 55 pence per placing share. The placing raised £40.0 million of additional capital before expenses and approximately £38.6 million after expenses. The placing was subject to shareholder approval at a general meeting on 22 February 2021 by which all of the Resolutions were duly passed on a poll at the General Meeting. Upon Admission, the enlarged share capital is comprised of 179,369,199 ordinary shares with one voting right per share. 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 subscription price of £38,600,000.
A number of the Directors of the Group conditionally agreed to subscribe for an aggregate of 381,464 ordinary shares through the placing.
New office premises lease agreement
The Company signed a new lease agreement, effective from 1st April 2021, for office premises for the new Manchester headquarters. The lease agreement has a contractual term end date of August 2030 and a contractual break date of August 2025. The new office will support the Company to meet its growth ambitions over the forthcoming years as outlined within the Strategic Review section of this annual report.
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