Full Year Results
27 October 2020
Orchard Funding Group PLC
("Orchard Funding Group" or the "company" or the "group")
Full Year Results
For the 12 months ended 31 July 2020
Orchard Funding Group PLC, the finance company which specialises in insurance premium finance and the professions funding market, is pleased to announce its audited full year results for the year ended 31 July 2020.
Highlights
· The impact of COVID-19 has affected all aspects of the business this year (lending, revenue and profit)
· Gross revenues in the period decreased by 3.67% to £5.28 million for the 12 months to 31 July 2020 (31 July 2019 £5.48 million)
· The loan book fell by 15.06% year on year to £27.30 million. This was after applying the requirements of IFRS 9
· Profit after tax fell by 22.09% from £1.63 million to £1.27 million
· Earnings Per Share ("EPS") fell in the period by 22.19% to 5.96p (31 July 2019 7.66p)
· The group lent £65.53 million to clients in the 12 months to 31 July 2020 a decrease of 10.22% (31 July 2019 £72.99 million)
· We are again proposing a full year dividend per share of 3.0 pence
· Barclays Bank and Conister Bank have again renewed our facilities at £17 million and £2 million respectively
· We have further strengthened the board with the appointment of Steven Hicks as Non-executive Chairman effective from 7 October 2020
Ravi Takhar, Chief Executive Officer of the company, stated:
"In an unprecedented year of global pandemic, our business model has again proved resilient. We have still delivered growth in NAV in the year and the development of our own IT system continues to give direct benefit to the business and enable us to test adjacent markets to increase our lending in those areas. Our exciting future is all due to the commitment and hard work of our staff and the support of our shareholders and our bankers, to whom we give many thanks."
For further information, please contact:
Orchard Funding Group PLC +44 (0)1582 346 248
Ravi Takhar, Chief Executive Officer
Liberum (Nomad and Broker) +44 (0)20 3100 3222
Investment banking
Neil Patel
Richard Bootle
For Investor Relations please go to: www.orchardfundinggroupplc.com
Group financial highlights
Our first full financial year as a listed company ended on 31 July 2016. Over the period to 31 July 2019, Orchard significantly grew its business year on year, materially increasing lending, income and profits. As a result of the COVID-19 pandemic this is the first year where we have seen a fall in lending and income.
Comparing lending, income and profit for 2020 with 2019:
Lending volume is down from £72.99m in 2019 to £65.53m in 2020 (10.22%)
Loan book (post ECL provision) is down from £32.14m in 2019 to £27.30m in 2020 (15.06%)
Bank funding is down from £16.18m in 2019 to £10.99m in 2020 (32.17%)
Gross total income is down from £5.48m in 2019 to £5.28m in 2020 (3.67%)
Net total income is down from £4.32m in 2019 to £4.13m in 2020 (4.63%)
Other operating costs are up from £2.20m in 2019 to £2.44m in 2020 (10.83%)
Operating profit is down from £2.02m in 2019 to £1.56m in 2020 (22.92%)
Further detail on the above is given throughout the Group strategic report on pages 5 to 15 of the full financial statements.
Chairman's statement
This is my first statement as Chairman of Orchard Funding Group plc and, because of COVD-19, it has been a very challenging year, not just for Orchard but for businesses throughout the world. While the financial cost has been staggering, our thoughts are with those who have lost their lives as a result of this terrible disease and those who risk theirs on an almost daily basis to help protect the rest of us.
We began the year well and, comparing the first six months of this year with that of 2019, we were up on lending volumes by 4.04%, gross revenue by 3.25% and net income by 4.49%. Then COVID-19 impacted. The result has been that our lending is down to pre-2018 levels, although both gross and net income are approximately 4% down on the previous year. The country officially went into recession in the second quarter of the year although there has been growth since. The macro background remains as uncertain for Orchard as it does for the rest of the world.
As you will see from my biography on page 19 of the full financial statements, I have had a 40 year career in Financial Services and have extensive governance, risk management and compliance experience enabling me to make a positive contribution to Orchard's governance and risk management framework. We continue to take a proactive, risk-based attitude to lending, in particular ensuring that our approach is continually evaluated in the light of changing circumstances and strengthened where necessary. Our primary methodology is to have risk prevention where possible and mitigation where not. This is particularly important in these turbulent times, when no-one is sure how deep or how long the recession will be.
Expecting lending to fall during this financial year as a result of COVID-19, we issued a trading update in June to that effect. However, we also indicated that our earnings after tax would be higher than the market was expecting and this has been the case. Notwithstanding that, our earnings have fallen since the previous year and the resultant EPS decreased from 7.66p to 5.96p, a reduction of 22.18%. While it would be wrong to say that the board is happy with this, given the circumstances which has led to this situation, the outturn is better than could have been the case.
We continue to invest in staff and systems. The board sees such investment as key to growth. During the lockdown, all but one member of staff worked from home and most of our customers were completely unaware of this. This is a wonderful tribute to our people and our systems and is confirmation (if it were needed) that we are justified in our spending in these areas. I thank our staff sincerely and cannot praise them enough.
The group's main focus of operations remains the insurance premium finance market. The move last year into school fees and static caravan fees was showing signs of serious growth - until COVID-19. Many schools were closed and people were unable to use their holiday homes. Likewise, leisure lending (mainly sports clubs) was similarly affected. These are areas which we believe will resume again although they will be impacted by local enhanced lockdown restrictions.
There continues to be strong competition in some areas of our business with pressure being put upon rates. The largest players in the accountancy fee funding market continue aggressively to protect their market positions. The same can be said of the insurance premium finance market. That said, we believe that we are in a strong position to continue to grow our lending volumes at acceptable rates and at the right level of risk.
Our banking licence application has now been withdrawn for a number of reasons. These are set out on page 5 of the Group strategic report in the full financial statements.
Our enhanced IT system became fully operational this year and our partners have expressed delight at its improved functionality. This will continue to be developed over the coming years.
The level and growth of dividends announced by any company is a balance between retention for future investment and rewarding shareholders for the confidence they have shown in the business. Our model is business growth and our plans in this respect require cash to be retained. This requirement is intensified by the uncertainties surrounding both COVID-19 and, later in the year, Brexit. The board feels it prudent to propose that the annual dividend (including the interim dividend) is held at 3p.
Given the present circumstances, the board is satisfied with the progress of the group during this year. We look to the future with confidence.
Chief executive's review
This financial year was one that is unprecedented in our 20-year history of lending. Our business model proved resilient during the global financial crisis in 2008 and is again proving resilient in a global crisis, which is even deeper and more wide ranging than the 2008 crisis.
We have traded through the current crisis with a lower level of lending in our core markets of insurance and accountancy fee funding and at the same time, in part, offset this lower level of lending and proved our resilience by lending into new markets with similar credit characteristics to our core lending markets.
Our new markets mark an exciting and excellent opportunity for the business in the future. For example, from a standing start we provided over £5million of lending in the static caravan pitch fee market in the financial year. All of our lending was fully supported by guarantees from financially strong park operators. We added over 100 golf clubs to our client list and again benefited from golf club guarantees in respect of our lending to golf club members. We also added over 30 schools to our client list and conducted over £1.7 million of lending to help parents fund their children's private school fees. Through our entry into new markets, we have demonstrated our pro-active approach to business, our prudence, by only lending into markets that share the credit characteristics of our historic lending and our continual pursuit of growing our business for the benefit of our staff and shareholders.
This year we have also continued with the development of our own bespoke IT system, Lend XP. As well as supporting our own business, Lend XP is now used by all of our finance company clients. As mentioned last year, Lend XP enables us to integrate effectively and efficiently with 3rd party IT systems and has continued to increase our operational efficiency and our ability to conduct business with introducers, for whom IT integration is a pre-condition to doing business. This development clearly has a cost and we therefore invested in higher spending on IT than over the previous year. This is a key part of our philosophy of spending and investing money prudently and only in the best interests of our business and our stakeholders. Our IT development was also intended to enable us to offer new lending products. This we have achieved and has led to a very exciting development in our business. Through our own IT system, we have been able to lend into the new lending markets referred to above in a quick and cost-effective manner.
We still believe that IT will be the most significant factor in the financial services sector over the coming years. We took the initiative on this point by not only continuing to develop our own IT system but, as we disclosed last year entering into a venture where we hold 30% in a new open banking software company. This entity has now obtained FCA approval to trade. We are very excited about this investment for a number of reasons. Regulatory rules require affordability assessments to be conducted in respect of each borrower. We believe the only way to conduct effective affordability assessments is through a review of a borrower's bank statements. This is usually impractical for short-term point of sale financing and can only be achieved through sophisticated IT solutions. Orchard's open-banking venture will provide this ability in real time and form a key part of Orchard's underwriting process. This solution will be invaluable to Orchard but will also be an attractive service to other lenders, who have already expressed interest in conducting trials on Orchard's open-banking solution. The open-banking solution will offer benefits to Orchard before it enters new markets as the real-time solution will ensure that credit offered to borrowers is supported by effective underwriting
We continue to be supported by our experienced and loyal staff. Notwithstanding the current market turmoil, we have grown staff numbers to accommodate the changing nature of our business, ensuring that our partners and borrowers have the excellent support that they deserve. Our senior managers have been with us for more than a decade and this is indicative of the type of business that we are - caring and supportive to our people. We believe our staff to be one of our greatest assets and they enable us to continue to deliver a very high level of service to our clients. We have also been able to ensure that all staff have worked from home during the current crisis and thank them for ensuring that our customers have received the benefit of uninterrupted and excellent service during this difficult period.
We would again like to thank Barclays Bank PLC and Conister Bank PLC for our current liquidity lines. We have adequate liquidity for our near-term lending aspirations. As shareholders are aware, we were working to obtain a banking licence for Orchard's business in a cost-effective manner. The current position is that the application has been withdrawn for the reasons set out on page 5 of the Group strategic report in the full financial statements, but will be resurrected when the time is right.
We have further bolstered our senior management team with the addition of Steven Hicks, our Chairman and Ketan Malde our independent non-executive director. As you will see from their profiles on page 19 of the full financial statements both Steven and Ketan bring a wealth of experience to the group from the banking sector.
In summary, the downward trend in our core lending markets due to COVID-19 has in part been offset by our exciting entry into new lending markets, which has enabled us to deliver higher than expected earnings in a difficult financial period and provides realistic and proven avenues for us to grow into the future. We have also continued the development of our own IT system, which has enabled us to be flexible and quick to take advantage of new lending opportunities. We will continue to benefit from this advantage with some exciting new initiatives we are currently working on.
We paid a dividend of 2p per share in December 2019 and an interim of 1p per share in April 2020. I am happy to announce that the board has proposed a final dividend of 2p per share to be paid in December 2020, subject to shareholder approval.
Group strategic report
Strategy and objectives
The group's principal objective has not changed and is still to increase our profitability in a prudent, sustainable manner, having due regard for the interests of all stakeholders (employees, shareholders, partners, other customers, creditors, regulators, the local and wider community and other parts of government). The interests of one class of stakeholder may, in some instances, conflict with those of another (for example, it would be better for shareholders to receive higher dividends at the cost of employees having lower wages). The board is responsible for ensuring that all stakeholders are treated fairly and it bears this in mind during the decision making process.
We have six strategic drivers behind our objective of increasing profitability:
· to differentiate our business from that of our competitors, based on service excellence, correct pricing and robust underwriting procedures;
· to increase lending in a responsible manner;
· to preserve our sources of liquidity;
· to innovate;
· to continually improve our IT systems;
· to support our excellent sales team in their work.
The directors still believe in our two pronged approach to lending - to increase the number of our partners who fit in with our business values (brokers, accountants and other third party introducers) as well as to increase the volume of business from each of these partners.
Our banking licence application was submitted on 30 April 2020. Since then, the major effect that COVID-19 has had on all businesses has been apparent. We reached the point where, to progress the licence, a substantial amount of time and investment was needed to ensure the success of the application. The board determined that in this uncertain economic environment, all efforts should be focused on the core activities of our business and that the banking licence application process should be put on hold. The application was therefore withdrawn on 19 October 2020 and will be revisited when there is some return to normality in the market.
As far as innovation is concerned, we constantly strive to examine markets and product lines which we can service based on our philosophy of safe lending and sensible returns. Those markets in which we began investing last year have begun to produce results. It is only the COVID-19 issue which has somewhat subdued these this year.
Our IT system is now predominantly in-house, providing stability for our future business, the ability to increase lending in our core markets where IT system integration is required and the ability to enter new markets, as well as giving us much more control over, and thereby reducing risks in, the development of the system.
Our sales team are our first line in dealing with our partners, arranging prospect meetings and, where required, making use of senior personnel to help them close a deal. Care of our partners is of paramount importance in our business culture and this aspect is a constant part of training for all staff. Feedback from our partners in this area has been positive.
Our aim is to continue to build strongly on both our core markets and those which assist in achieving our principal objective.
Our business model
The group provides credit to businesses and consumers to enable them to spread the cost of their insurance premiums, professional fees or other service fees over a period of up to one year. Our business model is a "hold to collect" model in which assets are held to maturity to collect cash flows of principal and interest, rather than holding assets for sale. More detail on this is given in note 2.4 on page 38 of the full financial statements.
The nature of our products is so similar in terms of risk, reward and processes that any segregation would not give meaningful information to users of the financial statements. Our underwriting and debt management procedures are so similar that we have not disaggregated results arising from our several markets. We believe that to do so would obscure material information and reduce the understandability of the financial statements. We therefore still report a single trading segment - lending
Lending limits to our customers are set by reference to financial information (credit reports, regulatory and other requirements) and by reference to other qualitative information for both our introducing partners and for the end borrowers. In addition, an annual review process, including regulatory permissions and credit checks, is conducted for each introducing partner and each partner is monitored monthly for the group's financial exposure to that entity. Much of our lending gives us recourse to the introducing partner, is through regulated introducers and no cash is passed over until at least the first repayment is received. In the case of insurance, the customer can have their cover withdrawn for non-payment with any refunds being paid to Orchard.
Bexhill borrows up to 75% of the amount advanced to each of its clients (up to a maximum of £17m) from its bankers, Barclays Bank plc. There are lending covenants which Bexhill has always upheld, Barclays conducts regular reviews on Bexhill and supplements these with an audit of its covenants with the bank every six months. These are carried out by auditors appointed by the bank. Orchard has a borrowing facility of £2m with Conister Bank. Conister requires information on lending to be sent on a regular basis.
£9.48m of the Barclays facility was in use at the year end and £1.50m of the Conister facility. The balance of lending is provided by the subsidiaries from their resources. At 31 July 2020 the group had net current financial assets (receivables plus cash in hand less current liabilities) amounting to £15.50m. Both subsidiaries have operated within a disciplined lending environment since they began trading.
The group's average cost of finance was approximately 4.8% of funds borrowed in the financial year to 31 July 2020 (4.75% on the same basis in the year to 31 July 2019). Cost of finance includes arrangement and legal fees payable for access to funding and fees for non-use of the facility. Non-use fees have been higher this year because the reduction in lending led to a lower borrowing requirement. Barclays borrowing is based on LIBOR which, on average, has fallen over the previous year, while the Conister rate has increased. In previous years only interest has been used to calculate borrowing costs and, on that basis, the group's average cost of finance this year would have been 3.63% (2019 3.74%).
Principal risks and uncertainties
The group's activities expose it to a variety of risks.
The board has identified the following principal risks, their potential impact on Orchard, an assessment of change in risk year-on-year, our risk appetite and how we mitigate risk. Principal risks are those which could have most impact on our ability to continue in business. Indicators of those risks (key risk indicators or KRIs) are shown below. Orchard's sole business is lending money in the short term (all repayable within a year) and therefore the risks apply to this area.
Credit risk
|
Explanation of the risk |
The risk that debtors or guarantors will default |
|
Impact on the group |
A major loss could have a serious effect on group profit. A £100k loss on a loan asset is £100k straight off profit before tax. |
|
Year-on-year change in risk |
Risk has increased this year as a result of COVID-19. People are unsure how the economy will be performing after government support measures stop. Widespread unemployment may lead to defaults on loans. |
|
Risk appetite |
In the current climate and with the advent of the expected credit loss model, our aim is to limit reported credit losses to below 2% of income generating assets. |
|
Mitigation of risk |
Money is only lent for periods up to one year predominantly through introducers who guarantee the loans and who are regulated businesses themselves. Borrowing limits are set based on prudent underwriting principles. Impairment reviews are regularly conducted to identify potential problems early. Note 18 gives further details of mitigation of credit risk. |
Liquidity risk
|
Explanation of the risk |
A lack of funding to finance our business. |
|
Impact on the group |
Without adequate funding we cannot conduct our business. |
|
Year-on-year change in risk |
Risk has not changed. COVID-19 has had no impact. Our bankers have indicated their wish to continue funding. |
|
Risk appetite |
We aim to have 5% more funds than would be sufficient to enable our plans to be met. |
|
Mitigation of risk |
Our principal bankers have supported us since 2002 and have maintained our funding at £17m throughout the year. They have renewed our facility for another year and have indicated, so far as they are able, that they have no wish to withdraw that support. We also have additional banking facilities from Conister Bank plc amounting to £2m to support our loan book. Excess available credit plus our net current financial assets amounted to £23.57m at 31 July 2020. |
Interest rate risk
|
Explanation of the risk |
The risk that we lend at one rate and borrow at a rate higher than anticipated. |
|
Impact on the group |
Reduced margins mean reduced profit. |
|
Year-on-year change in risk |
Risk has not changed. Even with the decrease in rates during this year, the risk remains as in previous years. |
|
Risk appetite |
Our risk appetite is 25% above the interest rate that we are paying when a loan is made without being able to pass this on to our customers. |
|
Mitigation of risk |
Management is in regular contact with its bankers and routinely reviews the financial situation in the economy. Loans made are relatively short term (no more than twelve months with the average at ten) so any increase is likely to have a fairly short-term impact. |
Systems risk
|
Explanation of the risk |
Disruption to or failure of our IT systems. Cyber threats - data being accessed illegally. |
|
Impact on the group |
Persistent or serious failures could lead to lack of confidence in our system and reduce our operational capabilities. Penalties for allowing data breaches are severe and could lead to us not being able to operate at all. |
|
Year-on-year change in risk |
Risk has increased this year with a new system going fully live. The system has proved robust so far and better than the Anchor system but there is some "bedding down" to find any problems. The risk of cyber-crime has not increased. |
|
Risk appetite |
There is no risk appetite for either failure or cyber-crime. |
|
Mitigation of risk |
Remote support access enables prompt resolution of incidents. Internet connection provides guaranteed access. Our controls are such that even a minor disruption is very quickly picked up and action taken. Systems are covered by a support contract which enables quick identification of any problems. The group continues to develop its processes for prevention of cyber threats. If prevention is not guaranteed the systems in place give us the capability to detect, respond and recover from those attacks. |
Conduct risk
|
Explanation of the risk |
Any action that leads to unfair customer outcomes. Any action that has an adverse effect on market stability or effective competition. Fraud. |
|
Impact on the group |
Failing to deal effectively with conduct risk faces regulatory action, fines, and reputational damage. |
|
Year-on-year change in risk |
Risk has not changed |
|
Risk appetite |
The board has no appetite for non-compliance with regulation or for any instance of fraud being carried out. |
|
Mitigation of risk |
The board sets standards which comply with regulation and best practice. The CEO monitors staff compliance with those standards, reports deficiencies to the board and provides staff with advice on the interpretation of the standards. Controls are in place to prevent internal fraud with day to day supervision by the CEO. Regular monitoring of introducing partners is conducted including a review of sources of loan repayments. |
The group's overall risk management programme focuses on reducing the effect of these risks on its financial performance. A risk appetite is established for the key risk areas. This is the level at which risk is accepted by the group before action needs to be taken. A regular assessment of the principal risks affecting the group, based on a traffic light classification, is carried out by the executive directors who then pass this on to the full board of directors on an exception basis. The board identifies, evaluates and mitigates financial risks and has written policies for all major risk areas. The tables above show the group's principal risk appetite and how risk is mitigated. A risk register is maintained in which any instances of any of the aforementioned risks are recorded and, where necessary, acted upon.
We are committed to maintaining the highest standards of ethics and integrity in the way we do business. We adopt a zero tolerance approach to bribery and fraud and expect our business partners to do the same. Our staff are encouraged to contact the board if they have any concerns in this regard. We are committed to behaviour that results in fair outcomes for our customers (both introducers and end borrowers).
In summary:
· credit risk is reduced by a robust system of checks on introducers, borrowers and by third party guarantees;
· liquidity risk is alleviated by funding lines from our bankers;
· interest rate risk is mitigated by the fact that loans are short term and by regular interaction with our bankers;
· risk from disruption to the IT system and cyber-crime is avoided by thorough business continuity procedures and procedures designed to prevent, detect, respond and recover from malicious attacks; and
· conduct risk is mitigated by staff training, board oversight and monitoring of introducing partners.
The nature of the business is that loans are made either to introducer finance companies or to clients of our introducing partners. Although there is some significant lending to individual finance companies, the individual debts making up these loans are collected by Orchard and assigned to Orchard. At 31 July 2020, the latest date of review, the largest nominal exposure was £4.89m representing 17.51% of our loans (before expected credit loss provisions). This consisted of advances made through one broker and comprising many smaller loans. The reality, therefore, is that our exposure is low. At 31 July 2020 total outstanding loans were £27.52m (2019 £32.56m) (before expected credit loss provisions), of which the highest individual loan (not a block loan to a premium finance company) was less than £100k, representing under 0.37% of the outstanding amounts. This was the realistic level of our highest exposure at that date and was the situation throughout this and previous years. It is not expected to change in the foreseeable future.
We have experienced late payments in the past. The majority of these are through our customers changing banking details. Where there are other issues which cause late payment, we investigate these.
During this year, because of COVID-19, some of our borrowers have requested payment holidays and we have accommodated these. Where they are properly agreed with a borrower, these payment holidays do not necessarily result in a significant increase in the credit risk associated with those loans. The "days past due" for these loans is based on the revised, agreed schedule. That is not to say that there may be other factors which might impact on credit risk but these are looked at separately as part of our wider review of the credit quality of our lending, an approach which accords with guidance from the Prudential Regulatory Authority in a letter from Sam Woods, Deputy Governor and CEO of the PRA to bank CEOs in June 2020.
We review debts for impairment and make provision where necessary. As part of this process, we have provided for £0.13m during the year to 31 July 2020, net of reversal of previous provisions and items written off against those provisions (£0.11m in the year to 31 July 2019). The provision this year is £0.55m carried forward at 31 July 2020 (£0.42m at 31 July 2019). Note 2.4 on page 37 of the full financial statements outlines the approach to credit impairments.
There is no doubt that the level of potential bad debt has been adversely affected by COVID-19, although Orchard has not suffered, thus far, as much as many other businesses. The biggest consequence of COVID-19 has been cancellations of loans taken out to pay for discretionary spending. This has not led to losses but has reduced lending (and therefore income) below the level we had forecast last year.
The main uncertainties in these financial statements are those connected with the level of expected credit losses. These require management judgement in the absence of objective evidence. They are detailed in note 3 on page 43 of the full financial statements.
The business environment
The world has been changed this year by COVID-19. It was identified as a pandemic in March by the World Health Organisation and our Government took action to control its spread in this country which resulted in the closing of many businesses in March. This action has had ramifications in every area of commerce and led to the Bank of England (BoE) forecasting in May that the UK economy could contract by 17% by the end of the year. On Wednesday 12 August it was announced that the UK officially went into recession in the second quarter of the year, with the largest quarterly GDP fall since records began at 20.4% according to the GDP first quarterly estimate, UK: April to June 2020.
However, in July GDP was around 18½% above its trough in April and around 11½% below its 2019 Q4 level. For 2020 Q3 as a whole, BoE staff expected GDP to be around 7% below its 2019 Q4 level as reported by the Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 16 September 2020.
The Government announced a further relaxation of the lockdown regulations in July, indicating an ambition on their part to move the economy again in a safe manner. The effect of this has not yet come through into our lending figures but the board is confident that it will in the future. This is despite unemployment being high at present. Our budgets and forecasts are predicated on growth in discretionary spending re-commencing. Overall, we believe that economic activity will begin to pick up, albeit slowly.
There is, still, the ongoing uncertainty attaching to a trade agreement with the European Union after December 2020. The board, however, does not believe that the direct effect of this on Orchard will be significant in the short to medium term. There are too many unknown factors to assess the situation in the longer term. Potential issues are likely to revolve around the value of the pound against other traded currencies, which will impact on spending. In any event, the current COVID-19 problem is currently considerably more of an issue.
Development and performance of the business
Overview
We saw growth in lending in line with expectations up until mid-March this year. Then the Government announced a period of lockdown and lending fell. The effect of this on Orchard was twofold: first, demand for new lending slowed down substantially; secondly, loans which had been made earlier in the year were cancelled or discounted because people were unable to make use of the related services. In June this year Orchard issued a trading update to ensure that investors were kept up to date with how the group was affected.
Prior to mid-March lending into leisure, school fees and site fees was 17.47% of our total lending. This compared with 2.08% for the whole of the year to 31 July 2019. These have been sound markets. We still believe that most of our premium finance growth will come from the direct insurance side rather than from broker premium funding companies, although these companies still remain our largest market. The demand for professional fee finance has continued to slow.
Although profits have fallen this year, they are still higher than the market was expecting. Certain costs, including those which should have been incurred in connection with the banking licence, had been postponed. The application for this has now been withdrawn for the reasons set out on page 5 of the full financial statements.
Product lines already introduced are reviewed regularly to evaluate the impact they are having on the business. To date that impact has been encouraging. We continue to use the same disciplined approach when evaluating potential new markets.
The board has agreed to conduct a limited pilot of longer term lending into the static caravan market. Details are shown in future developments on page 13 of the full financial statements.
To summarise: it is our intention to increase our sales in existing markets, expand into adjacent markets, maintain good cost control commensurate with our plans and secure further sources of funding.
Financial indicators
The function of the business is to lend money safely. The ability to find borrowers is therefore key to the business. We have not only added to our introducing partner base but have continued with our extensive marketing scheme. This continues to work well (albeit that economic conditions have become more challenging this year).
Our margin is an important area. Bexhill UK Limited lends at a particular rate for a period of up to one year. Each month borrowings from Barclays Bank plc are refinanced at 2.90% above LIBOR. As LIBOR changes, refinancing costs can move up or down with a corresponding movement on margins, effectively eroding or augmenting our margin. Given the short term nature of our lending any likely changes would make a small impression on margins. Our own analysis indicates that the influence on our business would be negligible and it is for this reason that our risk appetite is to accept rate increase of up to 25% higher than we are paying at the time the loan is made to a customer (see Interest rate risk on page 7 of the full financial statements). Rates for new lending can, however, be altered to reflect any changes.
Overheads in this business are relatively stable. We have increases resulting from an increased sales function, investment in the banking licence and enhancements to our IT systems. Other overheads have not altered significantly.
Financial key performance indicators (KPIs)
The table below gives a breakdown of group KPIs as well as indicators not considered KPIs but which give a better understanding of the figures.
Lending, revenue and profit are all lower than last year. Despite a competitive market, lending was 5.63% up to the end of February 2020 against lending during the equivalent period in 2019. The effect of COVID-19 was quite dramatic. Given the circumstances, the directors are satisfied with the performance of the group.
As would be expected, this decrease in lending has led to a decrease in profitability as well as a decreased borrowing requirement.
The format of the Consolidated income statement has been amended to better reflect the group's activities as a lending company, to bring reporting in line with other financial entities and give better comparisons for investors and other users of the financial statements. Additionally, the performance indicators used in the past were updated for the same reason. Those below differ from those shown last year.
Until last year return on equity was used. This year we have used return on average equity as we believe this gives a more accurate picture of profitability. In the past we also used the level of external funding at the year end. This year we have used an average to better reflect how borrowings are used. Likewise, cost of external funds only included interest paid. This year it includes bank charges which relate directly to income from lending (arrangement fees etc.). Own resources in the past consisted of net assets which included fixed assets, prepayments and long-term liabilities. This year own resources are current financial assets less all current liabilities. This is seen as a better measure of funds to trade with. All years have been restated to reflect these changes.
| 2020 | 2019 | 2018 | 2017 | 2016 |
KPIs
Lending volume | £65.53m | £72.99m | £68.73m | £63.35m | £48.56m |
Average interest earning assets1 | £29.72m | £31.54m | £29.68m | £25.11m | £19.79m |
Total revenue | £5.28m | £5.48m | £5.17m | £4.55m | £3.46m |
Average external funding | £12.82m | £14.35m | £13.16m | £11.49m | £8.11m |
Cost of external funds | £0.62m | £0.70m | £0.63m | £0.49m | £0.43m |
Cost of funds/funds ratio | 4.84% | 4.88% | 4.79% | 4.26% | 5.30% |
Own resources (net current financial assets) | £15.50m | £14.82m | £13.94m | £13.03m | £12.21m |
Operating costs | £2.44m | £2.20m | £1.92m | £2.01m | £1.54m |
Return on average equity | 8.31% | 11.24% | 11.10% | 10.51% | 8.34% |
Other performance indicators
Net interest income | £3.94m | £4.15m | £3.86m | £3.49m | £2.63m |
Profit before tax | £1.55m | £2.02m | £1.89m | £1.64m | £1.27m |
Profit after tax | £1.27m | £1.63m | £1.51m | £1.34m | £1.00m |
EPS (pence) 2 | 5.96 | 7.66 | 7.08 | 6.25 | 4.70 |
DPS (pence)3 | 3.00 | 3.00 | 3.00 | 3.00 | 3.00 |
Return on capital employed | 6.74% | 7.24% | 6.77% | 6.69% | 6.40% |
1. Average interest earning assets consist of the average of the opening and closing loan book after taking account of the impairment provision.
2. There are no factors which would dilute earnings therefore fully diluted earnings per share are identical.
3. Dividends per share are based on interim dividends paid in the year and proposed final dividend for the year.
Non-financial indicators
Staffing
The most important non-financial indicator remains quality of management and staff.
Our senior members of staff are all fully trained in every facet of the business and have good relationships with more junior staff members whom they able and willing to assist when required. They have been with us for many years.
Customer care is of paramount importance in our business culture and this aspect is a constant part of training for everyone in the organisation. Feedback from our partners in this area has been very positive. Non-financial performance targets set for our staff have all been met. These include, but are not limited to, ensuring that our partners and end-user customers receive prompt responses to any queries they raise.
Orchard is a small group with 17 non-director employees. Although no employee is on the main board, there is no formal workforce advisory panel, nor is there a designated workforce non-executive director, all employees have access to the executive directors at any time and can raise any issues with them. They are also able to contact the Chairman should they wish to discuss a matter which they feel may not be appropriate for the executive.
Partner retention
Partner retention is another significant area in our business. This couples well with another non-financial indicator, brand preference. As our partner base grows, so does awareness of who we are and what we do. We review our partner base regularly to establish whether they are increasing or decreasing the amount of business they do with us. Action is taken if business from one source is dropping.
Innovation
A key non-financial strategy is innovation (see Strategy and objectives on page 5 of the full financial statements). Innovation is the ability to continually evolve and grow our business in our chosen markets. When looking at new products we stay within our risk parameters and examine whether the returns justify the resources expended. If new products fit our return and risk expectations, we proceed to the testing stage - relatively small amounts of lending. We believe that innovation is fundamental to growth.
IT systems
A robust, reliable and secure IT system is crucial to the business. We work closely with external outsource partners to continually review and develop our IT systems. Our customers have seen the advantages of the new system, making it easier to manage their agreements. We continue to upgrade the system in response to customer requirements.
Quality of lending
Our lending has been based on sound underwriting since we began - we carefully assess any person or body to whom we lend. In addition, we receive at least one instalment before we pay out (eliminating first payment default); the direct debit establishes timely collection and an electronic link to our borrowers; in most cases our partners guarantee the payment should the end borrower default; and, if the partner fails, many of our end borrowers are protected by the financial services compensation scheme thereby ensuring that we are paid.
Good governance
The role of the board is set out in the Corporate governance report on pages 20 to 22of the full financial statements. Among its objectives is to protect and enhance long-term value for all stakeholders. It sets the overall strategy for the group and supervises executive management. It also ensures that good corporate governance policies and practices are implemented within the group. In the course of discharging its duties, the board acts in good faith, with due diligence and care, and in the best interests of the group and its shareholders.
Going concern
The financial statements have been prepared on a going concern basis which assumes that the group will be able to continue its operations for the foreseeable future.
The directors continually assess the prospects of the group. Forecasts are prepared for a three-year period, on a rolling basis. These are also subject to stress testing, the main aspects of which are the value of loans made, the return on those loans and the level of expected credit losses. In these scenarios, there is no indication that there will be a problem in continuing as a going concern, even taking account of the effects of COVID-19. However, it is important to appreciate that the further away in time the estimate, the less reliable it is. The forecasts last year were prepared on the basis that bank base rate would rise by 0.25% pa over the next three years, based on an indication by the then Governor of the BoE, Mark Carney. Since then the BoE has reduced rates to 0.10%. Given the continuing, inherent uncertainty surrounding COVID-19, it is considerably more difficult to assess the future economically. Our forecasts therefore assume a base rate of 0.10% until July 2023. There may be some pressure on rates later on but it is unlikely that they will increase in the next two years.
The nature of our lending is such as to permit us to react to any changes in base rate within a short period of time (as mentioned in the section on interest rate risk on page 7 of the full financial statements) and with relatively little impact on our margins.
As a result of the impact of COVID-19, we have revised our forecasts downwards.
The key assumptions and bases used in the forecasts are now:
· Loans through our partners will grow to circa £80m in 2022/23;
· Liquidity will be available to fund those loans;
· Margins will remain relatively stable throughout the period;
· Overheads will increase at the rate of inflation with stepped increases at certain points, e.g. when capacity constraints are hit or when project spending is required;
· The funding system will be able to accommodate the increased business.
The directors have prepared and reviewed the financial projections covering a period of almost three years from the date of signing of these financial statements, taking account of the potential impact that COVID-19 may have on the results. In each year, and in particular in the 12 to 18 month period from signing, there is sufficient cash and there are sufficient reserves to enable the group to pay its debts as they fall due. In addition, they have further stress tested these projections to a point which they believe is unlikely to happen (reducing lending, reducing margins and increasing bad debt) to give a confidence buffer. Even in this scenario, based on the level of existing cash, the projected income and expenditure and the excess of our loan book over external debt (amounting to approximately £16.2m at the year end), the directors have a reasonable expectation that the company and group have adequate resources to continue in business for the foreseeable future. Accordingly, the going concern basis has been used in preparing the financial statements.
Future developments
It is the intention of the board to continue in our core markets but to test a small amount of longer term lending.
The board has therefore agreed to conduct a limited pilot of longer term lending into the static caravan market. This market gives us a risk adjusted return commensurate with our core lending. As usual, protection for our stakeholders is of paramount importance to us and we shall apply the same strict underwriting procedures as we do in other markets. In addition, the lending will be fully secured and there will be recourse to a third party which has substantial assets. The pilot lending will be for an amount of no more than £500k and will be for a period of no more than seven years
Environmental, social responsibility, community, human rights issues and gender diversity
The impact of the group on the environment consists of power used in an office environment and fuel used for getting to and from work. Environmental issues are therefore negligible.
The group operates out of an office in Luton. Most of our employees are based in the local area. We therefore contribute to the economy of the local community. We provide health club membership and childcare vouchers for any staff who wish it.
We provide equal opportunities for all applicants and members of staff, irrespective of race, colour, sex, disability or marital status.
The composition of the main board of directors is currently all male. The board of the two subsidiaries consist of one male and two females each. Males make up 68.18% of the employees in total (68.00% in 2019).
We review the background of our suppliers and will not use any supplier which, as far as we are aware, breaches our own high standards as regards human rights.
Section 172(1) Statement
Section 172(1) requires a director of a company to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
All matters brought to the board for consideration are reviewed in the light of how they will impact on stakeholders. This review involves balancing the interests of all stakeholders and includes having regard to:
· profitability;
· risk associated with the proposal (see the Principal risks and uncertainties);
· how the decision will impact on our employees (both in financial terms and how the quality of their work life and outside life will be affected). Further detail on how we engage with our workforce is shown under Environmental, social responsibility, community, human rights issues and gender diversity;
· what impact it will have on our partners and other customers (as mentioned under Non-financial indicators). Proper customer care, particularly in avoiding unfair outcomes, is of paramount importance to Orchard;
· our reputation (the impact of loss of reputation is dealt with under Conduct risk);
· either the CEO and/or CFO meet with major investors at least twice a year to discuss the group's progress and overall plans, obtaining valuable comments on how we are perceived. All reports and other documents are on our website and any investor may request a meeting with any member of the board.
In a wider sense:
· Orchard does not deal unfairly with its suppliers and business associates and ensures that payment terms are adhered to. In fact, in many cases it assists those associates to expand their business. For example, last year it took an investment in Accolade Education Finance Limited, a small private company, so that they could have the benefit of a well-established finance company as a shareholder. This gave them access to Orchard's experience in the lending market;
· it behaves as a good neighbour, helping the local community where it is able and employing people from the locality - which also assists in reducing our carbon footprint;
· in its dealings with government, particularly the revenue authorities, it is completely open, paying what it owes on time;
· it has had no instances from the FCA of non-compliance with regulations;
· Environmental, social responsibility, community, human rights issues and gender diversity are discussed earlier.
The board considers whether proposals put to it have long-term outcomes which affect its stakeholders. In most cases the proposals have no material long-term consequences. However, where there are potential consequences, the board takes account of the long-term nature of its decisions. For example, some years ago decisions were made both to change our IT system and to apply for a banking licence. Both decisions were long term in nature and required resources to be provided. The board agreed to both, seeing the benefits in the longer term for most of our stakeholders.
Directors' report
The directors present their annual report together with the audited accounts of the group and the company for the year ended 31 July 2020.
Results and dividends
The group profit for the year after taxation was £1,27m (2019 £1,63m). This is shown on page 26 of the full financial statements. The directors consider that the going concern basis is appropriate, supported by the profitability of the group and the significant cash balances. During the year the group paid dividends amounting to £641k to shareholders (2019 £641k) - note 13 of the full financial statements. The board is pleased to propose a final dividend of 2 pence per share to be paid on 18 December 2020 to shareholders on the register on 11 December 2020, with an ex-dividend date of 10 December 2020. The final dividend is subject to shareholder approval at the company's upcoming annual general meeting on 9 December 2020.
Future developments
Future developments and a fuller business review are contained in the Chief executive's review and the group strategic report.
Directors and their interests
The directors who served during the year and their beneficial interests in the share capital of the company are shown in the remuneration report on pages 17 and 18 of the full financial statements. There is a directors' and officers' indemnity insurance policy in existence. There were no other third party indemnity provisions for the directors.
Directors' responsibilities
The directors are responsible for preparing the strategic report, directors' report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare group and company financial statements for each financial year. The directors are required by the AIM rules of the London Stock Exchange to prepare group financial statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and have elected under company law to prepare the company financial statements in accordance with IFRS as adopted by the EU.
The group financial statements are required by law and IFRS adopted by the EU to present fairly the financial position of the group and the company and the financial performance of the group; the Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation.
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 the company and of the profit or loss of the group for that period.
In preparing each of the group and company financial statements, the directors are required to:
a) select suitable accounting policies and then apply them consistently;
b) make judgements and accounting estimates that are reasonable and prudent;
c) state whether they have been prepared in accordance with IFRSs adopted by the EU;
d) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group's and the company's transactions and disclose with reasonable accuracy at any time the financial position of the group and the company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the group and the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Orchard Funding Group plc website.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Research and development
During the financial year nothing was spent on research and development.
Financial instruments
Detailed information on the group's financial instruments is stated in notes 2.4 and 2.5 of the full financial statements.
The group's objectives and policies for managing risk are shown under Principal risks and uncertainties on pages 7 to 8 of the full financial statements.
Employees and environmental issues
The group is an equal opportunity employer. Details of the group's approach to employee and environmental matters are shown on page 13 of the full financial statements.
Statement as to disclosure of information to auditor
The directors who were in office on the date of approval of these financial statements have confirmed, as far as they are aware, that there is no relevant audit information of which the auditor is unaware. Each of the directors have confirmed that they have taken all of the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.
Auditor
A resolution to reappoint RSM UK Audit LLP as auditor for the ensuing year will be proposed at the forthcoming annual general meeting.
Consolidated income statement
|
| 2020 | 2019 |
| Notes | £000 | £000 |
Continuing operations |
|
|
|
Interest receivable and similar income | 5 | 4,558 | 4,856 |
Interest payable and similar charges | 5 | (624) | (704) |
Net interest income |
| 3,934 | 4,152 |
Other trading income | 5 | 722 | 625 |
Other direct costs | 5 | (533) | (455) |
Net other income |
| 189 | 170 |
|
|
|
|
Net total income |
| 4,123 | 4,322 |
|
|
|
|
Other operating costs | 6 | (2,436) | (2,197) |
Net impairment losses on financial assets | 6 | (130) | (111) |
Net gain on financial assets at fair value through consolidated income | 6 | - | 6 |
Operating profit |
| 1,557 | 2,020 |
Interest receivable |
| 6 | 5 |
Interest payable | 7 | (2) | (4) |
Profit before tax |
| 1,561 | 2,021 |
Tax | 8 | (288) | (387) |
Profit for the year from continuing operations attributable to the owners of the parent |
| 1,273 | 1,634 |
|
|
|
|
Earnings per share attributable to the owners of the parent during the year (pence) |
|
|
|
Basic and diluted | 10 | 5.96 | 7.66 |
|
|
|
|
The format of the consolidated income statement differs from the format applied last year.
Details of the restatement are shown in note 4 of the full financial statements.
Consolidated statement of other comprehensive income
|
|
|
2020 |
2019 |
|
|
Notes |
£000 |
£000 |
|
Profit for the year from continuing operations attributable to the owners of the parent |
|
1,273 |
1,634 |
|
|
|
|
|
|
|
|
|
|
|
Items that will not be reclassified to profit or loss: |
|
|
|
|
Changes in the fair value of equity investments at fair value through other comprehensive income: |
|
|
|
|
Valuation losses on the fair value of investments through other comprehensive income |
|
- |
(56) |
|
|
|
|
|
|
Total comprehensive income for the year from continuing operations attributable to the owners of the parent |
|
1,273 |
1,578 |
|
|
|
|
|
An equity investment was acquired in June 2019. The group has made an irrevocable election to adjust changes in fair values through other comprehensive income. The investment has been reduced to its estimated fair value of £nil.
Consolidated statement of financial position
|
| 2020 | 2019 |
| Notes | £000 | £000 |
|
|
|
|
|
|
|
|
Non-current assets |
|
|
|
Property, plant and equipment |
| 39 | 29 |
Right of use assets |
| 96 | 58 |
Intangible assets |
| 16 | 42 |
Deferred tax asset |
| 6 | 10 |
Investment |
| - | - |
Investment at fair value through profit and loss |
| 6 | 6 |
Investment at fair value through other comprehensive income |
| - | - |
Other receivables | 11 | 7 | 12 |
|
| 170 | 157 |
|
|
|
|
Current assets |
|
|
|
Loans to customers | 11 | 27,300 | 32,141 |
Other receivable and prepayments | 11 | 120 | 156 |
Cash and cash equivalents: |
|
|
|
Bank balances |
| 2,300 | 2,139 |
|
| 29,720 | 34,436 |
|
|
|
|
Total assets |
| 29,890 | 34,593 |
|
|
|
|
Liabilities |
|
|
|
Current liabilities |
|
|
|
Trade and other payables | 13 | 2,939 | 3,015 |
Borrowings | 12 | 11,004 | 16,218 |
Tax payable |
| 273 | 370 |
|
| 14,216 | 19,603 |
Non-current liabilities |
|
|
|
Borrowings | 13 | 72 | 15 |
Deferred tax liabilities |
| - | 5 |
|
| 72 | 20 |
|
|
|
|
Total liabilities |
| 14,288 | 19,623 |
|
|
|
|
Equity attributable to the owners of the parent |
|
|
|
Called up share capital |
| 214 | 214 |
Share premium |
| 8,692 | 8,692 |
Merger reserve |
| 891 | 891 |
Retained earnings |
| 5,805 | 5,173 |
Total equity |
| 15,602 | 14,970 |
|
|
|
|
|
|
|
|
Total equity and liabilities |
| 29,890 | 34,593 |
|
|
|
|
Consolidated statement of changes in equity
|
| Called up |
|
|
|
|
|
| share | Retained | Share | Merger | Total |
|
| capital | earnings | Premium | reserve | equity |
|
| £000 | £000 | £000 | £000 | £000 |
Balance at 1 August 2018 |
| 214 | 4,240 | 8,692 | 891 | 14,037 |
|
|
|
|
|
|
|
Change in accounting policy |
| - | (4) | - | - | (4) |
Restated total equity at the beginning of the financial year |
| 214 | 4,236 | 8,692 | 891 | 14,033 |
|
|
|
|
|
|
|
Changes in equity |
|
|
|
|
|
|
Profit for the period |
| - | 1,634 | - | - | 1,634 |
Movement in equity investments at fair value through other comprehensive income |
| - | (56) | - | - | (56) |
Transactions with owners: |
|
|
|
|
|
|
Dividends paid |
| - | (641) | - | - | (641) |
|
|
|
|
|
|
|
Balance at 31 July 2019 |
| 214 | 5,173 | 8,692 | 891 | 14,970 |
|
|
|
|
|
|
|
Profit and total comprehensive income |
| - | 1,273 | - | - | 1,273 |
Transactions with owners: |
|
|
|
|
|
|
Dividends paid |
| - | (641) | - | - | (641) |
|
|
|
|
|
|
|
Balance at 31 July 2020 |
| 214 | 5,805 | 8,692 | 891 | 15,602 |
|
|
|
|
|
|
|
Retained earnings consist of accumulated profits less losses of the group. They represent the amounts available for further investment in group activities. Only the element which constitutes profits of the parent company are available for distribution. There are no restrictions on payment of dividends by the subsidiaries to the parent or by the parent to shareholders.
The share premium account arose on the IPO on 1 July 2015 at a premium of 95p per share. Costs of the IPO have been deducted from the account as permitted by IFRS.
The merger reserve arose through the formation of the group on 23 June 2015 using the capital reorganisation method.
Consolidated statement of cash flows
|
| 2020 | 2019 |
|
| £000 | £000 |
Cash flows from operating activities: |
|
|
|
Operating profit |
| 1,557 | 2,020 |
Depreciation and amortisation |
| 86 | 83 |
|
| 1,643 | 2,103 |
Decrease/(increase) in loans to customers, other receivables and prepayments |
| 4,882 | (1,211) |
(Decrease)/increase in trade and other payables |
| (76) | 970 |
|
| 6,449 | 1,862 |
Tax paid |
| (387) | (364) |
|
|
|
|
Net cash generated by operating activities |
| 6,062 | 1,498 |
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
Interest received |
| 6 | - |
Purchases of property, plant and equipment |
| (29) | (16) |
Purchase of intangible fixed assets |
| - | (36) |
Purchase of investment at fair value through other comprehensive income |
| - | (56) |
Proceeds of sale of assets |
| 9 | - |
|
|
|
|
Net cash absorbed by investing activities |
| (14) | (108) |
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
Dividends paid |
| (641) | (641) |
Net receipts from borrowings |
| 1,000 | 684 |
Borrowings repaid |
| (6,207) | (541) |
Lease repayments |
| (39) | (39) |
|
|
|
|
Net cash absorbed by financing activities |
| (5,887) | (537) |
|
|
|
|
Net increase in cash and cash equivalents |
| 161 | 853 |
Cash and cash equivalents at the beginning of the year |
| 2,139 | 1,286 |
|
|
|
|
Cash and cash equivalents at the end of year |
| 2,300 | 2,139 |
|
|
|
|
Notes to the consolidated financial statements
1. Preliminary announcement
Orchard Funding Group plc ("Orchard") is a public limited company incorporated and domiciled in England
and Wales, whose shares are publicly traded on the AIM market of the London Stock Exchange. The registered
office is 721 Capability Green, Luton, Bedfordshire LU1 3LU and the principal place of business is the United
Kingdom.
The preliminary announcement set out above does not constitute Orchard's statutory financial statements for
the years ended 31 July 2020 or 2019 within the meaning of section 434 of the Companies Act 2006 but is
derived from those audited financial statements. The auditor's report on the consolidated financial statements
for the years ended 31 July 2020 and 2019 is unqualified and does not contain statements under s498(2) or
(3) of the Companies Act 2006.
Subject to the disclosures in note 2 below, the accounting policies used for the year ended 31 July 2020 are unchanged from those used for the statutory financial statements for the year ended 31 July 2019. The 2020 statutory accounts will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
2. Compliance with accounting standards
While the financial information included in this preliminary announcement has been computed in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRS.
Accounting standards adopted in the year
IFRIC 23 Uncertainty over Income Tax Treatments Financial Instruments - provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation requires the group to determine whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution, and to determine if it is probable that the tax authorities will accept the uncertain tax treatment. If it is not probable that the uncertain tax treatment will be accepted, the tax uncertainty is measured based on the most likely amount or expected value, depending on whichever method better predicts the resolution of the uncertainty. This measurement is required to be based on the assumption that each of the tax authorities will examine amounts they have a right to examine and have full knowledge of all related information when making those examinations.
The group has made no transactions, nor has it any assets or liabilities which it believes give rise to uncertain tax treatments.
3. Going concern
The financial statements have been prepared on a going concern basis which assumes that the group will be able to continue its operations for the foreseeable future.
The directors have prepared and reviewed financial projections, on an annual basis, covering a period of just under three years from the date of signing of these financial statements, with a particular focus on the period of 12 to 18 months from the date of signing. Based on the level of existing cash, the projected income and expenditure and the excess of our loan book over external debt (amounting to approximately £16.2m at the year end), the directors have a reasonable expectation that the company and group have adequate resources to continue in business for the foreseeable future. Accordingly, the going concern basis has been used in preparing the financial statements. This is discussed more fully in the Group strategic report on page 12 of the full financial statements.
4. Revised format of the Consolidated income statement
The format of the Consolidated income statement has been amended to better reflect the group's activities as a lending company, to bring reporting in line with other financial entities and give better comparisons for investors and other users of the financial statements. In the past the statement showed interest and other revenue from which were deducted finance and other operational costs to arrive at a gross profit figure. Costs directly associated with interest income are now deducted from it to arrive at a net interest income figure. Costs directly associated with other income are deducted from that to arrive at a net other income figure. In addition, bank charges which relate directly to interest or other income are included as part of those respective direct costs. Previously they were included as part of administrative expenses. The reconciliation between the two measures for 2019 is shown below:
|
| Note | As originally stated | Adjustments | As restated |
Prior year description | Current year description |
| £000 | £000 | £000 |
Continuing operations |
|
|
|
|
|
Interest revenue | Interest receivable and similar income | 1 | 4,671 | 185 | 4,856 |
Other revenue | Other trading income | 1 | 810 | (185) | 625 |
|
|
| 5,481 | - | 5,481 |
Finance costs | Interest payable and similar charges | 2 | (558) | (146) | (704) |
Other operational costs | Other direct costs | 2 | (72) | (383) | (455) |
Gross profit | Net total income |
| 4,851 | (529) | 4,322 |
|
|
|
|
|
|
Administrative expenses | Other operating costs | 2 | (2,726) | 529 | (2,197) |
Net impairment losses on financial and contract assets | Net impairment losses on financial assets |
| (111) | - | (111) |
Net gain on financial assets at fair value through consolidated income | Net gain on financial assets at fair value through consolidated income |
| 6 | - | 6 |
Operating profit |
|
| 2,020 | - | 2,020 |
Interest receivable on bank balances | Interest receivable |
| 5 | - | 5 |
Interest payable | Interest payable |
| (4) | - | (4) |
Profit before tax |
|
| 2,021 |
| 2,021 |
Tax |
|
| (387) | - | (387) |
Profit for the year | Profit for the year |
| 1,634 | - | 1,634 |
|
|
|
|
| |
Note 1 - In previous years, non-use fees were treated as other income. The board considers that these properly belong as part of interest receivable and similar income in line with other financial entities.
Note 2 - In previous years all bank fees were treated as an administrative expense. The board considers that those fees which relate to borrowing funds to lend on to customers (arrangement fees including associated legal costs) should properly be treated as interest payable and similar charges.
In addition, certain fees were incurred which were recharged to customers and these have been moved to other direct costs. The respective amounts were £146k and £383k. The total of £529k has been removed from what would have been administrative expenses (now other operating costs). Bank account management fees of £17k are included in other operating costs.
5. Revenue
Revenue (which for these purposes includes interest income, which is outside the scope of IFRS 15) consists of income which is recognised at a single point in time and that which occurs over a given period (up to one year). No income is receivable in more than one year.
There has been a change in revenue allocations from 2019 and before to those shown in 2020. Details are in note 4.
The group has no single major customer. All income is from financing. Revenue can be analysed as follows:
| 2020 | 2019 |
| £000 | £000 |
Revenue |
|
|
Interest revenue using the effective interest rate method | 4,558 | 4,856 |
Other revenue | 722 | 625 |
| 5,280 | 5,481 |
Timing of revenue recognition: |
|
|
At a point in time - direct debit charges | 505 | 360 |
At a point in time - non utilisation fees and loan administrative fees | 390 | 306 |
At a point in time - default and settlement fees | 81 | 47 |
Over time - licence fees | 103 | 144 |
Over time - interest revenue outside the scope of IFRS 15 | 4,201 | 4,624 |
| 5,280 | 5,481 |
6. Expenses by nature
|
| 2020 | 2019 |
|
| £000 | £000 |
Interest payable in direct costs |
| 466 | 558 |
Bank fees in direct costs |
| 646 | 529 |
Other direct costs |
| 45 | 72 |
Employee costs (including directors) |
| 1,178 | 1,100 |
Advertising and selling costs |
| 443 | 413 |
Professional and legal fees |
| 229 | 198 |
Impairment losses (note 11) |
| 130 | 111 |
IT costs |
| 149 | 91 |
Cost of listing |
| 85 | 87 |
Depreciation and amortisation |
| 86 | 80 |
Interest payable on right-of-use assets |
| 2 | 4 |
Other net expenses |
| 262 | 223 |
Fair value gains on investments |
| - | (6) |
|
| 3,719 | 3,460 |
|
|
|
|
7. Finance income and costs
The group's income comes from making loans.
Interest payable on borrowings to finance these loans is therefore included as a cost of sale under interest payable and similar charges. The amount included was £466k (2019 £558k).
The group receives a small amount of interest from its bank balances. This year it amounted to £6k (2019 £5k).
Interest payable is in respect of right-of-use assets and amounted to £2k (2019 £4k).
8. Tax expense
8.1 Current year tax charge
| 2020 | 2019 |
| £000 | £000 |
Current tax expense | 299 | 396 |
Adjustment re previous year tax expense | (10) | - |
Deferred tax expense relating to the origination and reversal of temporary differences | (1) | (9) |
| 288 | 387 |
8.2 Tax reconciliation
The tax assessed for the year differs from the main corporation tax rates in the UK (19%, 2019 - 19%).
The differences are explained below.
| 2020 | 2019 |
| £000 | £000 |
Profit before tax for the financial year | 1,561 | 2,020 |
|
|
|
Applicable rate - 19.00% (2019 19.00%) | 19.00% | 19.00% |
|
|
|
Tax at the applicable rate | 297 | 384 |
Effects of: |
|
|
Expenses not deductible for tax | 1 | 2 |
Adjustment re previous year tax expense | (10) | - |
Reduced rate of tax on reversing timing differences
| - | 1 |
Tax charge for the period | 288 | 387 |
|
|
|
9. Dividends
| 2020 | 2019 |
| £000 | £000 |
Amounts recognised as distributions to equity holders in the period: |
|
|
Final dividend for the year ended 31 July 2019 of 2p (2018 2p) per share |
427 |
427 |
Interim dividend for the year ended 31 July 2020 of 1p (2019 1p) per share | 214 | 214 |
| 641 | 641 |
|
|
|
Proposed final dividend for the year ended 31 July 2020 of 2p (2019 2p) per share | 427 |
427 |
|
|
|
10. Earnings per share
Earnings per share is based on the profit for the year of £1.27m (2019 £1.63m) and the weighted average number of the ordinary shares in issue during the year of 21.35m(2019 21.35m). There are no options or other factors which would dilute these therefore the fully diluted earnings per share is identical.
11. Loans to customers and other receivables
| 2020 | 2019 | ||
| Group | Company | Group | Company |
| £000 | £000 | £000 | £000 |
Non-current |
|
|
|
|
Financial assets at amortised cost |
|
|
|
|
Other receivables | 7 | - | 12 | - |
| 7 | - | 12 | - |
Current |
|
|
|
|
Financial assets at amortised cost |
|
|
|
|
Loans to customers: |
|
|
|
|
Gross | 27,517 | - | 32,563 | - |
Impairment provision | (217) | - | (422) | - |
| 27,300 | - | 32,141 | - |
Financial assets at amortised cost |
|
|
|
|
Intercompany receivables | - | 10,362 | - | 10,338 |
Other receivables | 104 | - | 134 | - |
| 104 | 10,362 | 134 | 10,338 |
| 27,404 | 10,362 | 32,275 | 10,338 |
Prepayments | 16 | 7 | 22 | 6 |
| 27,420 | 10,369 | 32,297 | 10,344 |
|
|
|
|
|
Loans to customers
Standard credit terms for trade receivables are based on the length of the loan but repayments are due on a monthly basis. Detail of impairment reviews are shown in note 2.4 of the full financial statements.
The expected credit losses on receivables not past due have been assessed as very low, because of the following factors:
· No loan is made until the first repayment has been received by the group;
· In the event of default, the group has recourse to the underlying borrower;
· In the case of insurance receivables, the Financial Services Compensation Scheme provides additional cover to the group; and
· For insurance receivables, the cover ceases, premiums paid are refunded, and the group has access to these refunds.
Loans to customers can be analysed as follows. The reference to stage 1, 2 and 3 refer to those stages explained in note 2.4 of the full financial statements.
The figures refer to the group as the company has no loans to customers.
|
| 2020 |
|
| 2019 |
|
| Gross | Impairment allowance | Net | Gross | Impairment allowance | Net |
| £000 | £000 | £000 | £000 | £000 | £000 |
Amount receivable - stage 1 | 27,186 | (34) | 27,152 | 31,941 | - | 31,941 |
Amount receivable - stage 2 | 120 | (1) | 119 | 200 | - | 200 |
Amount receivable - stage 3 | 211 | (182) | 29 | 422 | (422) | - |
| 27,517 | (217) | 27,300 | 32,563 | (422) | 32,141 |
|
|
|
|
|
|
|
Amounts shown as past due but not impaired are largely covered by the Financial Services Compensation Scheme.
97.26% of customer receivables are subject to recourse to the introducing partner in the event of default by the borrower.
| 2020 | 2019 |
| Group | Group |
| £000 | £000 |
Impairment provision at 1 August | 422 | 343 |
Increase in provision in the year | 130 | 111 |
Receivables written off during the year as uncollectable | (335) | (32) |
Impairment provision at 31 July | 217 | 422 |
Intercompany receivables
The holding company is owed a substantial amount by its two largest subsidiaries. These debts are interest free and due on demand. Neither subsidiary has the cash to repay these immediately and therefore, under the requirements of IFRS 9, provision may need to be made in the financial statements of the holding company. However, the board does not see any need for a provision because:
(a) the loans to customers which each subsidiary has made will generate sufficient cash to repay these loans (after payment of other liabilities) on a "run off" basis (as cash is collected it could be paid across to the parent). Loans to customers in the subsidiaries are all repayable within 12 months; and
(b) any risk of loss is considered remote (not expected) and therefore no impairment provision is necessary.
12. Borrowings - group
| 2020 | 2019 | ||
| Secured | Unsecured | Secured | Unsecured |
| £000 | £000 | £000 | £000 |
Non-current: |
|
|
|
|
Borrowings arising from right-of-use assets | - | 72 | 3 | 12 |
| - | 72 | 3 | 12 |
|
|
|
|
|
Current: |
|
|
|
|
Bank loans | 10,977 | - | 16,184 | - |
Borrowings arising from right-of-use assets | - | 27 | 6 | 28 |
| 10,977 | 27 | 16,190 | 28 |
|
|
|
|
|
The parent company has no external borrowings.
12.1 Terms and debt repayment schedule
Barclays Bank borrowings of £9.48m are secured by a fixed and floating charge over all the assets of Bexhill, bear interest at rates of 2.90% above LIBOR plus any associated costs. They are repayable within one year of the advances. The loans are provided on a revolving 12 monthly basis under a facility which was renewed on 29 July 2020. The maximum drawdown on the facility is currently £17.00m of which £7.52m was undrawn at the year-end (2019 £1.32m). The directors consider that the terms of this facility closely match the maturity dates of the group's receivables.
Conister Bank borrowings of £1.50mare secured over the assets of Orchard Funding, bear interest at an average rate of 5.11% pa and are repayable within one year of the advance. The maximum drawdown facility is currently £2.00m of which £0.50m was undrawn at the year-end (2019 £1.50m).
The minimum payments under lease liabilities are as follows:
| 2020 | 2019 |
| Group | Group |
| £000 | £000 |
|
|
|
Within 1 year | 30 | 36 |
Later than 1 year but no later than 5 | 76 | 15 |
| 106 | 51 |
Future finance charges | (7) | (2) |
| 99 | 49 |
The present value of hire purchase and finance lease liabilities are as follows:
|
|
|
|
|
|
Within 1 year | 27 | 35 |
Later than 1 year but no later than 5 | 72 | 14 |
| 99 | 49 |
|
|
|
Lease liabilities other than for the short leasehold premises are secured on the assets that they finance and bear interest at varying rates.
12.2 Reconciliation of liabilities arising from financing activities
The information given below relates to the group. The parent has no cash-flows from financing activities as all its costs are paid for by its subsidiaries.
| At 1 August 2018 | Cash flows | At 31 July 2019 | Non-cash movements | Cash flows | At 31 July 2020 |
| £000 | £000 | £000 | £000 | £000 | £000 |
Non-current: |
|
|
|
|
|
|
Other loans | 41 | (41) | - | - | - | - |
Borrowings arising from right-of-use assets | 48 | (33) | 15 | 88 | (31) | 72 |
| 89 | (74) | 15 | 88 | (31) | 72 |
Current: |
|
|
|
|
|
|
Bank loans | 16,000 | 184 | 16,184 | - | (5,207) | 10,977 |
Borrowings arising from right-of-use assets: | 36 | (2) | 34 | - | (7) | 27 |
| 16,036 | 182 | 16,218 | - | (5,214) | 11,004 |
Total liabilities from financing activities | 16,125 | 108 | 16,233 | 88 | (5,245) | 11,076 |
Interest on right-of-use assets included in liabilities |
| (4) |
|
| (1) |
|
Cashflows from financing activities |
| 104 |
|
| (5,246) |
|
Comprising: |
|
|
|
|
|
|
Net receipts from borrowings |
| 684 |
|
| 1,000 |
|
Borrowings repaid |
| (541) |
|
| (6,207) |
|
Lease repayments |
| (39) |
|
| (39) |
|
|
| 104 |
|
| (5,246) |
|
|
|
|
|
|
|
|
12.3 Non-cash financing activities
The group extended the term of its lease in May 2020 which was a modification of the existing lease. This has led to a non-cash financing transaction of £88k. Details are shown in note 2.6 of the full financial statements.
13. Trade and other payables
Current liabilities | 2020 | 2019 | ||
| Group | Company | Group | Company |
| £000 | £000 | £000 | £000 |
Trade payables | 2,487 | - | 2,554 | - |
Other payables | 26 | - | 70 | - |
Other tax and social security costs | 36 | 20 | 40 | 23 |
Accrued expenses | 390 | 46 | 351 | 71 |
| 2,872 | 66 | 3,015 | 94 |
Trade payables are unsecured and are usually paid within 30 days of recognition.
14. Financial instruments
The company is exposed to the risks that arise from its use of financial instruments. The objectives, policies and processes of the company for managing those risks and the methods used to measure them are detailed in note 5 of the full financial statements.
14.1 Principal financial instruments
The principal financial instruments used by the company, from which financial instrument risk arises, are as follows:
· Loans to customers
· Other receivables
· Cash and cash equivalents
· Trade payables
· Bank borrowings
· Financing for right-of-use assets
14.2 Financial instruments by category
The group held the following financial assets at the reporting date:
| 2020 | 2019 | ||
| Group | Company | Group | Company |
| £000 | £000 | £000 | £000 |
Non-current assets |
|
|
|
|
Investments: |
|
|
|
|
- amortised cost | - | 2,807 | - | 2,807 |
- fair value through consolidated income statement | 6 | 6 | 6 | 6 |
Trade and other receivables: |
|
|
|
|
Other receivables measured at amortised cost: non-current | 7 | - | 12 | - |
Current assets |
|
|
|
|
Loans to customers | 27,300 | - | 32,141 | - |
Other receivables: current | 104 | 10,362 | 134 | 10,338 |
Cash and cash equivalents: |
|
|
|
|
Bank balances and cash in hand | 2,300 | - | 2,139 | - |
| 29,717 | 13,175 | 34,432 | 13,151 |
|
|
|
|
|
The group held the following financial liabilities at the reporting date:
| 2020 | 2019 | ||
| Group | Company | Group | Company |
| £000 | £000 | £000 | £000 |
Financial liabilities at amortised cost: |
|
|
|
|
Interest bearing loans and borrowings: |
|
|
|
|
Borrowings payable: non-current | 72 | - | 14 | - |
Borrowings payable: current | 11,004 | - | 16,219 | - |
Trade and other payables | 2,903 | 46 | 2,975 | 71 |
| 13,979 | 46 | 19,208 | 71 |
|
|
|
|
|
14.3 Fair value of financial instruments
The fair values of the financial assets and liabilities are not materially different to their carrying values due to the short-term nature of the current assets and liabilities.
14.4 Financial risk management
The group's activities expose it to a variety of financial risks. These risks are dealt with in detail in the Group strategic report under Principal risks and uncertainties.
15. Treatment of borrowings
The group borrows money from its bankers and lends this on, together with its own funds, to its customers.
Any increase in activity leads to an increase in debtors and an associated increase in borrowings. If the company was one which bought and sold goods or services the money borrowed would be similar to the company's stock in trade and the change in creditors would be shown as part of operating cash flows. However, accounting standards require cash flows from financing to be shown separately and this means that there appears to be a large outflow of cash from the company's operations which is then covered by borrowings. For reasons stated above this is not the case.
16. Major non-cash transactions.
The group extended the term on its leasehold premises in May 2020. This modification to the lease led to the introduction of an additional right of use asset and lease liability onto the Consolidated statement of financial position. Details are shown in note 2.7 of the full financial statements.
17. Post balance sheet events
An investment was made last year in a company called Zebra Finance Limited. Since this year end the company has entered into a company voluntary arrangement. The fair value was considered to be £nil last year and remains the same this year.
Details are shown in note 17 of the full financial statements.
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