TIDMORCH
RNS Number : 2600D
Orchard Funding Group PLC
27 October 2020
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 GBP5.28
million for the 12 months to 31 July 2020 (31 July 2019 GBP5.48
million)
-- The loan book fell by 15.06% year on year to GBP27.30
million. This was after applying the requirements of IFRS 9
-- Profit after tax fell by 22.09% from GBP1.63 million to GBP1.27 million
-- Earnings Per Share ("EPS") fell in the period by 22.19% to 5.96p (31 July 2019 7.66p)
-- The group lent GBP65.53 million to clients in the 12 months
to 31 July 2020 a decrease of 10.22% (31 July 2019 GBP72.99
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 GBP17 million and GBP2 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 GBP72.99m in 2019 to GBP65.53m in
2020 (10.22%)
Loan book (post ECL provision) is down from GBP32.14m in 2019 to
GBP27.30m in 2020 (15.06%)
Bank funding is down from GBP16.18m in 2019 to GBP10.99m in 2020
(32.17%)
Gross total income is down from GBP5.48m in 2019 to GBP5.28m in
2020 (3.67%)
Net total income is down from GBP4.32m in 2019 to GBP4.13m in
2020 (4.63%)
Other operating costs are up from GBP2.20m in 2019 to GBP2.44m
in 2020 (10.83%)
Operating profit is down from GBP2.02m in 2019 to GBP1.56m 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 GBP5million 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 GBP1.7 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 GBP17m) 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 GBP2m with Conister Bank. Conister
requires information on lending to be sent on a regular basis.
GBP9.48m of the Barclays facility was in use at the year end and
GBP1.50m 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 GBP15.50m. 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 The risk that debtors or guarantors will default
risk
Impact on the group A major loss could have a serious effect on
group profit. A GBP100k loss on a loan asset
is GBP100k straight off profit before tax.
Year-on-year change Risk has increased this year as a result of
in risk 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.
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Liquidity risk
Explanation of the A lack of funding to finance our business.
risk
Impact on the group Without adequate funding we cannot conduct our
business.
Year-on-year change Risk has not changed. COVID-19 has had no impact.
in risk 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 GBP17m
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 GBP2m to support our loan book. Excess available
credit plus our net current financial assets
amounted to GBP23.57m at 31 July 2020.
-------------------- ------------------------------------------------------
Interest rate risk
Explanation of the The risk that we lend at one rate and borrow
risk at a rate higher than anticipated.
Impact on the group Reduced margins mean reduced profit.
Year-on-year change Risk has not changed. Even with the decrease
in risk 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 Disruption to or failure of our IT systems.
risk 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 Risk has increased this year with a new system
in risk 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 Any action that leads to unfair customer outcomes.
risk 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 Risk has not changed
in risk
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 GBP4.89m
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
GBP27.52m (2019 GBP32.56m) (before expected credit loss
provisions), of which the highest individual loan (not a block loan
to a premium finance company) was less than GBP100k, 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 GBP0.13m
during the year to 31 July 2020, net of reversal of previous
provisions and items written off against those provisions (GBP0.11m
in the year to 31 July 2019). The provision this year is GBP0.55m
carried forward at 31 July 2020 (GBP0.42m 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 18 1/2 % above its trough in
April and around 11 1/2 % 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 GBP65.53m GBP72.99m GBP68.73m GBP63.35m GBP48.56m
Average interest earning
assets(1) GBP29.72m GBP31.54m GBP29.68m GBP25.11m GBP19.79m
Total revenue GBP5.28m GBP5.48m GBP5.17m GBP4.55m GBP3.46m
Average external funding GBP12.82m GBP14.35m GBP13.16m GBP11.49m GBP8.11m
Cost of external funds GBP0.62m GBP0.70m GBP0.63m GBP0.49m GBP0.43m
Cost of funds/funds ratio 4.84% 4.88% 4.79% 4.26% 5.30%
Own resources (net current
financial assets) GBP15.50m GBP14.82m GBP13.94m GBP13.03m GBP12.21m
Operating costs GBP2.44m GBP2.20m GBP1.92m GBP2.01m GBP1.54m
Return on average equity 8.31% 11.24% 11.10% 10.51% 8.34%
Other performance indicators
Net interest income GBP3.94m GBP4.15m GBP3.86m GBP3.49m GBP2.63m
Profit before tax GBP1.55m GBP2.02m GBP1.89m GBP1.64m GBP1.27m
Profit after tax GBP1.27m GBP1.63m GBP1.51m GBP1.34m GBP1.00m
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 GBP80m 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 GBP16.2m 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 GBP500k 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 GBP1,27m (2019
GBP1,63m). 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 GBP641k to shareholders (2019 GBP641k) - 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 GBP000 GBP000
---------------------------------------- ------ -------- --------
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 GBP000 GBP000
--------------------------------------------- ------- ------- -------
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 GBPnil.
Consolidated statement of financial position
2020 2019
Notes GBP000 GBP000
----------------------------------------- ------ ------- -------
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
GBP000 GBP000 GBP000 GBP000 GBP000
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
GBP000 GBP000
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 GBP16.2m 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:
As originally
Note stated Adjustments As restated
Prior year description Current year description GBP000 GBP000 GBP000
----------------------------- -------------------------- ----- -------------- ------------ ------------
Continuing operations
Interest receivable
Interest revenue and similar income 1 4,671 185 4,856
Other revenue Other trading income 1 810 (185) 625
5,481 - 5,481
Interest payable
Finance costs 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 Net impairment losses
and contract assets on financial assets (111) - (111)
Net gain on financial Net gain on financial
assets at fair assets at fair value
value through consolidated through consolidated
income 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 GBP146k and GBP383k. The total of GBP529k
has been removed from what would have been administrative expenses
(now other operating costs). Bank account management fees of GBP17k
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
GBP000 GBP000
----------------------------------------------------------- ------------------ ------------------
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
GBP000 GBP000
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 GBP466k (2019
GBP558k).
The group receives a small amount of interest from its bank
balances. This year it amounted to GBP6k (2019 GBP5k).
Interest payable is in respect of right-of-use assets and
amounted to GBP2k (2019 GBP4k).
8. Tax expense
8.1 Current year tax charge
2020 2019
GBP000 GBP000
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
GBP000 GBP000
------------------------------------------
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
GBP000 GBP000
-------------------------------------------- ------- -------
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
GBP1.27m (2019 GBP1.63m) 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
GBP000 GBP000 GBP000 GBP000
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
Impairment Impairment
Gross allowance Net Gross allowance Net
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------
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
GBP000 GBP000
--------------------------------------------
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
GBP000 GBP000 GBP000 GBP000
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 GBP9.48m 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
GBP17.00m of which GBP7.52m was undrawn at the year-end (2019
GBP1.32m). The directors consider that the terms of this facility
closely match the maturity dates of the group's receivables.
Conister Bank borrowings of GBP1.50mare 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 GBP2.00m of which GBP0.50m was
undrawn at the year-end (2019 GBP1.50m).
The minimum payments under lease liabilities are as follows:
2020 2019
Group Group
GBP000 GBP000
-------------------------------------
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 At 31 Non-cash Cash At 31
2018 Cash flows July 2019 movements flows July 2020
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
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 GBP88k. 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
GBP000 GBP000 GBP000 GBP000
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
GBP000 GBP000 GBP000 GBP000
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
GBP000 GBP000 GBP000 GBP000
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
GBPnil last year and remains the same this year.
Details are shown in note 17 of the full financial
statements.
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