Final Results

Distribution Finance Cap. Hldgs PLC

09 April 2024

9 April 2024

Distribution Finance Capital Holdings plc

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

Audited Results for the year ended 31 December 2023 and Q1 Trading Update

More than threefold increase in PBT and eleven consecutive quarters of loan book growth.

Distribution Finance Capital Holdings plc, the specialist bank providing working capital solutions to dealers and manufacturers across the UK, today announces its audited results for the year ended 31 December 2023 as well as a Q1 trading update.

Highlights

	2023	2022	Change
Performance
Loan Book (£m)	581	439	+32%
New loans advanced to customers (£m)	1,200	1,001	+20%
No of dealer customers	1,182	998	+18%
Financial
Gross Revenue (£m)	60.4	26.8	+125%
Net Income (£m)	38.0	20.4	+86%
Cost of Risk (bps)	228	74	154bps
Excluding RoyaleLife (bps)	53	50
Profit before tax (£m)	4.6	1.3	251%
Net Assets (£m)	100.4	96.2	+4%
Adjusted earnings per share (pence)¹	1.8	0.4	340%
Tangible net asset value per share (pence)	55.6	53.2	+5%

1. 2022 earnings per share is adjusted to remove the initial recognition of deferred tax assets that occurred in 2022. Earnings per share without this adjustment was 5.4p.

• Profit before tax increased more than threefold to £4.6m (2022: £1.3m).

• New lending up 20% to a record £1.2bn (2022: £1.0bn), supporting a year-end loan book of £581m (2022: £439m).

• Net interest margin (NIM) improved to 7.6% (2022: 6.5%), materially ahead of 6% target.

• Cost-to-income ratio reduced to 58% (2022: 82%) demonstrating the intrinsic operational leverage available at scale.

• Stock turn has continued to normalise to 148 days (2022: 102 days) supporting loan book growth, whilst continuing to operate well within risk tolerances.

• Continued low number of arrears cases: 30 dealers (2022: 24) or c2.5% of total dealers more than one day past due or in legal recovery.

• Retail deposits increased during the year by £95m, with over 15.2k savings accounts and £575m of deposits at 31 December 2023.

• Steady growth in new product adjacencies of receivables and wholesale financing, delivering over £24m of new lending and £18m loan book at year-end.

• Delivered non-dilutive capital capacity to support growth: upsizing of British Business Bank ENABLE Guarantee to £250m with further £100m extension potential; obtained £20m Tier 2 capital facility from British Business Investments.

• Accredited by Best Companies as a 3-star company and a "World Class Place to Work" (2022: 2-star).

Q1 Trading and Outlook

• Quarterly loan origination up c22% on prior year at c£330m (Q1 2023: £270m).

• Loan book increased to more than £610m, up over £100m on prior year (Q1 2023: £505m) achieving eleven consecutive quarters of loan book growth.

• Whilst focused on dealer credit quality, supported record numbers:1,233 dealers (31 March 2023: 1,079) with over £1.1bn (31 March 2023: £900m) of credit facilities being provided.

• NIM performance has continued to be strong and is expected to be in excess of 6% target through the year, reverting to target with base rate reductions over the medium-term.

• Exceptional arrears performance with 18 dealers with arrears greater than 1 day past due or in legal recoveries; total arrears excluding RoyaleLife credit loss equates to less than 0.3% of entire loan book; well below 1% through the cycle.

• Stock turn operating at 150 days, well within blended risk tolerance.

• Organic build of new hire purchase lending product underway, with regulatory approval expected to be sought later in 2024 and ramp up of loan origination in 2025.

• Capital capacity to grow loan book to approximately £800m, with full extent of ENABLE Guarantee and Tier 2 capital, at which point financial characteristics of the firm support further organic growth.

• Remain opportunistic when looking at alternative routes to unlock faster growth including M&A.

• The Board expects financial performance for the full year to be in line with expectations, targeting a year end loan book in the range of £650m to 700m.

Carl D'Ammassa, Chief Executive, commented: "We are delighted to have delivered another year of significant financial momentum and sustainable profitable growth, culminating in more than a threefold increase in profit. 2023 has been a year of significant progress for us."

"We have started 2024 well and see opportunities for further growth in our core lending product as well as new product adjacencies. Becoming a multi-product lender underpins our strategy to scale the bank and achieve mid-to-high teen returns over the medium term. Having engaged colleagues who think we are a world class place to work is undoubtedly a key element of our excellent financial performance."

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

Annual General Meeting

The Company will hold its Annual General Meeting on 5 June 2024 at the Company's registered office in Manchester. The Notice of AGM and Form of Proxy will be posted to shareholders in due course and a copy will be available at www.dfcapital-investors.com.

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
http://www.dfcapital-investors.com

Investec Bank plc (Nomad and Broker)	+44 (0) 207 597 5970
David Anderson Bruce Garrow Harry Hargreaves Maria Gomez de Olea
Liberum Capital Limited (Joint Broker)	+44 (0) 203 100 2000
Chris Clarke William King Anake Singh

Chair's Statement

Dear Shareholder

Since receiving full authorisation as a bank in September 2020, the post-pandemic macro-economic headwinds have been significant. As a firm, one of our key priorities has been ensuring we achieve sustainable profitable growth to demonstrate the resilience of our business model. Following the Group's maiden profit in 2022, I am delighted that this has more than tripled, reaching £4.6m for the year.

Scaling the Group has been a key ingredient to defining our success. Having now closed the first quarter of 2024, the Group has delivered eleven consecutive quarters of loan book growth since authorisation. The bank supports more dealers and manufacturers each year, has successfully developed adjacent products and services to support its strategic growth ambitions, managed costs effectively and worked hard to navigate the inevitable credit risk challenges caused by higher interest rates and general inflationary pressures. The Board is very pleased with the firm's successes and the strong execution by the management team during the year.

Focus on culture key to a sustainable and successful business

Having the right culture is an important element of being a successful and scalable financial services organisation. We have seen most recently the adverse impact and regulatory intervention that inadequate customer outcomes, deep rooted in a poor culture, can have on a firm. As a Board we spend a lot of our time focusing on the firm's culture as we believe that sustainable and successful businesses have a strong positive cultural DNA.

In the context of financial services, culture has a very broad definition, stretching from how products and services are designed and manufactured - particularly in the light of the new Consumer Duty; how firms go about meeting their regulatory responsibilities; the quality of service offered to customers; the support given to the communities in which firms operate; and how employees feel about working in the firm. Looking through this cultural lens, it is pleasing to see the extent of evolution across the various areas.

Assessed through the Board committee structure we believe the firm's approach to risk management is robust. The firm's commitment to giving back to the communities in which it operates is impressive. We continue to offer exceptional levels of service and products that resonate with our customers too. It is, therefore, unsurprising given the firm clearly has these cultural elements right, that the Group improved its overall employee engagement through the period. For the third consecutive year the firm has increased its accreditation rating by Best Companies and I am very proud that it has been recognised in the latest survey as a 3-star world class place to work.

It is important to note, largely because we are regularly asked, that DF Capital has no exposure to any discretionary commission arrangements that has prompted the Financial Conduct Authority's review into the motor finance and the regulated consumer lending sector.

Committed to developing a multi-product lending franchise supporting dealers and manufacturers

The firm's strategic plan remains unchanged in that we remain committed to developing a multi-product lending franchise supporting the sales and development of dealers and manufacturers. Having reached profitability, the Board believes that retained earnings should be deployed to support medium term growth and capital accretion. We do not believe at this stage of the Group's evolution that distributing profits via dividends is the right course of action. We will, however, keep this under regular review.

The Group believes it has capacity to grow its current loan book to approximately £800m based on current capital, upsizing the ENABLE Guarantee to £350m and a full drawdown of the £20m Tier 2 Capital Facility. Upon reaching a loan book of c£800m, the profitability generated should support good organic growth from that point onwards although at slower rates than we have grown at since receiving the bank licence. We remain opportunistic when looking at alternative routes to unlock faster growth, including M&A.

Another year of significant progress

As you read this year's annual report, I am confident you will share my view that 2023 has been a year of exceptional achievements. Notwithstanding the sizeable credit loss provision relating to RoyaleLife, which the Board has closely monitored throughout, the underlying performance has been sufficiently strong that this unique and complex credit loss could be absorbed entirely whilst still delivering significant profitable growth.

2023 has been another year of significant progress for the Group as we continue to scale the bank to achieve sustainable profitability and make progress on our journey to achieve mid-to-high teen returns.

Mark Stephens

Independent Non-Executive Chair

Chief Executive Officer's Report

Dear Shareholder

2023 has been another strong year for the Group. We determined soon after being authorised as a bank in September 2020 that scaling the firm would be our primary route to profitability and it is, therefore, pleasing to announce ten consecutive quarters of loan book growth over that period which has unlocked our second full year of profit.

The pace of lending growth, supported by the operational leverage in our cost base delivered a more than threefold increase in the Group's profit before tax, which reached ￡4.6m during the period. Our tangible net asset value per share has increased also to 55.6p (2022: 53.2p).

Strong execution delivers significant financial momentum

The Group's products and services continue to resonate with our customers. We have delivered record levels of new loan origination in the period, reaching £1.2bn, up almost 20% on the prior year (2022: £1bn), with the Group's loan book growing by over 32% to £581m (2022: £439m).

We have continued to grow our reach across the sectors in which we operate, supporting almost 1,200 dealers (2022: 998) with a record c£1bn (2022: £817m) of credit lines available to support their inventory and working capital needs.

The Group's net interest margin ("NIM") increased to 7.6% (2022:6.5%) having successfully balanced our lending pricing, which is directly linked to the Bank of England Base Rate, against the increasing retail deposit rates expected by our depositors.

Costs have continued to be well-managed through the period, with a further widening of the jaws between net income and the Group's operating cost, delivering a sizeable reduction in the cost-to-income ratio to 58% (2022: 82%).

Portfolio quality has remained strong with 30 dealers (December 2022: 24) in arrears one day past due, representing less than 3% of the Group's entire dealer customer base.

The strength of underlying business performance during the period is such that the Group has fully absorbed a unique and complex credit provision of c￡10m relating to RoyaleLife, whilst still demonstrating this significant year-on-year profit increase of 250%.

Holistically, we are very pleased with the Group's financial performance through the period.

Growing our market share

Whilst the macro-economic environment has been fairly unpredictable and some sectors have faced particular challenges, we have managed to navigate these well and grow our market share.

Our portfolio of loans remains well diversified across the sectors in which we operate, having seen double-digit growth in almost every sector. It is pleasing to see the progress we are making in the specialist automotive market where we have more than doubled our lending over the year.

As well as record levels of new loan origination, a continued move towards normalised levels of stock across most sectors has supported some of our loan book growth. After a few turbulent years during the pandemic where dealers

were arguably overstocked then severely understocked due to supply chain challenges and high end-user demand shortly thereafter, it is pleasing to see more natural levels of inventory unfold. Stock turn, which we feel is most appropriately measured as the average age of loan outstanding, rather than our historical measure of average loan duration, has extended to 148 days (31 December 2022: 102 days), which falls in line with seasonal expectations and historical norms.

Slowing dealer sales has the potential to see our stock levels and loan book increase, with portfolio oversight continuing to be an important lever to control our credit risk.

It is fair to say that supply and demand dynamics across the sectors in which we operate are varied, with some still adjusting to the post pandemic environment and the macro-economic headwinds of elevated inflation and higher interest rates. This is particularly noted in the residential and holiday lodge markets, where manufacturers and park operators continue to navigate an imbalance between supply and demand, holding decent levels of stock coupled with slowing levels of manufacturer production. During this period of transition, a number of park operators have innovatively turned unsold stock into short-term holiday rental units, with our flexible lending approach ably supporting this.

Conversely, as motorised chassis cab availability has improved, we have seen an increase in stock levels across the motorhome sector. End-user demand remains particularly strong in this market. Manufacturing across the caravan market remains robust despite production marginally exceeding sales.

Across the motorcycle market registrations have been broadly flat on prior year, however, we have been able to grow our market share of the available inventory during the period in light of our strong service proposition. Larger boats and yachts have remained in strong demand, with higher interest rates adversely impacting consumer confidence to buy at the smaller end of the marine market.

Whilst we have seen growth across the non-leisure and commercial sectors, the market dynamic has been more challenging. Construction product demand has been adversely impacted by a slow down in housebuilding and major

infrastructure projects such as the scaling back of HS2, meaning the market has grown at a slower pace than expected. Additionally, extreme weather conditions have caused challenges for the agricultural sector where demand for products has been sluggish. Changes in Government policy on vehicle electrification and negative sentiment around charging infrastructure has dampened demand for electric commercial vehicles, but conversely has encouraged sales of combustion engine panel vans and chassis, a trend we expect to continue through 2024. We have made some progress in extending our commercial vehicle reach into the HGV space of the market, where we see significant opportunity for further loan book growth.

We have balanced the sector specific headwinds and opportunities exceptionally well. We see further runway ahead whether scaling with our manufacturer partners; onboarding more dealers; supporting further bounce-back as markets stabilise and consumer confidence increases; growing our market share with dealers; and pressing on with new asset classes such as specialist automotive, materials handling (eg. forklifts) and heavy good vehicles.

We believe having diversified asset classes and operating across many sectors provides resilience against specific industry headwinds. We continue to operate in an environment that is uncertain and fraught with challenges, particularly persistently elevated interest rates. Keeping close to our manufacturer partners and maintaining intimate relationships with our dealer customers helps us navigate these challenges but also frame appropriate financing solutions that help our customers mitigate the risk and capitalise on opportunities they see to grow.

Our service levels and extent of relationship management is highly regarded by our customers, as demonstrated by our broadly stable net promoter score of +37 (2022: +41), which is well above our external benchmark of +30.

Entering new sectors and developing products and services

As an early stage bank, we are well versed in testing lending concepts in a small-scale and controlled manner, to support opportunities presented to us by our customers. We have successfully launched receivables financing solutions and wholesale funding (i.e. lending to non-bank lenders) as routes to support our existing customers and strategic partners. These opportunities present excellent risk adjusted returns for the Group. At the end of 2023, we had over £18m of our loan book (c3%) in these new products with loan origination exceeding £24m through the year. We expect to grow these initiatives further in 2024, but do not see them representing more than 10-15% of our entire lending balance.

We are excited by recent developments that have seen us enter into an agreement to provide both receivables financing and inventory finance to a supplier in the renewable energy sector. We believe the nature of this lending across serialised lower value faster moving goods has the potential to be an area of further growth for the Group.

Additionally, we now have an established capability to provide working capital to support selective dealers in the Euro-zone. Whilst our efforts in the space are narrow and limited, focused on partnerships in both the Republic of Ireland and the Netherlands, we believe they present excellent opportunities for us to assess routes for longer term European expansion.

We have spoken for some time about natural extensions to our existing manufacturer and dealer relationships by providing finance "beyond the forecourt", to support retail sales. Hire purchase and leasing are common lending

products required by end-users in order to purchase our dealers' products. Dealers and manufacturer partners tell us that this is an area they feel DF Capital can further assist them, as they feel poorly or under-served by existing providers. We feel given the FCA's motor finance review, noting that the Group has no exposure to discretionary commission arrangements, that remediation efforts will distract many of the existing consumer hire purchase lenders, thus intensifying the needs of our dealers for a reliable, attentive and high quality provider to support product sales. We believe this represents a substantial opportunity for the Group and we expect to be well placed to fill this gap.

We have explored inorganic opportunities to bring hire purchase lending to life, unfortunately with little success thus far. Whilst we continue to actively consider inorganic routes to scale the bank further, we have started the organic build of a hire purchase capability, which will be targeted at our leisure assets on launch. The build is underway, and we expect to seek regulatory approval later in 2024, enabling us to ramp up the loan origination during 2025.

Highly regarded deposit raising capability

Our highly digitised retail deposit proposition continues to resonate with customers. We offer market leading rates, using "Best Buy Tables" as a route to attract new depositors. Our application journey is fast, allowing customers to open an account within minutes. We have invested in confirmation of payee capabilities through the year, which means customers not only receive a dedicated sort code and account number in their own name on application but also can confidently transfer funds from their nominated account having their new account details confirmed by their clearing bank. We launched our first easy access account this year too, opening up a further pool of depositors whilst also retaining loyal customers.

We believe service is key in building confidence in our depositors. Retention rates are high, typically c75% at product maturity. Our customers know that they can use our online platform to manage their accounts, or if they need assistance, they can call our Manchester based team to get the support they need without the long waits associated with many financial services firms.

It is no surprise, certainly to us, that we receive such strong positive customer satisfaction scores as measured by Feefo. We closed 2023 at a consistent 4.7 stars (2022: 4.7) but have recently seen this increase further to 4.8 stars rated across

almost 1,200 reviews over the last 12 months. We have also received Feefo's Platinum Trusted Service Award at the start of this year.

We closed the year with £575m of deposits, (2022: £480m) with over 15,200 accounts up over 20% on the prior year. Through the year we have continued to build a well-diversified range of product maturity profiles in the easy access, notice and fixed rate markets, raising £446m of new deposit or reinvestments at an average rate of 5.11%. We are currently building a business savings proposition, which should unlock lower funding costs for us over time, and expect to launch our maiden product during Q2 2024.

Our culture: Being a world-class place to work

We believe that sustainability in our business model is built by doing the right things for our customers, communities, the environment and our employees. We believe our focus on acting sustainably is deep rooted in the attitude of our employees and how they feel about the firm. Having employees that believe in what we are looking to achieve, support the ambitions of the firm and get it right for our customers define the quality of shareholder returns.

We have participated annually in the "Best Companies to Work for" survey over the last couple of years. We have been pleased with the progress we have made on the back of the employee feedback we receive through the survey. In 2023 97% (2022: 95%) of employees told us what they felt we were doing great and gave us pointers on how we can continue to evolve the firm's culture, making DF Capital an even better place to work.

I am delighted that we've built on our 2-star accreditation from Best Companies in 2022, being seen as an outstanding place to work, to achieve a 3-star accreditation. This is the highest rating from Best Companies and indicates that we are providing world-class levels of employee engagement.

Giving back to our local communities is something core to our DNA and I am proud of what we have done to support local charities throughout the year, culminating in our "Mega Give Back" day where the entire team supported a dozen charities across Manchester for the day. Our colleagues are generous with their time, giving over 1,700 hours through the year to support initiatives close to their hearts. For a small bank of c130 employees I feel we significantly punch above our weight in this regard.

We have a culture at DF Capital that I am very proud of. We are growing the firm in a sustainable way by treating our employees fairly, delivering exceptional levels of customer service and having a sound focus on risk management right across the firm, critical for any financial services organisation.

RoyaleLife credit loss

We are very disappointed with the outcome relating to RoyaleLife and associated companies ("RoyaleLife"), a customer of the Group since June 2018.

Through the year, the business worked hard to navigate the challenges unfolding in respect of this large single obligor arrears case. RoyaleLife had been pursuing a major multi-billion pound refinance and restructure, and whilst supportive of the refinancing and restructure of RoyaleLife, the Group had not made any further loans to this customer beyond July 2022.

During the latter half of 2023, this refinancing process slowed significantly in light of the complexity of RoyaleLife's financial situation, unique characteristics of the business and its complex organisational and legal structure. We had been in regular direct communication with the firm's principal, its largest existing secured lenders, potential new investors and new lender throughout, despite the Group not being a direct counterparty to the refinance ourselves. We expected our facility to be repaid in full and all arrears cleared on successful completion of the refinancing and based on representations received from stakeholders to that effect.

For much of the year RoyaleLife's facility was not operating in the normal course, with our audit process and portfolio

monitoring discovering a significant number of our funded assets being sold out of trust or missing from confirmed locations. Following failure of the refinancing process late in 2023, it became clear that RoyaleLife's financial situation and operation was much opaquer and more complex than originally determined, adversely impacting, to a greater degree than expected, a larger number of secured lenders and other creditors. Significant parts of RoyaleLife entered into administration and the principal has since faced bankruptcy having pledged personal guarantees and accrued debts in excess of £700m.

Given the unique circumstances associated with this arrears case and the extent of challenge across the entire and vast

cohort of lenders, we determined that it would be prudent to make a full provision of c£10m, equivalent to the customer's entire outstanding balance less a £0.4m negotiated settlement agreed with an individual park operator. We continue to pursue recovery of the outstanding debt to the fullest extent possible and where economically viable to progress.

Whilst identifying this case as unique in our portfolio of loans, we have ensured that our credit policies and portfolio

management procedures are updated to reflect learnings from this case. We are confident that we do not have loans with similar characteristics and complex obligor structures in our portfolio.

Outlook

We have started the year with continued momentum, reporting our eleventh consecutive quarter of loan book growth. The Group's loan book reached £610m at the end of the first quarter, up 5% from year end and over £100m increase on Q1 2023. Financial performance for the quarter is in line with expectations.

Whilst new loan origination has been strong, reaching £330m, unsurprisingly, given the macro-economic environment,

dealers are cautious about materially increasing their overall stock position. Dealer sales to end-users have been strong in the quarter, particularly in motorhomes, caravans and commercial vehicles sectors, which has seen our stock turn remain relatively flat at 150 days and is in line with expectations as well as seasonal and historical norms.

Dealer numbers continue to increase, with the addition of 90 through the quarter, reaching 1,233 (December 2023: 1,182) on a net basis. Credit facilities have also increased to £1.1bn (December 2023: £1.0bn).

The Group's overdue accounts continue to perform well, with 18 dealers having arrears one day past due or in legal recovery (December 2023: 30). The Group's total arrears balance excluding the c£10m provisioned balance relating to RoyaleLife, equates to less than 0.3% of our entire loan book. Whilst we are pleased with this exceptional performance, this is better than normal levels and expectations.

Notwithstanding the continued challenging macroeconomic environment, we feel positive about the year ahead. We have a number of business development initiatives in play as well as the continued organic growth of our core lending product. We expect our loan book to close the year in the range of £650-£700m.

Having successfully secured the support of British Business Bank's ENABLE Guarantee, a £20m Tier 2 capital facility from British Business Investments and our Tier 1 capital base, that is now growing through sustainable profitability, we see clear capital capacity to grow the bank to c£800m in the near-term.

We remain ambitious for the Group's future growth trajectory, seeing many opportunities in new lending product adjacencies that will allow us to further scale the bank and achieve mid-teen returns over the medium term. We stand firm in our ambitions to be a multi-product lender supporting the growth of our dealer and manufacturer customers in a deeper way across well-diversified end-user markets.

Carl D'Ammassa

Chief Executive Officer

Chief Financial Officer's Report

Dear Shareholder

We are pleased to report a year of demonstrable sustainability in profitability; pre-tax profit has increased by 250% to £4.6m (2022: £1.3m) and we continue to make progress in our journey to increase returns, reporting earnings per share of 1.8p (2022: adjusted earnings per share of 0.4p).

Net Interest Margin ahead of 6% target

Gross yield increased by 35% to 11.1% (2022: 8.2%), reflecting our ability to pass on base rate rises through newly originated loans. This, coupled with the continued significant year-on-year growth in the loan book, saw gross revenues, which are predominantly comprised of interest and similar income, increase by 125% to £60.4m (2022: £26.8m).

Net Interest Margin ("NIM"), which is gross yield less interest expense, increased by 17% during the period to 7.6% (2022: 6.5%), being well ahead of our NIM target of 6%, largely influenced by movements in UK base rates.

As expected, given the rising base rate, the average cost of retail deposits increased during the period to 4.27% (2022: 1.90%). As the Group's deposit book is predominantly an array of fixed rate tenors, it takes time for increasing deposit

rates to fully flow through to the deposit book as a whole, as older maturing deposits are replaced by newer deposits at higher rates. Accordingly, the loan book has repriced more quickly than the deposit book given its shorter average tenor, which has driven much of the favourable NIM expansion in the year. This positive mis-match has been more pronounced in 2023 given the speed of base rate increases and whilst we expect some favourability in the near-term it is less likely to remain over the medium term; unwinding over time as the base rate reduces. Our longer-term target NIM remains unchanged at 6%.

Net income, which is gross revenues less interest expense, increased by 86% to £38.0m (2022: £20.4m), given the above factors.

Summarised Statement of Comprehensive Income	2023 £'000	2022 £'000
Gross revenues	60,350	26,842
Interest expense	(22,336)	(6,411)
Net income	38,014	20,431
Operating expenses	(21,843)	(16,831)
Impairment charges	(11,598)	(2,296)
Profit before taxation	4,573	1,304
Taxation	(1,418)	8,457
Profit after taxation	3,155	9,761
Other comprehensive (loss)/income	183	(79)
Total comprehensive profit	3,338	9,682
Adjusted earnings per share	1.8p	0.4p

2022 earnings per share is adjusted to remove the initial recognition of deferred tax assets that occurred in 2022. Earnings per share without this adjustment was 5.4p.

Continuing to unlock our operational leverage

We have continued to invest in areas to support growth and scaling of the business, such as robotic process automation ("RPA"), API-connections with dealers, and character-recognition technologies. This builds further scalability into our operational capabilities. We have invested c£1m in systems and technology through the year to enhance our service further and unlock additional routes to release further operational leverage.

During 2022 the Group upgraded and grew its commercial and relationship management teams, feeling the full year benefit and cost of this during 2023. As a result, operating expenses increased by 30% to £21.8m (2022: £16.8m) and the Group's headcount reached 133 at the end of the year (31 December 2022: 117) with the majority of this further investment in customer facing roles. The increase in operating expenses of £5.0m is less than 30% of the £17.6m increase delivered in net income, meaning our cost to income ratio has reduced significantly to 58% (2022: 82%). We expect to see further reductions in this ratio as we scale the business, underpinning the delivery of our return ambitions.

Strong portfolio and credit risk management

Despite the macro-economic challenges and higher interest rate environment, the actions we have taken to manage our portfolio have delivered a consistently low number of arrears cases, with just 30 dealers having arrears at least one day past due at year end (31 December 2022: 24) representing less than 3% of the Group's dealers base, which includes 20 cases in legal recovery. Our period end reporting of dealers in arrears and legal recovery consistently demonstrates the high quality of our obligor base and our successful intra-period actions to remediate dealer defaults by product redistribution through our customer network or sale of our secured assets to other parties, effecting recovery in whole or part. The Group's total arrears balance represents 2.5% of its entire loan book (31 December 2022: 1.6%). Excluding RoyaleLife, the Group's arrears balance at 31 December 2023 equates to 0.7% of its entire loan book. During Q1 2024, the number of dealers in arrears has reduced further.

Cost of risk, which includes provisions for credit losses and write-offs, was 2.28% (2022: 0.74%). Excluding the provision on RoyaleLife, cost of risk was 0.53% being significantly below the through the cycle estimate of 1% of average gross

receivables.

The combined stage 1 and 2 impairment allowance at 31 December 2023 as a percentage of gross receivables was 0.47% (December 2022: 0.46%) which incorporates an IFRS9 overlay for the general uncertain macro-economic environment and outlook. The total impairment allowance (comprising stages 1, 2 and 3) at 31 December 2023 as a percentage of gross receivables was 2.50% (2022: 0.84%), and excluding the impact of RoyaleLife was 0.85%.

Arrears (£'000)

	31-Dec-23	31-Dec-22	31-Dec-21	31-Dec-20
Arrears - principal repayment, fees and interest
1-30 days past due	696	136	105	27
31-60 days past due	265	1,084	834	22
61-90 days past due	946	25	0	39
91 days + past due	12,102	5,885	164	132
	14,009	7,130	1,103	220
% Loan book	2.4%	1.6%	0.4%	0.2%
Excluding RoyaleLife	0.7%	0.6%	0.4%	0.2%
Associated principal balance
1-30 days past due	1,253	2,016	951	96
31-60 days past due	717	1,512	834	7
61-90 days past due	1900	214	0	14
91 days + past due	12,821	16,317	184	259
	16,691	20,058	1,970	376
% Loan book	2.9%	4.6%	0.8%	0.3%
Excluding RoyaleLife	1.1%	1.4%	0.8%	0.3%

Providing richer insight on the Group's stock turn

We committed earlier in the year to provide richer analysis and management information in relation to the Group's stock turn, recognising that our stated historical annual average of 150 days may not accurately reflect current market dynamics, the sectors in which we now operate and the current sector mix given our rate of growth and diversification. Having historically focused our attention on our average loan duration (ie. when loans are repaid) as a proxy for the speed

of dealer sales, we believe that the average outstanding loan tenor is now a more appropriate measure to determine whether our portfolio is ageing against historical experience and our risk tolerances.

The average outstanding loan tenor can be significantly influenced by the quantum of new loan origination in the period relative to the portfolio, as well as the speed of loan repayment. Our historical data, which covers the period 2018 to 2023, is significantly influenced by both pandemic and post-pandemic market dynamics. During the lockdown periods, loan duration extended given dealers were closed for business and no new loans were originated as manufacturing ceased. Conversely, sales of products increased materially as did manufacturing capacity during post-pandemic periods,

which saw both strong new loan origination and high loan repayments as assets sold.

Expected seasonal trends evidenced pre-pandemic have not been seen in our portfolio performance since 2020. Whilst helpful to monitor our loan ageing generally, measuring stock turn solely against our historical levels is not a reliable risk management performance indicator. Accordingly, we have provided in the table opposite the sector tolerance levels we apply in our portfolio oversight, alongside the annual average tenor of outstanding loans and our most recent experience.

Whilst average age of loans outstanding at 31 March 2024 has extended slightly beyond year-end to 150 days (31 December 2023: 148 days), it continues to operate well within our tolerances. The extended duration of loans in the lodge sector is in line with expectations particularly given the significant impact the aftermath of RoyaleLife's failure has had on new loan origination and orders with manufacturers, thus extending the average duration.

	Recent trend vs expected norms¹				Actual	Actual
	New Loans	Repayments	Historical Annual Average	Tolerance Level	31-Mar-24	31-Dec-23
Agriculture	In line	In line	119	240	135	141
Automotive	Higher	Faster	73	200	64	83
Industrial	In line	Slower	120	250	160	167
Lodges	Lower	In line	154	300	260	239
Marine	In line	In line	132	250	153	147
Motorcycle	In line	Slower	107	200	88	113
Motorhome & Caravan	Higher	Faster	105	200	110	98
Transport	Higher	Faster	86	200	109	122
Loan book average			128	240	150	148

Pay as sold inventory only - excludes rental lending, equivalent to 6% as at 31 December 2023.

¹ Qualitative assessment relative to 2023 experience quarter on quarter

Strong security position

In our core inventory finance lending product, we take legal title against individual assets to provide working capital to fund dealers' inventory or stock. Loans are advanced against the wholesale value of an asset. The value of dealer loans outstanding compared to wholesale value (loan to value or "LTV") at 31 December 2023 was 85% (31 December 2022: 91%). This reduction in LTV is predominantly due to a slowdown in stock turn, which has in turn led to an increase in the associated monthly capital repayments. We do not advance funds measured against retail prices, which typically represent a mark-up of approximately 20% on the wholesale invoice price. Accordingly, for our funding 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 approximately 30% in retail prices across the sectors and products we lend against.

We often hold additional security, which can mitigate credit losses further, in the form of personal and/or cross company

guarantees as well as having manufacturer repurchase or redistribution agreements in place across c60% of our inventory

finance loan book (2022: c.65%).

Well capitalised balance sheet supports growth ambitions

The Group is well-capitalised. At 31 December 2023 the Group's equity stood at ￡100.4m (31 December 2022: £96.2m).

During the year the Group entered into an ENABLE Guarantee with the British Business Bank for an initial £175m, which was subsequently increased to £250m and may be extended up to £350m in the future. In addition, the Group obtained a £20m Tier 2 Capital Facility from British Business Investments in September 2023 with £10m being drawn by year end. Gaining access to the ENABLE Guarantee and Tier 2 capital are key components of our strategic capital plan.

The Group believes it has capacity to grow its current loan book to approximately £800m based on current capital, upsizing the ENABLE Guarantee to £350m and a full drawdown of the £20m Tier 2 Capital Facility. At a c£800m loan book the financial characteristics of the Group would allow it to achieve further organic growth at a healthy rate without the need to raise additional Tier 1 capital.

Despite the 32% loan book growth during the year, the utilisation of the ENABLE Guarantee together with the £10m Tier 2 Capital drawn meant our CET1 ratio increased to 22.8% at 31 December 2023 (31 December 2022 c.22.1%); well above our regulatory capital minimum requirements.

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 2023.

Details of significant subsequent events are contained in note 45 to these consolidated financial statements. An indication of likely future developments in the business of the Group are included in the Strategic Report section.

Information about the use of financial instruments by the Group is detailed within note 39 to the consolidated financial statements.

Principal activity

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

Results and dividends

The total comprehensive profit for the year, after taxation, amounted to £3,338,000 (2022: £9,682,000). The Directors do not recommend the payment of a dividend (2022: £nil).

In the year ended 31 December 2023, the Group recognised a significant increase in expected credit loss provision to a total of £9.8m (2022: £0.7m) in respect of RoyaleLife as detailed in note 3.2. In the year ended 31 December 2022, the Group recognised a significant deferred taxation asset of £9m as detailed in note 16. The effect of these significant movements has been removed in the below table to present total comprehensive income for the periods on a more consistent basis:

	2023	2022
	£'000	£'000

Total comprehensive profit after taxation	3,338	9,682
of which, includes:
Deferred taxation asset recognition	-	9,043
RoyaleLife provision movement	(9,092)	(611)
	(9,092)	8,432

Comparative total comprehensive profit after taxation	12,430	1,250

Directors'

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

Mark Stephens

Sheryl Lawrence

Nicole Coll

Thomas Grathwohl

Haakon Stenrød

Carl D'Ammassa

Gavin Morris

Directors' shareholdings

As at 31 December 2023, the Directors held the following ordinary shares in the Company:

Director	Position	No. of ordinary shares	Voting rights (%)

Mark Stephens	Independent Board Chair	62,500	0.03%
Thomas Grathwohl	Independent Non-Executive Director	533,312	0.30%
Carl D'Ammassa	Chief Executive Officer	509,591	0.28%
Gavin Morris	Chief Financial Officer	384,026	0.21%

Significant shareholders

As at 31 December 2023, the following parties held greater than 3% of issued share capital in the Company in accordance with the requirements of Rule 5 of the Disclosure Guidance and Transparency Rules:

	No. of ordinary shares	Voting rights (%)

Watrium AS	26,646,093	14.86%
Davidson Kempner Capital Management	17,599,990	9.81%
Liontrust Asset Management	17,210,479	9.60%
Lombard Odier Asset Management	16,606,408	9.26%
River Global	13,000,000	7.25%
Janus Henderson Investors	10,667,749	5.95%
Premier Miton Investors	7,974,000	4.45%
UBS Securities	7,535,704	4.20%
BlackRock Investment Management	7,460,000	4.16%
CRUX Asset Management	5,941,454	3.31%
M&G Investments	5,500,000	3.07%
Allianz Global Investors	5,400,000	3.01%

Political and charitable donations

The Group made charitable donations of £11,703 (2022: £3,569) and no political donations during the year ended 31 December 2023 (2022: £nil).

Annual General Meeting

The Company anticipates holding its Annual General Meeting in June 2024. The Notice of AGM and Form of Proxy will be posted to shareholders in due course and a copy will be available at www.dfcapital-investors.com. The AGM will be held at the Company's registered office in Manchester.

Directors' insurance and indemnities

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

Statement of Going Concern

The Directors have completed a formal assessment of the Group's financial resources. In making this assessment the Directors have considered the Group's current available capital and liquidity resources, the business financial projections and the outcome of stress testing. Based on this review, the Directors believe that the Group is well placed to manage its business risks successfully within the expected economic outlook. See note 1.6 for further details.

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

Corporate Governance

The Corporate Governance Report on pages 61 to 95 contains information about the Group's corporate governance arrangements.

Subsequent events

Details relating to significant events occurring between 31 December 2023 and the date of approval of the financial statements are detailed further within Note 45 of the consolidated financial statements.

Disclosure of information to the auditor

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

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

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

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

Reappointment of auditor

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

Approved by the Board on 8 April 2024 and signed on its behalf by:

Carl D'Ammassa

Director

Statement of Directors' Responsibilities

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

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

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

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

§ properly select and apply accounting policies;

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

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

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

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

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

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

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

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

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

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

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

Consolidated Statement of Comprehensive Income

		2023	2022
	Note	£'000	£'000

Interest and similar income	4	59,970	25,407
Interest and similar expenses	6	(22,336)	(6,411)
Net interest income		37,634	18,996

Fee income	7	1,393	1,348
Fee expenses	8	(719)	-
Net losses on disposal of financial assets at fair value through other comprehensive income	21	-	(17)
Net (losses)/gains from derivatives and other financial instruments at fair value through profit or loss	22	(303)	99
Other operating income		9	5
Total operating income		38,014	20,431

Staff costs	9	(13,431)	(10,848)
Other operating expenses	11	(8,412)	(5,983)
Net impairment loss on financial assets	14	(11,598)	(2,296)
Total operating profit		4,573	1,304

Profit before taxation		4,573	1,304

Taxation (charge)/credit	16	(1,418)	8,457
Profit after taxation		3,155	9,761

Other comprehensive income/(loss):
Items that may subsequently be transferred to the income statement:

FVOCI debt securities:
Amounts transferred to the income statement		-	17
Fair value movements		183	(96)
Total other comprehensive income/(loss) for the year, net of tax		183	(79)

Total comprehensive income for the year		3,338	9,682

Earnings per share:		pence	pence
Basic EPS	40	1.8	5.4
Diluted EPS	40	1.7	5.4

The notes on pages 116 to 179 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

		2023	2022
	Note	£'000	£'000

Assets
Cash and balances at central banks		89,552	107,353
Loans and advances to banks	28	3,475	3,848
Debt securities	21	14,839	22,964
Derivatives held for risk management	22	537	57
Loans and advances to customers	20	568,044	435,883
Trade and other receivables	24	5,335	1,524
Current taxation asset	25	55	55
Deferred taxation asset	27	7,111	8,457
Property, plant and equipment	17	1,145	1,045
Right-of-use assets	18	1,227	433
Intangible assets	19	618	877
Total assets		691,938	582,496

Liabilities
Customer deposits	35	574,622	479,736
Derivatives held for risk management	22	565	42
Fair value adjustments on hedged liabilities	23	424	(84)
Financial liabilities	36	1,255	445
Trade and other payables	38	4,297	6,041
Provisions	13	67	77
Current taxation liability	26	73	-
Subordinated liabilities	37	10,221	-
Total liabilities		591,524	486,257

Equity
Issued share capital	31	1,793	1,793
Share premium	31	-	39,273
Merger relief	31	94,911	94,911
Merger reserve	33	(20,609)	(20,609)
Own shares	32	(401)	(364)
Retained earnings/(loss)		24,720	(18,765)
Total equity		100,414	96,239

Total equity and liabilities		691,938	582,496

The notes on pages 116 to 179 are an integral part of these consolidated financial statements.

These financial statements were approved by the Board of Directors and authorised for issue on 8^th April 2024. They were signed on its behalf by:

Carl D'Ammassa

Director

8^th April 2024

Registered number: 11911574

Consolidated Statement of Changes in Equity

	Issued share capital	Share premium³	Merger relief	Merger reserve	Own shares²	Retained earnings/(loss)	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000

Balance at 1 January 2022	1,793	39,273	94,911	(20,609)	(364)	(28,946)	86,058

Profit after taxation	-	-	-	-	-	9,761	9,761
Other comprehensive loss	-	-	-	-	-	(79)	(79)
Total comprehensive income	-	-	-	-	-	9,682	9,682
Share-based payments	-	-	-	-	-	499	499

Balance at 31 December 2022	1,793	39,273	94,911	(20,609)	(364)	(18,765)	96,239

Profit after taxation	-	-	-	-	-	3,155	3,155
Other comprehensive income	-	-	-	-	-	183	183
Total comprehensive income	-	-	-	-	-	3,338	3,338
Share-based payments¹	-	-	-	-		905	905
Employee Benefit Trust²	-	-	-	-	(37)	(31)	(68)
Share premium account cancellation³	-	(39,273)	-	-	-	39,273	-

Balance at 31 December 2023	1,793	-	94,911	(20,609)	(401)	24,720	100,414

¹ Refer to note 10 for details on share-based payments during the year.

² The Group has adopted look-through accounting (see note 1.3) and recognised the Employee Benefit Trust as Own Shares. Refer to note 32 for further details of the movements in the year.

³ In the year ended 31 December 2023, the Company cancelled its share premium account - refer to note 31 for details.

The notes on pages 116 to 179 are an integral part of these consolidated financial statements.

Consolidated Cash Flow Statement

		2023	2022
	Note	£'000	£'000

Cash flows from operating activities:
Profit before taxation		4,573	1,304
Adjustments for non-cash items and other adjustments Included in the income statement	29	13,000	4,664
Increase in operating assets	29	(149,456)	(193,189)
Increase in operating liabilities	29	94,171	183,809
Taxation received	25	-	4
Net cash used in operating activities		(37,712)	(3,408)

Cash flows from investing activities:
Purchase of debt securities	21	(14,554)	-
Proceeds from sale and maturity of debt securities	21	23,000	85,070
Interest received on debt securities	21	383	746
Purchase of own shares	32	(67)	-
Purchase of property, plant and equipment	17	(418)	(1,041)
Purchase of intangible assets	19	(117)	(193)
Net cash generated from investing activities		8,227	84,582

Cash flows from financing activities:
Repayment of lease liabilities	34	(227)	(141)
Issuance of subordinated liabilities	37	10,000	-
Acquisition of subordinated liabilities	29	(51)	-
Net cash from/(used in) financing activities		9,722	(141)

Net (decrease)/increase in cash and cash equivalents		(19,763)	81,033
Cash and cash equivalents at start of the year	29	110,630	29,597
Cash and cash equivalents at end of the year	29	90,867	110,630

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 subsidiaries, DF Capital Bank Limited (the "Bank") and DF Capital Financial Solutions Limited, which together form the "Group".

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

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

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

1.2 Basis of preparation

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

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

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

For the year ended 31 December 2023, DF Capital Financial Solutions Limited (Company number: 14891201) was exempt from the requirements of the Companies Act 2006 relating to the audit of individual accounts by virtue of section 479A of the Companies Act 2006. The Company, as the ultimate parent company, is providing a guarantee for DF Capital Financial Solutions Limited in accordance with section 479C of the Companies Act 2006 as at 31 December 2023.

1.3 Basis of consolidation

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

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

The Group's Employee Benefit Trust (EBT) is controlled and recognised by the Company using the look-through approach, i.e. as if the EBT is included within the accounts of the Company.

1.4 Adoption of new and revised standards and interpretations

International financial reporting standards issued and adopted for the first time in the year ended 31 December 2023

Improvements to the Conceptual Framework, as well as amendments to IAS 16 Property, Plant and Equipment, IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IFRS 9 Financial Instruments become effective in the current year. None of these amendments to IFRS impacted the Group's reported earnings, financial position or reserves, or the accounting policies.

IAS 16 was amended to prohibit entities from deducting from the cost of an item of property, plant and equipment, any proceeds of the sale of items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The Group has not sold any fixed assets of a material amount in the past, so this amendment has no material impact on the Group' financial statements.

The annual improvements to IFRS clarifies fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability for derecognition of financial liabilities in terms of IFRS 9 Financial Instruments. These fees include only those paid or received between the borrower and the lender. For lease incentives, the annual improvement removes the illustration of payments from the lessor relating to leasehold improvements in Illustrative Example 13 accompanying IFRS 16. This removes potential confusion regarding the treatment of lease incentives when applying IFRS 16. The amendments are not expected to have a significant impact on the annual financial statements.

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

New Accounting Standard

Description of change

Effective Date

Expected Impact on the Group

Amendments to

classification

of liabilities as

current or noncurrent

(IAS 1)

The IAS 1 amendments clarify the requirements for classifying liabilities as current or non-current. More specifically:

The amendments specify that the conditions which exist at the end of the reporting period are those which will be used to determine if a right to defer settlement of a liability exists.

Management expectations about events after the balance sheet date, for example on whether a covenant will be breached, or whether early settlement will take place, are not relevant.

The amendments clarify the situations that are considered settlement of a liability.

Annual periods commencing on or after 1 January 2024.

The Group presents its assets and liabilities in order of liquidity in its statement of financial position. This impact of this amendment would impact the disclosure of current versus non-current liabilities in the notes to the financial statements.

The Group does not expect this amendment to have a significant impact on the annual financial statements.

Amendments to

IFRS 16 - Lease

liability in a sale

and lease back

The amendment to IFRS 16 specifies the requirements that a seller-lessee uses in measuring the lease liability arising in a sale and lease back transaction, to ensure the seller-lessee does not recognise any amount of the gain or loss that relates to the right of use it retains.

Applying these requirements does

not prevent the seller-lessee from recognising, in profit or loss, any gain or loss relating to the partial or full termination of a lease, as required by paragraph 46(a) of IFRS 16.

Annual periods commencing on or after 1 January 2024.

The amendments are not expected to have a significant impact on the annual financial statements.

1.5 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.

1.6 Going concern

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

· The Group's financial projections;

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

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

· Recent failures in the banking sector and any implications for the Group. This included consideration of our deposit base which is made up entirely of retail customers of which 96% are fully covered by the Financial Services Compensation Scheme ('FSCS'). The liquid assets of the Group being predominantly either cash held at the Bank of England or in UK government gilts. The Group's asset and liability maturity profile;

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

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

Information on the Group's business strategy, performance and outlook are detailed in the Chair'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.

1.7 Critical accounting estimates and judgements

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

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

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

1.8 Foreign currency translation

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

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

2. Summary of significant accounting policies

2.1 Revenue recognition

Net interest income

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

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

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

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

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

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

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

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

Fee income

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

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

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

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

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

· the contract has commercial substance; and

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

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

Fee expense

Fee and commission expense predominantly consists of non-incremental fees in relation to financial guarantee schemes, undrawn facility commitment facility fees, introducer commissions, and other non-incremental direct costs. Where these fees and commissions are incremental costs that are directly attributable to the issue of a financial instrument, they are included in interest income as part of the EIR calculation. Where they are not incremental costs that are directly attributable, they are recognised within fee and commission expense as the services are received.

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

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

Other income from financial instruments

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

Other operating income

Other operating income predominantly consists of payroll subsidies, specifically in relation to Statutory Maternity/Paternity Pay (SMP/SPP) as levied by HM Revenue & Customs.

2.2 Property, plant and equipment

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

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

Fixtures & fittings 3 years

Computer equipment 3 years

Telephony & communications 3 years

Leasehold improvements 1 - 10 years

Motor vehicles 3 years

Right-of-use assets are depreciated over the shorter period of the lease term and the useful life of the underlying asset. All current lease agreements have a maximum lease term of 7 years. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset.

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

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

2.3 Intangible assets

Computer software

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

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

Internally generated intangible assets

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

· expenditure can be reliably measured;

· the product or process is technically and commercially feasible;

· future economic benefits are likely to be received;

· intention and ability to complete the development; and

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

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

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

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

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

2.4 Financial instruments

Initial recognition

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

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

Classification

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

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

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

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

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

The Group reassesses its business models each reporting period.

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

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

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

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

Financial assets - measurement

I. Financial assets measured at amortised cost

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

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

II. Fair value through other comprehensive income (FVTOCI)

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

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

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

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

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

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

Financial assets - impairment

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

· Financial assets measured at amortised cost;

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

· Loan commitments

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

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

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

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

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

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

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

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

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

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

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

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

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

See note 39 for further details about how the Group assesses increases in significant credit risk.

Definition of a default

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

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

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

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

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

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

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

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

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

· Significant financial difficulty of the borrower or issuer;

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

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

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

See note 39 for further details about how the Group identifies credit impaired assets.

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

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

Movements back to stages 1 and 2

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

Presentation of allowance for ECL in the statement of financial position

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

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

· For loan commitments: as a provision.

Revisions to estimated cash flows

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

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

Modification of financial assets

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

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

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

Derecognition of financial assets

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

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

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

Write-offs

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

Financial guarantees, letters of credit and undrawn loan commitments

Undrawn loan commitments and letters of credit are commitments under which, over the duration of the commitment, the Bank is required to provide a loan with pre-specified terms to the customer. These contracts are in the scope of the ECL requirements. The nominal contractual value of financial guarantees, letters of credit and undrawn loan commitments, where the loan agreed to be provided is on market terms, are not recorded in the statement of financial position. The nominal values of these instruments together with the corresponding ECLs are disclosed in note 39.

Forward-looking macroeconomic scenarios

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

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

Financial liabilities

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

Subordinated liabilities

Subordinated notes issued by the Group are assessed as to whether they should be treated as equity or financial liabilities. Where there is a contractual obligation to deliver cash or other financial assets, they are treated as a financial liability and measured at amortised cost using the EIR method after taking account of any discount or premium on the issue and directly attributable costs that are an integral part of the EIR. The amount of any discount or premium is amortised over the period to the expected call date of the instrument.

All subordinated notes issued by the Group are classified as 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.

Equity instruments

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

Financial liabilities - measurement

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

I. Financial liabilities measured at amortised cost

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

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

II. Financial liabilities at fair value through profit or loss

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

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

Derecognition of financial liabilities

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

Impairment of non-financial assets

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

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

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

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

2.5 Derivative financial instruments

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

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

2.6 Hedge accounting

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

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

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

The Group considers the following as key sources of hedge ineffectiveness:

· the mismatch in maturity date of the swap and hedged item, as swaps with a given maturity date cover a portfolio of hedged items which may mature throughout the month;

· the actual behaviour of the hedged item differing from expectations, such as early repayments or withdrawals and arrears; and

· minimal movements in the yield curve leading to ineffectiveness where hedge relationships are sensitive to small value changes.

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

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

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

Fair value hedge accounting for portfolio hedges of interest rate risk

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

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

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

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

2.7 Current and deferred income tax

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

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

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

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

Deferred tax liabilities are recognised for all taxable temporary differences.

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

2.8 Cash and cash equivalents

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

2.9 Employee benefits - pension costs

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

2.10 Share-based payments

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

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

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

It is assumed where the Company grants awards to employees of the Company and its subsidiaries, the employee offers services to the respective employing entity only. Where the Company satisfies awards granted to an employee of its subsidiary, there is no obligation for the subsidiary to reimburse the Company. Consequently, all share-based payments are considered equity-settled with any awards to an employee of its subsidiary being deemed a capital contribution with a corresponding debit to investment in subsidiaries. As the Company is settling these awards through its own equity instruments, there is a corresponding credit to the retained earnings account. The Company recognises the expense of share-based payments in the respective entity of the employee.

See note 10 for further details on the share schemes.

2.11 Leasing

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

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

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

Lease liability

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

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

Right-of-use asset

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

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

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

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

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

Short-term leases and leases of low value assets

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

2.12 Provisions for commitments and other liabilities

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

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

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

2.13 Operating segments

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

The Group's products and the markets to which they are offered are so similar in nature that they are reported as one class of business. 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.

2.14 Earnings per share

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

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

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

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

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

2.15 Merger relief

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

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

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

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

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

2.16 Merger accounting

Business combination and merger accounting

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

The principles of merger accounting are as follows:

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

§ No new goodwill arises in merger accounting; and

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

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

Merger reserve

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

2.17 Own Shares

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

Own shares represents shares of the Company that are held by the Employee Benefit Trust.

3. Critical accounting judgements and key sources of estimation uncertainty

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

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

Judgements

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

3.1. Expected credit losses loan impairment

Significant increase in credit risk for classification in stage 2

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

The Group has aligned its assessment of significant increases in credit risk to its internal threshold criteria for prompting customer pricing reviews for consistency.

Due to the short-term behavioural term of the current lending portfolio, the Group has not applied a probationary ("cooling off") period to exposures which are no longer triggering the stage 2 threshold criteria so these will move back to stage 1 once the classification criteria is no longer met.

Definition of default

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

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

Estimates

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

3.2. Expected credit losses loan impairment

Probability of default ("PD")

In the absence of sufficient internal historical default data, the Group uses an external credit rating agency to provide credit ratings and corresponding probability of defaults ("PDs") for the vast majority of the Group's counterparties. These are "Through-the-Cycle" PDs which represents a long-run average probability of default, opposed to Point-in-Time PDs which are shorter term and partially reflect the current economic outlook. Further, the primary data points which impact credit ratings and PDs are derived from past events, therefore, PDs are inherently a lagging indicator of expected default activity over the following 12 month period and longer.

Consequently, the Group utilises external macro-economic forecast data sourced from an external economics research company to adjust PDs from Through-the-Cycle to Point-in-Time, and further consider how default activity may evolve in the future. Following this exercise, as at 31 December 2023 the Group has applied a c.34% scalar increase to its PDs as opposed to a c.40% scalar increase as at 31 December 2022.

A 100% deterioration in PDs (excluding stage 3 exposures, which are already in default) would result in an additional impairment charge of £1,901,000 at 31 December 2023 (31 December 2022: £1,130,000).

Loss given default ("LGD")

The Group reviewed its LGD modelling assumptions as at 31 December 2023 by comparing observed loss given default rates against modelled LGD. The Group analyses historical default events by different sectors, products, and counterparty activity to validate whether its current LGD methodology is reasonable. The Group may apply managerial overlays to its LGD assumptions to accommodate for deviations in expected LGD rates over the following 12 month period and longer from historical observed LGD rates.

Although the Group has observed strong performance in default recoveries within the year ended 31 December 2023, the Group has elected to review its LGD modelling assumptions to reflect an uncertain economic outlook, specifically within industries identified as having higher potential loss rates. Collateral haircuts have been reviewed at industry-level, along with an adjustment of "sold-out-trust" (SOTs) probabilities, which weaken the Group's recovery position due to becoming uncollateralised.

A 10% reduction in the expected discounted cashflows from the collateral held by the Group would result in an additional impairment charge of £967,000 at 31 December 2023 (31 December 2022: £2,389,000).

The Group's arrears balance includes c£10m in respect of RoyaleLife. As set out in the Chief Executive Officer's Report, given the unique circumstances associated with this arrears case, including the challenges involved in repayment recoveries across the entire cohort of lenders, and significant parts of RoyaleLife entering into administration, it was determined prudent to materially provide against the outstanding balance after consideration of cash collateral.

Forward looking macroeconomic scenarios

The Group considers four economic stress scenarios within its impairment modelling whereby the Group stresses PD and LGD inputs in accordance with expected macro-economic 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.

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

Scenario	Probability Weighting (%)	ECL Impairment (£'000)	ECL Coverage¹ (%)

31 December 2023
Upside	20%	13,181	2.22%
Base	50%	13,816	2.33%
Downside	20%	15,243	2.57%
Severe downside	10%	20,037	3.38%
Weighted Total	100%	14,596	2.46%

31 December 2022
Upside	15%	2,427	0.55%
Base	55%	2,823	0.64%
Downside	25%	5,343	1.20%
Severe downside	5%	9,362	2.11%
Weighted Total	100%	3,720	0.84%

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

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

	2023	2022
Scenario	£'000	£'000

Upside	(1,415)	(1,293)
Base	(780)	(897)
Downside	647	1,623
Severe downside	5,441	5,642

3.3. Deferred taxation asset

In the year ended 31 December 2022, the Group recognised a deferred taxation asset, which was based on the latest recently approved financial forecasts through to December 2026 with the deferred taxation asset being fully utilised during this period.

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

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

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

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

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

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

In each of the individual sensitivities performed above, the reduction in profitability means the timing of full recovery of the deferred tax asset is delayed, but in all cases it is expected to be fully utilised within 5 years and, therefore, the Board is satisfied that these sensitivities do not impact the level of deferred tax asset to be recognised at 31 December 2023.

In the year ended 31 December 2023 the Group has performed favourably in accordance with the forecasts used to estimate the deferred taxation asset. The Group has updated its forecasts for actual performance in the elapsed period to ensure the deferred taxation asset recognition is still valid.

The Group has an unrecognised deferred tax asset of £0.7m (2022: £0.7m). This unrecognised deferred tax asset as at December 2023 relates entirely to the prior taxable losses in Distribution Finance Capital Holdings plc entity.

4. Interest and similar income

	2023	2022
	£'000	£'000

At amortised cost (using effective interest rate method):
On loans and advances to customers	55,203	24,333
On loans and advances to banks	4,246	1,065
	59,449	25,398

At FVOCI:
On debt securities	521	9
Total interest and similar income	59,970	25,407

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. As a result, it is considered that the chief operating decision maker uses only one segment to control resources and assess the performance of the entity, while deciding the strategic direction of the Group. For this purpose, the chief operating decision maker of the Group is the Board of Directors.

6. Interest and similar expenses

The Group is solely funded by customer deposits and Group reserves. See note 35 and 36 for further detail of the movements in customer deposits and financial liabilities during the year.

	2023	2022
	£'000	£'000

At amortised cost (using effective interest rate method):
On customer deposits	21,799	6,373
On subordinated liabilities	269	-
	22,068	6,373
At FVTPL:
Net interest expense on financial instruments hedging liabilities	268	38
Total interest and similar expense	22,336	6,411

7. Fee income

	2023	2022
	£'000	£'000

Facility-related fees	1,393	1,348
Total fee income	1,393	1,348

8. Fee expense

	2023	2022
	£'000	£'000

Enable guarantee charges	648	-
Financial guarantee charges	19	-
Undrawn commitment facility fees	8	-
Non-incremental direct costs	44	-
Total fee expense	719	-

In the year ended 31 December 2023, the Group entered into a number of financial guarantee schemes which allows the Group to reduce its regulatory capital requirements. The Group is charged facility and commitment fees for these schemes which are not considered as integral to the effective interest rate of loans and advances to customers.

The Group recognised £44,000 in the year ended 31 December 2023 in relation to directly attributable non-incremental costs for the issuance of financial instruments.

9. Staff costs

Analysis of staff costs:

	2023	2022
	£'000	£'000

Wages and salaries	10,437	8,651
Share-based payments	905	499
Contractor costs	22	75
Social security costs	1,314	1,099
Pension costs arising on defined contribution schemes	753	524
Total staff costs	13,431	10,848

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):

	2023	2022
	No.	No.

Management	13	12
Finance	8	7
Credit & Risk	26	19
Sales & Marketing	35	29
Operations	28	23
Technology	16	13
Total average headcount	126	103

Directors' emoluments:

	Fees/basic salary	Bonuses	Employer pension contributions	Benefits in kind	Long term incentive schemes²	2023 total	2022 total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000

Executive Directors:
Carl D'Ammassa	444	311	44	9	-	808	831
Gavin Morris	286	102	29	10	-	427	419
	730	413	73	19	-	1,235	1,250

Non-executive Directors:
Mark Stephens	150	-	-	-	-	150	150
Thomas Grathwohl	75	-	-	-	-	75	75
Nicole Coll	85	-	-	-	-	85	54
Sheryl Lawrence	95	-	-	-	-	95	60
Haakon Stenrød¹	-	-	-	-	-	-	-
	405	-	-	-	-	405	339

Total Director remuneration	1,135	413	73	19	-	1,640	1,589

¹ Haakon Stenrød holds his position as Non-Executive Director by virtue of major shareholding by Watrium AS exercising their right to appoint a Director under their Relationship Agreement. He is compensated by Watrium AS.

² Taxable gain on share awards exercised during the year.

The pension for the year ended 31 December 2023 to Carl D'Ammassa and Gavin Morris of £44,000 (2022:£43,000) and £29,000 (2022:£26,000) respectively is the sum of payments made to these individuals in lieu of Group pension contributions.

Carl D'Ammassa and Gavin Morris have received share options as part of long-term incentive schemes - further details of these share option schemes can be found in note 10.

Carl D'Ammassa is the highest paid Director with total remuneration of £808,000 (2022: £831,000) in the year ended 31 December 2023. Carl D'Ammassa has been awarded share options of which none have been exercised yet as at 31 December 2023 (2022: nil). Refer to note 10 for further details of these awards.

10. Share-based payments

The share-based payment expense during the year comprised the following:

	2023	2022
	£'000	£'000

Performance Share Plan (PSP)	860	489
Sharesave Scheme (SAYE)	45	10
Total share-based payments expense	905	499

The Group has the following share options scheme for employees which have been granted and remain outstanding at 31 December 2023:

Plan	No. of options outstanding 31 December 2023	Options outstanding value 31 December 2023 £'000	Grant dates	Vesting dates	Exercise price	Performance conditions attached	Settlement method	Charge for year ended 31 December 2023 £'000

General Award 2020	143,350	54	Jun-20	Jun-23	Nil	No	Equity	6
General Award 2021	134,130	69	Jun-21	Jun-24	Nil	No	Equity	21
General Award 2022	337,422	60	May-22	May-25	Nil	No	Equity	37
General Award 2023	325,739	23	Apr-23	Apr-26	Nil	No	Equity	23
Manager CSOP Award	384,298	31	Aug-20 Aug-20 Aug-20	Jun-21 Jun-22 Jun-23	40.5p	No	Equity	2
Manager PSP Award	821,668	333	Aug-20 Aug-20 Aug-20	Aug-20 Jun-21 Jun-22	Nil	No	Equity	-
CEO Recruitment Award	900,000	338	Jun-20	Jun-23	Nil	Yes	Equity	55
Senior Manager Award 2020	581,080	211	Jun-20	Jun-23	Nil	Yes	Equity	62
Senior Manager Award 2021	113,394	61	Jun-21 Jun-21 Nov-21	Sep-22 Jun-24 Nov-24	Nil	No	Equity	18
Senior Manager Award 2022	1,314,170	255	May-22 Sep-22	May-25 Sep-25	Nil	Yes	Equity	151
Senior Manager Award 2023	5,592,609	427	Apr-23 Jul-23 Jul-23 Jul-23 Jul-23 Jul-23 Aug-23 Oct-23	Apr-26 Feb-24 Feb-25 Feb-26 Jul-26 Feb-27 Aug-26 Aug-26	Nil	Yes	Equity	420
Leader & High Performer Award 2022	200,876	36	May-22 Feb-23	May-25 May-25	Nil	No	Equity	24
Leader & High Performer Award 2023	586,820	40	Apr-23	Apr-26	Nil	No	Equity	41
Sharesave Scheme	1,418,952	55	Nov-21 Jun-22 May-23	Jan-25 Aug-25 Aug-26	46.3p 30p 30.72p	No	Equity	45
TOTAL	12,854,508	1,993						905

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

During the year ended 31 December 2023, the movements in share options granted, forfeited, and exercised were as follows:

	Options outstanding at start of year	Options granted during the year	Options forfeited during the year	Options exercised during the year	Options outstanding at end of the year	Options exercisable at end of the year
Plan	No.	No.	No.	No.	No.	No.

Year ended 31 December 2023
General Award 2020	222,500	-	(26,151)	(52,999)	143,350	143,350
General Award 2021	160,248	-	(26,118)	-	134,130	-
General Award 2022	385,511	-	(48,089)	-	337,422	-
General Award 2023	-	365,000	(39,261)	-	325,739	-
Manager CSOP Award	384,298	-	-	-	384,298	384,298
Manager PSP Award	853,334	-	-	(31,666)	821,668	821,668
CEO Recruitment Award	900,000	-	-	-	900,000	900,000
Senior Manager Award 2020	885,000	-	(173,200)	(130,720)	581,080	581,080
Senior Manager Award 2021	144,370	-	(11,291)	(19,685)	113,394	19,685
Senior Manager Award 2022	1,765,000	-	(450,830)	-	1,314,170	-
Senior Manager Award 2023	-	5,673,292	(80,683)	-	5,592,609	-
Leader & High Performer Award 2022	201,022	5,000	(5,146)	-	200,876	-
Leader & High Performer Award 2023	-	615,000	(28,180)	-	586,820	-
Sharesave Scheme	1,068,212	717,166	(366,426)	-	1,418,952	-
Total	6,969,495	7,375,458	(1,255,375)	(235,070)	12,854,508	2,850,081

Year ended 31 December 2022
General Award 2020	287,500	-	(65,000)	-	222,500	-
General Award 2021	216,000	3,000	(58,752)	-	160,248	-
General Award 2022	-	450,000	(64,489)	-	385,511	-
Manager CSOP Award	385,298	-	(1,000)	-	384,298	-
Manager PSP Award	853,334	-	-	-	853,334	853,334
CEO Recruitment Award	900,000	-	-	-	900,000	-
Senior Manager Award 2020	885,000	-	-	-	885,000	-
Senior Manager Award 2021	114,370	30,000	-	-	144,370	39,370
Senior Manager Award 2022	-	1,765,000	-	-	1,765,000	-
Leader & High Performer Award 2022	-	220,000	(18,978)	-	201,022	-
Sharesave scheme	-	1,693,596	(625,384)	-	1,068,212	-
Total	3,641,502	4,161,596	(833,603)	-	6,969,495	892,704

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

	2023			2022
Plan	Options outstanding at end of the year	Weighted average remaining contractual life (years)	Weighted average fair value at grant date	Options outstanding at end of the year	Weighted average remaining contractual life (years)	Weighted average fair value at grant date

General Award 2020	143,350	-	37.50	222,500	0.5	37.50
General Award 2021	134,130	0.4	61.00	160,248	1.4	61.00
General Award 2022	337,422	1.4	37.00	385,511	2.4	37.00
General Award 2023	325,739	2.3	38.50	-	-	-
Manager CSOP Award	384,298	-	8.00	384,298	0.4	8.00
Manager PSP Award	821,668	-	40.50	853,334	-	40.50
CEO Recruitment Award	900,000	-	37.50	900,000	0.5	37.50
Senior Manager Award 2020	581,080	-	37.50	885,000	0.5	37.50
Senior Manager Award 2021	113,394	0.5	60.27	144,370	1.1	60.27
Senior Manager Award 2022	1,314,170	1.4	34.85	1,765,000	2.4	36.12
Senior Manager Award 2023	5,592,609	2.4	36.75	-	-	-
Leader & High Performer Award 2022	200,876	1.4	37.03	201,022	2.4	37.00
Leader & High Performer Award 2023	586,820	2.3	38.50	-	-	-
Sharesave Scheme	1,418,952	2.0	13.98	1,068,212	2.5	44.35
	12,854,508			6,969,495	1.4	38.63

Where a share award scheme has an exercise price that is equal to £nil, valuation models such as the Black Scholes valuation model cannot be used to determine the fair value of the award at the grant date, therefore, it is assumed the market price of the share is assumed to be the fair value. For schemes which have an exercise price greater than £nil, the Group has used the following variables for the respective schemes:

	Manager CSOP Award	Sharesave Scheme	Sharesave Scheme	Sharesave Scheme

Grant date	Aug-20	Nov-21	Jun-22	May-23
Contractual life (years)	3	3	3	3
Share price at issue (pence)	40.50	57.50	37.50	38.40
Exercise price (pence)	40.50	46.30	30.00	30.72
Expected volatility (%)	30.00%	30.00%	30.00%	30.00%
Risk-free rate (%)	0.20%	0.55%	2.08%	3.91%
Dividend yield (%)	0.00%	0.00%	0.00%	0.00%

The terms of the individual schemes are as follows:

General Award

In the year ended 31 December 2023, nil cost options over ordinary shares of £0.01 each of the current share capital of the Company were granted to all employees (excluding Directors). These options vest over a 3-year period and are not subject to specific performance conditions.

Manager PSP and CSOP Award

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

The fair value of the CSOP was measured at the grant date using the Black-Scholes model - see table above for further details of the inputs into this valuation model.

No further awards under this scheme were granted in the years ended 31 December 2023 and 31 December 2022.

CEO Recruitment Award

On his appointment on 9 March 2020, Carl D'Ammassa was granted 900,000 nil cost options by way of a Recruitment Award. In the year ended 31 December 2023, the Group's Remuneration Committee agreed that the performance conditions and service conditions relating to all 900,000 shares had been fully satisfied and the award should vest in full.

Senior Manager Award

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

In the year ended 31 December 2023, Senior Managers were granted additional awards based on either promotion, recruitment incentives, or performance. Performance conditions are included for 4,889,000 options of the 5,673,292 awards granted in the year ended 31 December 2023, and all awards vest over a period of up to 1 to 4 years subject to service conditions being met.

Leader & High Performer Award

In the year ended 31 December 2023, the Group awarded nil cost options over ordinary shares of £0.01 each of the current share capital of the Company to non-senior managers of the Group. This scheme does not include performance conditions and vest over a period of 3 years subject to service conditions being met.

Sharesave Scheme

The Group has operated a 'Save As You Earn' scheme ('SAYE' or 'Sharesave Scheme') for several years which is available to all UK-based employees. This is a HMRC-approved share scheme, whereby the scheme allows employees to purchase options by saving a fixed amount of between £10 and £500 per month over a period of three years at the end of which the options, subject to leaver provisions, are usually exercisable. If not exercised, the amount saved is returned to the employee. During the year ended 31 December 2023, the Group has offered a scheme with a grant date of May 2023 and a vesting date of August 2027. The option price is calculated using the closing bid-market price of a Distribution Finance Capital Holdings plc ordinary share over the five dealing days prior to the Invitation Date and applying a discount of 20%.

The fair value at grant date for the schemes is calculated by using the Black-Scholes Model - see table above for further details of the inputs into this valuation model.

Director share awards:

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

	Options outstanding at start of year	Options granted during the year	Options forfeited during the year	Options exercised during the year	Options outstanding at end of the year	Options exercisable at end of the year
Plan	No.	No.	No.	No.	No.	No.

Year ended 31 December 2023
Carl D'Ammassa:
General Award 2020	5,000	-	-	-	5,000	5,000
CEO Recruitment Award	900,000	-	-	-	900,000	900,000
Senior Manager Award 2022	400,000	-	-	-	400,000	-
Senior Manager Award 2023	-	1,168,000	-	-	1,168,000	-
Sharesave Scheme	60,000	-	-	-	60,000	-
	1,365,000	1,168,000	-	-	2,533,000	905,000
Gavin Morris:
General Award 2020	5,000	-	-	-	5,000	5,000
Manager CSOP Award	74,074	-	-	-	74,074	74,074
Manager PSP Award	19,733	-	-	-	19,733	19,733
Senior Manager Award 2020	200,000	-	(69,280)	-	130,720	130,720
Senior Manager Award 2022	200,000	-	-	-	200,000	-
Senior Manager Award 2023	-	753,000	-	-	753,000	-
Sharesave Scheme	60,000	-	-	-	60,000	-
	558,807	753,000	(69,280)	-	1,242,527	229,527

Total Director Awards	1,923,807	1,921,000	(69,280)	-	3,775,527	1,134,527

Year ended 31 December 2022
Carl D'Ammassa:
General Award 2020	5,000	-	-	-	5,000	-
CEO Recruitment Award	900,000	-	-	-	900,000	-
Senior Manager Award 2022	-	400,000	-	-	400,000	-
Sharesave Scheme	-	60,000	-	-	60,000	-
	905,000	460,000	-	-	1,365,000	-
Gavin Morris:
General Award 2020	5,000	-	-	-	5,000	-
Manager CSOP Award	74,074	-	-	-	74,074	-
Manager PSP Award	19,733	-	-	-	19,733	19,733
Senior Manager Award 2020	200,000	-	-	-	200,000	-
Senior Manager Award 2022	-	200,000	-	-	200,000	-
Sharesave Scheme	-	60,000	-	-	60,000	-
	298,807	260,000	-	-	558,807	19,733

Total Director Awards	1,203,807	720,000	-	-	1,923,807	19,733

See above section within this note for further details of the schemes, including the fair value (market price) at grant date. Performance conditions are attached to the Senior Manager Award 2023 for both Carl D'Ammassa and Gavin Morris. All awards are subject to service conditions being met over the vesting period.

11. Other operating expenses

		2023	2022
	Note	£'000	£'000

Finance costs	12	76	21
Depreciation	17,18	498	318
Amortisation of intangible assets	19	376	382
Professional services expenses		2,189	1,541
Audit and accountancy fees		418	290
IT-related expenses		2,506	1,862
Other operating expenses		2,349	1,569
Total other operating expenses		8,412	5,983

12. Finance costs

	2023	2022
	£'000	£'000

Interest on lease liabilities	76	21
Total finance costs	76	21

13. Provisions

Analysis for movements in other provisions:

		Leasehold dilapidations
		£'000

Year ended 31 December 2023
At start of year		77
Additions		25
Utilisation of provision		-
Unused amounts reversed		(10)
Unwinding of discount		5
Lease modification		(30)
At end of year		67

Year ended 31 December 2022
At start of year		73
Additions		-
Utilisation of provision		-
Unused amounts reversed		-
Unwinding of discount		4
At end of year		77

As detailed in note 18, the Group currently leases office premises at its Manchester headquarters. At the end of the contractual lease term in August 2030, the Group is required to return the leased premises in their original state. The Group has estimated total restoration costs of £125,000 by assessing the expected costs and through management judgement. These amounts have been discounted to present value by using an applicable discount factor.

Given the prolonged period until these costs are incurred, the current provision is using a best estimate which will be reviewed at least annually. Any potential revision in the future, including impact from continued inflationary pressures, is not considered to be material.

14. Net impairment loss on financial assets

	2023	2022
	£'000	£'000

Movement in impairment allowance in the year	11,034	2,028
Write-offs	564	268
Total net impairment losses on financial assets	11,598	2,296

See note 20 on further analysis of the movement in impairment allowances on loans and advances to customers.

Analysis of write-offs:

		2023	2022
	Note	£'000	£'000

Realised losses on loan receivables	20	355	186
Realised losses on trade receivables	24	8	19
Recovery transaction costs		251	63
Bad debt VAT relief		(50)	-
Total write-offs		564	268

15. Profit before taxation

Profit before taxation is stated after charging:

	2023	2022
	£'000	£'000

Depreciation of property, plant and equipment	318	95
Depreciation of right-of-use assets	180	223
Amortisation of intangible assets	376	382
Allowance for credit impaired assets	11,034	2,028
Staff costs	13,431	10,848
Auditor's remuneration	418	290
	25,757	13,866

Analysis of auditor's remuneration:

	2023	2022
	£'000	£'000
Audit services:
Fees payable to the Company's auditor for the audit of the Company's annual accounts	72	58
Fees payable to the Company's auditor for the audit of its subsidiaries	215	177
Fees paid to the Company's auditors relating to prior periods	39	1
Total audit services fees	326	236

Assurance services:
Interim review	92	54
Total assurance services fees	92	54

Total auditor's remuneration	418	290

16. Taxation

Analysis of tax charge recognised in the year:

	2023	2022
	£'000	£'000

Current taxation charge:
UK corporation tax on profit for the current year	73	586
Adjustments in respect of prior years	-	-
Total current taxation charge	73	586

Deferred taxation charge/(credit):
Current year	1,345	(9,043)
Adjustments in respect of prior years	-	-
Total deferred taxation charge/(credit)	1,345	(9,043)

Total taxation charge/(credit)	1,418	(8,457)

Reconciliation of profit before taxation to total tax credit recognised:

	2023	2022
	£'000	£'000

Profit on ordinary activities before taxation	4,573	1,304

Taxation on Profit on ordinary activities at standard corporation tax rate of 23.5% (2022:19%)	1,076	248

Effects of:
Fixed asset differences	3	-
Disallowable expenses	275	118
Other permanent differences	(18)	-
Other short-term timing differences for which no deferred tax asset has been recognised	-	1
Current year losses for which no deferred tax asset has been recognised	3	219
Recognition of deferred taxation asset	-	(9,043)
Remeasurement of deferred tax for changes in tax rates	79	-
Total tax charge/(credit)	1,418	(8,457)

Current tax on profits reflects UK corporation tax levied at a rate of 23.5% for the year ended 31 December 2023 (31 December 2022: 19%). The Company is not subject to the banking surcharge levied at a rate of 3% (31 December 2022: 8%) on the profits of banking companies chargeable to corporation tax after an allowance of £100 million (31 December 2022: £25m) per annum.

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

On 1 April 2023 the UK corporation tax rate increased from 19% to 25%. The 23.5% is based on a pro-rated tax charge of 19% to 31 March 2023 and 25% to 31 December 2023. At the same date, the Banking Surcharge was reduced from 8% to 3%, whilst the allowance increased from £25m to £100m.

A deferred tax asset is only recognised to the extent the Group finds it probable that the prior taxable losses can be utilised against future taxable profits. As at 31 December 2023, the Group has an estimated unrecognised deferred tax asset of £0.7m (31 December 2022: £0.7m) from prior taxable losses.

In the year ended 31 December 2023, the Group has recognised a deferred tax asset in respect of future taxable profits. Further detail on the deferred taxation asset is provided in note 27.

17. Property, plant and equipment

	Leasehold Improvements	Furniture, Fixtures & Fittings	Computer Hardware	Telephony & Communications	Motor Vehicles	Total
	£'000	£'000	£'000	£'000	£'000	£'000

Cost:
As at 1 January 2022	33	152	276	6	-	467
Additions	-	-	87	-	954	1,041
Disposals and write offs	(23)	(128)	(204)	(6)	-	(361)
As at 31 December 2022	10	24	159	-	954	1,147
Additions	13	129	121	-	155	418
Disposals and write offs	-	(1)	(16)	-	-	(17)
As at 31 December 2023	23	152	264	-	1,109	1,548

Accumulated depreciation:
As at 1 January 2022	24	124	214	6	-	368
Charge for the year	4	16	59	-	16	95
Disposals and write offs	(23)	(128)	(204)	(6)	-	(361)
As at 31 December 2022	5	12	69	-	16	102
Charge for the year	4	32	65	-	217	318
Disposals and write offs	-	(1)	(16)	-	-	(17)
As at 31 December 2023	9	43	118	-	233	403

Carrying amount:
At 31 December 2022	5	12	90	-	938	1,045
At 31 December 2023	14	109	146	-	876	1,145

In the year ended 31 December 2023, the Group wrote off fully depreciated assets of £17,000. During the year ended 31 December 2022, the Group wrote off fully depreciated assets of £361,000.

18. Right-of-use assets

	Buildings
	£'000

Cost:
As at 1 January 2022	1,138
Additions	4
Disposals and write offs	-
Lease modifications	11
As at 31 December 2022	1,153
Additions	407
Disposals and write offs	-
Lease modifications	567
As at 31 December 2023	2,127

Accumulated depreciation:
At 1 January 2022	497
Charge for the year	223
Disposals and write offs	-
At 31 December 2022	720
Charge for the year	180
Disposals and write offs	-
At 31 December 2023	900

Carrying amount:
At 31 December 2022	433
At 31 December 2023	1,227

During the year ended 31 December 2023, the Group entered into a new lease agreement for additional office space at its existing Manchester headquarters. The Group expects to utilise the right-of-use asset to the contractual maturity date in August 2030. The Group recognised additions of £394,000 in respect of the new lease agreement.

For an existing lease agreement, the Group expected to enact a contractual break clause in 2025 for its lease agreement of the Manchester headquarters office, however, following the signing of the agreement for additional space, the Group now expects for the original lease agreement to also elapse at the contractual end date in August 2030. Consequently, the Group has recognised £567,000 in lease modifications to reflect the increased expected term of the lease agreement.

Further, during the year ended 31 December 2023, the Group reversed £10,000 for an unused dilapidations provision for a prior period terminated office lease agreement.

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

The maturity analysis of lease liabilities is presented in note 34.

Amounts recognised in the income statement:

	2023	2022
	£'000	£'000

Depreciation expense on right-of-use assets	180	223
Interest expense on lease liabilities	76	21
Expense relating to short-term leases	3	44
Expense relating to leases of low value assets	9	6
Expenses relating to variable lease payments not included in measurement of lease liability	112	90
Total amounts recognised in the income statement	380	384

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

	2023	2022
	£'000	£'000

Buildings:
Fixed payments	227	141
Variable payments	118	98
Total lease payments	345	239

19. Intangible assets

	Computer Software
	£'000

Cost:
At 1 January 2022	1,775
Additions from internal development	193
Additions from separate acquisitions	-
Disposals and write offs	(27)
At 31 December 2022	1,941
Additions from internal development	117
Additions from separate acquisitions	-
Disposals and write offs	(538)
At 31 December 2023	1,520

Accumulated amortisation:
At 1 January 2022	709
Charge for the year	382
Disposals and write offs	(27)
At 31 December 2022	1,064
Charge for the year	376
Disposals and write offs	(538)
At 31 December 2023	902

Carrying amount:
At 31 December 2022	877
At 31 December 2023	618

In the year ended 31 December 2023, the Group capitalised £117,000 (2022: £172,000) of consultancy costs and £nil (2022: £21,000) of employee costs in relation to the development of software platforms aimed at improving the commercial lending processes, customer journey for commercial clients and development of retail customer deposits platform. The amortisation period for these software costs is within a range of 3-5 years following an individual assessment of the asset's expected life. The Group performed an impairment review at 31 December 2023 and concluded an impairment of £nil (2022: £nil).

In the year ended 31 December 2023, the Group wrote off fully depreciated intangible assets of £538,000 (2022: £27,000).

20. Loans and advances to customers

	2023	2022
	£'000	£'000

Loan book principal	580,525	439,282
Accrued interest and fees	3,602	2,002
Gross carrying amount	584,127	441,284

less: impairment allowance	(14,596)	(3,720)
less: effective interest rate adjustment	(1,487)	(1,681)
Total loans and advances to customers	568,044	435,883

Refer to note 39 for details on the expected maturity analysis of the gross loans receivable balance.

Refer to note 14 and 39 for further details on the impairment losses recognised in the periods.

Ageing analysis of gross loan receivables:

	2023	2022
	£'000	£'000

Not in default:
Not yet past due	566,503	422,845
Past due: 1 - 30 days	467	136
Past due: 31 - 60 days	35	1,074
Past due: 61 - 90 days	-	25
Past due: 90+ days	-	-
	567,005	424,080
Defaulted:
Not yet past due and past due 1 - 90 days	5,020	11,319
Past due 90+ days	12,102	5,885
	17,122	17,204

Total gross carrying amount	584,127	441,284

Analysis of gross loans and advances to customers:

		Stage 1		Stage 2	Stage 3	Total
		£'000		£'000	£'000	£'000

	As at 1 January 2023	410,756		13,323	17,205	441,284

	Transfer to Stage 1	42,913		(42,913)	-	-
	Transfer to Stage 2	(88,983)		89,328	(345)	-
	Transfer to Stage 3	(2,617)		(3,728)	6,345	-
	Net lending/(repayment)	183,883		(34,958)	(5,727)	143,198
	Write-offs	-		-	(355)	(355)
	Total movement in gross loan receivables	135,196		7,729	(82)	142,843

	As at 31 December 2023	545,952		21,052	17,123	584,127
Loss allowance coverage at 31 December 2023			0.46%	0.76%	69.58%		2.50%

	Stage 1	Stage 2	Stage 3	Total
	£'000	£'000	£'000	£'000

As at 1 January 2022	239,327	9,585	542	249,454

Transfer to Stage 1	6,920	(6,597)	(323)	-
Transfer to Stage 2	(29,077)	29,081	(4)	-
Transfer to Stage 3	(1,731)	(16,739)	18,470	-
Net lending/(repayment)	195,333	(2,007)	(1,310)	192,016
Write-offs	(16)	-	(170)	(186)
Total movement in gross loan receivables	171,429	3,738	16,663	191,830

As at 31 December 2022	410,756	13,323	17,205	441,284

Loss allowance coverage at 31 December 2022	0.47%	0.63%	9.84%	0.84%

Analysis of impairment losses on loans and advances to customers:

	Stage 1	Stage 2	Stage 3	Total
	£'000	£'000	£'000	£'000

As at 1 January 2023	1,943	84	1,693	3,720

Transfer to Stage 1	365	(365)	-	-
Transfer to Stage 2	(464)	606	(142)	-
Transfer to Stage 3	(16)	(174)	190	-
Remeasurement of impairment allowance	(1,668)	266	10,870	9,468
Net lending/(repayment)	2,362	(257)	(342)	1,763
Write-offs	-	-	(355)	(355)
Total movement in loss allowance	579	76	10,221	10,876

As at 31 December 2023	2,522	160	11,914	14,596

	Stage 1	Stage 2	Stage 3	Total
	£'000	£'000	£'000	£'000

As at 1 January 2022	1,142	155	421	1,718

Transfer to Stage 1	76	(73)	(3)	-
Transfer to Stage 2	(146)	146	-	-
Transfer to Stage 3	(13)	(421)	434	-
Remeasurement of impairment allowance	(24)	143	1,028	1,147
Net lending/(repayment)	908	134	(17)	1,025
Write-offs	-	-	(170)	(170)
Total movement in loss allowance	801	(71)	1,272	2,002

As at 31 December 2022	1,943	84	1,693	3,720

21. Debt securities

	2023	2022
	£'000	£'000

FVOCI debt securities:
Treasury bills	-	-
UK government gilts	14,839	22,964
Total FVOCI debt securities	14,839	22,964

Analysis of movements during the year:
At 1 January	22,964	108,867
Purchased debt securities	14,554	-
Proceeds from sold or maturing securities	(23,000)	(85,070)
Coupons received	(383)	(746)
Interest income	521	9
Realised gains/(losses)	-	(17)
Unrealised gains/(losses)	183	(96)
Amounts transferred to the income statement	-	17
At 31 December	14,839	22,964

Maturity profile of debt securities:
Within 12 months	14,839	22,964
Over 12 months	-	-

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

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

Refer to note 39 for details of the maturity profile of these securities.

22. Derivatives

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

	Gross amount of recognised financial assets/(liabilities)	Net amount of financial assets/(liabilities) presented in the Statement of Financial Position	Cash collateral paid/(received) not offset in the Statement of Financial Position	Net amount
	£'000	£'000	£'000	£'000

31 December 2023
Derivative assets:
Interest rate risk hedging	537	537	(372)	165
Derivative liabilities:
Interest rate risk hedging	(565)	(565)	222	(343)

31 December 2022
Derivative assets:
Interest rate risk hedging	57	57	(28)	29
Derivative liabilities:
Interest rate risk hedging	(42)	(42)	98	56

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

Margin call collateral is either paid or received with the swap counterparties on all active swap contracts - this has been included in the above table. As at 31 December 2023, the Group has a variation margin receivable of £150,000 (2022: £70,000) with swap counterparties. Further, the Group holds £2,000,000 (2022: £500,000) of independent collateral with banks for the swap facility, which is not included within the above table. See note 28 for the balance of cash collateral held with banks.

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

	Total nominal amount	Less than 3 months	3 - 12 months	1 - 5 years	More than 5 years
	£'000	£'000	£'000	£'000	£'000

31 December 2023
Derivative assets	45,000	-	30,000	15,000	-
Derivative liabilities	100,000	45,000	55,000	-	-
	145,000	45,000	85,000	15,000	-

31 December 2022
Derivative assets	70,000	-	30,000	40,000	-
Derivative liabilities	20,000	5,000	-	15,000	-
	90,000	5,000	30,000	55,000	-

The Group has 10 (2022: 6) derivative contracts with an average fixed rate of 4.65% (2022: 4.21%).

23. Hedge Accounting

	2023	2022
	£'000	£'000

Hedged liabilities:
Current hedge relationships	407	(77)
Swap inception adjustment	17	(7)
Fair value adjustments on hedged liabilities	424	(84)

As at the year ended 31 December 2023, the Group only hedges liabilities in the form of its customer deposits and subordinated liabilities. The Group does not hedge its loans and advances to customers given these assets are expected to reprice within a short time frame.

Refer to note 39 for further details on the Group's interest rate risk management.

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

At present, the Group expects its hedging relationships to be highly effective as the Group hedges only fixed term deposit accounts and subordinated liabilities for which the fair value movements between the hedged item and hedging instrument are expected to be highly correlated. Further, the Group does not anticipate having to rebalance the relationship once entered into due to the contractual terms of these financial liabilities. In the year ended 31 December 2023, there has been no cancelled or de-designated hedge relationships due to failed hedge accounting relationships.

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

	2023		2022
	Hedged item	Hedging instrument	Hedged item	Hedging instrument
	£'000	£'000	£'000	£'000

Customer deposits:
Carrying amount of hedged item/nominal value of hedging instrument	150,639	145,000	90,505	90,000
Cumulative fair value adjustments of hedged item/fair value of hedging instrument	(424)	(28)	(84)	-
Changes in the fair value adjustment of hedged item/hedging instrument used for recognising the hedge ineffectiveness for the period	(542)	133	(84)	-

In the Consolidated Statement of Financial Position, £537,000 (2022: £57,000) of hedging instruments were recognised within derivative assets; and £565,000 (2022: £42,000) within derivative liabilities.

24. Trade and other receivables

	2023	2022
	£'000	£'000

Trade receivables	3,965	850
Impairment allowance	(259)	(101)
	3,706	749

Other debtors	452	273
Accrued income	-	94
Prepayments	1,177	408
	1,629	775

Total trade and other receivables	5,335	1,524

All trade receivables are due within one year, refer to note 39 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:

	2023	2022
	£'000	£'000

Not in default:
Not yet past due	3,513	563
Past due: 1 - 30 days	21	27
Past due: 31 - 60 days	176	2
Past due: 61 - 90 days	12	-
Past due: 90+ days	1	-
	3,723	592
Defaulted:
Not yet past due and past due 1 - 90 days	65	194
Past due 90+ days	177	64
	242	258

Total trade receivables	3,965	850

Analysis of movement of impairment losses on trade receivables:

	2023	2022
	£'000	£'000

At 1 January	101	75
Amounts written off	(8)	(19)
Amounts recovered	-	-
Change in loss allowance due to new trade and other receivables originated net of those derecognised due to settlement	166	45
At 31 December	259	101

25. Current taxation asset

	2023	2022
	£'000	£'000

At 1 January	55	59
Repayments	-	(4)
At 31 December	55	55

26. Current taxation liability
	2023	2022
	£'000	£'000

At 1 January	-	-
Charge to profit and loss account	(73)	-
Payments	-	-
At 31 December	(73)	-

Refer to note 27 for further details of the deferred taxation asset.

27. Deferred taxation asset

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

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

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

	2023	2022
	£'000	£'000

At 1 January	8,457	-
(Charge)/credit to profit and loss account	(1,346)	8,457
At 31 December	7,111	8,457

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

	2023	2022
	£'000	£'000

Losses	7,402	8,730
Short term timing differences	8	8
Fixed assets	(299)	(281)
Deferred taxation asset	7,111	8,457

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

The Group has an unrecognised deferred tax asset value of £0.7m (2022:£0.7m) which is not expected to be utilised for the foreseeable future.

On 1 April 2023 the UK corporation tax rate increased from 19% to 25%. At the same date, the Banking Surcharge was reduced from 8% to 3%, whilst the allowance increased from £25m to £100m. As at 31 December 2023, the deferred tax asset is based on these revised rates.

28. Loans and advances to banks

	2023	2022
	£'000	£'000

Unencumbered:
Included in cash and cash equivalents: balances with less than three months to maturity at inception	1,315	3,277
Encumbered:
Cash collateral on derivatives placed with banks	2,160	571
Total loans and advances to banks	3,475	3,848

29. Notes to the cash flow statement

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

	2023	2022
	£'000	£'000

Cash and balances at central banks	89,552	107,353
Loans and advances to banks	1,315	3,277
Total cash and cash equivalents	90,867	110,630

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

		2023	2022
	Note	£'000	£'000

Depreciation of property, plant and equipment	17	318	95
Depreciation of right-of-use assets	18	180	223
Amortisation of intangible assets	19	376	382
Share-based payments	10	905	499
Impairment allowances on receivables	14	11,598	2,296
Movement in other provisions	13	(15)	4
Interest income on debt securities	21	(521)	(9)
Finance costs	12	76	21
Unwind of discount	13	5	4
Interest on subordinated liabilities	6	269	-
Amortisation of subordinated liabilities acquisition costs	29	3
Interest in suspense		(194)	1,149
Total non-cash items and other adjustments		13,000	4,664

Net change in operating assets:

	2023	2022
	£'000	£'000

Increase in loans and advances to customers	(141,768)	(190,709)
Derivative financial instruments	(480)	(57)
Increase in other assets	(7,328)	(2,423)
Increase in operating assets	(149,456)	(193,189)

Net change in operating liabilities:

	2023	2022
	£'000	£'000

Increase in customer deposits	94,886	182,879
Derivative financial instruments	522	42
Fair value adjustments for portfolio hedged risk	508	(84)
(Decrease)/increase in other liabilities	(1,745)	972
Increase in operating liabilities	94,171	183,809

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.

	2023			2022
	Lease liabilities (see note 34)	Subordinated liabilities (see note 37)	Total	Lease liabilities (see note 34)	Subordinated liabilities (see note 37)	Total
	£'000	£'000	£'000	£'000	£'000	£'000

At 1 January	395	-	395	504	-	504

Financing cash flows:
Recognition of subordinated liabilities	-	10,000	10,000	-	-	-
Subordinated liabilities acquisition costs	-	(51)	(51)	-	-	-
Interest payments	(227)	-	(227)	(141)	-	(141)

Non-cash movements:
Interest expense on subordinated liabilities	-	269	269	-	-	-
Amortisation of subordinated liabilities acquisition costs	-	3	3	-	-	-
Recognition of lease liabilities	365	-	365	-	-	-
Interest expense on lease liabilities	76	-	76	21	-	21
Lease modification	596	-	596	11	-	11
At 31 December	1,205	10,221	11,426	395	-	395

30. Investment in subsidiaries

Subsidiary	Principal activity	Shareholding %	Class of shareholding	Country of incorporation	Registered address

DF Capital Bank Limited	Financial Services	100%	Ordinary	UK	St James' Building, 61-95 Oxford St, Manchester, M1 6EJ

DF Capital Financial Solutions Limited	Financial Services	100%	Ordinary	UK	St James' Building, 61-95 Oxford St, Manchester, M1 6EJ

31. Equity

	2023	2022	2023	2022
	No.	No.	£'000	£'000

Authorised:
Ordinary shares of 1p each	179,369,199	179,369,199	1,793	1,793
Allotted, issued and fully paid: Ordinary shares of 1p each	179,369,199	179,369,199	1,793	1,793

Analysis of the movements in equity:

At the Company's annual general meeting on 24 May 2023 (the "AGM"), a resolution was passed to cancel the Company's share premium account. The purpose of the proposed cancellation was to create additional distributable reserves and to provide the Company with greater flexibility and headroom in the future to: pay ordinary course dividends; undertake a share buyback; redeem preference shares; or to fund purchases by its Employee Benefit Trust of shares in the capital of the Company. As set out in the notice of the AGM, the Directors intend to apply £50,000 of the distributable reserves which the capital reduction has created to fund the redemption by the Company of the 50,000 non-voting redeemable preference shares of £1.00 each in the capital of the Company.

To be effective, the cancellation required Court approval which the Group has obtained and thus making the cancellation effective. This follows the Court order approving the reduction of capital which was registered with Companies House on 29 June 2023.

The below table detailed equity movements within the share capital, share premium and merger relief accounts during the years ended 31 December 2023 and 31 December 2022:

	Date	No. of shares	Issue Price	Share Capital	Share Premium	Merger Relief	Total
		#	£	£'000	£'000	£'000	£'000

Balance at 1 January 2022		179,369,199		1,793	39,273	94,911	135,977

No movements in the year		-	-	-	-	-	-

Balance at 31 December 2022		179,369,199	-	1,793	39,273	94,911	135,977

Share premium account cancellation	29-Jun-23	-	-	-	(39,273)	-	(39,273)

Balance at 31 December 2023		179,369,199		1,793	-	94,911	96,704

32. Own shares

At 31 December 2023 the Group's Employee Benefit Trust held 2,926,617 (2022: 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 2023 was £658,489 (2022: £992,700).

	2023	2022
	£'000	£'000

At 1 January	(364)	(364)
Acquisition of shares	(67)	-
Settlement of employee share awards	30	-
At 31 December	(401)	(364)

33. Merger reserve

There were no movements relating to the merger reserve account during years ended 31 December 2023 and 31 December 2022.

34. Lease liabilities

	2023	2022
	£'000	£'000

At 1 January	395	504
Initial recognition	365	-
Interest expense	76	21
Lease payments	(227)	(141)
Lease modification	596	11
At 31 December	1,205	395

During the year ended 31 December 2023, the Group entered into a new lease agreement for additional office space at its Manchester headquarters. The Group has recognised £365,000 of additional lease payment obligations in respect to this new agreement.

In conjunction to the above new lease, the Group reviewed the expected term of the existing lease agreement of the Manchester headquarters office, which resulted in a lease modification of £596,218 - refer to note 18 for further details.

The fair value of the Group's lease obligations as at 31 December 2023 is estimated to be £1,205,000 (2022: £395,000) using a discount rate between 5% to 10%. The 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:

	2023	2022
	£'000	£'000

Analysed as:
Non-current	148	109
Current	1,057	395
Total lease liabilities	1,205	504

Maturity analysis of expected lease payments:
Year 1	253	162
Year 2	252	184
Year 3	252	79
Year 4	253	-
Year 5	252	-
Onwards	360	-
Total expected lease payments	1,622	425

Less: unearned interest	(417)	(30)

Total lease liabilities	1,205	395

35. Customer deposits

	2023	2022
	£'000	£'000

Retail deposits	574,622	479,736
Total customer deposits	574,622	479,736

Amounts repayable within one year	512,168	364,674
Amounts repayable after one year	62,454	115,062
	574,622	479,736

Refer to note 39 for the maturity profile of the customer deposit balances.

36. Financial liabilities

	2023	2022
	£'000	£'000

Lease liabilities	1,205	395
Preference shares	50	50
Total financial liabilities	1,255	445

Lease liabilities:

See note 34 for further details on the lease liabilities of the Group.

Preference shares:

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

The maturity profile of the financial liabilities are as follows:

	2023	2022
	£'000	£'000

Current liabilities	148	145
Non-current liabilities	1,107	300
Total financial liabilities	1,255	445

Refer to note 39 for changes in financial liabilities balances during the year, including both cash and non-cash changes, as classified within the Group's consolidated cash flow statement under cash flows from financing activities.

37. Subordinated liabilities

	2023	2022
	£'000	£'000

Tier 2 notes	10,000	-
Accrued interest	269	-
Deferred acquisition costs	(48)	-
Total subordinated liabilities	10,221	-

In September 2023 the Group entered into a non-dilutive Tier 2 capital facility from British Business Investments, with an initial £5m drawdown on inception and a further £5m drawdown in October 2023. The contractual term dates for the notes are 5 years from the respective drawdown date. The Group is required to pay bi-annual coupons with a full principal repayment due on the maturity date.

Refer to note 39 for changes in subordinated liabilities balances during the year, including both cash and non-cash changes, as classified within the Group's consolidated cash flow statement under cash flows from financing activities.

Refer to note 39 for the maturity profile of the subordinated liabilities.

38. Trade and other payables

	2023	2022
	£'000	£'000

Current liabilities
Trade payables	528	218
Social security and other taxes	132	360
Other creditors	875	2,993
Pension contributions	71	-
Accruals	2,621	2,446
Total current liabilities	4,227	6,017

Non-current liabilities
Social security and other taxes	70	24
Total non-current liabilities	70	24

Total trade and other payables	4,297	6,041

39. 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 36), subordinated liabilities (see note 37) and equity (comprising issued capital, merger relief, reserves, own shares and retained earnings - see notes 31 to 33).

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

The regulatory capital resources of the Group were as follows:

	2023	2022
	£'000	£'000

CET1 capital: instruments and reserves
Called up share capital	1,793	1,793
Share premium accounts	-	39,273
Retained earnings account	24,537	(28,447)
Accumulated other comprehensive income & other reserves	74,084	83,620
CET1 capital before regulatory adjustments	100,414	96,239

CET1 capital: regulatory adjustments
Intangible assets	(618)	(877)
Investment in own shares	(2,120)	(2,303)
Prudent valuation adjustment	(15)	(23)
Deferred tax asset	(7,111)	(8,457)
Exposure amount qualifying for a RW of 1250%	(11,281)	-
CET1 capital	79,269	84,579

Tier 1 capital	79,269	84,579

Tier 2 capital	10,269	-

Total regulatory capital	89,538	84,579

This table is not subject to audit.

The return on assets of the Group (calculated as profit/(loss) after taxation divided by average total assets) was 0.49% (2022: 2.2%).

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

Principal financial instruments

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

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

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

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

· Debt securities, source of interest rate risk;

· Derivative instruments, credit and liquidity risk;

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

· Subordinated liabilities, primarily interest rate risk and liquidity risk;

· Trade receivables, primarily credit risk and liquidity risk;

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

Summary of financial assets and liabilities:

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

	Amortised cost	Fair value through other comprehensive income	Fair value through profit or loss	Total
31 December 2023	£'000	£'000	£'000	£'000

Financial assets:
Cash and balances at central banks	89,552	-	-	89,552
Loans and advances to banks	3,475	-	-	3,475
Debt securities	-	14,839	-	14,839
Derivative assets	-	-	537	537
Loans and advances to customers	568,044	-	-	568,044
Trade receivables	3,706	-	-	3,706
Other receivables	452	-	-	452
Total financial assets	665,229	14,839	537	680,605

31 December 2023

Financial liabilities:
Customer deposits	574,622	-	-	574,622
Derivative liabilities	-	-	565	565
Other financial liabilities	1,205	-	-	1,205
Subordinated liabilities	10,221	-	-	10,221
Trade payables	528	-	-	528
Other payables	1,148	-	-	1,148
Preference shares	50	-	-	50
Total financial liabilities	587,774	-	565	588,339

	Amortised cost	Fair value through other comprehensive income	Fair value through profit or loss	Total
31 December 2022	£'000	£'000	£'000	£'000

Financial assets:
Cash and balances at central banks	107,353	-	-	107,353
Loans and advances to banks	3,848	-	-	3,848
Debt securities	-	22,964	-	22,964
Derivative assets	-	-	57	57
Loans and advances to customers	435,883	-	-	435,883
Trade receivables	749	-	-	749
Other receivables	273	-	-	273
Total financial assets	548,106	22,964	57	571,127

31 December 2022

Financial liabilities:
Customer deposits	479,736	-	-	479,736
Derivative liabilities	-	-	42	42
Other financial liabilities	395	-	-	395
Trade payables	218	-	-	218
Other payables	3,377	-	-	3,377
Preference shares	50	-	-	50
Total financial liabilities	483,776	-	42	483,818

Analysis of financial instruments by valuation model

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

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

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

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

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

	Carrying amount	Fair value	Level 1	Level 2	Level 3
31 December 2023	£'000	£'000	£'000	£'000	£'000

Financial assets not measured at fair value:
Cash and balances at central banks	89,552	89,552	89,552	-	-
Loans and advances to banks	3,475	3,475	3,475	-	-
Loans and advances to customers	568,044	568,044	-	-	568,044
Trade receivables	3,706	3,706	-	-	3,706
Other receivables	452	452	-	-	452
	665,229	665,229	93,027	-	572,202

Financial liabilities not measured at fair value:
Customer deposits	574,622	574,177	-	-	574,177
Other financial liabilities	1,205	1,205	-	-	1,205
Subordinated liabilities	10,221	10,742	-	10,742	-
Trade payables	528	528	-	-	528
Other payables	1,148	1,148	-	-	1,148
Preference shares	50	50	-	-	50
	587,774	587,850	-	10,742	577,108

	Carrying amount	Fair value	Level 1	Level 2	Level 3
31 December 2022	£'000	£'000	£'000	£'000	£'000

Financial assets not
measured at fair value:
Cash and balances at central banks	107,353	107,353	107,353	-	-
Loans and advances to banks	3,848	3,848	3,848	-	-
Loans and advances to customers	435,883	435,883	-	-	435,883
Trade receivables	749	749	-	-	749
Other receivables	273	273	-	-	273
	548,106	548,106	111,201	-	436,905

31 December 2022

Financial liabilities not
measured at fair value:
Customer deposits	479,736	478,800	-	-	478,800
Other financial liabilities	395	395	-	-	395
Trade payables	218	218	-	-	218
Other payables	3,377	3,377	-	-	3,377
Preference shares	50	50	-	-	50
	483,776	482,840	-	-	482,840

Where assets and liabilities are not measured at fair value, the Group has calculated their fair values at the reporting date as follows:

Cash and balances at central banks

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

Loans and advances to banks

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

Loans and advances to customers

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

Customer deposits

The fair value of fixed rate retail deposits has been estimated by discounting future cash flows at current market rates of interest. Retail deposits at variable rates and deposits payable on demand are considered to be at current market rates and as such fair value is estimated to be equal to carrying value.

Subordinated liabilities

The fair value of the subordinated liabilities is estimated by discounting the expected cashflows using an interest rate for similar liabilities with the same remaining maturity rate and credit profile.

Trade and other receivables, other borrowings and other liabilities

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

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

	Carrying amount	Principal amount	Level 1	Level 2	Level 3
31 December 2023	£'000	£'000	£'000	£'000	£'000

Financial assets measured at fair value:
Debt securities	14,839	15,000	14,839	-	-
Derivative assets	537	45,000	-	537	-
	15,376	60,000	14,839	537	-

Financial liabilities measured at fair value:
Derivative liabilities	565	100,000	-	565	-
	565	100,000	-	565	-

	Carrying amount	Principal amount	Level 1	Level 2	Level 3
31 December 2022	£'000	£'000	£'000	£'000	£'000

Financial assets
measured at fair value:
Debt securities	22,964	23,000	22,964	-	-
Derivative assets	57	70,000	-	57	-
	23,021	93,000	22,964	57	-

Financial liabilities
measured at fair value:
Derivative liabilities	42	20,000	-	42	-
	42	20,000	-	42	-

Debt securities

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

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

Derivatives

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

Financial risk management

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

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

The Group is exposed to the following financial risks:

· Credit risk

· Liquidity risk

· Interest rate risk

Further details regarding these policies are set out below.

Credit risk

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

Credit risk management

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

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

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

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

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

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

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

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

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

Significant increase in credit risk

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

The following is based on the procedures adopted by the Group for the year ended 31 December 2023:

Granting of credit

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

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

· Facility purpose or reason for increase,

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

· Key risks and mitigants for the application,

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

· Pricing,

· Confirmation that the proposed exposure falls within risk appetite,

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

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

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

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

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

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

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

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

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

Identifying significant increases in credit risk

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

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

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

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

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

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

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

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

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

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

Identifying loans and advances in default and credit impaired

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

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

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

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

Exposure at default (EAD)

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

Expected credit losses (ECL)

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

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

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

1. Counterparty PD; and

2. LGD on the asset

whereby: ECL = EAD x PD x LGD

Forward looking information

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

Maximum exposure to credit risk:

	2023	2022
	£'000	£'000

Loans and advances to banks	3,475	3,848
Derivative assets	537	57
Loans and advances to customers	568,044	435,883
Trade and other receivables	4,158	1,022
	576,214	440,810

Collateral held as security:

	2023	2022
	£'000	£'000

Fully collateralised:
Loan-to-value* ratio:
Less than 50%	14,261	2,798
51% to 70%	56,482	36,764
71% to 80%	93,582	63,239
81% to 90%	108,833	69,499
91% to 100%	291,266	264,118
Total collateralised lending	564,424	436,418

Partially collateralised lending	-	-

Unsecured lending	19,703	4,866

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

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

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

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

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

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

As at 31 December 2023, 96.6% of the loan portfolio was fully collateralised (2022: 99.4%).

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.

The below table analyses gross carrying amount and impairment allowance by counterparty industry sector:

	31 December 2023		31 December 2022
	£'000	Portfolio %	£'000	Portfolio %

Gross carrying amount:
Lodges and holiday homes	148,441	25.4%	118,156	26.8%
Motorhomes and caravans	131,478	22.5%	83,420	18.9%
Transport	130,982	22.4%	113,595	25.7%
Marine	55,981	9.6%	47,713	10.8%
Industrial equipment	35,926	6.2%	30,159	6.8%
Motor vehicles	27,458	4.7%	20,767	4.7%
Agricultural equipment	26,995	4.6%	24,555	5.6%
Wholesale	18,500	3.2%	-	0.0%
Automotive	8,366	1.4%	2,919	0.7%
Total gross carrying amount	584,127	100%	441,284	100%

	£'000	ECL coverage %	£'000	ECL coverage %

Impairment allowance:
Lodges and holiday homes	(11,428)	7.7%	(1,704)	1.4%
Motorhomes and caravans	(454)	0.3%	(227)	0.3%
Transport	(563)	0.4%	(445)	0.4%
Marine	(773)	1.4%	(304)	0.6%
Industrial equipment	(87)	0.2%	(74)	0.2%
Motor vehicles	(312)	1.1%	(277)	1.3%
Agricultural equipment	(688)	2.5%	(662)	2.7%
Wholesale	(251)	1.4%	-	0.0%
Automotive	(40)	0.5%	(27)	0.9%
Total impairment allowance	(14,596)	2.5%	(3,720)	0.8%

Credit quality

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

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

31 December 2023	Stage 1		Stage 2		Stage 3		Total
	£'000	Portfolio %	£'000	Portfolio %	£'000	Portfolio %	£'000	Portfolio %

Gross carrying amount:
Above average (Risk rating 1-2)	432,493	74%	-	0%	763	0%	433,256	74%
Average (Risk rating 3-5)	93,568	16%	17,729	3%	1,850	0%	113,147	19%
Below average (Risk rating 6+)	19,891	3%	3,323	1%	14,510	3%	37,724	7%
Total gross carrying amount	545,952	93%	21,052	4%	17,123	3%	584,127	100%

	£'000	ECL coverage %	£'000	ECL coverage %	£'000	ECL coverage %	£'000	ECL coverage %

Impairment allowance:
Above average (Risk rating 1-2)	(1,483)	0.3%	-	0.0%	(526)	68.9%	(2,009)	0.5%
Average (Risk rating 3-5)	(860)	0.9%	(150)	0.8%	(315)	17.0%	(1,325)	1.2%
Below average (Risk rating 6+)	(179)	0.9%	(10)	0.3%	(11,073)	76.3%	(11,262)	29.9%
Total impairment allowance	(2,522)	0.5%	(160)	0.8%	(11,914)	69.6%	(14,596)	2.5%

31 December 2022	Stage 1		Stage 2		Stage 3		Total
	£'000	Portfolio %	£'000	Portfolio %	£'000	Portfolio %	£'000	Portfolio %

Gross carrying amount:
Above average (Risk rating 1-2)	267,000	61%	6,629	2%	-	0%	273,629	62%
Average (Risk rating 3-5)	110,818	25%	5,433	1%	14,757	3%	131,008	30%
Below average (Risk rating 6+)	32,938	7%	1,261	0%	2,448	1%	36,647	8%
Total gross carrying amount	410,756	93%	13,323	3%	17,205	4%	441,284	100%

	£'000	ECL coverage %	£'000	ECL coverage %	£'000	ECL coverage %	£'000	ECL coverage %

Impairment allowance:
Above average (Risk rating 1-2)	(475)	0.2%	(17)	0.3%	-	0.0%	(492)	0.2%
Average (Risk rating 3-5)	(981)	0.9%	(46)	0.8%	(1,292)	8.8%	(2,319)	1.8%
Below average (Risk rating 6+)	(487)	1.5%	(21)	1.7%	(401)	16.4%	(909)	2.5%
Total impairment allowance	(1,943)	0.5%	(84)	0.6%	(1,693)	9.8%	(3,720)	0.8%

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:

	2023	2022
	£'000	£'000

Status at balance sheet date:
Not past due, nor defaulted	3,513	563
Past due but not in default	210	29
Defaulted	242	258
Total gross carrying amount	3,965	850

Impairment allowance	(259)	(101)
Carrying amount	3,706	749

See note 24 for analysis of the movements in gross trade receivables and impairment allowances in terms of IFRS 9 staging.

Financial guarantee schemes

In the year ended 31 December 2023, the Group entered into financial guarantee schemes which allow the Group to reduce its regulatory capital requirements.

In January 2023 the Group entered into the ENABLE guarantee scheme with the British Business Bank for an initial facility of £175m which provided the Group with incremental capacity to scale its loan book without the need for additional Tier 1 equity capital by up to £75m. In August 2023, the facility size was increased to £250m which increased this incremental capacity to £105m. The Group has considered the impact of the ENABLE guarantee scheme on its expected credit losses which has been deemed to have an immaterial net impact on the Group's impairment allowances given the recourse criteria thresholds on the scheme. The guarantees is a mitigant against significant systemic, portfolio-level loss events but is very unlikely to be drawn upon in the natural course of business.

In December 2023, the Group entered into a trade credit insurance policy covering a portion of the Group's loan book exposure in the case of default to a maximum limit of £10m. Given the scheme size at the year-end it is deemed to have an immaterial net impact on the Group's impairment allowances.

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 £208,000 at 31 December 2023 (31 December 2022: £nil).

Liquidity risk

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

Liquidity risk management

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

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

Liquidity stress testing

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

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

Maturity analysis for financial assets:

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

	Carrying amount	Gross nominal inflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2023	£'000	£'000	£'000	£'000	£'000	£'000	£'000

Cash and balances at central banks	89,552	89,552	89,552	-	-	-	-
Loans and advances to banks	3,475	3,475	1,325	(49)	(173)	2,372
Debt securities	14,839	15,075	-	-	15,075	-	-
Derivative assets	537	537	-	-	7	530	-
Loans and advances to customers	568,044	573,485	77,060	174,366	280,617	41,442	-
Trade receivables	3,706	3,965	3,965	-	-	-	-
Other receivables	452	452	145	1	51	4	251
	680,605	686,541	172,047	174,318	295,577	44,348	251

	Carrying amount	Gross nominal inflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2022	£'000	£'000	£'000	£'000	£'000	£'000	£'000

Cash and balances at central banks	107,353	107,353	107,353	-	-	-	-
Loans and advances to banks	3,848	3,848	3,277	75	(58)	554	-
Debt securities	22,964	23,233	13,008	113	10,112	-	-
Derivative assets	57	20	-	-	39	(19)	-
Loans and advances to customers	435,883	439,282	58,593	138,833	219,829	22,027	-
Trade receivables	749	850	850	-	-	-	-
Other receivables	273	273	1	-	8	154	110
	571,127	574,859	183,082	139,021	229,930	22,716	110

Maturity analysis for financial liabilities:

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

	Carrying amount	Gross nominal outflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2023	£'000	£'000	£'000	£'000	£'000	£'000	£'000

Customer deposits	574,622	588,866	82,022	83,486	355,709	67,649	-
Derivative liabilities	565	565	-	220	345	-	-
Other financial liabilities	1,205	1,622	-	64	189	1,008	361
Subordinated liabilities	10,221	16,350	-	318	953	15,079	-
Trade payables	528	528	528	-	-	-	-
Other payables	1,148	1,337	1,045	27	7	258	-
Preference shares	50	50	-	-	50	-	-
	588,339	609,318	83,595	84,115	357,253	83,994	361

Loan commitments	-	7,833	7,833	-	-	-	-

	Carrying amount	Gross nominal outflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2022	£'000	£'000	£'000	£'000	£'000	£'000	£'000

Customer deposits	479,736	491,911	47,861	43,564	278,483	122,003	-
Derivative liabilities	42	68	51	-	-	17	-
Other financial liabilities	395	425	-	23	139	263	-
Trade payables	218	218	218	-	-	-	-
Other payables	3,377	3,249	3,212	-	(33)	70	-
Preference shares	50	50	-	-	-	50	-
	483,818	495,921	51,342	43,587	278,589	122,403	-

Loan commitments	-	10,663	10,663	-	-	-	-

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. The Bank aims to naturally hedge interest rate risk through raising funding of a similar profile of the loans being funded. Where this is not possible, interest rate swaps are used to manage repricing mismatches.

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

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

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

	2023	2022
	£'000	£'000

Change in interest rate (basis points):
Sensitivity of EVE +200bps	(268)	658
Sensitivity of EVE -200bps	273	(681)

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

	2023	2022
	£'000	£'000

Change in interest rate (basis points):
Sensitivity of profit +200bps	911	1,868
Sensitivity of profit -200bps	(1,755)	(2,522)

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.

40. Earnings per share

	2023	2022
	£'000	£'000

Earnings attributable to ordinary shareholders:
Profit after tax attributable to the shareholders	3,155	9,761

Weighted average number of shares, thousands:
Basic	179,369	179,369
Dilutive impact of share-based payment schemes	8,125	-
Diluted	187,494	179,369

Earnings per share, pence per share:
Basic	1.8	5.4
Diluted	1.7	5.4

41. Controlling party

As at 31 December 2023 there was no controlling party of the ultimate parent company of the Group, Distribution Finance Capital Holdings plc.

42. Country by country reporting (CBCR)

CBCR was introduced through Article 89 of CRD IV, aimed at the banking and capital markets industry. The name, nature of activities and geographic location of the Group's companies are presented below:

Jurisdiction	Country	Name	Activities
UK	England	Distribution Finance Capital Holdings plc	Holding company
		DF Capital Bank Limited	Commercial lending and specialist personal savings
		DF Capital Financial Solutions Limited	Commercial lending

Other disclosures required by the CBCR directive are provided below:

UK totals	2023	2022

Average number of employees	126	103
Turnover, £'000	60,350	26,842
Profit before taxation, £'000	4,573	1,304
Taxation charge/(credit), £'000	1,418	(8,457)

The tables below reconcile tax charged and tax paid during the year.

	2023	2022
UK totals	£'000s	£'000s

Taxation charge/(credit)	1,418	(8,457)
Effects of:
Deferred taxation asset recognition	-	9,043
Deferred taxation asset utilisation	(1,345)	(586)
Other timing differences	(73)	-
Taxation paid	-	-

All activities relating to the Group are conducted within the United Kingdom and the Group is not subject to non-domestic taxation.

43. Related party disclosures

In the year ended 31 December 2023, Directors were awarded share-based payments, refer to note 10 for further details.

Directors' emoluments are disclosed in note 9 of these consolidated financial statements.

In the year ended 31 December 2023, there were no other related party transactions.

44. Transactions with key management personnel

All related party transactions were made on terms equivalent to those that prevail in arm's length transactions. During the year, there were no related party transactions between the key management personnel and the Group other than as described below.

The Directors and Senior Leadership team are considered to be key management personnel. Directors' remuneration is disclosed in note 9 and in the Directors' Remuneration Report on page 80. The Senior Leadership team are all employees of the Group. The aggregate remuneration of the key management personnel (including Directors) is shown in the table below:

	2023	2022
	£'000	£'000

Short-term employment benefits	3,808	3,014
Share-based payments	54	-
Total key management personnel remuneration	3,862	3,014

Key management personnel held deposits with the Group of £117,000 (2022: nil).

45. Subsequent events

There have been no subsequent events between 31 December 2023 and the date of this report which would have a material impact on the financial position of the Group.

The Company Statement of Financial Position

		2023	2022
	Note	£'000	£'000
Assets
Loans and advances to banks	5	81	146
Trade and other receivables	7	157	155
Amounts receivable from Group Undertakings		86	-
Investment in subsidiaries	8	135,604	134,213
Total assets		135,928	134,514

Liabilities
Trade and other payables	10	836	700
Financial liabilities	11	50	50
Amounts payable to Group Undertakings	9	6,742	5,522
Total liabilities		7,628	6,272

Equity
Issued share capital	12	1,793	1,793
Share premium	12	-	39,273
Merger relief	12	94,911	94,911
Retained earnings/(loss)		31,997	(7,371)
Own shares	13	(401)	(364)
Total equity		128,300	128,242

Total equity and liabilities		135,928	134,514

The notes on pages 183 to 188 are an integral part of these financial statements.

Distribution Finance Capital Holdings plc recorded loss after taxation for the year ended 31 December 2023 of £779,000 (2022: loss of £1,414,000). These financial results are derived entirely from continuing operations.

These financial statements were approved by the Board of Directors and authorised for issue on 8^th April 2024. They were signed on its behalf by:

Carl D'Ammassa

Director

8 April 2024

Registered number: 11911574

The Company Cash Flow Statement


		2023	2022
	Note	£'000	£'000

Cash flows from operating activities:
Loss before taxation	4	(779)	(1,414)
Adjustments for non-cash items and other adjustments included in the income statement	6	(1,970)	(1,029)
Increase in operating assets	6	(2)	(34)
Increase in operating liabilities	6	137	155
Taxation paid		-	-
Net cash used in operating activities		(2,614)	(2,322)

Cash flows from investing activities:
Purchase of own shares	13	(67)	-
Net cash used in investing activities		(67)	-

Cash flows from financing activities:
Proceeds from intercompany loan		2,616	1,938
Net cash from financing activities		2,616	1,938

Net decrease in cash and cash equivalents		(65)	(384)
Cash and cash equivalents at start of the year	5	146	530
Cash and cash equivalents at end of the year	5	81	146

The Company Statement of Changes in Equity



	Issued share capital	Share premium³	Merger relief	Own shares²	Retained earnings/(loss)	Total
	£'000	£'000	£'000	£'000	£'000	£'000

Balance at 1 January 2022	1,793	39,273	94,911	(364)	(6,456)	129,157

(Loss) after taxation	-	-	-	-	(1,414)	(1,414)
Share-based payments	-	-	-	-	499	499

Balance at 31 December 2022	1,793	39,273	94,911	(364)	(7,371)	128,242

(Loss) after taxation	-	-	-	-	(779)	(779)
Share-based payments¹	-	-	-	-	905	905
Employee Benefit Trust²	-	-	-	(37)	(31)	(68)
Share premium account cancellation³	-	(39,273)	-	-	39,273	-

Balance at 31 December 2023	1,793	-	94,911	(401)	31,997	128,300

¹Refer to note 10 of the consolidated financial statements for further details of movements in the year.

²The Company has adopted look-through accounting (see note 1.3 to the Group's consolidated financial statements) and recognised the Employee Benefit Trusts within the Company. Refer to note 13 for further details on movements in the year.

³ In the year ended 31 December 2023, the Company cancelled its share premium account - refer to note 31 of the consolidated financial statements for details.

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 adopted by the United Kingdom (UK) and interpretations issued by the IFRS Interpretations Committee (IFRS IC).

1.2 Going concern

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

1.3 Income statement

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

2. Summary of significant accounting policies

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

2.1 Investment in subsidiaries

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

3. Critical accounting judgements and key sources of estimation uncertainty

In the financial statements for the year ended 31 December 2023, 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

	2023	2022
	£'000	£'000

Net loss attributable to equity shareholder of the Company	(779)	(1,414)

5. Loans and advances to banks

	2023	2022
	£'000	£'000

Included in cash and cash equivalents: balances with less than three months to maturity at inception	81	146
Total loans and advances to banks	81	146

6. Notes to the cash flow statement

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

	2023	2022
	£'000	£'000

Loans and advances to banks	81	146
Total cash and cash equivalents	81	146

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

	2023	2022
	£'000	£'000

Management fee recharge	(2,287)	(1,205)
Share-based payments	317	176
Total non-cash items and other adjustments	(1,970)	(1,029)

Changes in liabilities arising from financing activities:

The Company had no changes in the Company's liabilities arising from financing activities, including both cash and non-cash changes, for the years ended 31 December 2023 and 31 December 2022.

7. Trade and other receivables

	2023	2022
	£'000	£'000

Other debtors	50	50
Indirect taxes	11	4
Prepayments	96	101
Total trade and other receivables	157	155

8. Investment in subsidiaries

	£'000
Balance at 1 January 2022	134,213

No transactions in the year	-

Balance at 31 December 2022	134,213

Capital contribution - parent equity-settled share-based payments	1,391

Balance at 31 December 2023	135,604

In years prior to the year ended 31 December 2023, the Company treated share-based payments awarded to employees of subsidiaries as cash settled, for which there was a debit against the intercompany loan. In the year ended 31 December 2023, this arrangement was reviewed, and concluded that there is no obligation for the subsidiaries to reimburse the Company for the settlement of share awards. In the year ended 31 December 2023, the total figure of £1,391,000 includes a figure in respect of prior years of £803,000.

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

For the year ended 31 December 2023, the Company conducted an impairment assessment of the investment in subsidiaries and concluded that there is no impairment required (2022: £nil).

9. Amounts payable to Group undertakings

	2023	2022
	£'000	£'000

Amounts payable to DF Capital Bank Limited	6,742	5,522
Total amounts payable to Group undertakings	6,742	5,522

All amounts drawn and outstanding under the intercompany loan facility, including all accrued interest and costs, are payable on demand by the lender DF Capital Bank Limited. Interest on the loan shall accrue daily and is charged at 4% over the Sterling Overnight Indexed Average (SONIA) rate at the end of each calendar month. This contractual agreement has an expiry date of 31 December 2024.

10. Trade and other payables

	2023	2022
	£'000	£'000

Trade payables	187	-
Accruals	593	654
Social security taxes	56	46
Total trade and other payables	836	700

11. Financial liabilities

	2023	2022
	£'000	£'000

Preference shares	50	50
Total financial liabilities	50	50

Reconciliation of movements in financial liabilities:

	Preference Shares
	£'000

Balance at 1 January 2022	50

No transactions in the year	-

Balance at 31 December 2022	50

No transactions in the year	-

Balance at 31 December 2023	50

12. Share capital

	2023	2022	2023	2022
	No.	No.	£'000	£'000
Authorised:
Ordinary shares of 1p each	179,369,199	179,369,199	1,793	1,793
Allotted, issued and fully paid: Ordinary shares of 1p each	179,369,199	179,369,199	1,793	1,793

	Date	No. of shares	Issue Price	Share Capital	Share Premium	Merger Relief	Total
		#	£	£'000	£'000	£'000	£'000

Balance at 1 January 2022		179,369,199		1,793	39,273	94,911	135,977

No movements in the year		-	-	-	-	-	-

Balance at 31 December 2022		179,369,199	-	1,793	39,273	94,911	135,977

Share premium account cancellation	29-Jun-23	-	-	-	(39,273)	-	(39,273)

Balance at 31 December 2023		179,369,199		1,793	-	94,911	96,704

13. Own shares

	£'000

Balance at 1 January 2022	(364)

No transactions in the year	-

Balance at 31 December 2022	(364)

Acquisition of shares	(67)
Settlement of employee share awards	30

Balance at 31 December 2023	(401)

14. Financial instruments

The Group monitors and manages risk management at a group-level and, therefore, the Risk Management Framework stipulated in note 39 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, liquidity risk and capital 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.

The regulatory capital requirements in respect of capital risk are assessed at both a consolidated group level and for DF Capital Bank Limited at an entity level.

See note 39 of the consolidated financial statements for further details on how the Company defines and manages credit risk, liquidity risk and capital risk.

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

	Carrying amount	Fair value	Level 1	Level 2	Level 3
31 December 2023	£'000	£'000	£'000	£'000	£'000

Financial assets not
measured at fair value
Loans and advances to banks	81	81	81	-
Other receivables	61	61	-	-	61
Amounts receivable from Group Undertakings	86	86	-	-	86
	228	228	81	-	147

31 December 2023

Financial liabilities not
measured at fair value
Trade payables	187	187	-	-	187
Other payables	56	56	-	-	56
Preference shares	50	50	-	-	50
Amounts payable to Group Undertakings	6,742	6,742	-	-	6,742
	7,035	7,035	-	-	7,035

	Carrying amount	Fair value	Level 1	Level 2	Level 3
31 December 2022	£'000	£'000	£'000	£'000	£'000

Financial assets not
measured at fair value:
Loans and advances to banks	146	146	146	-	-
Other receivables	54	54	-	-	54
	200	200	146	-	54

31 December 2022

Financial liabilities not
measured at fair value:
Other payables	46	46	-	-	46
Preference shares	50	50	-	-	50
Amounts payable to Group Undertakings	5,522	5,522	-	-	5,522
	5,618	5,618	-	-	5,618

Maximum exposure to credit risk:

	2023	2022
	£'000	£'000

Loans and advances to banks	81	146
Trade and other receivables	61	54
Amounts receivable from Group Undertakings	86	-
	228	200

Maturity analysis for financial assets

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

	Carrying amount	Gross nominal inflow	Less than 1 months	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2023	£'000	£'000	£'000	£'000	£'000	£'000	£'000

Loans and advances to banks	81	81	81	-	-	-	-
Other receivables	61	61	11	-	50	-	-
Amounts receivable from Group Undertakings	86	86	-	-	86	-	-
	228	228	92	-	136	-	-

	Carrying amount	Gross nominal inflow	Less than 1 months	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2022	£'000	£'000	£'000	£'000	£'000	£'000	£'000

Loans and advances to banks	146	146	146	-	-	-	-
Other receivables	54	54	4	-	-	50	-
	200	200	150	-	-	50	-

Maturity analysis for financial liabilities

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

	Carrying amount	Gross nominal outflow	Less than 1 months	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2023	£'000	£'000	£'000	£'000	£'000	£'000	£'000

Trade payables	187	187	187	-	-	-	-
Other payables	56	111	33	-	-	78	-
Preference shares	50	50	-	-	50	-	-
Amounts payable to Group Undertakings	6,742	6,742	-	-	6,742	-	-
	7,035	7,090	220	-	6,792	78	-

	Carrying amount	Gross nominal outflow	Less than 1 months	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2022	£'000	£'000	£'000	£'000	£'000	£'000	£'000

Other payables	46	80	1	-	51	28	-
Preference shares	50	50	-	-	-	50	-
Amounts payable to Group Undertakings	5,522	5,522	-	-	5,522	-	-
	5,618	5,652	1	-	5,573	78	-

15. Subsequent events

There have been no subsequent events between 31 December 2023 and the date of this report which would have a material impact on the financial position of the Company.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

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Distribution Finance Capital Holdings (DFCH)

Tuesday, 30th April 2024

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