TIDMORCH

RNS Number : 1649Q

Orchard Funding Group PLC

26 October 2021

26 October 2021

Orchard Funding Group PLC

("Orchard Funding Group" or the "company" or the "group")

Full Year Results

For the 12 months ended 31 July 2021

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 2021.

Highlights

-- The impact of COVID-19 continued to affect all aspects of the business in 2020/2021 (lending, revenue and profit)

-- Gross total income in the period decreased by 12.88% to GBP4.60 million for the 12 months to 31 July 2021 (31 July 2020: GBP5.28 million)

   --     The loan book increased by 9.41% year on year to GBP29.87 million 
   --     Profit after tax fell by 34.42% from GBP1.27 million (31 July 2020) to GBP0.84 million 
   --     Earnings Per Share ("EPS") fell in the period by 34.42% to 3.91p (31 July 2020: 5.96p) 

-- The group lent GBP61.02 million to clients in the 12 months to 31 July 2020 a decrease of 6.88% (31 July 2020: GBP65.53 million)

   --     Proposed full year dividend per share of 3.0 pence 

-- Refinanced existing borrowings at a lower rate and increased the amount available at GBP20 million compared to GBP19 million in 2020, in addition to a new GBP7.5m facility

Ravi Takhar, Chief Executive Officer of the company, stated:

"In another unprecedented year of global financial crisis, our business model has again proved resilient. We have successfully re-financed our bank facilities with Barclays Bank and Conister Bank. Our new funding partners Toyota Financial Services and NatWest provide us with a stable and flexible liquidity platform from which we can lend into the post Covid-19 market. We will continue to focus on our core markets of insurance and professions, while pursuing adjacent markets which can provide us with attractive and safe returns. We are confident that the market will eventually return to pre-Covid 19 levels and that our lending will continue to improve over that period."

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

Lauren Kettle

For Investor Relations please go to: www.orchardfundinggroupplc.com

Group financial highlights

The COVID-19 pandemic affected this year even more so than the previous. Falls in lending and income which happened for the first time last year have continued into this year.

Comparing lending, income and profit for 2021 with 2020:

Lending volume is down from GBP65.53m in 2020 to GBP61.02m in 2021 (6.88%)

Loan book (post ECL provision) is up from GBP27.30m in 2020 to GBP29.87m in 2021 (9.42%)

Funding is up from GBP10.98m in 2020 to GBP12.25m in 2021 (11.56%)

Gross total income is down from GBP5.28m in 2020 to GBP4.60m in 2021 (12.88%)

Net total income is down from GBP4.13m in 2020 to GBP3.44m in 2021 (16.71%)

Other operating costs are up from GBP2.44m in 2020 to GBP2.52m in 2021 (3.28%)

Operating profit is down from GBP1.56m in 2020 to GBP1.05m in 2021 (32.69%)

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

The economic backdrop has made this another challenging year for the group. The ongoing COVID-19 restrictions have impacted on consumer demand and there has been continued aggressive competition for business from the established players in the market.

This has had an inevitable impact on our results. Our new lending volumes have fallen by 6.9%, total revenue is down 12.9%, profit after tax is down 34.4% and EPS has reduced from 5.96p to 3.91p when compared to the full year ending July 2020.

However there are several positives that I take from this year. Our business has proved to be resilient, and we are in a good position to grow as the economy recovers and consumer demand returns post the pandemic. I am very pleased that our core insurance business has continued to perform, and the majority of our staff have been able to work from home with no impact on our customers or partners. We have secured new funding from Toyota Financial Services PLC and National Westminster Bank PLC replacing our historical Barclays Bank PLC and Conister Bank facilities. This is a great show of confidence in our business model. I want to thank our loyal staff, customers and partners for their continued support over the last year.

We continue to pilot lending into new markets where we can compete on the basis of our experienced staff, underwriting processes and supporting systems. Whilst insurance premium funding will remain our core activity, we are keen to seek out new markets to grow our revenue.

The board remains confident of our ability to grow our business as the impact of the pandemic fades, and we are pleased to propose that the annual dividend is held at 3p.

Steven Hicks

Chairman

25 October 2021

Chief executive's review

Our business model proved resilient during the global financial crisis in 2008 and again proved resilient in the Covid-19 Crisis ("the Crisis"), which was even deeper and more-wide ranging than the 2008 crisis. We supported all our staff and ensured that not a single employee was put on furlough. We supported all our clients, who suffered no interruption to their liquidity requirements during the Crisis. We supported all our borrowers, including those with payment difficulties throughout the Crisis. We are proud to say that we have come through the Crisis with all our staff, clients and customers and our business is in a strong position to service and benefit from the post Covid-19 market.

We have had to work hard to ensure that there was a constant and cost-effective supply of liquidity throughout the Crisis for our business. We re-financed Barclays Bank PLC, with funding from Toyota Financial Services PLC and Conister Bank with National Westminster Bank PLC. Against a very difficult backdrop, we were able to execute re-financing in the Crisis, which is more flexible and cost effective than our historic facilities. This is a great achievement by our finance team, puts us in an excellent position for the future and we thank them for their great efforts to obtain these new facilities.

As expected, we traded through the Crisis with a lower level of lending than in the year ending July 20. Despite the market, we still managed to lend over GBP60m and maintained our lending in the insurance sector, whilst seeing falls in lending in professional fee funding and site fee funding. Our sales team is focused on the recovery of lost lending and will work hard to achieve this as the market returns to normal levels.

As well as our core markets, we continue to test adjacent markets to our current products. Through our site fee lending product, we have now launched a Hire Purchase product, which enables customers to acquire static caravans. We are delighted to confirm that we are now lending in this market and are well placed to grow our market share due to our existing relationships with Park Operators. Through our entry into new markets, we continue to demonstrate 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.

We continue to develop 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. 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. IT development clearly has a cost and we therefore continue to invest in this fundamental part of our business. 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. In house IT enables us to efficiently launch products into new markets without significant infra-structure costs. This year our IT has enabled us to lend into the Hire Purchase market quickly and on a cost-effective basis.

As reported last year we have made a FinTech investment into an Open Banking platform, which enables us to analyse a customer's bank statements on a real time basis. 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. Our Open Banking platform is now live and has materially improved our ability to quickly and effectively underwrite borrowers. We are already using open banking to underwrite borrowers for our new HP static caravan product.

We continue to be supported by our experienced and loyal staff. Notwithstanding the current market turmoil, we continue to invest in staff 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 Toyota Financial Services PLC and National Westminster Bank PLC for our current liquidity lines. We have adequate liquidity for our near-term lending aspirations.

In summary, the downward trend in our core lending markets due to Covid-19 was expected. We have a strong and robust platform, which is well supported by cost-effective and flexible liquidity lines, which will support our future lending aspirations and growth.

We paid a dividend of 2p per share in December 2020 and an interim of 1p per share in April 2021. I am happy to announce that the board has proposed a final dividend of 2p per share to be paid in December 2021, subject to shareholder approval.

Ravi Takhar

Chief executive officer

25 October 2021

Group strategic report

Strategy and objectives

The group's principal objective remains to increase our profitability in a prudent, sustainable manner, having due regard for the interests of all stakeholders. The term stakeholders in this respect is wide ranging and includes employees, shareholders, our introducing partners, other customers, creditors, regulators, other parts of government and the local and wider community. Each of these groups has different, sometimes conflicting, interests, and it is the responsibility of the board to ensure that all stakeholders are treated fairly. This concept of fairness to all is paramount in 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, fair pricing and robust underwriting procedures;

   --      to increase lending in a responsible manner; 
   --      to preserve and, where deemed necessary, increase our sources of liquidity; 
   --      to innovate; 
   --      to continually improve our IT systems; 
   --      to support our excellent staff in their work. 

Differentiation covers a number of factors: the ease of transfer of business from other lenders to us; taking time to fully understand our introducing partners' businesses; being easily contactable by all our customers; providing flexible funding arrangements; reducing our partners costs and giving them regular training and assistance.

The directors still believe in our two pronged approach to lending - to increase the number of 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, while always having regard to the risks associated with lending and keeping fair treatment of customers at the heart of our business.

Our approach to innovation is to review markets and product lines which we believe fit our lending criteria - safe lending and sensible returns.

Our IT system is fully 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. It gives us much more control over, and thereby reduces 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. They are ably supported by other members of the team who ensure that proper care is taken of our partners. 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 to achieve our principal objective by maintain and enhancing our strategies listed above.

Our business model

The group's main business in the past was to provide 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. This remains the core of our lending. However, this year we have begun to make longer term loans, up to seven years for asset finance. Our business model is a "hold to collect" model in which financial assets are held to maturity to collect cash flows of principal and interest, rather than holding them for sale. More detail on this is given in note 2.6(d) on page 41 of the full financial statements.

Despite the fact that we now have longer term lending, the nature of our products is so alike 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. The majority 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. In the case of longer term lending, the procedure is more vigorous, making use of open banking technology. Indeed, we have turned down potential borrowers because they did not achieve our strict requirements.

During the year the group refinanced its borrowings. The interest rates charged (excluding associated costs) were lower than was previously being charged.

The group has borrowing facilities up to up to a maximum of GBP20m for general lending. In addition Orchard Finance has a facility of up to GBP7.5m to be used exclusively for lending in respect of products from the provider of those funds.

Of the general facility, GBP9.83m was unused at the year end, Of the restricted facility, GBP5.42m was unused.

The balance of lending is provided from group resources. At 31 July 2021 the group had net current financial assets (receivables plus cash in hand less current liabilities) amounting to GBP14.15m.

The group's average cost of finance was 6.03% of funds borrowed in the financial year to 31 July 2021 (4.86% on the same basis in the year to 31 July 2020). Cost of funds includes arrangement and legal fees payable for access to funding and fees for non-use of the facility. There is some distortion this year as costs were incurred for a facility which was not used by the year end. If only interest were included in cost of finance the percentages would be 3.03% for 2021 and 3.63% for 2020.

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 and therefore the risks apply to this area.

Credit risk

 
 Explanation of        The risk that debtors or guarantors will default 
  the risk 
 Impact on the         A major loss could have a serious effect on group 
  group                 profits - the whole of the capital loss will impact 
                        on profit. 
 Year-on-year change   Risk remains similar to last year as a result of 
  in risk               the continuing COVID-19 issue. Although we have 
                        passed the major initial economic impact of the 
                        pandemic, we are still unsure as to what will happen 
                        to the economy (for example, unemployment) in the 
                        near future.. 
 Risk appetite         In the current climate our aim is to limit reported 
                        credit losses to below 0.2% of income generating 
                        assets. 
 Mitigation of         In most cases, money is only lent for periods up 
  risk                  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 17 of the full financial statements 
                        gives further details of mitigation of credit risk. 
                        In addition, our documentation is reviewed by our 
                        legal team to ensure that debts are not subject 
                        to challenge at a later date. 
--------------------  ------------------------------------------------------- 
 

Liquidity risk

 
 Explanation of        A lack of funding to finance our business. 
  the risk 
 Impact on the         Without adequate funding we cannot conduct our business. 
  group 
 Year-on-year change   Risk has not changed. We refinanced this year during 
  in risk               a turndown in the economy at a lower headline rate 
                        indicating that risk is certainly no greater than 
                        in the past. 
 Risk appetite         We aim to have 5% more funds than would be sufficient 
                        to enable our plans to be met. 
 Mitigation of         Our borrowing facilities are due for renewal in 
  risk                  April 2022 for Bexhill and June 2022 for Orchard. 
                        Our funders have indicated, so far as they are able, 
                        that they have no wish to withdraw their support. 
                        Excess available credit plus our net current financial 
                        assets amounted to GBP23.98m at 31 July 2021 (excluding 
                        borrowings restricted to Toyota products). Our operating 
                        costs for the year were GBP2.52m (excluding impairment 
                        allowance) giving more than sufficient headroom 
                        to operate well into the future. 
--------------------  ---------------------------------------------------------- 
 

Interest rate risk

 
 Explanation of        The risk that we lend at one rate and borrow at 
  the risk              a rate higher than anticipated. 
 Impact on the         Reduced margins mean reduced profit. 
  group 
 Year-on-year change   In principle, risk has changed insofar as we now 
  in risk               have longer term fixed rate lending. However, at 
                        present this business represents a small proportion 
                        of our lending (6.52% of our 2021 lending). Any 
                        rate changes on our other lending would have a very 
                        little effect. 
 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         Management is in regular contact with its funders 
  risk                  and routinely reviews the financial situation in 
                        the economy. The majority of 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. Longer term loans are 
                        still a very small percentage of the business. 
--------------------  -------------------------------------------------------- 
 

Systems risk

 
 Explanation of    Disruption to or failure of our IT systems. 
  the risk          Cyber threats - data being accessed illegally. 
 Impact on the     Persistent or serious failures could lead to lack 
  group             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      Our new system has been fully operational for almost 
  change in risk    two years now and we are over the settling down period. 
                    The system is proving robust. 
                    The risk of cyber-crime has not increased. 
 Risk appetite     There is no risk appetite for either failure or cyber-crime. 
 Mitigation of     Remote support access enables prompt resolution of 
  risk              incidents. Internet connection provides guaranteed 
                    access. 
                    We have commissioned a risk assessment of our system 
                    by external IT specialists. 
                    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. 
                    All our staff are well trained in the use of our 
                    systems and are well placed to notice and unusual 
                    activity. 
----------------  ------------------------------------------------------------- 
 

Conduct risk

 
 Explanation of    Any action that leads to unfair customer outcomes. 
  the risk          Any action that has an adverse effect on market stability 
                    or effective competition. 
                    Fraud. 
 Impact on the     Failing to deal effectively with conduct risk faces 
  group             regulatory action, fines, and reputational damage. 
 Year-on-year      Risk has not changed. 
  change in risk 
 Risk appetite     The board has no appetite for non-compliance with 
                    regulation or for any instance of fraud within or 
                    on the organisation. 
 Mitigation of     The board sets standards which comply with regulation 
  risk              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. 
                    Our documentation is reviewed by our legal team to 
                    ensure that it is meets the requirements of the FCA. 
----------------  ------------------------------------------------------------ 
 

The group's overall risk management programme focuses on reducing the effect of these risks on its financial performance. A risk appetite (the level at which risk is accepted by the group before action needs to be taken) is established for the key risk areas. 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. The board identifies, evaluates and mitigates financial risks and there are written policies for all major risk areas at subsidiary company level (where the activity takes place). 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 borrowing facilities from our funders; 

-- interest rate risk is mitigated by the fact that most 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 finance companies or to clients of our introducing partners. Although there is some significant lending to individual finance companies, the underlying debts making up these loans are collected by Orchard and assigned to Orchard. At 30 September 2021, the latest date of review, the largest nominal exposure was GBP3.82m to one finance company representing 12.48% of our loans (before expected credit loss provisions). The highest exposure to a non-finance company was GBP2.43m and consisted of advances comprising many smaller loans (the average amount for each loan was GBP178). The reality, therefore, is that our exposure is low. At 30 September 2021 total outstanding loans were GBP30.60m (at 31 July 2020 GBP27.52m) (before expected credit loss provisions), of which the highest individual loan (not a block loan to a premium finance company) was GBP26.80k. This was for asset finance and represented less than 0.1% of total outstanding loans. This is likely to remain the situation in the future.

We have experienced late payments in the past. The majority of these are through our customers changing banking details. Prior to the year to July 2020, we made a charge for late payments. This reduced our expected credit losses. Last year and this we have not made these charges. We intend to do so again in the next financial year.

During this year, because of COVID-19, some of our borrowers 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.

We review debts for impairment and make provision where necessary. As part of this process, we have released GBP131k during the year to 31 July 2021, net of reversal of previous provisions and items written off against those provisions (GBP130k was charged in the year to 31 July 2020). The provision this year is GBP72k carried forward at 31 July 2021 (GBP217k at 31 July 2020). Part of the reason for this reversal is that, where we are not paying out cash until months later, these have been excluded from need to make provision as there can be no credit loss on these. Note 2.6 on page 40 of the full financial statements outlines the approach to credit impairments.

There is no doubt that the level of potential bad debt had been adversely affected by COVID-19 for most of the year, The biggest consequence of COVID-19 had been cancellations of loans taken out to pay for discretionary spending. This did not lead to financial losses but reduced lending (and therefore income) below the level we had projected in the year before last. The latter part of the year has seen lending starting to increase again.

The main uncertainties in these financial statements are those connected with the level of expected credit losses. Although objective evidence is obtained where possible (macroeconomic factors etc.), these still require a good deal of management judgement. They are detailed in note 3 on page 45 of the full financial statements.

The business environment

COVID-19 was identified as a pandemic in March 2020 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 that month. We suffered in the period up to 31 July 2020. Our financial year began in the same vein. There was an easing of lockdown in July 2020 but this quickly led to further out-breaks of the disease resulting in a full lockdown by January 2021. This has effectively remained through most of the rest of the group's 2020/21 financial year. However, Orchard has seen increases in lending towards the end of the financial year and our forecasts indicate that this is likely to continue. This will, of course, be dependent on the economy remaining open.

One outcome of the restrictions was that Government debt replaced non-mortgage, personal debt. A research publication by the Commons Library published in July 21, quotes figures from the Bank of England showing that unsecured debt fell in each month between March 2020 and May 2021.

This, again, impacted our lending in that individuals who might in the past have financed insurance premiums etc. were not borrowing to do so.

We now have a trade agreement with the EU, although there is uncertainty attaching to the Northern Ireland Protocol. The board is of the opinion that the direct effect of this on Orchard will not be significant in the short to medium term. There are too many unknown factors to assess the situation in the longer term. The main issues are still likely to revolve around the value of the pound against other traded currencies, which will impact on spending.

Development and performance of the business

Overview

The financial year began for us in the same vein as the year before had ended, with reductions in lending in every month when compared to the equivalent month in the previous year.

This situation continued until March 2021 after which lending began to rise again on the same basis. 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.

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.

We began lending into longer term markets, as mentioned last year and these are going well. We intend to grow these further. Details are shown in future developments on page 13 of the full financial statements.

To summarise: it remains 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 begun again to sell more through this base. This continues to work well (albeit that economic conditions have become more challenging this year).

Our margin is an important area. Some of our borrowing is fixed to bank base rate and some to SONIA. As these rates alter so will our borrowing costs. Given the short term nature of most 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. There is, however, greater risk with our longer term products that rate increases would erode margins.

Other operating costs in this business are relatively stable. We have increases resulting from an increased sales function, staff costs and enhancements to our IT systems but other overheads have been reduced. The net result is an overall increase of 3.28% (excluding provision for expected credit losses).

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. During 2020 COVID impacted our business for approximately four months. This year the impact was for eight months. 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.

 
   2021   2020   2019   2018   2017 
 

KPIs

 
 Lending volume                GBP61.02m   GBP65.53m   GBP72.99m   GBP68.73m   GBP63.35m 
 Average interest earning      GBP28.59m 
  assets(1)                                GBP29.72m   GBP31.54m   GBP29.68m   GBP25.11m 
 Total revenue                  GBP4.60m    GBP5.28m    GBP5.48m    GBP5.17m    GBP4.55m 
 Average external funding       GBP9.28m   GBP12.82m   GBP14.35m   GBP13.16m   GBP11.49m 
 Cost of external funds         GBP0.56m    GBP0.62m    GBP0.70m    GBP0.63m    GBP0.49m 
 Cost of funds/funds ratio         6.03%       4.84%       4.88%       4.79%       4.26% 
 Own resources (net current    GBP14.15m 
  financial assets)                        GBP15.50m   GBP14.82m   GBP13.94m   GBP13.03m 
 Operating costs                GBP2.52m    GBP2.44m    GBP2.20m    GBP1.92m    GBP2.01m 
 Return on average equity          5.35%       8.31%      11.24%      11.10%      10.51% 
 

Other performance indicators

 
 Net interest income           GBP3.22m   GBP3.94m   GBP4.15m   GBP3.86m   GBP3.49m 
 Profit before tax             GBP1.05m   GBP1.55m   GBP2.02m   GBP1.89m   GBP1.64m 
 Profit after tax              GBP0.84m   GBP1.27m   GBP1.63m   GBP1.51m   GBP1.34m 
 EPS (pence) (2)                   3.91       5.96       7.66       7.08       6.25 
 DPS (pence)3                      3.00       3.00       3.00       3.00       3.00 
 Return on capital employed       4.33%      6.74%      7.24%      6.77%      6.69% 
 

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.

Net total income (as shown in the Consolidated income statement) was lower than the previous year, mainly as a result of reduced lending. Operating costs overall are up by GBP80k. Included in operating costs is commission paid on direct insurance business and this business has increased this year leading to higher commission costs of approximately GBP83k than in 2020. Additionally, staff costs were GBP89k higher. Other operating costs have seen reductions of GBP92k. In all, the board are happy with the operating costs in the business.

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 16 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. We completed the initial development of our system and it is now the only system we use. Our customers have seen advantages of this, 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 21 to 23 of 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 four 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. Our forecasts assume a base rate of 0.10% in the short term, although if this increased further there would be little impact because of the short term nature of most of our lending.

The character 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 earlier in this report ) and with relatively little impact on our margins.

As a result of our estimate of the impact of the post COVID-19 economy, we continue to be cautious in our forecasting.

The key assumptions and bases used in the forecasts are now:

   --    Loans through our partners will grow to circa GBP77m in 2023/24; 
   --    Liquidity will be available to fund those loans; 
   --    Margins on lending will remain relatively stable throughout the period averaging at 6.08%; 

-- 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 four years from the date of signing of these financial statements. 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, 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 and grow our core markets. In addition, we tested a small amount of longer term asset lending (static caravans as we mentioned last year) and this seems to be working well. It is our intention to expand this but only if our underwriting procedures indicate that it is advantageous for us to do so. The lending will be fully secured by the introducers. As mentioned before, given the longer term nature, a more vigorous approach is taken to lending in this area.

We shall, of course, continue to look at other markets which fit our risk and return profile. The board has agreed to a pilot test of bridging finance. This will be short term (less than a year) and, as usual, subject to our rigorous underwriting procedures.

The group will continue to look at alternative sources of finance as liquidity is of key importance to what we do.

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 (see SECR reporting later on in this report).

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 and keep our travel carbon footprint relatively low. 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 68.42% of the employees in total (68.18% in 2020).

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 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 (albeit by Zoom in the last 18 months) 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, we have increased our investment in Open B Gateway Limited, a small private company, so that they could have the benefit of finance to further develop their software platform;

-- 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. During the year it was decided to withdraw the application for the banking licence.

In deciding on the pilot for bridging finance during the year as noted on page 13 of the full financial statements, the board took account of the requirements of 172(1).

Streamlined Energy and Carbon Reporting (SECR)

The directors believe that the company is exempt from reporting under the SECR framework as its energy use is below the threshold for reporting. The de minimis exemption is for companies whose usage is below 40MWh in the reporting period. According to CLS Chartered Consultancy this is the equivalent of around nine houses worth of electricity or four houses worth of gas. The group operates out of a small office which operates only on electricity and has had no more than two staff members working there during the year. Fuel for cars is provided for some staff but the total amount of fuel used is no more than 8k litres.

Approved by the directors and signed by order of the board

Liam McShane,

Company secretary

25 October 2021

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 GBP0.84m (2020 GBP1.27m). This is shown in the Consolidate income statement. 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 (2020 GBP641k) - note 8. The board is pleased to propose a final dividend of 2 pence per share to be paid on 17 December 2021 to shareholders on the register on 10 December 2021, with an ex-dividend date of 9 December 2021. The final dividend is subject to shareholder approval at the company's upcoming annual general meeting on 9 December 2021.

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 18 and 19 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 have elected under company law and the AIM Rules of the London Stock Exchange to prepare the group financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and have elected under company law to prepare the company financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and applicable law.

The group and company financial statements are required by law and international accounting standards in conformity with the requirements of the Companies Act 2006 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 international accounting standards in conformity with the requirements of the Companies Act 2006;

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 (2020 GBPNil).

Financial instruments

Detailed information on the group's financial instruments is stated in notes 2.6 and 2.7 of the full financial statements.

The group's objectives and policies for managing risk are shown under Principal risks and uncertainties in the Group strategic report.

Employees and environmental issues

The group is an equal opportunity employer. Details of the group's approach to employee and environmental matters are shown in the Group strategic report under Environmental, social responsibility, community, human rights issues and gender diversity.

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.

Approved by the directors and signed by order of the board

Liam McShane,

Company secretary

25 October 2021

Consolidated income statement

 
                                                      2021      2020 
                                           Notes    GBP000    GBP000 
----------------------------------------  ------  --------  -------- 
 Continuing operations 
 Interest receivable and similar income      4       3,783     4,558 
 Interest payable and similar charges        5       (559)     (624) 
 Net interest income                                 3,224     3,934 
                                                  -------- 
 Other trading income                        4         817       722 
 Other direct costs                          5       (603)     (533) 
 Net other income                                      214       189 
                                                  -------- 
 
 Net total income                                    3,438     4,123 
                                                  -------- 
 
 Other operating costs                       5     (2,516)   (2,436) 
 Net impairment gains/(losses) on 
  financial assets                           5         131     (130) 
 Net gain on financial assets at fair 
  value through consolidated income          5           -         - 
 Operating profit                                    1,053     1,557 
 Interest receivable                         6           -         6 
 Interest payable                            6         (3)       (2) 
 Profit before tax                                   1,050     1,561 
 Tax                                         7       (211)     (288) 
 Profit for the year from continuing 
  operations attributable to the owners 
  of the parent                                        839     1,273 
                                                  -------- 
 
 
 Earnings per share attributable to 
  the owners of the parent during the 
  year (pence) 
 Basic and diluted                           9        3.91      5.96 
----------------------------------------  ------  --------  -------- 
 
 

Consolidated statement of other comprehensive income

 
                                                      2021     2020 
                                           Notes    GBP000   GBP000 
----------------------------------------  -------  -------  ------- 
 Profit for the year from continuing 
  operations attributable to the owners 
  of the parent                                        839    1,273 
 
 
 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: 
 Changes in fair value of investments                    -        - 
 
 Total comprehensive income for the 
  year from continuing operations 
  attributable to the owners of the 
  parent                                               839    1,273 
 
 

Consolidated statement of financial position

 
                                                      2021     2020 
                                            Notes   GBP000   GBP000 
-----------------------------------------  ------  -------  ------- 
 
 
 Non-current assets 
 Property, plant and equipment                          23       39 
 Right of use assets                                    56       96 
 Intangible assets                                       4       16 
 Deferred tax asset                                      -        6 
 Investment at fair value through profit 
  and loss                                              81        6 
 Loans to customers                          10      2,257        - 
 Other receivables                           10          -        7 
                                                     2,421      170 
-----------------------------------------  ------  -------  ------- 
 
 Current assets 
 Loans to customers                          10     27,616   27,300 
 Other receivables and prepayments           10        233      120 
 Cash and cash equivalents: 
     Bank balances                                   2,170    2,300 
                                                    30,019   29,720 
-----------------------------------------  ------  -------  ------- 
 
 Total assets                                       32,440   29,890 
 
 Liabilities 
 Current liabilities 
 Trade and other payables                    12      4,182    2,939 
 Borrowings                                  11     11,439   11,004 
 Tax payable                                           138      273 
                                                    15,759   14,216 
-----------------------------------------  ------  -------  ------- 
 Non-current liabilities 
-----------------------------------------  ------  -------  ------- 
 Borrowings                                  11        878       72 
-----------------------------------------  ------  -------  ------- 
 Deferred tax liabilities                                3        - 
-----------------------------------------  ------  -------  ------- 
                                                       881       72 
-----------------------------------------  ------  -------  ------- 
 
 Total liabilities                                  16,640   14,288 
-----------------------------------------  ------  -------  ------- 
 
 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                                   6,003    5,805 
 Total equity                                       15,800   15,602 
-----------------------------------------  ------  -------  ------- 
 
 
 Total equity and liabilities                       32,440   29,890 
-----------------------------------------  ------  -------  ------- 
 
 

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 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 
---------------------------------  --------  ---------  --------  --------  ------- 
 
 Profit and total comprehensive 
  income                                  -        839         -         -      839 
 Transactions with owners: 
 Dividends paid                           -      (641)         -         -    (641) 
 
 Balance at 31 July 2021                214      6,003     8,692       891   15,800 
---------------------------------  --------  ---------  --------  --------  ------- 
 
 

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

 
                                                    2021      2020 
                                                  GBP000    GBP000 
 Cash flows from operating activities: 
 Operating profit                                  1,053     1,557 
 Depreciation and amortisation                        71        86 
                                                   1,124     1,643 
 (Increase)/decrease in loans to customers, 
  other receivables and prepayments              (2,679)     4,882 
 Increase/(decrease) in trade and other 
  payables                                         1,243      (76) 
--------------------------------------------- 
                                                   (312)     6,449 
 Tax paid                                          (337)     (387) 
 
 Net cash (absorbed)/generated by operating 
  activities                                       (649)     6,062 
 
 
 Cash flows from investing activities 
 Interest received                                     -         6 
 Purchases of property, plant and equipment          (3)      (29) 
 Purchase of investment                             (75)         - 
 Proceeds of sale of assets                            -         9 
 
 Net cash absorbed by investing activities          (78)      (14) 
 
 
 Cash flows from financing activities 
 Dividends paid                                    (641)     (641) 
 Net receipts from borrowings                     12,245     1,000 
 Net borrowings repaid                          (10,977)   (6,207) 
 Lease repayments                                   (30)      (39) 
 
 Net cash generated/(absorbed) by financing 
  activities                                         597   (5,887) 
 
 Net (decrease)/increase in cash and cash 
  equivalents                                      (130)       161 
 Cash and cash equivalents at the beginning 
  of the year                                      2,300     2,139 
--------------------------------------------- 
 
 Cash and cash equivalents at the end of 
  year                                             2,170     2,300 
--------------------------------------------- 
 
 

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 2021 or 2020 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 2021 and 2020 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 2021 are unchanged from those used for the statutory financial statements for the year ended 31 July 2020. The 2021 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 International Accounting Standards in conformity with the Companies Act 2006, this announcement does not itself contain sufficient information to comply with International Accounting Standards in conformity with the Companies Act 2006.

Effect of new, or changes to financial reporting standards

At the date of authorisation of these financial statements, all of the new or amended Accounting Standards and Interpretations issued by the International Accounting Standards Board ('IASB') that are mandatory for the current reporting period and are relevant to the group's operations have been applied.

There are a number of new standards, amendments and interpretations that been issued but are not effective for these financial statements. They are not expected to impact the financial statements as either they are not relevant to the group's activities or are consistent with accounting policies already followed by the group.

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 almost four years from the date of signing of the statutory financial statements. 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 GBP17.62m 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 under Going concern. Orchard Funding Group plc ("the company") and its subsidiaries (together "the group") provide funding and funding support systems to insurance brokers and professional firms through the trading subsidiaries. The group operates in the United Kingdom.

   4.       Segment information 

The group operates wholly within the United Kingdom therefore there is no meaningful information that could be given on a geographical basis. Since 2017 the board has only recognised one segment - lending. This is because the risks, rewards and management of the debt are so similar, or that certain other lending is immaterial in terms of income, assets or lending, that any segregation (other than central costs) would not give meaningful information to users of the financial statements.

The board therefore assesses the entire business based on operating profit (before tax and exceptional items, but after finance costs which are a cost of sale). 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. Income from approximately 6.52% of lending is receivable in more than one year.

The group has no single major customer. All income is from financing. Revenue can be analysed as follows:

 
                                                                        2021                2020 
                                                                      GBP000              GBP000 
--------------------------------------------------------  ------------------  ------------------ 
            Revenue 
--------------------------------------------------------  ------------------  ------------------ 
            Interest revenue                                           3,783               4,558 
            Other revenue                                                817                 722 
--------------------------------------------------------  ------------------  ------------------ 
                                                                       4,600               5,280 
--------------------------------------------------------  ------------------  ------------------ 
            Timing of revenue recognition: 
            At a point in time - direct debit charges                    573                 505 
            At a point in time - non utilisation 
             fees                                                        189                 357 
            Over time - loan administrative fees                         101                  33 
            At a point in time - default and settlement 
             fees                                                          -                  81 
            Over time - licence fees                                     143                 103 
            Over time - interest revenue outside 
             the scope of IFRS 15                                      3,594               4,201 
--------------------------------------------------------  ------------------  ------------------ 
                                                                       4,600               5,280 
--------------------------------------------------------  ------------------  ------------------ 
 
   5.       Expenses by nature 
 
                                            2021     2020 
                                          GBP000   GBP000 
 Interest payable in direct costs            281      466 
 Bank fees in direct costs                   870      646 
 Other direct costs                           11       45 
 Employee costs (including directors)      1,267    1,178 
 Advertising and selling costs               518      443 
 Professional and legal fees                 194      229 
 Impairment (gains)/losses (note10)        (131)      130 
 IT costs                                    152      149 
 Cost of listing                              84       85 
 Depreciation and amortisation                71       86 
 Interest payable on right-of-use 
  assets                                       3        2 
 Other net expenses                          230      262 
                                           3,550    3,719 
 --------------------------------------  -------  ------- 
 
 
   6.       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 GBP281k (2020 GBP466k).

The group receives a small amount of interest from its bank balances. This year it amounted to GBPNil (2020 GBP6k).

Interest payable is in respect of right-of-use assets and amounted to GBP3k (2020 GBP2k).

   7.       Tax expense 
   7.1       Current year tax charge 
 
                                                                 2021               2020 
                                                               GBP000             GBP000 
 Current tax expense                                              202                299 
 Adjustment re previous year tax expense                           12               (10) 
 Deferred tax expense relating to the origination 
  and reversal of temporary differences                           (3)                (1) 
                                                                  211                288 
--------------------------------------------------  -----------------  ----------------- 
 
   7.2       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.

 
                                                         2021               2020 
                                                       GBP000             GBP000 
------------------------------------------ 
 Profit before tax for the financial year               1,050              1,561 
------------------------------------------  -----------------  ----------------- 
 
 Applicable rate - 19.00% (2020 19.00%)                19.00%             19.00% 
------------------------------------------  -----------------  ----------------- 
 
 Tax at the applicable rate                               199                297 
 Effects of: 
  Expenses not deductible for tax                           -                  1 
  Adjustment re previous year tax expense                  12               (10) 
  Reduced rate of tax on reversing timing                   -                  - 
   differences 
 Tax charge for the year                                  211                288 
------------------------------------------  -----------------  ----------------- 
 
 
   8.          Dividends 
 
                                                 2020     2019 
                                               GBP000   GBP000 
--------------------------------------------  -------  ------- 
 Amounts recognised as distributions to 
  equity holders in the period: 
 Final dividend for the year ended 31 July 
  2020 of 2p (2019 2p) per share                  427      427 
 Interim dividend for the year ended 31 
  July 2021 0of 1p (2020 1p) per share            214      214 
                                                  641      641 
--------------------------------------------  -------  ------- 
 
 Proposed final dividend for the year ended 
  31 July 2021 of 2p (2020 2p) per share          427      427 
--------------------------------------------  -------  ------- 
 
 
   9.          Earnings per share 

Earnings per share is based on the profit for the year of GBP0.84m (2020 GBP1.27m) and the weighted average number of the ordinary shares in issue during the year of 21.35m(2020 21.35m). There are no options or other factors which would dilute these therefore the fully diluted earnings per share is identical.

   10.     Loans to customers and other receivables 
 
                                        2021               2020 
                                   Group   Company    Group   Company 
                                  GBP000    GBP000   GBP000    GBP000 
 Non-current 
 Financial assets at amortised 
  cost 
 Loans to customers: 
 Gross                             2,259         -        -         - 
 Impairment provision                (2)         -        -         - 
-------------------------------  -------  --------  -------  -------- 
                                   2,257         -        -         - 
-------------------------------  -------  --------  -------  -------- 
 
 Other receivables                     -         -        7         - 
                                   2,257         -        7         - 
-------------------------------  -------  --------  -------  -------- 
 
 Current 
 Financial assets at amortised 
  cost 
 Loans to customers: 
 Gross                            27,686             27,517         - 
 Impairment provision               (70)              (217)         - 
-------------------------------  -------  --------  -------  -------- 
                                  27,616             27,300         - 
-------------------------------  -------  --------  -------  -------- 
 Financial assets at amortised 
  cost 
 Intercompany receivables              -     9,888        -    10,362 
 Other receivables                   124         -      104         - 
-------------------------------  -------  --------  -------  -------- 
                                     124     9,888      104    10,362 
-------------------------------  -------  --------  -------  -------- 
                                  27,740     9,888   27,404    10,362 
-------------------------------  -------  --------  -------  -------- 
 Prepayments                         109        25       16         7 
-------------------------------  -------  --------  -------  -------- 
                                  27,849     9,913   27,420    10,369 
-------------------------------  -------  --------  -------  -------- 
 
 

Standard credit terms for loans to customers are based on the length of the loan but repayments are due on a monthly basis. Detail of impairment reviews are shown in note 2.6 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;

-- 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 2.6 of the full financial statements.

The figures refer to the group as the company has no loans to customers.

 
                                     2021                           2020 
                               Impairment                     Impairment 
                       Gross    allowance      Net    Gross    allowance      Net 
                      GBP000       GBP000   GBP000   GBP000       GBP000   GBP000 
------------------- 
 Amount receivable 
  - stage 1           29,882         (29)   29,853   27,186         (34)   27,152 
 Amount receivable 
  - stage 2               18            -       18      120          (1)      119 
 Amount receivable 
  - stage 3               45         (43)        2      211        (182)       29 
                      29,945         (72)   29,873   27,517        (217)   27,300 
-------------------  -------  -----------  -------  -------  -----------  ------- 
 
 

Included in amounts receivable above are stage 1 receivables due after more than one year amounting to GBP2,309k on which the impairment allowance was GBP2k (2020 GBPNil and GBPNil respectively).

An amount of GBP31k is due after more than five years. There is no impairment allowance on this amount.

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:

-- 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). The majority of loans to customers in the subsidiaries are all repayable within 12 months; and

-- any risk of loss is considered remote (not expected) and therefore no impairment provision is necessary.

   11.     Borrowings 
 
                                           2021     2020 
                                         GBP000   GBP000 
 Non-current: 
 Borrowings                                 834        - 
 Borrowings arising from right-of-use 
  assets                                     44       72 
                                            878       72 
 
 Current: 
 Bank loans                              11,411   10,977 
 Borrowings arising from right-of-use 
  assets                                     28       27 
-------------------------------------- 
                                         11,439   11,004 
-------------------------------------- 
 
 

All borrowings are secured. The parent company has no external borrowings.

   11.1     Terms and debt repayment schedule 

The group refinanced its borrowings during the year. This resulted in Bexhill repaying GBP9.48m to its previous funder and Orchard Funding repaying GBP1.5m to its previous funder. The total amount of GBP10.98m is shown as being repaid in the Consolidated statement of cashflows.

The Bexhill facility is renewable in April 2022, Orchard Funding in June 2022 and November 2022 for Orchard Finance. There is no indication that these facilities will not be renewed.

Borrowings by Bexhill of GBP10.17m are secured by a fixed and floating charge over all the assets of Bexhill, bear interest at an average rate of 2.92% excluding associated costs (2020 3.49% on the same basis) and are repayable within one year of the advance. The maximum drawdown on the facility is currently GBP15.00m (2020 GBP17.00m) of which GBP4.83m was undrawn at the year-end (2020 GBP7.52m).

Orchard Funding borrowings are secured by a fixed and floating charge over all the assets of Orchard Funding, bear interest at an average rate of 5.28% pa excluding associated costs (2020 5.11% on the same basis) and are repayable within one year of the advance. The maximum drawdown facility is currently GBP5.00m (2020 GBP2.00m) of which GBP5.00m was undrawn at the year-end (2020 GBP0.50m).

Orchard Finance has access to a maximum drawdown borrowing facility of GBP7.50m (2020 GBPNil) of which GBP5.43m was undrawn at the year end. This facility can only be used for products of the lender, bears no interest, is secured by a fixed and floating charge over all the assets of the company and is repayable as monies are received by Orchard Finance from loans made by it.

The directors consider that the terms of these facilities closely match the maturity dates of the group's receivables.

No amounts are due after five years on any of the facilities.

The minimum payments under lease liabilities are as follows:

 
                                                    2021               2020 
                                                   Group              Group 
                                                  GBP000             GBP000 
------------------------------------- 
 
 Within 1 year                                        30                 30 
 Later than 1 year but no later than 
  5                                                   45                 76 
                                                      75                106 
 Future finance charges                              (3)                (7) 
-------------------------------------                     ----------------- 
                                                      72                 99 
-------------------------------------  -----------------  ----------------- 
 

The present value of hire purchase and finance lease liabilities are as follows:

 
 
 
 Within 1 year                                    28             27 
 Later than 1 year but no later than 
  5                                               44             72 
-------------------------------------  -------------  ------------- 
                                                  72             99 
 
 

Liabilities in respect of right-of-use assets are unsecured and bear interest at the group's marginal cost of borrowing on inception of the lease. This is 3.60%.

.

   11.2     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                           At 31               At 31 
                                August     Non-cash      Cash     July       Cash     July 
                                  2019    movements     flows     2020      flows     2021 
                                GBP000       GBP000    GBP000   GBP000     GBP000   GBP000 
 Non-current: 
 Other loans                         -            -         -        -        834      834 
 Borrowings arising 
  from right-of-use 
  assets - leases                   15           88      (31)       72       (28)       44 
                              -------- 
                                    15           88      (31)       72        806      878 
----------------------------  --------  -----------  --------  -------  ---------  ------- 
 Current: 
 Bank loans                     16,184            -   (5,207)   10,977        434   11,411 
 Borrowings arising 
  from right-of-use 
  assets - leases                   34            -       (7)       27          1       28 
                              -------- 
                                16,218            -   (5,214)   11,004        435   11,439 
----------------------------  --------  -----------  --------  -------  ---------  ------- 
 Total liabilities 
  from financing activities     16,233           88   (5,245)   11,076      1,241   12,317 
----------------------------  --------  -----------            -------             ------- 
 Interest on right-of-use 
  assets included in 
  liabilities                                             (1)                 (3) 
                                                     --------           --------- 
 Cashflows from financing 
  activities                                          (5,246)               1,238 
                                                     --------           --------- 
 Comprising: 
 Net receipts from 
  borrowings                                            1,000              12,245 
 Borrowings repaid                                    (6,207)            (10,977) 
 Lease repayments                                        (39)                (30) 
                                                      (5,246)               1,238 
                                                     --------           --------- 
 
 
   11.3     Non-cash financing activities 

The group extended the term of its lease in May 2020 which was a modification of the existing lease. This led to a non-cash financing transaction of GBP88k in the previous year.

   12.     Trade and other payables 
 
 Current liabilities                    2021               2020 
                                   Group   Company    Group   Company 
                                  GBP000    GBP000   GBP000    GBP000 
 Trade payables                    3,274         -    2,487         - 
 Other payables                       32         -       26         - 
 Other tax and social security 
  costs                               31        15       36        20 
 Accruals and deferred income        845       100      390        46 
------------------------------- 
                                   4,182       115    2,939        66 
-------------------------------  -------  --------  -------  -------- 
 
 

Trade payables are unsecured and are usually paid within 30 days of recognition. Included within accruals and deferred income is deferred income of GBP104k (2020: GBPnil) related to income received in advance for loan administration services. The majority of this balance is expected to reverse within the next 12 months.

   13.     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 4 of the full financial statements.

   13.1     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 
   --      Borrowings 
   --      Financing for right-of-use assets 
   13.2     Financial instruments by category 

The group held the following financial assets at the reporting date:

 
                                         2021               2020 
                                    Group   Company    Group   Company 
                                   GBP000    GBP000   GBP000    GBP000 
 Non-current assets 
 Financial assets at fair value 
  through consolidated income 
  statement: 
 Investments                           81        81        6         6 
 Financial assets at amortised 
  cost: 
 Investments                            -     2,807        -     2,807 
 Loans to customers                 2,257         -        -         - 
 Other non-current receivables          -         -        7         - 
 Current assets 
 Financial assets at amortised 
  cost: 
 Loans to customers                27,616         -   27,300         - 
 Other receivables: current           124     9,888      104    10,362 
 Cash and cash equivalents: 
    Bank balances and cash in 
     hand                           2,170         -    2,300         - 
-------------------------------- 
                                   32,248    12,775   29,717    13,175 
--------------------------------  -------  --------  -------  -------- 
 
 

The group held the following financial liabilities at the reporting date:

 
                                                 2021               2020 
                                            Group   Company    Group   Company 
                                           GBP000    GBP000   GBP000    GBP000 
 Financial liabilities at amortised 
  cost: 
 Interest bearing loans and borrowings: 
   Borrowings payable: non-current            878         -       72         - 
   Borrowings payable: current             11,439         -   11,004         - 
 Trade and other payables                   4,151       100    2,903        46 
---------------------------------------- 
                                           16,468       100   13,979        46 
----------------------------------------  -------  --------  -------  -------- 
 
 
   13.3     Fair value of financial instruments 

The fair values of the financial assets and liabilities are not materially different to their carrying values.

   13.4     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.

   14.     Treatment of borrowings 

The group borrows money 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.

   15.     Post balance sheet events 

There were no post balance sheet events which fall to be disclosed in these financial statements.

   16.     Availability of annual report and accounts and notice of AGM 

A copy of the report and accounts for the year ended 31 July 2021will shortly be posted to shareholders and a copy will be available to download from the company's website at www.orchardfundinggroupplc.com . Accompanying the report and accounts is a notice convening the company's annual general meeting, to be held at 10.00am on Thursday 9 December 2021, at 1st Floor, 721 Capability Green Luton, Bedfordshire LU1 3LU.

A copy of the notice of AGM will also be available to download from the company's website.

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