13 December 2023

Orchard Funding Group PLC

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

Full Year Results

For the 12 months ended 31 July 2023

 

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 2023.

 

 

Highlights

·     Increases in lending, revenue and profit

·     Gross total income in the period increased by 27.14% to £7.86 million for the 12 months to 31 July 2023 (31 July 2022 £6.19 million)

·     The loan book increased by 34.87% year on year to £58.99 million

·     Profit after tax rose by 12.50% from £1.52 million to £1.71 million

·     Earnings Per Share ("EPS") rose in the period by 12.82% to 8.03p (31 July 2022 7.11p)

·     The group lent £99.87 million to clients in the 12 months to 31 July 2023 an increase of 24.90% (31 July 2022 £79.96 million)

·     We are again proposing a full year dividend per share of 3.0 pence

·     We have increased the amount of funding to which we have access (from £28.70m to £30.74m unrestricted funds).

 

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

 

"We are delighted to report our robust performance and return to historic profit levels.

We have grown our business whilst maintaining the historic credit quality of our lending book. We continue to benefit from excellent liquidity from Toyota Financial Services and Nat West. We have also now bolstered our liquidity with access to the listed retail bond market through Orchard Bond Finance.

We continue to invest in and benefit from our software platform, which gives us a number of advantages in underwriting, servicing and marketing our business.

We are very well placed to manage the current difficulties in the UK economy and will continue to manage and operate our business carefully and in the best interests of all our stakeholders."

 

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

Lauren Kettle

Chris Clarke

 

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

 

 

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014 as amended by The Market Abuse (Amendment) (EU Exit) Regulations 2019. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

 

 

Group financial highlights

 

Until 2019, Orchard grew its lending year on year. From August 2019 to July 2021 lending fell primarily due to the impact of Covid-19. In the last two years this situation has been reversed. This year overall lending increased.

 

 

 

 

Comparing lending, income and profit for 2023 with 2022:

 

 

		2023 (£m)	2022 (£m)	Increase (%)
Lending volume		99.87	79.96	24.90%
Loan book (post ECL provision)		58.99	43.74	34.87%
Borrowing		34.72	25.53	36.00%
Gross total income		7.86	6.19	26.98%
Net total income		5.60	4.84	15.70%
Other operating costs		3.44	2.97	15.82%
Operating profit		2.16	1.88	14.89%

 

 

 

 

 

Further detail on the above is given throughout the Group strategic report on pages 4 to 15 of the full financial statements.

 

 

Chairman's statement

 

I am very pleased to report that the business continues to grow despite the ongoing economic headwinds. We have again achieved record lending volumes of nearly £100m and the outstanding loan book is at an all time high. This growth has been achieved in our core insurance premium funding markets.  

 

The economic outlook is showing some signs of improvement but the ongoing uncertainty and significant increase in base lending rates has impacted our business. Our margins have been compressed, although despite this we have still delivered higher profits.  The planned expansion into longer term lending in the static caravan market and the short term bridging loan market has been slowed, as we proceed with caution in line with our prudent approach to lending. 

 

I am very proud of what our committed staff have achieved this year. They have delivered record volumes of business with only a small increase in numbers. This increase in productivity is a testament to their hard work and also to the scalability of our systems and the effectiveness of our flexible hybrid working arrangements. 

 

We continue to benefit from excellent support from our introducing partners and funders. In particular, it has been good to see the relationship with Toyota Financial Services continue to develop and business volumes increase. 

 

Relatively high base rates will likely endure well into 2024 and the Bank of England has been clear that a low base rate environment is not imminent. The macroeconomic and geopolitical situation remains unstable and this brings ongoing uncertainty for our business in the short term. Margins will continue to be squeezed and we will be alert for any increase in arrears and ready to support our customers as necessary. The medium term outlook remains positive. We are seeing ongoing growth in our core market and I remain optimistic that our platform of a highly skilled team and strong track record will enable us to diversify into aligned lending markets. 

 

I am pleased to confirm that we are proposing to maintain the dividend at 3 pence per share enabling us to keep retaining profits to invest in future growth. 

 

 

 

 

 

Steven Hicks

Chairman

 

12 December 2023

Chief executive's review

 

We are pleased to report record lending of nearly £100 million and record earnings for the year ended 31 July 2023.

 

Our staff have worked hard and successfully to continue to increase our lending in our core market of insurance premium finance. Whilst our professions and leisure lending has remained solid, safe and stable, the economic back drop has limited our appetite to lend in the static caravan and property bridging market.

 

Another factor that has impacted our earnings significantly is the rapid rise in base rate, which has a direct and immediate impact on our cost of funds. We operate in extremely competitive markets which has limited our ability to pass on base rate rises to our customers and have therefore suffered an erosion of our net income.

 

We continue to carefully manage operational costs and retain a loyal and hardworking team of staff.

 

IT is still an important focus of the business. We continue to develop our lending platform Lend XP and have also developed our open banking platform to enable fully automated affordability calculations for our customers.

 

We operate in highly regulated markets. The regulatory framework is burdensome and the costs of regulatory compliance continue to increase. We continue to manage our regulatory obligations and responsibilities effectively.

 

As we enter a new financial year there are some obvious headwinds that the business will be required to navigate.

 

A significant concern is the increase in cost of funds, which will more fully impact the business going forward. We will also have to manage the impact on consumer demand for credit due to the current difficult economic conditions.

 

Our business has operated in its markets for over 20 years. We enter our 8th year as a listed company with the benefit of our accumulated experience, our loyal staff, excellent funding partners and market leading and cost effective IT. We are therefore optimistic and excited about the prospects for the business going forward.

 

I would like to thank our staff, Toyota and NatWest, our funding partners, our shareholders, bond holders and customers for their continued support and loyalty.

 

We are pleased to be able to maintain our dividend payment.

 

 

 

 

 

 

Ravi Takhar

Chief executive officer

 

12 December 2023

 

Group strategic report

 

Strategy and objectives

Our strategy  has remained the same since we commenced business - to increase our profitability in a prudent, sustainable manner, having due regard for the interests of all stakeholders. Stakeholders are not just our employees and shareholders but also introducing partners, other customers, creditors, regulators, other parts of government and the local and wider community. It is the responsibility of the board of directors to ensure that all stakeholders are treated in a fair manner, despite the fact that each group may have conflicting interests. This concept of even-handedness permeates through the decision making process.

The strategic drivers behind our principal objective are still to:

·    differentiate our business from that of our competitors, based on service excellence, fair pricing and robust underwriting procedures;

·    increase lending in a responsible manner using a two pronged approach - 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;

·    preserve and, where deemed necessary, increase our sources of liquidity;

·    innovate by reviewing markets and product lines which we believe are appropriate for our lending criteria - safe lending and sensible returns - as well as evaluating other ways of doing business;

·    continually improve our IT systems by further development to enable efficient processing of information and to assist in reducing the various risks attaching to our business;

·    support our excellent staff in their work by providing them with the means to find lending opportunities, assisting them in developing those opportunities, offering continuous training and ensuring, where we are able, that there is a balance between work and home life.

 

Our business model

Our core business remains providing credit to businesses and consumers to enable them to spread the cost of their insurance premiums, professional fees or other service fees. Until two years ago this credit was offered over a period of up to one year. Two years ago we expanded into asset finance (up to seven years) and gap insurance (up to three years). Last year we introduced a bridging loan product which, again, is up to one year. These newer ranges have dovetailed well with our core business. 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 3.6(d) on page 40 of the full financial statements.

The nature of most of our lending is similar in terms of risk, reward and processes. However, we have a significant amount of lending which is no risk and offers lower returns than other types of lending. This is lending for Toyota products. Our lending in this area has grown by almost 20% over the previous year. We have therefore applied segregation to the results of the group. This is shown in note 6. The divisions are described in the note as "Toyota products" and "Standard lending". In most other cases our Standard lending is covered by recourse to a guaranteeing partner. Our underwriting and debt management procedures are similar enough that we have not found it necessary to disaggregate results arising from our several other markets.

All of our lending is within the UK.

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 (as mentioned earlier) to further mitigate the risk of default. In terms of bridging finance, our maximum loan compared to the value of the property ("LTV") is 75%, with no loan this year being more than 70% LTV.

A retail listed bond was issued on 2 March 2022. Full details plus the prospectus are on the company's website at https://www.orchardfundinggroupplc.com/bonds. This raised £3.90m and has given us further secure liquidity.

Excluding the bond, the group has borrowing facilities up to up to a maximum of £27.00m (2022 £25.00m) for general lending. In addition Orchard Finance has a facility of up to £20.00m (2022 £10.00m) to be used exclusively for lending in respect of products from the provider of those funds.

Of the general facility, £6.28m was unused at the year end (2022 £8.58m), Of the restricted facility, £9.76m was unused (2022 £4.64m). We send regular reports to our funders to indicate that we are complying with covenants and the loans are subject to an external audit by those funders where they require it.

The balance of lending is provided from group resources. At 31 July 2023 the group had net financial assets (financial assets less financial liabilities) amounting to £19.20m (2022 £17.62m).

The group's average cost of finance (calculated by interest payments over borrowings in the year) was 6.64% (3.57% on the same basis in the year to 31 July 2022). Cost of finance includes arrangement and legal fees payable for access to funding and fees for non-use of the facility. If only interest and no charges were included in the cost of finance, the percentages would be 6.03% for 2023 and 2.95% for 2022.

 

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.

 

Credit risk

Explanation of the risk	The risk that debtors or guarantors  will default
Impact on the group	A major loss could have a serious effect on group profits - the whole of the capital loss will impact on profit.
Year-on-year change in risk	Risk has changed in that the economy has worsened with higher inflation and higher  interest rates. There is still a risk of business collapses and higher unemployment although commentators are not now forecasting a recession.
Risk appetite	Our aim is to limit reported credit losses to below 0.5% of income generating assets.
Mitigation of risk	In most cases, money is only lent for periods up to one year predominantly through introducers who guarantee the loans and who are regulated businesses themselves. Borrowing limits are set based on prudent underwriting principles. Impairment reviews are regularly conducted to identify potential problems early. Note 17 gives further details of mitigation of credit risk. In addition, our documentation is reviewed regularly by our legal team to ensure that debts are not subject to challenge at a later date.

Liquidity risk

Explanation of the risk	A lack of funding to finance our business.
Impact on the group	Without adequate funding we cannot conduct our business.
Year-on-year change in risk	Risk has fallen since last year. The providers of our funds have increased our facilities and we still have cash from issuing the five year retail bond.
Risk appetite	We aim to have 5% more funds than would be sufficient to enable our plans to be met.
Mitigation of risk	Our borrowing facilities are due for renewal in April 2024 for Bexhill, May 2024 for Orchard Finance and June 2024 for Orchard Funding. There has been no indication from the providers of our funds that they will withdraw their support. Excess available credit plus our net financial assets amounted to £19.208m at 31 July 2023. Our total operating costs for the year were £3.44m giving more than sufficient headroom to operate well into the future.

Interest rate risk

Explanation of the risk	The risk that we lend at one rate and borrow at a rate higher than anticipated.
Impact on the group	Reduced margins mean reduced profit.
Year-on-year change in risk	Risk has changed substantially. Our lending is all at fixed rates. In the past this has not been a major problem as base rates remained stable. However, we have seen eight rate rises since August 2022 until July 2023 with another in August meaning that the cost of servicing our lending has risen while the income has remained stable. We continue to look closely at all new lending to ensure that our margins are sufficient for us still to remain profitable. Most of our lending is within twelve months but we do have longer term fixed rate lending. This is still a small proportion of our total lending (3.26% of our 2023 lending).
Risk appetite	Our risk appetite in the past was 25% above the interest rate that we were paying when a loan was made, without being able to pass this on to our customers. Clearly this is unsustainable in the current climate when rates are rising to counter high levels of inflation. Our appetite now is to ensure that the net interest margin on new lending remains above 7.50%. Last year we used 10.00% but the level of interest rate increases this year has shown that this is not possible. At 7.50% we are still profitable.
Mitigation of risk	Management is in regular contact with its funders 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.

 

Non-repayment risk

Explanation of the risk	The retail bond is a five year bond. At the end of that term the money will need to be repaid to the bond holders. This is the risk that there will be insufficient cash in the system to make those repayments.
Impact on the group	The amount raised on the market was approx. £3.90m. Should the company which raised the money not be able to repay this it would lead to the group having to find £0.39m under a guarantee but, more importantly, lead to reputational risk which might cause other funders to consider not renewing facilities.
Year-on-year change in risk	Again, there is no change in risk since last year.
Risk appetite	There is no risk appetite for non-repayment. The costs to the group could be significant.
Mitigation of risk	This risk is mitigated by the fact that the amounts involved could easily be covered by the likely cash position at the time that repayment is due.

 

Systems risk

Explanation of the risk	Disruption to or failure of our IT systems. Cyber threats - data being accessed illegally.
Impact on the group	Persistent or serious failures could lead to lack of confidence in our system and reduce our operational capabilities. Penalties for allowing data breaches are severe and could lead to us not being able to operate at all.
Year-on-year change in risk	Our system is proving robust and risk has therefore remained as last year. The risk of cyber-crime has not increased.
Risk appetite	There is no risk appetite for either failure or cyber-crime.
Mitigation of risk	Remote support access enables prompt resolution of incidents. Internet connection provides guaranteed access. 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 the risk	Any action that leads to unfair customer outcomes. Any action that has an adverse effect on market stability or effective competition. Fraud.
Impact on the group	Failing to deal effectively with conduct risk faces regulatory action, fines, and reputational damage.
Year-on-year change in risk	Risk has not changed.
Risk appetite	The board has no appetite for non-compliance with regulation or for any instance of fraud within or on the organisation.
Mitigation of risk	The board sets standards which comply with regulation and best practice. The CEO monitors staff compliance with those standards, reports deficiencies to the board and provides staff with advice on the interpretation of the standards. Controls are in place to prevent internal fraud with day to day supervision by the CEO. Regular monitoring of introducing partners is conducted including a review of sources of loan repayments. 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, by regular interaction with our bankers and by reviewing the net interest margin;

·    non-repayment risk is alleviated by our normal business processes of finding markets which can give a profitable return and generate sufficient cash to make the repayments on the bonds;

·    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 31 July 2023, the largest nominal exposure was £8.29m (2022 £6.69m) to one finance company representing 13.98% (2022 15.25%) of our loans before expected credit loss provisions ("ECL").  The highest exposure to a non-finance company was £3.19m (2022 £2.15m) and consisted of advances comprising many smaller loans (the average amount for each loan was £223). At 31 July 2023 total outstanding loans were £59.29m before ECL (2022 £43.87m), of which the highest individual loan (not a block loan to a premium finance company) was £321k. This was for property bridging and represented less than 0.54% (2022 0.43%) of total outstanding loans.

We review debts for impairment and expected credit losses and make provision where necessary. As part of this process, we have increased the provision by £64k during the year to 31 July 2023 (2022 £63k), net of reversal of previous provisions and items written off against those provisions. This has been charged to the income statement below operating costs. The provision this year is £305k carried forward at 31 July 2023 (£135k at 31 July 2022). As our loan book grows so does the provision. Note 3.6 outlines the approach to credit impairments.

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  management judgement. They are detailed in note 4.

 

The business environment

Businesses are still in a period of instability. The ongoing problems in Ukraine and the conflict in the Middle  East have led to further unrest in the markets.

As a result of the above we have seen rates of inflation not seen for many years, with the Bank of England increasing interest rates to combat these high inflation rates. Bank of England base rate has increased nine times since our last year end. Although inflation fell in October to its lowest level in two years, interest rate decreases are not likely until the Bank of England sees inflation under control.

In this environment, individuals and businesses are more likely to try to conserve cash and spread expenditure over a period of time. Insurance is one type of expenditure which lends itself to this approach. It is also a purchase which is a necessity either for legal reasons or for security. Orchard's core business is exactly that - providing funds for the spreading of insurance payment. We are in an ideal position to provide help to our introducers and their customers in these difficult times by providing this service.

 

Development and performance of the business

Overview

We have continued to grow our lending, continuing the trend seen in the last financial year with growth in every month this year except December. Overall growth in lending was 24.91% over the previous year.

Most of our premium finance growth continues to come from the direct insurance side (this was up 45.56% compared to the previous year) rather than from broker premium funding companies ("PFC"'s). PFCs still remain our largest market and has grown to £46.68m in this financial year (2022 £37.03m). After some stabilising of the market for professional fee funding last year, demand has fallen this year to £3.73m (2022 £4.38m).

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 this has slowed this year due to the economic environment. We still intend to grow these  further once the economic conditions improve.

To summarise: it remains our intention to increase our sales in existing markets and expand into adjacent markets, always having regard to returns that are needed to keep the business financially healthy. We shall continue to control costs, only spending where we believe it will increase our profitability. We have sufficient liquidity at present but this is always kept under review.

Financial indicators

The function of the group remains to lend money safely. Good quality customers are therefore central to the development of the business. We have continued to add to our introducing partner base and have continued to sell more through this base. Despite hard economic conditions, this continues to work well.

Our margin is an important area. Some of our borrowing is fixed to bank base rate and some to the Sterling Overnight Index Average, "SONIA." As these rates alter so will our borrowing costs. Given the short term nature of most of our lending any likely changes would only have an impact on our margins in the short term. We continue to ensure, where possible given the current economic conditions, that as base rate or SONIA rise, we are faster to readjust our pricing. There remains greater risk with our longer term products that rate increases would erode margins.

Most other operating costs in this business are relatively stable. We have increased our staffing levels this year and we have increases resulting from growing sales. The other main increase is the amortisation of costs incurred in issuing the bond. Overall, operating costs (including ECL and impairment of an investment) are 15.94% higher than in 2022. Details of these costs are shown in note 6.

 

Financial key performance (KPIs) and other performance indicators

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.

Group profit before tax was 15.43% higher than in 2022. The board are satisfied with the results this year.

 

All £m unless otherwise stated

2023

2022

2021

2020

2019

KPIs

Lending volume	£99.87	£79.96	£61.02	£65.53	£72.99
Average interest earning assets1	£51.36	£36.81	£28.59	£29.72	£31.54
Total revenue	£7.86	£6.19	£4.60	£5.28	£5.49
Average external funding2	£20.32	£15.77	£9.28	£12.82	£14.35
Cost of external funds	£1.35	£0.59	£0.56	£0.62	£0.70
Cost of funds/funds ratio3	6.64%	3.57%	6.03%	4.84%	4.88%
Own resources (net financial assets)4	£19.20	£17.61	£15.88	£15.74	£15.23
Operating costs (including impairments)	£3.44	£2.91	£2.52	£2.44	£2.20
Net interest margin5	9.48%	11.98%	11.26%	13.26%	13.19%
ROAE (Return on average equity)6	9.94%	9.36%	5.35%	8.31%	10.90%

 

 

Other performance indicators

Net interest income	£4.87	£4.41	£3.22	£3.94	£4.16
Profit before tax	£2.17	£1.88	£1.05	£1.56	£1.97
Profit after tax	£1.71	£1.52	£0.84	£1.27	£1.58
Gross interest margin7	12.11%	13.58%	13.22%	15.34%	15.41%
EPS (pence)8	8.03	7.11	3.91	5.96	7.67
DPS (pence)9	3.00	3.00	3.00	3.00	3.00
Return on capital employed (ROCE)10	4.42%	5.19%	4.33%	6.74%	7.24%

 

1.   Average interest earning assets consist of the average of the opening and closing loan book after taking account of the impairment provision.

2.   Average external funding comprises amounts borrowed on a daily basis net of repayments.

3.   Cost of funds/funds ratio is the cost of external funds divided by average external funding.

4.   The method of calculating own resources available has changed from using net current financial assets to net financial assets to take account of long term financial assets and liabilities as this reflects better the resources available over the longer term. Comparatives have been recalculated on this basis.

5.   Net interest margin is net interest income divided by the average loan book.

6.   ROAE consists of profit after tax divided by average equity. Average equity is the average of opening and closing equity.

7.   Gross interest margin is gross interest income divided by the average loan book.

8.   There are no factors which would dilute earnings therefore fully diluted earnings per share are identical.

9.   Dividends per share are based on interim dividends paid in the year and proposed final dividend for the year.

10. ROCE consists of earnings before interest, tax, depreciation and amortisation divided by capital employed. Capital employed comprises capital and reserves together with borrowings, less cash held.

 

Net total income (as shown in the Consolidated statement of comprehensive income) continues to grow. Operating costs before ECL and impairment of investment are up by £397k. Included in interest payable and similar charges are costs associated with the bond issue which have the first full years amortisation amounting to £46k. Staff costs were £277k higher, reflecting the fact that we have taken on additional staff and increased pay. Commission has grown by £126k this year as sales have increased. The impairment allowance this year was £64k. In addition we carried out a review on our investment in Open B Gateway Limited and concluded that this was severely impaired. The fair value of this investment has been estimated at £Nil resulting in an impairment of £75k. This is detailed in note 16.

 

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 are 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 18 employees excluding the main board directors. 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. There are two non-main board directors as directors of the subsidiaries.

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 unexpectedly dropping.

Innovation

A key non-financial strategy is innovation (see Strategy and objectives on page 4 of the full financial statements). Innovation is the ability to continually evolve and grow our business in our chosen markets. When looking at new products we stay within our risk parameters and examine whether the returns justify the resources expended. If new products fit our return and risk expectations, we proceed to the testing stage - relatively small amounts of lending. We believe that innovation is fundamental to growth.

IT systems

A robust, reliable and secure IT system is crucial to the business. We work closely with external outsource partners to continually review and develop our IT systems. Our system and has been tried and tested for a number of years. We began two years ago to take advantage of the open banking system as part of our risk strategy and this has been invaluable. 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. In addition, the open banking system has helped ensure quality of lending.

Good governance

The role of the board is set out in the Corporate governance report on pages 19 to 21 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. The non-executive directors are there to challenge the executives. The board 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. It is important to appreciate that the further away in time the estimate, the less reliable it is.

The character of our lending is such as to permit us to react to any changes in base rate within a relatively short period of time other than with those loans that can be up to three or seven years ahead. These amount to 3.26% (2022 5.10%) of which 2.81% (2022 4.38%) are three years or less. Not included in these figures are loans made by Orchard Finance where, although longer term, the risk is taken by the provider of the funds.

The key assumptions and bases used in the forecasts are that for the year ending by 31 July 2026:

·   Loans through our partners will grow to circa £133m;

·   Liquidity will be available to fund those loans;

·   Net interest margins on lending will fall to an average for the year of 8.15%;

·   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, management 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

There has been little change in how we wish to grow the business in the future. Fee funding, site fee and school fee income have fallen this year and it is expected that they will fall further. Against that, we have seen growth in PFC, insurance premium funding, asset financing and bridging finance. We are still exploring complementary markets but will only sell into these if they fit our risk and return profile.

We took an investment in Open B Banking in 2020 and increased our investment in that company in 2021. Although the supplier is not actively engaged in developing the system further (hence the reason for the impairment of our investment detailed in note 16 to the full financial statements) we have the rights to further develop this ourselves and we are doing so as part of our own IT development.

Despite the fact that we have secure sources of funding at present, we shall continue to look at alternative sources of liquidity as this 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.

Although the group operates out of an office in Luton, most of our employees work from home at least 3 days a week. This has proved to be worthwhile for both employee and employer. It is envisaged that this method of working will continue. It has meant that our carbon footprint as a business in the area has fallen (although there is some impact on the environment from home working).

We provide health club membership and childcare vouchers for any staff who wish them.

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 subsidiaries consist of two females and one male each (although one subsidiary has two male directors). Males make up 56.52% of the employees in total (61.90% in 2022).

We are a small entity in terms of staffing and our CEO is always available for staff to discuss any matters with him. Although many of our staff continue to operate from home, he is able to be contacted by telephone, e-mail or face to face if necessary. In this way our staff have communication lines to the board via the CEO. If they would prefer to discuss a matter with the Chairman, he is also available.

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.

Environmental issues are therefore negligible (see SECR reporting on page 13 of the full financial statements).

 

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 on page 5 of the full financial statements);

·   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 on page 12 of the full financial statements;

·   what impact it will have on our partners and other customers (as  mentioned under Non-financial indicators on page 10 of the full financial statements). Proper customer care, particularly in avoiding unfair outcomes, is of overriding importance to Orchard;

·   our reputation (the impact of loss of reputation is dealt with under Conduct risk on page 7 of the full financial statements);

·   either the CEO and/or CFO are in contact with major investors at least twice a year (albeit by Teams or telephone) to discuss the group's progress and overall plans. This gives us an insight into how our investors perceive us. 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;

·   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 above.

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.

 

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.

 

 

Approved by the directors and signed by order of the board

 

 

 

 

 

 

 

Liam McShane,

Company secretary

 

12 December 2023