Chairman's statement

We have already shared that our business will be impacted by the loss of GAP Insurance volumes, and as a result of an external fraud. These were both material and disappointing events. Despite this, I am pleased to note we had a good first six months, with strong growth in lending volume and total revenue compared to the same period last year.  Profitability has been impacted by the external fraud, but net of this shows an improvement on the same period last year.

The group has paid a consistent level of dividend since floating on AIM.  The board has decided to postpone the decision regarding a payment of an interim dividend as we conduct a review of the capital allocation policy and the benefits of the continued admission of the company's ordinary shares to trading on AIM. This decision will allow us maximum flexibility in these deliberations. 

Steven Hicks
Chairman

Chief Financial Officer's summary

There is still a great deal of turbulence in the markets, primarily due to the two main conflicts at present - Ukraine and Gaza. Inflation is still running quite high but has fallen for the first time in months to 3.4% in February. Interest rates also appear to have stabilised although the Bank of England have not yet cut rates or indicated a loosening of monetary policy.

Against this backdrop, we performed well in H1 2024. Post period end we were affected by two material events.  First, in the light of the FCA's examination of the selling of GAP insurance products, several providers are leaving the market. While the margins on this side of our business are not as high as our other markets, it represented a substantial part of business written (approx. 12.5% in the six months to January 2024). This is a three year term product and the impact on total revenue will be seen over the next three years as the loans are repaid.  There has been no impact in this half-year.

Secondly, 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 on 1 March 2024. Subsequent analysis indicated that the actual potential loss is £398k 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.

For the six months to 31 January 2024, PBT fell by 13.60%, PAT by 19.80% and EPS by 19.75%. The full year outturn will be impacted to reflect the loss of GAP business. The average increase in lending (adjusted for the fraud) is 25.92% higher than the six months to 31 January 2023.

Operating costs excluding impairment losses are 19.11% higher than the equivalent period last year (£1.87m in 2024 compared to £1.57m in 2023),while the impairment provision has risen by 2,350.00% for the reason stated in the third paragraph above.

Staff have continued to operate from home which continues to work well for them and our partners. Our systems have proved effective in managing this home-working in a seamless manner without any loss in efficiency.

Despite the loss occasioned by the fraud, we are still in a strong financial position. At 31 January 2024 we had net current assets of £18.62m (31 January 2023 £15.64m) and £7.29m of unused unrestricted borrowing facility (31 January 2023 £8.58m). Together, these show a strong capital, funding and liquidity position.

Impairment reviews are carried out at each reporting period on all financial assets. The method employed for  assets arising from lending is shown in the audited accounts to 31 July 2023 and is based on expected credit losses (ECLs). As part of this exercise we review debts to establish whether they have moved from one ECL stage to another. There have been no material movements from one stage to another in our interest earning assets during the period. At 31 January 2024 the provision was £789k (31 January 2023 £464k). Other assets (fixed assets and investments) are also subject to impairment reviews but none is needed this period.

The investment in Open B Gateway Limited was mentioned last year and the investment was fully impaired as shown in the Consolidated statement of comprehensive income as Impairment loss on investment in associate in 2023. Nothing has happened regarding this investment which would indicate that it should be restated therefore the board remains of the opinion that the value of the investment should still be £Nil.

Our principal risks, as shown in the full year financial statements to 31 July 2023, are credit risk, liquidity risk, interest rate risk, IT disruption risk and conduct risk. Since the issue of the retail bond in March 2022, risks associated with both its non-use and failure to repay are also included. A full explanation of each of them together with their impact and mitigation are detailed in those financial statements.

Key Performance Indicators (KPIs)

Our KPIs are set so that fluctuations outside a certain tolerance would trigger an examination of our operations to establish why these fluctuations have occurred and, if necessary, take any remedial action deemed necessary.

Our KPIs are based on lending, the cost of lending and, to some extent, operating costs. We try to ensure that risk is mitigated when lending but no lending is risk free.

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

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

Return on average equity is based on PAT divided by the average of equity at the end of the previous reporting period and that of the current period. We believe that this measure is seen as more useful than simply looking at equity at the end of the period.

Average external funding is based on the amount borrowed for the exact number of days for which the advance was made.

Key performance indicators

Financial summary - other performance indicators

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

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

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

7.   There are no factors which would dilute earnings therefore fully diluted earnings per share are identical. EPS is based on the half-year results divided by shares in issue.

8.   Dividends per share are based on interim dividends paid in the year and proposed final dividend for the year. The final decision to pay dividends is postponed pending the completion of the capital allocation policy review.

9.   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.

Lending volume was up by 25.92%, average interest earning assets by 33.31% and total revenue by 23.47%.  By contrast, as a result of the fraud impairment, PBT fell by 13.60%, PAT by 19.80% and  EPS by 19.75%. The increases in lending and revenue were to be expected. Without the loss from the fraud PBT would have been £1.48m - up 18.70% on the equivalent period last year.

Operating costs have increased by 48.43% over the equivalent period last year, including impairment losses. Without these the increase was 19.11%. Within these costs, however, there are some increases in excess of that figure. Premises costs have increased by 130.77% from £13k in the six months to 31 January 2023 to £30k in this period. This was because of the move to new premises during the period. Likewise, the provision for audit fees has increased by 104.69%.

During the period the company purchased a property for use as an office. The lease on the previous premises expired during this time and it was thought prudent to acquire premises suited to our needs. The cost for this property was £446k.

Cost of external funding has risen substantially when compared to the equivalent six months in 2023. This was expected as rates rose to combat inflation. As a result, our cost of funds ratio increased from 5.58% on an annualised basis in the period to 31 January 2023 to 7.90%. These figures include not just headline interest but costs associated with obtaining the finance. The board believes that rates have now stabilised although it appears unlikely that they will fall for some time.

In summary, the next six months will remain a challenge because of ongoing international issues and the loss of some GAP business, but the board feels that no further provisions or estimates (based on our forecasts) are needed at this time.

The board is currently conducting a review into how and where we spend our capital as well as exploring the benefits of continued listing on AIM. With this in mind, it has been decided to postpone the declaration of an interim dividend to permit more flexibility in making these decisions.

Liam McShane

Chief Financial Officer

Consolidated statement of comprehensive income

Consolidated statement of financial position

Consolidated statement of changes in equity

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

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

 Consolidated statement of cash flows

Cash and cash equivalents consists of bank balances.

Notes to the financial statements

1. General information

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

The company is a public company listed on AIM, a market operated by the London Stock Exchange, incorporated and domiciled in the United Kingdom. The address of its registered office is 222 Armstrong Road, Luton, Bedfordshire LU2 0FY.

The condensed consolidated interim financial information for the six months ended 31 January 2024 has been prepared in accordance with the presentation, recognition and measurement requirements of applicable UK adopted International Accounting Standards  ('IFRS') except that the group has not applied IAS 34, Interim Financial Reporting, which is not mandatory for UK groups listed on AIM, in the preparation of the condensed consolidated interim financial information.

The financial information does not include all of the information required for full annual financial statements and should be read in conjunction with the financial statements of the group for the year ended 31 July 2023 which are prepared in accordance with IFRS.

The accounting policies used in the preparation of condensed consolidated interim financial information for the six months ended 31 January 2024 are in accordance with the presentation, recognition and measurement criteria of IFRS and are consistent with those which are expected to be adopted in the annual statutory financial statements for the year ending 31 July 2023. There are a number of new standards, amendments and interpretations that have 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.

Under the expected credit loss (ECL) model required in IFRS 9, there has been a further £485k charged to consolidated income (31 January 2023 £16k). This includes a provision for the fraud amounting to £398k. The main focus of the assessment is debt arrears as, although based on past performance, they are the best indicator of potential default. The increase is not a large as would be commensurate with the increase in the loan book but a lot of the potential bad debt had already been provided for, arrears are under control and there are no other factors which would indicate potential credit losses. In assessing potential provisions, the group has adopted the simplified approach which requires the entity to recognise a loss allowance based on lifetime ECLs at each reporting date, right from origination. Part of this process has been to examine the impact of ongoing international situation.

The group's 2023 annual report provides full details of significant judgements and estimates used in the application of the group's accounting policies. There have been no significant changes to these judgements and estimates during the period.

The financial information included in this document is unaudited and does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 July 2023 are the group's statutory accounts for that financial year. Those accounts have been reported on by the company's auditor and delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

2. Segmental reporting

The group's activities are providing funding for insurance premiums, professional fees, school fees, leisure activities and asset financing wholly within the UK.

Most of our lending meets the criteria for aggregation as the underwriting process, management of the loans, distribution channels, risks and rewards are all similar.

The group does, however, report to the board of directors in terms of two segments - lending for Toyota products  which carry no credit risk and have a lower return, and other lending. The first table is the total and the second Toyota products.

Notes to the financial statements

Revenue                                             

 Expenses by nature

Toyota revenue (included in total revenue above)

Toyota expenses by nature (included in expenses by nature above)

3.   Taxation

The tax assessed for the period differs from the main corporation tax rates in the UK (25% for the half year to 31 January 2024, 19% for the half year to 31 January 2023 and 21.01% for the full year to 31 July 2023) because of the effect of items disallowed for tax and accelerated capital allowances.

4.   Earnings per share

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