Chairman's statement

I am pleased to give my first report on the group's results for the half year ended 31 January 2020.

I joined the group because I believed strongly in the business model. Having had the opportunity to have discussions with both the executive directors, other non-executive directors, and key staff, I am convinced that the bank licence is the way forward to grow the business and secure liquidity.

The group has continued to grow its new lending and loan book in the first half of the current financial year. Lending has achieved approximately 4% growth and the loan book has increased by almost 8% compared to the six-month period to 31 January 2019. New business sales activity has moved into areas that previously we only touched on. We are always actively looking to expand further our sales capacity. We still have a strong capability to process short term loans efficiently, our processing platform is scalable and our management team are confident in our operational capability to handle further growth in lending volumes. We shall, of course, continue to look at adjacent sectors to complement our traditional lending but any movement into these sectors will this will only be where our model is preserved (good underwriting leading to relatively safe lending).

While we continue to compete with some very large lenders, our customer service sets us apart and we intend to continue with this personal touch.

We are similar to other businesses operating in these traumatic times. There is a serious pandemic affecting us all at present. All our products are likely to suffer because of this.. However, we have a strong capital position and adequate external funding lines through Barclays and Conister Bank to both see us through and finance any growth. We do continue to review our liquidity strategies including our application to the Prudential Regulation Authority (PRA) for the company to secure a banking licence which would allow us much greater flexibility to raise funding in the future. The banking licence has been a long-standing strategic goal for Orchard but, in keeping with our cautious approach to growth, we have made sure we understand the costs and the risks associated with being a bank. This process should reach a milestone by the end of April 2020, with the application being submitted.

Our senior banking personnel (those concerned with risk, financial reporting and governance) have been appointed but we shall continue to add people as required in order to provide the necessary assurance to the banking regulator and to our shareholders.

I have confidence in the management team and the company's ability to expand given its high quality loan book. I am encouraged by the potential for growing the new business lending, the loan book and interest income. In the short term, profits will not be as high as in previous periods as a result of the investment in the banking licence but should grow once this is granted.

Current trading and outlook

We made certain strategic acquisitions during the last financial year. We are beginning to see the shoots of opportunity from these investments.

I believe there remains considerable scope to pursue our strategic priorities by developing the business model organically and pursuing equally attractive acquisition opportunities, should such opportunities lead to something which would enhance the business and build shareholder value.

Mark Sismey-Durrant
Chairman

Chief Financial Officer's summary

The figures for the six month period ended 31 January 2020 demonstrate growth over the equivalent half year in 2018/2019 in lending and turnover.

Lending volume was up 4.04% and gross revenue 3.25% compared to the six months to 31 January 2019.

Profit before and after tax has, as was expected, fallen. Net costs have risen from £1.27m to £1.52m - an increase of £250,000.

The main driver behind this was an increase in several classes of non-direct costs, discussed further below

As stated in the full year financial statements to 31 July 2019, the plan for the current year is to increase our sales in existing markets, expand into adjacent markets and re-apply for our banking licence, whilst continuing to keep costs in line with our plans.

Like many businesses, we are operating in the midst of a very serious pandemic. There is no question that all business entities will be affected. However, as a result of sound underwriting procedures, multiple layers of protection and guarantees by the government to aid businesses in surviving this, we have confidence that the group will see little negative impact. However, being prudent we have added an additional 0.1% impairment provision across all of our trade receivables as at 31 January 2020. This is realistically a higher percentage as much of that loan book has already been repaid. The board consider this sufficient as a buffer against the coronavirus threat.

Key Performance Indicators (KPIs)

KPIs for the group are the means by which the board monitors the efficiency of the business. These are set so that fluctuations outside a certain tolerance would require further examination of the business operations. They revolve around lending and the cost of lending. Our model remains to apply a sound underwriting process and multiple layers of credit protection wherever possible. However, like all similar businesses, lending is not risk free.

The group's core business is still insurance premium funding and funding for professionals but we have expanded our short term lending market in recent years to include school fees, leisure lending and associated lending. We continue to look at complimentary markets but each new area is only taken on when management is happy that it fits with our current model. It is then monitored carefully and if it is not performing against target it will not be continued.

All these parts are managed on a similar basis, carry similar risks and rewards and need to comply with similar regulations. They are therefore combined for reporting purposes.

The directors consider the following financial indicators as KPIs:

·           Lending.

·           Gross rate on loans made.

·           Return on equity (ROE).

·           Borrowing and other capital resources.

·           Cost of borrowing.

The table below gives a breakdown of group KPIs. This also includes those items not considered KPIs but which give a better understanding of the figures.

Return on equity is based on PAT divided by simple equity (capital and reserves). Return on capital employed is based on EBITDA divided by equity plus loans net of any cash reserves.

The former measure is more of use to investors while the latter is a measure of efficiency for management purposes.

Key performance indicators

Financial summary - other performance indicators

Lending volume is 4.04% up on the equivalent half year in the previous period. As was stated in the financial statements for the year ended 31 July 2019, our competitors are still forcefully defending their market share across the areas in which we operate, although our lending is beginning to increase into new product lines.

As a result of the activities of our competitors, gross income has not been as high as was hoped (although still 3.25% up on the half year to January 2019). Given the difficult trading conditions experienced during the last year, we believe that we have performed well.

The main driver behind the reduction in profit before and after tax, was an increase over the equivalent half year on 2018/19 in several classes of non-direct costs.

External consultancy and professional fees have increased by £45,000, in large part for advice given in respect of the bank licence application.

Staffing has been bolstered for the same reason both at board level and with other significant personnel (risk management, IT etc). Overall, employment costs have risen by £115,000 (including recruitment fees).

Likewise, IT costs have increased by £26,000 as part of the continuing development of our systems to make them "bank ready".

As we have moved into adjacent markets, more needs to be spent on selling costs. These have risen by £46,000.

We also have the continuing process of assessing financial assets for expected credit losses. Given the potential impact of coronavirus, we have made a provision of an additional 0.1% on all debts which we consider reasonable in the circumstances. This has led to an increase in the provision for impairment by £52,000 during the period.

Last year Barclays Bank plc agreed to increase our banking facility from £15.00m to £17.00m. At 31 January 2020 we were employing £12.13m of this facility (2019 £15.00m of a £17.00m facility). We had utilised all of the Conister Bank facility of £2.00m (£1.00m out of £2.00m in the period to 31 January 2019).

With this additional availability of bank funding, our own net assets of £15.37m at 31 January 2020 (£14.56m at 31 January 2019) and the prospect of getting the bank licence within the next 12 months, the group is well set for substantial growth.

The board is pleased to declare an interim dividend of 1 pence per share to be paid on 26 June 2020 to shareholders on the register at 12 June 2020, with an associated ex-dividend date of 11 June 2020.

Liam McShane

Chief Financial Officer
 

Consolidated income statement

Consolidated statement of other comprehensive income

Consolidated statement of financial position

The period to 31 January 2019 has been restated to take account of the adoption of IFRS 16 during the year to 31 July 2019.

Consolidated statement of changes in equity

The merger reserve arose through the formation of the group on 23 June 2015 using the consolidation method which treats the merged companies as if they had been combined throughout the current and comparative accounting periods. The accounting principles for these combinations gave rise to a merger reserve in the consolidated statement of financial position, being the difference between the nominal value of new shares issued by the company for the acquisition of the shares of the subsidiaries and each subsidiary's own share capital.

The share premium account arose on the issue of shares on the IPO on 1 July 2015 at a premium of 95p per share. Costs directly attributable to the issue of shares have been deducted from the account.

 Consolidated statement of cash flows

Cash and cash equivalents consists of bank balances.

Notes to the financial statements

1. General information

Orchard Funding Group PLC ("the company") and its subsidiaries (together "the group") provide funding and funding support systems for insurance premiums, professional and equivalent fees and other services. The group operates in the United Kingdom.

The company is a public company listed on AIM, a market operated by the London Stock Exchange, incorporated and domiciled in the United Kingdom. The address of its registered office is 721 Capability Green, Luton, Bedfordshire LU1 3LU.

The condensed consolidated interim financial information for the six months ended 31 January 2020 has been prepared in accordance with the presentation, recognition and measurement requirements of applicable International Financial Reporting Standards adopted by the European Union ('IFRS') except that the group has not applied IAS 34, Interim Financial Reporting, which is not mandatory for UK groups listed on AIM, in the preparation of the condensed consolidated interim financial information.

The financial information does not include all of the information required for full annual financial statements and should be read in conjunction with the financial statements of the group for the year ended 31 July 2019 which are prepared in accordance with IFRS.

The accounting policies used in the preparation of condensed consolidated interim financial information for the six months ended 31 January 2020 are in accordance with the presentation, recognition and measurement criteria of IFRS and are consistent with those which are expected to be adopted in the annual statutory financial statements for the year ending 31 July 2020. A number of IFRSs and Interpretations have been endorsed by the EU that will apply for the first time in the period to 31 July 2020. These have no impact on the group's financial statements.

Under the expected credit loss (ECL) model required in IFRS 9, provision has been made in the financial statements to 31 January 2020 amounting to 0.15% of trade receivables (31 January 2019 0.63%). In assessing potential provisions, the group has adopted the simplified approach which requires the entity to recognise a loss allowance based on lifetime ECLs at each reporting date, right from origination. Part of this process has been to examine the impact of the coronavirus epidemic and part of the provision is in respect of this. As all trade receivables are payable within one year this would be the same if based on a 12 month expected credit loss model.

IFRS 16 was adopted early and first applied in the year to 31 July 2019. The adoption of this standard has resulted in the recognition of an additional asset and liability, together with an accumulated reduction in retained earnings up to 1 August 2018. The impact in this reporting period and the next two will be to have a higher charge for interest payable and a lower one for administrative expenses than would have been the case under IAS 17. Group overall retained earnings by the end of the lease will be unaffected by the treatment during the term of the lease. The financial statements for the six months to 31 January 2019 have been restated to take account of the impact of this adoption.

The group's 2019 annual report provides full details of significant judgements and estimates used in the application of the group's accounting policies. There have been no significant changes to these judgements and estimates during the period.

The financial information included in this document is unaudited and does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 July 2019 are the group's statutory accounts for that financial year. Those accounts have been reported on by the company's auditor and delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

2. Segmental reporting

The group operates wholly within the United Kingdom, therefore there is no meaningful information that could be given on a geographical basis.

Notes to the financial statements

The group still lends into insurance premium funding, funding for professionals, school fee and leisure lending. 

The board decided some time ago that there is very little to be gained in separating its lending by product line for reporting purposes. They meet the criteria for aggregation (underwriting process, management of the loans, distribution channels, risks and rewards) and all are similar. The customer base does differ (insurance brokers, professional firms, schools and leisure) but our lending is still subject to strict underwriting processes.

2. Segmental reporting

    6 months ended 31 January 2020

    6 months ended 31 January 2019

Notes to the financial statements

   Year ended 31 July 2019

3.   Taxation 

The tax assessed for the period differs from the main corporation tax rates in the UK (19% for the half years to 31 January 2020 and 2019 and for the full year to 31 July 2019) because of the effect of items disallowed for tax and accelerated capital allowances.

4.   Earnings per share 

Earnings per share are based on the total comprehensive income shown above, for each relevant period, and the weighted average number of ordinary shares in issue during each period. For all three periods, this was 21,354,167. There are no options or other factors which would dilute these, therefore the fully diluted earnings per share is identical.