10 December 2024

Orchard Funding Group PLC

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

Full Year Results

For the 12 months ended 31 July 2024

 

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 2024.

 

 

Highlights

·     Lending volume is up from £99.87m in 2023 to £114.70m in 2024 (14.85%)

·     Loan book (post ECL provision) is up from £58.99m in 2023 to £66.98m in 2024 (13.54%)

·     Borrowing is up from £34.72m in 2023 to £40.22m in 2024 (15.84%)

·     Gross total income in the period increased by 22.65% to £9.64 million for the 12 months to 31 July 2024 (31 July 2023: £7.86 million)

·     Net total income is up from £5.60m in 2023 to £6.89m in 2024 (23.04%)

·     Profit after tax fell by 8.19% from £1.71 million (31 July 2023) to £1.57 million

·     Operating costs (excluding impairments) are up from £3.30m in 2023 to £3.60m in 2024 (9.09%)

·     Expected credit losses and other impairments are up from £0.14m in 2023 to £1.17m in 2024

·     Earnings Per Share ("EPS") fell in the period by 7.91% to 7.39p (31 July 2023: 8.03p)

·     As reported to the market on 17 May 2024, the directors do not intend to propose a dividend

·     We have increased borrowing availability by £3.00 million over that available last year

 

Further detail on the above is given throughout the Group strategic report on pages 4 to 12 of the full financial statements.

 

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

"Our business is resilient. We have had to endure a number of impacts to our group during the year and notwithstanding those impacts, we have continued to trade confidently and profitably.

We enter our 10th 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 about the prospects for the business going forward."

 

For further information, please contact:

Orchard Funding Group PLC                                                        +44 (0)1582 280 140

Ravi Takhar, Chief Executive Officer

Allenby Capital Limited (Nomad and Broker)                              +44 (0)20 3328 5656

Nick Naylor/James Reeve (Corporate Finance)

Amrit Nahal/Jos Pinnington (Sales and Corporate Broking)

 

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

 

Chairman's statement

 

I am pleased to report a strong financial performance, despite this being a challenging year for our business.  As previously reported, we were impacted by the withdrawal of guaranteed asset protection (GAP) products by several insurance companies.  We were also subject to an external fraud, and one of our largest introducers has recently entered administration. The financial impact of the last two events is £811k.  The macro-economic headwinds also continued with higher base rates for longer than anticipated by the market.

 

 Despite this, we have achieved record lending volumes, more than £100m for the first time (£114.7m) and a loan book that has ended the year at £67m.  This growth has been seen predominantly in our core insurance premium funding markets, whilst we continue to make slow but steady progress in the asset finance and bridging sectors. 

 

The Board is pleased that this growth in volumes has ensured that despite the difficulties we have faced, we have maintained profit before tax at £2.12m (2023 £2.17m).   We have also stabilised our margins with net income margin maintained at circa 9%.

 

This could not have been achieved without the continuing hard work and commitment of our staff together with the ongoing support of our introducer partners and funders.  Our business has again showed its resilience and ability to withstand shocks and continue to deliver for all of our stakeholders. 

 

We are mindful of how the ongoing economic challenges could affect our customers. The board is encouraged by the normalisation of inflationary conditions and the expected gradual shift to a lower base rate environment.  I remain optimistic about our medium-term outlook, and our ability to continue to grow our lending volumes in a controlled way and to maintain our margins.

 

We have previously advised that the Board believes it is in the company's best interest to cease the payment of dividends for the current financial year. I am aware that this will be disappointing, as we have a track record of consistently paying returns to shareholders. However, the capital retained can be used to make, if appropriate, an acceptable tender offer to shareholders in the future and will enable management the strategic flexibility, when appropriate, to deploy funds to support the lending of the business.

 

 

 

 

 

 

 

Steven Hicks

Chairman

 

9 December 2024

Chief executive's review

 

 

Our business is resilient. We have had to endure a number of impacts to our group during the year and notwithstanding those impacts, we have continued to trade confidently and profitably.

 

Our staff has 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.

 

Higher than historic base rates continue to impact our business as they have  a direct and immediate impact on our cost of funds. We operate in extremely competitive markets and are not able to pass on base rate rises to our customers and therefore continue to suffer an erosion of our net income. The recent base rate cuts are welcomed and will benefit the net income of our business going forward.

 

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.

 

Our business has operated in its markets for over 20 years. We enter our 10th 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 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.

 

 

 

 

 

 

 

 

Ravi Takhar

Chief executive officer

 

9 December 2024

 

Group strategic report

 

Strategy and objectives

Our strategy remains as before - 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

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.

During the year the board began the process of reviewing the company's capital allocation policy and whether continued admission on the AIM market was appropriate given the size of the group. This process is continuing with conversations being held between the board and investors.

 

Our business model

Our business 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 to the full financial statements. The financial assets are loans to businesses and consumers to enable them to spread the cost of their insurance premiums, professional fees or other service fees. Most of our lending remains within a one year repayment period although approximately 1.33% of our lending is for a period in excess of one year and 0.85% in excess of five years excluding lending by Orchard Finance which is financially risk free.

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. Lending in this area was growing substantially until earlier this year when the FCA announced an enquiry into the selling of this product. Toyota initially withdrew from the market but is now reviewing this. This part of the business, because of the lower risk and lower returns is reported on as a separate segment. This is shown in note 5 to the full financial statements. 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. 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%.

Notwithstanding the above, we suffered an instance of fraud. This was caused by a fraudulent introducer creating fraudulent credit agreements. The board initially set aside a provision of £500k, as notified to the market on 1 March 2024. Subsequent analysis indicated that the actual potential loss is £391k and the provision has been adjusted accordingly. The board has conducted a thorough review of its wider lending book and introducer network to satisfy itself that no fraud risk exists elsewhere in its current loan book, alongside a review of its systems and controls and to ensure that the risk that the group suffers a similar fraud in the future is minimised.

The group has borrowing facilities, other than the retail bond of £3.90m, up to up to a maximum of £30.00m (2023 £27.00m) for general lending. In addition Orchard Finance has a facility of up to £20.00m (2023 £20.00m) to be used exclusively for lending in respect of products from the provider of those funds.

Of the general facility, £7.02m was unused at the year end (2023 £6.28m) and of the restricted facility, £6.55m was unused (2023 £9.76m). 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 group's average cost of finance (calculated by interest payments over borrowings in the year) was 7.99% (6.70% on the same basis in the year to 31 July 2023). Cost of finance includes arrangement and legal fees and fees for non-use of the facility.

 

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.

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 below 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).

 

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 increased last year with the worsening state of the economy in part caused by worldwide conflicts. The board believe that this risk remains the same this year.
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 16 to the full financial statements 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 remained stable since last year. The providers of our funds have maintained their support.
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 2025 for Bexhill, May 2025 for Orchard Finance and June 2025 for Orchard Funding. There has been no indication from the providers of our funds that they will withdraw their support.

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	Rates have not changed substantially since last year and the associated risk remains much the same. Most of our lending is within twelve months and any longer term lending is in line with the previous year.
Risk appetite	Our risk appetite is to ensure that the net interest margin on new lending remains above 7.5%.
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 nature of the business is that loans are made either to finance companies ("PFC") 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 2024, the largest nominal exposure was £10.76m (2023 £8.29m) to one PFC representing 15.79% (2023 13.98%) of our loans after expected credit loss provisions ("ECL"). The highest exposure to a non-PFC was £4.56m (2023 £3.19m) and consisted of advances comprising many smaller loans (the average amount for each loan was £271 (2023 £223)). The highest individual loan (not a block loan to a premium finance company) was £376k (2023 £321k), representing less than 0.56% (2023 0.54%) of total outstanding loans.

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 3 to the full financial statements.

 

The business environment

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

Despite the above, inflation has begun to fall and the Bank of England have reduced the base rate in the last few months indicating that they feel that inflation is now heading 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 14.89% over the previous year.

Most of our premium finance growth continues to come from the direct insurance side which was up 17.26% compared to the previous year. Lending to broker premium funding companies ("PFC"'s) was 13.75% higher than in 2023. Demand for professional fee funding has fallen again, by 10.59%. this year.

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.

The Financial Conduct Authority ("FCA") has been investigating the selling of GAP insurance products for some time now. As a result of their proposals, several providers of this product decided to leave the market. This included Toyota Financial Services. There is currently a review of this by Toyota Financial Services and it looks likely that they will maintain some presence in this market. Our largest partner broker for this product, Nukula Limited trading as Insure That, went into administration in July 2024. A provision has been made for these debts amounting to £479k. At 31 October 2024 debtors were again reviewed for impairment and this provision was still considered to be valid.

 

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 the group 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 (excluding ECL, other impairments and consolidation goodwill) are 9.09% higher than in 2023. Details of these costs are shown  in note 5 of the full financial statements.

 

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 2.51% lower than in 2023. Given the level of impairment allowance this year, the board are satisfied with the results.

 

All £m unless otherwise stated

2024

2023

2021

2020

2019

KPIs

Lending volume	£114.70	£99.87	£79.96	£61.02	£65.53
Average interest earning assets1	£62.98	£51.36	£36.81	£28.59	£29.72
Total revenue	£9.64	£7.86	£6.19	£4.60	£5.28
Average external funding2	£23.92	£20.32	£15.77	£9.28	£12.82
Cost of external funds	£1.91	£1.35	£0.59	£0.56	£0.62
Cost of funds/funds ratio3	7.99%	6.64%	3.57%	6.03%	4.84%
Own resources (net financial assets) 4	£20.11	£19.20	£17.61	£15.88	£15.74
Operating costs (excluding impairments)	£3.60	£3.30	£2.91	£2.52	£2.44
Impairment charges/(credits)	£1.17	£0.14	£0.06	£(0.13)	£0.13
Net interest margin5	9.15%	9.48%	11.98%	11.26%	13.26%
ROAE (Return on average equity)6	8.56%	9.94%	9.36%	5.35%	8.31%

 

 

Other performance indicators

Net interest income	£5.76	£4.87	£4.41	£3.22	£3.94
Profit before tax	£2.12	£2.17	£1.88	£1.05	£1.56
Profit after tax	£1.57	£1.71	£1.52	£0.84	£1.27
Gross interest margin7	12.18%	12.11%	13.58%	13.22%	15.34%
EPS (pence) 8	7.39	8.03	7.11	3.91	5.96
DPS (pence) 9	0.00	3.00	3.00	3.00	3.00
Return on capital employed (ROCE)10	3.83%	4.42%	5.19%	4.33%	6.74%

 

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 other impairments are up by £299k. Included in interest payable and similar charges are costs associated with the bond issue which have amortisation amounting to £42k. Staff costs were £51k higher. Commission has grown by £209k this year as sales have increased.

As a result of the fraud and InsureThat going into administration, as mentioned earlier, provision has had to be made in the sum £391k regarding the fraud and £475k in respect of InsureThat. The balance of the impairment allowance in the Consolidated statement of comprehensive income this year is £369K.

 

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. . Our staff have significant experience in working within the group.

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 19 employees excluding the main board directors. 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 with 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 18 to 20 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 seven years ahead. These amount to 1.33% (2023 3.26%) of which 0.48% (2023 2.81%) 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  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 in 2020. We increased our holding to 60% in May 2024 and to 90% in August 2024. This investment was fully impaired last year as the company was not actively engaged in developing the system further. The group has now taken on the responsibility for this. These financial statements reflect the results of Open B and the impairment of the investment has been reversed.

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 three 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 2023).

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 12 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 section earlier);

·    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 earlier on this page;

·    what impact it will have on our partners and other customers (as  mentioned under Non-financial indicators on page 10). 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

 

9 December 2024