NSF.L Regulatory News (NSF)

Non-Standard Finance plc

('Non-Standard Finance', 'NSF', the 'Company' or the 'Group')

Unaudited Half Year Results to 30 June 2018

2 August 2018

Highlights

§ The Group is now benefiting from the significant investment made in all three divisions over the past 18 months

§ Normalised revenue (before fair value adjustments) up 51% to £78.9m (2017: £52.2m); reported revenue of £75.1m (2017: £46.3m)

§ Reduction in Group impairment to 25.9% of normalised revenue (2017: 28.9%) on a like-for-like basis1

§ Normalised operating profit (before fair value adjustments and amortisation of acquired intangibles) up 79% to £15.2m (2017: £8.5m); reported operating profit of £7.0m (2017: loss of £1.2m)

§ Normalised profit before tax (before fair value adjustments and amortisation of acquired intangibles) up 4% to £5.6m (2017: £5.4m); reported loss before tax of £2.6m (2017: reported loss of £4.2m)

§ Net loan book up 37% on a like-for-like basis to reach £267.4m before fair value adjustments (£275.6m after fair value adjustments); (30 June 2017 under IFRS 9: £194.9m before fair value adjustments)

§ Current trading: the Group is trading slightly ahead of our expectations and we remain confident in the full-year outlook

§ Half year dividend per share up 20% to 0.6p reflecting the outlook for the second half of 2018 (2017: 0.5p per share)

Financial summary

* Note that following the acquisition of George Banco and the adoption of IFRS 9, the 2017 figures are not strictly comparable and are as previously published (under IAS 39: Financial Instruments: Recognition and Measurement).

1 Calculated on a rolling 12-month basis assuming that IFRS 9 had been adopted for both periods.

2 Normalised figures are before fair value adjustments and the amortisation of acquired intangibles.

3 Normalised earnings per share in 2018 is calculated as normalised profit after tax of £4.551m divided by the weighted average number of shares of 313,388,139. Normalised earnings per share in 2017 is calculated as normalised profit after tax of £4.282m, divided by the weighted average number of shares of 317,049,682.

John van Kuffeler, Group Chief Executive, said

"Our three business divisions are continuing to deliver as planned with strong loan book growth and tight controls on impairment. The investments made over the past 18-months are starting to bear fruit and we are well-placed to continue to deliver substantial earnings and dividend growth.

"The third quarter has started well, underpinning our confidence in the full year outlook and we are pleased to declare a 20% increase in the half year dividend to 0.6p per share.

"As we look further ahead, both our performance to-date and strong market position means that the opportunity before us is now even greater than we first thought. We are finalising our plans for 2019 and beyond and will provide a full update to the market at our annual investor day in November 2018."

The tables below provide an analysis of the normalised results (excluding fair value adjustments and the amortisation of acquired intangibles) for the Group for the six month period to 30 June 2018 and 30 June 2017 respectively.

4  Excludes fair value adjustments and amortisation of acquired intangibles.

Context for the results

§ Note that the 2017 half year results are not strictly comparable as (i) George Banco was acquired on 17 August 2017; and (ii) from 1 January 2018 the Group adopted IFRS 9, a new accounting standard covering financial instruments that replaces IAS 39: Financial Instruments: Recognition and Measurement.

§ As permitted by IFRS 9, comparative information for 2017 has not been restated. Refer to notes to the financial statements for transitional impact of IFRS 9.

Interviews with John van Kuffeler, Group Chief Executive and Nick Teunon, Chief Financial Officer

Interviews with John van Kuffeler and Nick Teunon will be available as video and text from 7.00 am on 2 August 2018 on the Group's website: www.nsfgroupplc.com.

Analyst meeting, webcast and dial-in details

There will be an analyst meeting at 9.30 am on 2 August 2018 for invited UK-based analysts at the offices of The Maitland Consultancy, The HKX Building, 3 Pancras Square, London, N1C 4AG. The meeting will be simultaneously broadcast via webcast and conference call. To watch the live webcast, please register for access by visiting the Group's website www.nsfgroupplc.com. Details for the dial-in facility are given below. A copy of the webcast and slide presentation given at the meeting will be available on the Group's website later today.

Dial-in details to listen to the analyst presentation at 9.30 am, 2 August 2018

 All times are British Summer Time (BST).

For more information:

About Non-Standard Finance

Non-Standard Finance plc is listed on the main market of the London Stock Exchange (ticker: NSF) and was established in 2014 to acquire and grow businesses in the UK's non-standard consumer finance sector. Under the direction of its highly experienced main board, the Company has acquired a sustainable group of businesses offering credit to the c.10-12 million UK adults who are not served by (or choose not to use) mainstream financial institutions. Its three business divisions are: unsecured branch-based lending, guarantor loans and home credit. Each division is fully authorised by the FCA and has benefited from significant investment in branch expansion, recruitment, training and new IT infrastructure and systems. These investments have supported the delivery of improved customer outcomes together with growing financial returns for shareholders.

Group Chief Executive's statement

Introduction

We have continued to consolidate our position as a leading player in the UK's non-standard finance market. Strong organic growth in branch-based lending and home credit was complemented by a full period's contribution from George Banco which was acquired in August 2017, positioning the Group as the clear number two in the fast growing guarantor loans segment. Being a leader is a key pillar of our business strategy and each of our three operating divisions has a top three position in its respective segment of the UK's non-standard finance market. In addition, our two largest divisions, branch-based lending and guarantor loans, are continuing to benefit from particularly strong market growth5.

Having funded the acquisition of George Banco with a new six-year debt facility whilst at the same time obtaining further debt funding, the Group's capital structure has changed substantially from a year ago. Despite this change and the impact of the introduction of IFRS 9 from 1 January 2018, we were able to increase normalised profit before tax for the six months to 30 June 2018 and we remain on course to deliver a full year result in-line with our expectations.

5 Executive Insights, Volume XX, Issue 39 - L.E.K. Consulting, July 2018

Results

The Group delivered normalised revenue before fair value adjustments of £78.9m (2017: £52.2m) and normalised operating profit of £15.2m (2017: £8.5m). Reported revenue after fair value adjustments was £75.1m (2017: £46.3m); reported operating profit was £7.0m (2017: loss of £1.2m) and reported loss before tax was £2.6m (2017: £4.2m). 

The combined net loan book across all three divisions as at 30 June 2018 grew to £267.4m before fair value adjustment (£275.6m after fair value adjustments) implying a year on year increase of 37% on a pro forma basis (assuming George Banco had been acquired on 1 January 2017), and based on the Group's estimated net loan book at 30 June 2017 under IFRS 9 (including George Banco) of £194.9m. Further details regarding the estimated impact of IFRS 9 on the balance sheet as at 30 June 2017 is set out below.

Branch-based lending

We opened 11 new branches during the first half of 2018 and so had 64 branches open at 30 June 2018, 20 more than a year ago, confirming Everyday Loans' position as the UK's largest branch-based provider of unsecured loans in the non-standard finance market. As well as increasing our geographic coverage and access to consumers, we have also benefited from significant operational improvements that are reflected by our key performance indicators (see Divisional Review below). Despite the significant upfront investment in new branches, recruitment, training and associated infrastructure costs, the business delivered a 22% increase in normalised operating profit to £12.0m (2017: £9.8m).

Guarantor loans

The acquisition of George Banco in August 2017 transformed our position in the exciting and fast growing UK guarantor loans segment. The first half of 2018 saw us deliver a particularly strong performance across a range of KPIs including loan book growth, numbers of customers whilst maintaining a tight control on impairment. In the six months to 30 June 2018 we delivered a more than six-fold increase in revenue and a 36-fold increase in normalised operating profit to £3.9m (2017: £0.1m). While the overall level of demand for guarantor loans is growing strongly, we are continuing to take market share from competitors and are focused on consolidating our position as the clear number two in the UK.

Home credit

Loans at Home continued to enjoy strong year-on-year loan book growth. As at 30 June 2018, our network comprised 962 self-employed agents (2017: 862) operating out of 69 offices (2017: 52) and serving more than 98,500 active customers (2017: 88,300). The result was that Loans at Home delivered a much improved normalised operating profit of £2.0m (2017: £0.8m) and is now a much larger business. We expect to see a return to more modest loan book growth in the second half of 2018 as compared with the exceptional growth achieved in 2017.

Business strategy

Our long-term vision and strategy for the Group is unchanged. Our addressable market remains large with approximately 10-12 million adults either unwilling or unable to access credit from more mainstream banks and financial institutions, equating to approximately one third of the UK's working adult population. Non-standard customers tend to have low or variable income, be self-employed, have lower credit ratings or be somehow credit impaired. Continued growth in the number of self-employed persons in the UK as well as a 22% increase in County Court Judgments ('CCJs') issued in England and Wales in 2017 to over 1.1m means that the demand for non-standard finance remains high.

While macroeconomic uncertainties caused by Brexit remain, the UK economy remains reasonably robust with record high levels of employment and historically low levels of unemployment. The proportion of full time jobs that are on 'low pay' (defined as the value that is two-thirds of median hourly earnings - source: ONS) is at its lowest point for over a decade - 18.4% (versus 22.0% in 2002).

Against this backdrop, we remain focused on three sub-segments of the non-standard market: branch-based lending, guarantor loans and home credit. Each has significant potential, high risk-adjusted margins and an ability to deliver attractive, long-term returns. To realise this potential our strategy is to:

· be a leader in each of our chosen segments;

· invest in our core assets (networks, people, technology and brands); and

· act responsibly.

2017 was a year of significant investment, consolidating our leading positions in all three segments and providing a solid platform for growth. This is now feeding through into our operational and financial performance, a process that we expect will continue through the rest of 2018 and into 2019.

Funding

Given the strong rate of loan book growth across all three divisions, the Group has reached agreement in principle with its existing lenders to provide £70m of additional credit facilities on similar terms as its existing arrangements. Once in place, this increase will take the Group's total committed debt facilities to £330m and will provide long-term funding to deliver the Group's growth plans into 2020.

Regulation

The Group's regulatory environment continues to evolve and while we expect this process to continue, we are looking forward to a period of relative stability following the completion of a number of detailed consultations and interventions:

· Staff incentives and performance management - The Financial Conduct Authority ('FCA') published its policy statement and final rules in March 2018 clarifying the controls it expects firms to have in place to manage any risk of non-compliance with their regulatory obligations arising from performance management or incentives.

· High-cost credit review - In May 2018 the FCA published a further consultation following a detailed review into high-cost credit, including some proposed changes to operational procedures for regulated home credit firms (there was no impact on either branch-based lending or guarantor loans). Whilst the wider industry is in the process of responding to the proposals, we do not believe that such measures, if implemented, will have a material impact on the Group's home credit business.

· Breathing space - in June 2018, HM Treasury issued a summary of the responses received to its call for evidence regarding the proposal by government to introduce a breathing space scheme that, inter alia, would give someone in serious problem debt the right to legal protections from their creditors for up to six weeks, in order to receive debt advice and enter into a sustainable debt solution. The government is expected to issue a policy proposal for consultation during the summer of 2018 through which it will aim to design a scheme which is accessible, supportive and easy to administer.

· Assessing creditworthiness in consumer credit - on 30 July 2018 the FCA published a final policy statement on its original consultation paper regarding proposed rules and guidance on how firms assess creditworthiness in consumer credit.

Having anticipated carefully how each of these developments might impact the Group's future performance, we do not expect them to have any material effect on our business. However, we are not complacent and continue to monitor all regulatory developments closely and where appropriate, participate fully in any related consultations or debate. We are also ready to implement whatever measures can further improve the delivery of great outcomes for our customers or that may be deemed necessary by the regulator. 

Half year dividend

Reflecting the Group's strong underlying performance, the Board is pleased to declare a 20% increase in the half year dividend to 0.6p per share (2017: 0.5p) with a total half year dividend pay-out of approximately £1.9m (2017: £1.6m) or 41% of normalised post-tax profits. 

The half year dividend of 0.6p per share (2017: 0.5p) will be payable on 17 October 2018 to those shareholders on the register of shareholders on 21 September 2018 (the 'Record Date').

Current trading and outlook

The investments made over the past 18-months are starting to bear fruit and we are well-placed to deliver substantial earnings and dividend growth.

Since the end of June 2018, each of our three business divisions has continued to perform strongly, driven by further loan book growth and careful control of impairment. 

As a result, the Group is trading slightly ahead of our expectations and whilst uncertainties around Brexit continue, the fact that we have high risk adjusted margins in all three of our business divisions means that we are well-placed to weather any macroeconomic headwinds that may appear on the horizon. Given both our performance to-date and strong market position in all three segments it is clear that the opportunity before us is now even greater than we first thought. We are finalising our plans for 2019 and beyond and will provide an update to the market at our annual investor day in November 2018.

John de Blocq van Kuffeler

Group Chief Executive

2 August 2018

Financial review

The timing and significance of the acquisition of George Banco as well as the adoption of IFRS 9 (see below) from 1 January 2018 means that the results for the Group in the first half of 2018 and the first half of 2017 are not directly comparable. As permitted by IFRS 9, comparative information for 2017 has not been restated. However, the notes to the financial statements provide further details regarding the transitional impact of IFRS 9.

Group reported results

The reported results for the Group for the six months to 30 June 2018 comprised a full period of all businesses whilst the reported results for the six months to 30 June 2017 do not include any contribution from George Banco that was acquired on 17 August 2017. Fair value adjustments and amortisation of acquired intangibles in 2018 include amounts relating to the acquisitions of Loans at Home, Everyday Loans (including TrustTwo) and George Banco.

6 Reported figures, adjusted to exclude fair value adjustments and amortisation of acquired intangibles

Normalised revenue increased by 51% to £78.9m (2017: £52.2m) reflecting strong organic growth in all divisions and a full period of George Banco which was acquired on 17 August 2017. As discussed further below, increased administration costs reflected the addition of George Banco and the significant expansion in both branch-based lending and home credit. The net result was that normalised operating profit increased by 79% to £15.2m (2017: £8.5m).

Having secured committed, six-year debt funding to finance the acquisition of George Banco and on the back of the significant increase in the size of the Group's loan book, interest costs in the first half increased by 212% to £9.6m (2017: £3.1m). As a result, normalised profit before tax was £5.6m (2017: £5.4m) and the reported loss before tax (after fair value adjustments and amortisation of acquired intangibles of £8.2m), was £2.6m (2017: loss before tax of £4.2m). Normalised earnings per share was 1.45p (2017: 1.35p) while the impact of fair value and other accounting adjustments meant that the Group's reported loss per share was 0.66p (2017: loss per share of 1.11p).

A more detailed review of each of the operating businesses is outlined below on both a normalised as well as a reported basis.

Divisional review

Branch-based lending

Everyday Loans is our largest business and represents the driving force behind the Group's financial performance. As at 30 June 2018, the net loan book had reached £166.6m, up 28% over the prior year on a like-for-like basis (2017: £129.9m) while active customer numbers had increased by 34% to 55,300 (2017: 41,300), serviced from 64 branches (2017: 44).

Founded in 2006, the business has a proven underwriting process and is one of very few providers of unsecured credit whose business model is founded upon building a personal relationship, face-to-face with each of its customers. While most direct competitors rely on an exclusively online customer journey, at Everyday Loans, in addition to conducting all of the remote checks done by pure digital providers, we also then ask to meet almost all of our customers in one of our branches before deciding whether or not to lend to them. Such an approach is unusual in the internet era and while costly to operate, the investment in people, training, premises and associated infrastructure is more than justified through the achievement of lower rates of impairment, higher risk adjusted margins and significant pre-tax profits when compared with pure online operators.

Opening branches in the right locations is a key element of our growth strategy. We look for areas of population with at least 70,000 adults matching our desired customer type: minimum of three years resident in the UK, earning average income but that are either credit impaired, have a thin credit file or are self-employed. Historically, new branches act as a drag on earnings in their first year but within three to four years are delivering an attractive return on asset (operating profit before central costs as a percentage of average net loan book) of over 20%.

Financial results

7 Reported figures, adjusted to exclude fair value adjustments and amortisation of acquired intangibles

8 Key performance indicators have been provided using normalised data only. We have provided twelve month figures on the basis that IFRS 9 had been adopted for both periods.

9 Excluding fair value adjustments.

10 Excluding fair value adjustments based on a twelve month average

11 See glossary for definitions

Normalised revenue was £35.8m (2017: £28.2m) driven by a 28% increase in the net loan book and a 0.8 percentage point increase in the average revenue yield on the loan book to 46.5% (2017: 45.7%). Fair value adjustments of £2.0m (2017: £5.9m) reflects part of the final year of the unwinding of the fair value adjustment made to the loan portfolio on acquisition and resulted in reported revenue of £33.8m (2017: £22.3). Other operating income of £0.9m came from the sale of a small portfolio of non-performing loans that was completed in the first half (2017: £1.2m).

The adoption of IFRS 9 resulted in impairments as a percentage of revenue on a rolling 12-month basis of 18.8% (2017: 23.0%) This was well within previous guidance and thanks to a much improved collections performance, was below both the prior year reported figure under IAS 39 as well as the IFRS 9 figure for 2017. As a result, the total charge in the period was £7.0m (2017: £6.4m). The investment associated with our planned opening of 12 new branches in 2018 meant that administrative expenses increased to £17.7m (2017: £13.2m) and total normalised operating profit increased by 22% to £12.0m (2017: £9.8m).

Higher finance costs, driven by the strong loan book growth and higher cost of funds following the refinancing of the Group's debt arrangements in August 2017, meant that normalised pre-tax profits were lower than last year. However, this is expected to reverse in the second half of 2018 as recently opened branches mature and move towards their full profit potential.

On a reported basis, the reduced level of fair value adjustments meant that revenue was up 52% to £33.8m (2017: £22.3m), operating profit was up 157% to £10.1m (2017: £3.9m) and profit before tax increased by 210% to £4.4m (2017: £1.4m).

As the capacity of our branch network has expanded, we have increased both the volume and quality of leads that we receive, and also improved the rate at which we convert the resultant applications into loans. In the six months to 30 June 2018, we screened a total of 761,400 applications (2017: 460,900) of which 177,700 were new borrowers that were 'approved in principle' (2017: 141,200) and sent through to the branch network for processing ('applications to branch' or 'ATBs'). By deepening our long-standing relationships with financial brokers, as well as by improving the customer journey through other channels, we have been able to increase the conversion rate of ATBs into loans implying a marked improvement in the quality of leads versus a year ago. At the same time, we have delivered a number of operational improvements through sharing of best practice, extensive training and the development of a 'can-do' culture across all staff. 

The strong financial performance in the first half was also driven by continued investment in our branch network, our broker relationships, our people and by maintaining a key focus on delinquency management. 

New branch openings - We opened 11 out of the 12 new branches planned for 2018 by April and one further branch will open in the second half. As a result, by the end of June 2018, the network had 20 more branches open than a year ago, increasing our network capacity, geographic coverage and customer reach. Reducing the distance that applicants have to travel to come in to a branch is one metric that is helping to improve our conversion of ATBs into loans.

Broker relationships - we have continued to work closely with a discrete number of financial brokers, helping them to improve the quality of leads they send through to us and also increasing the volume. In the six months to 30 June 2017, approximately 76% of our leads came via financial brokers. In the six months to 30 June 2018, this proportion had increased to 84%. Just as important, is the fact that an increasing proportion of the leads received through this channel are passing through our internal screening process and being converted into new loans with approximately 51% of all loans booked now coming via the broker channel (2017: 35%). Of the balance, 25% comes to us direct and 24% comes from existing or former borrowers.

Investment in people - with more branches we need more staff and also more managers and area managers to run the network effectively. Having identified this as a potential constraint on future growth, we have developed a bespoke recruitment process that is proving to be highly effective at identifying candidates with the right skills, attitude and ambition to become customer account managers. All new joiners are put through an intensive, classroom-based induction programme where they are taught all of the key processes so they can contribute as soon they arrive in-branch. With a network of 64 branches open today, we already have a large pool of internal management talent and have been able to supplement this by recruiting from other retail-based financial services companies.

Delinquency management - we have continued to maintain a tight control over impairment and rates of delinquency. This reflects the strength of our proven underwriting process but also an increased focus on all aspects of our collections procedures that helped us to deliver a further year-on-year reduction in the proportion of our loan book that was more than five days in arrears - this fell to 7.5% of operational receivables (i.e. before provisions) in June 2018 versus 8.2% a year earlier.

Plans for the rest of 2018

We are making good progress with our branch opening programme and remain on-track to reach 12 new branches by the end of the year. Whilst always vigilant regarding the potential impact of changes to the macroeconomic outlook, we are continuing to experience strong demand for our product and so have begun to turn our attention to 2019 and the potential to add further capacity. This is not just through more staff and more branches, but also through a continuous effort to deliver operational improvements that can increase conversion and productivity.

Having made great strides in increasing both of these metrics over the past 12 months, we plan to continue this evolution through a combination of sharing best practice across the network, developing further our training and management programmes as well as improving the quantity and quality of leads that are passed onto branches.

Guarantor loans

The Group's Guarantor Loans Division was completely transformed in August 2017 following our acquisition of George Banco to become the clear number two player in the UK's rapidly growing guarantor loans segment. As a result it has become the Group's second largest division with a net loan book of £62.9m at 30 June 2018, a 56% increase from a year earlier, assuming George Banco had been acquired on 1 January 2017, and adjusting for the impact of IFRS 9.

Guaranteed loans differ from our other two divisions as the presence of a guarantor changes the risk/reward dynamic and means that we can meet our underwriting criteria without having to meet the borrower face-to-face. In particular, the presence of a suitable guarantor can act as a positive influence on the borrower's propensity to stay on-track and repay the loan as planned. The net result is that, in most circumstances, a borrower with a thin or impaired credit file is able to obtain a loan at a significantly lower interest cost than if they had sought to borrow without a guarantor. Customers apply online or by phone and having passed a preliminary credit check, both borrower and guarantor are then taken through a thorough income and expenditure assessment thereby ensuring that while the borrower is primarily responsible for making the repayments, both the borrower and the guarantor (in the event of default) are capable of repaying the loan.

According to L.E.K. Consulting12, the value of total outstanding receivables in the segment grew at a compound annual growth rate of 43% between 2008 and 2016 to reach approximately £500m. Since then, the market has continued to grow strongly and in 2017 is estimated to have reached over £700m13 and has proven to be a highly valued market by investors - while the Group had an implied market share in 2017 of approximately 7%, Amigo Holdings PLC is the market leader with an estimated 88% market share12 and a market value today of approximately £1,300m. 

12 Executive Insights, Volume XX, Issue 39 - L.E.K. Consulting, July 2018

13 Amigo Holdings PLC prospectus - July 2018

Financial results

As noted above, the uplift in 2018 reflects a full period of George Banco but also strong underlying growth by our TrustTwo brand. The uplift in performance was due to improved management and a number of operational improvements that helped us to attract and process an increased numbers of leads, drive better conversion and increase the productivity of our people. The resulting strong loan book growth fed through into a substantial uplift in normalised revenue to £9.9m (2017: £1.5m) and this increased operating profit to £3.9m (2017: £0.1m). Despite higher finance costs, normalised pre-tax profits also increased strongly to £1.3m (2017: pre-tax loss of £0.1m).

14 Reported figures, adjusted to exclude fair value adjustments and amortisation of acquired intangibles

Our lending process involves capturing leads, turning them into applications and ensuring that those applications become loans. On a pro forma basis (i.e. assuming that George Banco had been acquired on 1 January 2017), the number of leads increased by 81% to 1.25m (2017: 690,000). This large increase reflected in part the fact that George Banco had been forced to reduce its lending substantially during May and June 2017 as a result of funding constraints. Following the acquisition by NSF and with the provision of ample funding in August 2017, lending practise resumed at George Banco, leading to a 91% increase in applications on a pro forma basis to almost 372,000 in the first half of 2018 (2017: 195,000). While this large increase resulted in a slightly lower rate of conversion, the number of loans booked still increased by 61% to 8,150 (2017: 5,060) and the value of loans booked in the period increased by 80% to £29.9m (2017: £16.6m).

This increase in volume was following a concerted effort and by working closely with the financial broking community to both increase the number of leads we receive, whilst also improving the quality of those leads - 30% of all leads passed through our screening process and became applications in H1 2018 which was a two percentage point increase versus the prior year (2017: 28%).

Processing more applications and converting them into loans requires a delicate balance of capacity and productivity. Having added a further 15 staff by the end of June 2018, we expect that volumes will continue to increase - not just because of more capacity, but also because as new recruits become more experienced, productivity also increases.

15 Key performance indicators have been provided using normalised data only. We have provided twelve month figures on the basis that IFRS 9 had been adopted for both periods. All definitions are as per glossary and above

The focus in 2018 has been on continuing to drive financial performance through the following key areas across both the George Banco and TrustTwo brands:

Maintaining a well-balanced channel mix - we source loan volumes through a variety of channels and while the financial broker market remains our most important channel with 53% of the total (2017: 49%), all channels have seen strong year-on-year growth. Our focus on attracting new customers meant that they represented 85% of volume while top-ups for existing or former borrowers fell to 15% of the total (2017: 21%) but still grew by 40% in absolute terms.

Developing a common underwriting approach and harmonised collections - ensuring consistency across both brands is having a positive impact on the quality of our underwriting as well as maintaining a tight control on impairment. During the first half of 2018 we completed the analytical work required with the credit reference agencies and established a common underwriting approach with all of our underwriters across the division. This will be followed by the introduction of supporting technology and a pricing matrix later in 2018.

Moving to a single loan management platform - we are making excellent progress on this important part of our integration plan and expect that by the end of 2018 all new loans written, irrespective of the brand, will be completed using a single loan management platform.  

Being obsessed about our customers' experience - by operating in different segments of the market, our two brands are able to offer applicants a different customer experience, depending upon source of lead, income, quality of guarantor and size and duration of loan. With improved management information we aim to offer a more tailored journey for applicants, improving conversion, productivity and delivering great customer outcomes.

Plans for the rest of 2018

The division's strong performance in the first half has provided an excellent platform for growth for the rest of 2018 and into 2019. We are focused on completing the remaining elements of our technical integration whilst maintaining good momentum in our operational and financial performance. This will be boosted by increased capacity with the recruitment of more staff and further operational efficiencies from harmonised processes and the continued development of our bespoke management information systems and tools.

Home credit

After a transformational 16-month period, Loans at Home has seen the shape, size and quality of its business increase significantly. As at 30 June 2018, the division had approximately 98,500 customers (2017: 88,300) served by a network of 962 self-employed agents (2017: 862) operating out of 69 offices (2017: 52) around the country. The net loan book increased to £37.8m at 30 June 2018, a 53% increase versus the prior year on a like-for-like basis. 

This strong growth was due largely to the major restructuring of our largest competitor which prompted large numbers of self-employed agents and staff to leave and join Loans at Home. As well as driving strong growth across a range of KPIs, the influx of new agents also helped to improve the quality of our loan book and the proportion of quality customers (those that had made 70% of all payments due within the previous 13-week period) increased to 59% of the total at 30 June 2018 (2017: 55%).

Operationally, the spans of control that we set in 2017 to manage the large influx of agents and customers are working well, ably supported by our handheld technology that is used by all of our agents. We have also now launched a new, fully mobile management information platform for managers who can now access full data analytics on all agents and associated customer information in real-time. This has reduced the time needed to access and process data, allowing more time to be out with agents and spending time with their customers.

While addressing a very different part of the market to branch-based lending, home credit shares the same face-to-face interaction with customers, not just for lending but also through the cash collection process. Regular personal contact also provides us as lender with up-to-date information about the customer's circumstances, thereby ensuring we are fully up-to-speed with their situation and can take this into account as part of our lending and collections process. 

At the heart of the home credit model has always been the strong sense of trust established between customer and agent, one that is founded on the weekly visit and on having established a relationship, sometimes over many months and even years. Customers know that if things change, their agent is able to discuss this with them and find the best solution for their circumstances, which may be through rescheduling one or more repayments, but without any penalty fees or costs to the customer. These and other features of home credit, such as the fact that the total cost of the credit is fixed at the outset and never changes, mean that it is popular among those on low or variable incomes who have to manage to a tight weekly budget. 

Based on figures provided by the FCA15, home credit customers have a median income of £15,500, or roughly half the national average. As a result, they can be more exposed to unexpected, or temporary changes to their income or expenditure. Whilst loans of up to £1,500 are available, most customers tend to borrow relatively small amounts (£400-£700) two or three times a year for specific items such as back-to-school, Christmas or an annual holiday as well as to help cover unexpected emergencies such as a broken home appliance or car breakdown.

Having recently completed its detailed review of a number of segments of the high-cost credit industry, the FCA noted that home credit was a service that was valued by consumers. Specifically, the FCA noted16:

"Generally, consumers are mainly positive about using home collected credit. Many said they would be significantly worse off if this line of credit were unavailable to them."

While the FCA considers that the home credit market is providing an important source of credit, it has issued a consultation on two suggested operational changes: that regulated firms (i) provide consumers with a comparison of the relative costs of refinancing an existing loan versus taking out a new loan; and (ii) capture how and when loan requests from consumers are received. The industry is reviewing these proposals carefully and will be responding in due course but welcomes the regulator's decision not to make wholesale changes to a market that it acknowledges is, on the whole, working well for consumers.

16High-Cost Credit Review: Consultation on rent-to-own, home-collected credit, catalogue credit and store cards, and alternatives to high-cost credit. Discussion on rent-to-own pricing - FCA, May 2018

Financial results

The larger loan book fed through to a significant uplift in revenue to £33.2m (2017: £22.5m), albeit on a marginally lower revenue yield. The adoption of IFRS 9 caused no surprises and the rate of impairment as a percentage of revenue at 36.6% (2017: 37.7%) was within our previously announced guidance range of 33-37%. As noted above, the larger and much higher quality loan book has resulted in a significant uplift in total collections and a reduction in the proportion of missed payments.

Administration costs increased to £19.5m (2017: £13.1m), driven by 17 more offices, 100 more self-employed agents and 106 more staff, both in the field and in oversight roles - the total number of staff at 30 June 2018 was 370 (2017: 264). Breaking down the costs further, agent commissions increased by 59% to £8.1m (2017: £5.1m) while other admin costs, including staff-related costs, also increased, this was by a smaller proportion. As a result, normalised operating profit was up substantially to £2.0m (2017: £0.8m) and while there was a £0.9m increase in finance costs to £1.3m (as a result of the strong loan book growth as well as the increased cost of the new debt facilities outlined above), normalised pre-tax profit doubled to £0.8m (2017: £0.4m).

17 We have provided twelve month figures on the basis that IFRS 9 had been adopted for both periods. All definitions are as per glossary and above

18 Before temporary additional commission

Plans for the rest of 2018

We remain focused on tightly managing our collections and impairment performance as well as supporting the agents recruited over the past year to reach their agreed number of customers as soon as they can. This will help to increase volumes and also reduce our costs as we remove the temporary additional commissions offered to newly recruited agents when they first joined our network.

The strong loan book growth and the increase in customer numbers and overall quality of our loan book for the year to-date bodes well for the seasonally important second half of the year. While we are working through the suggested operational changes put forward by the FCA as part of the High-Cost Credit Review, we do not anticipate any meaningful impact on our business should they be introduced in full.

Central costs

19 Adjusted to exclude amortisation of acquired intangibles related to the acquisition of Loans at Home, Everyday Loans and George Banco.

Normalised administrative expenses for the period were £2.8m (2017: £2.3m). They include plc-related costs as well as advisory and other related expenses. In addition, the Group incurred £4.3m of amortisation of intangible assets (2017: £3.7m) recognised on the acquisition of Loans at Home, Everyday Loans and George Banco.

IFRS 9

The International Accounting Standard Board's introduction of a new accounting standard covering financial instruments became effective for accounting periods beginning on or after 1 January 2018. This standard replaces IAS39: Financial Instruments: Recognition and Measurement. 

The new standard requires that lenders (i) provide for the expected credit loss ('ECL') from performing assets over the following year as a result of defaults forecast in the year and (ii) provide for the ECL over the life of the asset where that asset has seen a significant deterioration in credit risk. As a result, whilst the underlying cash flows from the asset are unchanged, IFRS9 has the effect of bringing forward provisions into earlier accounting periods.

This has resulted in a one-off adjustment to receivables and reserves on 1 January 2018 as detailed in the notes to the financial statements.

Whilst the adoption of IFRS 9 from 1 January 2018 has meant that the prior year figures, as previously reported, are not directly comparable, the Group estimates that the unaudited combined net loan book as at 30 June 2017, assuming IFRS9 had been adopted for the full accounting period ended 30 June 2017 would have been £165.2m (£194.9m if George Banco had been acquired on 1 January 2017). A breakdown of the unaudited analysis is as follows:

20 Adjusted to exclude fair value adjustments and the amortisation of acquired intangibles

Principal risks

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause reported and normalised results to differ materially from expected and historical results.

The principal risks facing the Group, together with the Group's risk management process in relation to these risks, are unchanged from those reported in the Group's Annual Report for the period ended 31 December 2017 (which is available for download at www.nsfgroupplc.com ) and relate to the following areas:

§ Conduct - risk of poor outcomes for our customers or other key stakeholders as a result of the Group's actions that may result in censure or penalty;

§ Regulation - risk through changes to regulations or a failure to comply with existing rules and regulations;

§ Credit - risk of loss through poor underwriting or a diminution in the credit quality of the Group's customers;

§ Business strategy - a failure to execute and integrate acquisitions (including technology), or to execute the Group's strategy as planned, may increase the risk of financial loss, including the possible impairment of goodwill;

§ Operational - the Group's operations are complex and have many important processes and procedures that if not followed or executed properly could increase the risk of financial loss; and

§ Cyber risk - the Group may suffer data loss or be subject to an unauthorised change that causes a security issue, data or systems abuse, cyber-attack or denial of service to any of the Group's systems.

On behalf of the Board of Directors

Nick Teunon

Chief Financial Officer

2 August 2018

Statement of Directors' responsibilities

The Directors confirm that, to the best of their knowledge, the unaudited condensed interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union, and that the interim report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

· An indication of important events that have occurred during the first six months of the financial year and their impact on the unaudited condensed interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· Material related party transactions that have occurred in the first six months of the financial year and any material changes in the related party transactions described in the last annual report and financial statements.

The current directors of Non-Standard Finance plc are listed in the 2017 Annual Report & Financial Statements. A list of current directors is also maintained on the Non-Standard Finance website: www.nsfgroupplc.com.

The maintenance and integrity of the Non-Standard Finance website is the responsibility of the Directors. The work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the unaudited condensed interim financial statements since they were initially presented on the website.

Legislation in the United Kingdom governing the preparation and dissemination of unaudited condensed interim financial statements may differ from legislation in other jurisdictions.

On behalf of the Board of Directors

Nick Teunon

Chief Financial Officer

2 August 2018

Independent review report to Non-Standard Finance plc

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 which comprises the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement of cash flows and related notes 1 to 11. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Statutory Auditor

London, United Kingdom

2 August 2018

Financial statements

Condensed consolidated statement of comprehensive income for the six months ended 30 June 2018

Loss per share

There are no recognised gains or losses other than disclosed above and there have been no discontinued activities in the period.

Condensed consolidated statement of financial position as at 30 June 2018

These financial statements were approved by the Board of Directors on 2 August 2018.

Signed on behalf of the Board of Directors

Nick Teunon

Chief Financial Officer

Condensed consolidated statement of changes in equity for the six months ended 30 June 2018

Condensed consolidated statement of cash flows for the six months ended 30 June 2018

Notes to the condensed set of financial statements for the six months ended 30 June 2018

General Information

Non-Standard Finance plc is a public limited company incorporated and domiciled in the United Kingdom. The address of the registered office is 5th Floor, 6 St Andrew Street, London, EC4A 3AE.

The unaudited condensed interim financial statements do not constitute the statutory financial statements of the Group within the meaning of section 434 of the Companies Act 2006. The statutory financial statements for the year ended 31 December 2017 were approved by the Board of Directors on 28 March 2018 and have been delivered to the Registrar of Companies. The report of the auditors on those financial statements was unqualified, did not draw attention to any matters by way of emphasis and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.

The unaudited condensed interim financial statements for the six months ended 30 June 2018 have been reviewed, not audited, and were approved by the Board of Directors on 2 August 2018.

1. Basis of preparation

The unaudited condensed interim financial statements for the six months ended 30 June 2018 have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union. The unaudited condensed interim financial statements should be read in conjunction with the statutory financial statements for the year ended 31 December 2017 which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

The Directors have reviewed the Group's budgets, plans and cash flow forecasts for 2018 together with outline projections for the subsequent years. Based on this review, they are satisfied that the Group has adequate resources to continue to operate for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the unaudited condensed interim financial statements.

2. Accounting policies

The amendments relating to the IFRS 9 'Financial Instruments' standard are mandatory for the first time for the financial year beginning 1 January 2018. Please see note 3 for further information. All other accounting policies adopted in preparing the unaudited condensed interim financial statements are consistent with those adopted in preparing the statutory financial statements for the year ended 31 December 2017.

Taxes on profits in interim periods are accrued using the tax rate that will be applicable to expected total annual profits.

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

3. Changes in accounting policies

On 1 January 2018, the Group implemented IFRS 9 "Financial Instruments" and IFRS 15 "Revenue from Contracts with Customers". As permitted by IFRS 9 and IFRS 15, comparative information for previous periods has not been restated. The impact on the Group's financial position of applying IFRS 9 requirements is set out below. The impact of adopting IFRS 15 is not material.

3.1 Impact on the financial statements

IFRS 9 has been adopted without restating comparative information. The reclassifications and the adjustments arising from the new impairment rules are therefore not reflected in the balance sheet as at 31 December 2017, but are recognised in the opening balance sheet on 1 January 2018. As prior periods have not been restated, changes in impairment of financial assets in the comparative periods remain in accordance with IAS 39 and are therefore not necessarily comparable to the loss provisions reported for the current period.

Implementation of IFRS 9 resulted in a £11.0 million reduction in the Group's opening equity at 1 January 2018 net of £2.6 million related to associated deferred tax impacts. There has been no change in the carrying amount of financial instruments on the basis of their measurement categories. All adjustments have arisen solely due to a replacement of the IAS 39 incurred loss impairment approach with an expected credit loss (ECL) approach.

The following table shows the adjustments recognised for each individual line item affected by the application of IFRS 9 at 1 January 2018. The application of IFRS 9 had no impact on the consolidated cash flows of the Group.

Condensed consolidated statement of financial position

3.2 IFRS 9 Financial Instruments - Impact of adoption

IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, de-recognition of financial instruments, impairment of financial assets and hedge accounting.

The adoption of IFRS 9 from 1 January 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. The new accounting policies are set out in note 3.3. In accordance with the transitional provisions in IFRS 9(7.2.15), comparative figures have not been restated. The Group does not use hedge accounting.

The total impact on the group's retained loss as at 1 January 2018 and 1 January 2017 is as follows:

3.2.1 Classification and measurement

On 1 January 2018 (the date of initial application of IFRS 9), the Group's management has assessed the financial instruments held by the Group and determined whether reclassification was needed under IFRS 9. Financial assets and financial liabilities of the Group comprise cash, loans and receivables, and bank borrowings. These are measured at amortised cost and there is no change in classification from IAS 39 under IFRS 9. Refer to note 3.3 for further detail.

3.2.2 Impairment of financial assets

The Group's amounts receivable from customers was subject to IFRS 9's new expected credit loss model.

The Group was required to revise its impairment methodology under IFRS 9 for this asset, refer to note 3.3 for more detail.

The impact of the change in impairment methodology on the group's retained earnings and equity is disclosed in the table in note 3.2 above.

While cash and cash equivalents and intercompany loans are also subject to the impairment requirements of IFRS 9, the Group has concluded that the expected credit loss on these items is nil and therefore no impairment loss adjustment is required.

3.2.3 Amounts receivable from customers

The amounts receivable from customers as at 31 December 2017 reconcile to the opening receivables balance on 1 January 2018 as follows:

1Before fair value adjustments

The additional loss allowance recognised upon the initial application of IFRS 9 as disclosed above resulted entirely from a change in the measurement attribute of the loss allowance relating to amounts receivable from customers.

To measure the expected credit losses, amounts receivable from customers have been grouped based on stages 1, 2 and 3. A summary by stage as at 1 January 2018 was determined as follows:

Reconciliation of estimate of IFRS 9 impairment provision as at 31 December 2017 to actuals as at 1 January 2018

Interest income under IFRS 9 for the six months ended 30 June 2018

3.3 IFRS 9 Financial Instruments - Accounting policies applied from 1 January 2018

3.3.1 Classification and measurement

Financial assets are measured on initial recognition at fair value. Under IFRS 9, the classification and subsequent measurement of financial assets is principally determined by the entity's business model and their contractual cash flow characteristics (whether the cash flows represent 'solely payments of principal and interest'). The standard sets out three types of business model:

- Hold to collect: the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. These assets are accounted for at amortised cost.

- Hold to collect and sell: this model is similar to the hold to collect model, except that the entity may elect to sell some or all of the assets before maturity as circumstances change. These assets are accounted for at fair value through other comprehensive income (FVOCI).

- Hold to sell: the entity originates or purchases an asset with the intention of disposing of it in the short or medium term to benefit from capital appreciation. These assets are held at fair value through profit or loss (FVTPL). An entity may also designate assets at FVTPL upon initial recognition where it reduces an accounting mismatch. An entity may elect to measure certain holdings of equity instruments at FVOCI, which would otherwise have been measured at FVTPL.

The Group has assessed its business models in order to determine the appropriate IFRS 9 classification. The loan books across all three divisions are held to collect contractual cash flows until the lending matures and therefore meet the criteria to remain at amortised cost. In order to be accounted for at amortised cost, it is necessary for individual instruments to have contractual cash flows that are solely payments of principal and interest (SPPI). The Group's financial instruments meet these criteria and therefore no re-classification is required. Financial assets and liabilities measured at amortised cost are accounted for under the Effective Interest Rate (EIR) method. This method of calculating the amortised cost of a financial asset or liability involves allocating interest income or expense over the relevant period. The EIR rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial asset or liability, or where appropriate, a shorter period, to the gross carrying amount on initial recognition.

The Group does not use hedge accounting.

3.3.2 Impairment of amounts receivable from customers

IFRS 9 introduces a revised impairment model which requires entities to recognise expected credit losses (ECL) based on unbiased forward-looking information. This replaces the IAS 39 incurred loss model which only recognises impairment if there is objective evidence that a loss has already been incurred and measures the loss at the most probable outcome.

From 1 January 2018, the Group applies the expected credit loss impairment model when determining the provisions to be applied to amounts receivable from customers. This comprises three stages: (1) on initial recognition, a loss allowance is recognised and maintained equal to 12 months of ECL; (2) if credit risk increases significantly relative to initial recognition, the loss allowance is increased to cover full lifetime ECL; and (3) when a financial asset is considered credit-impaired, the loss allowance continues to reflect lifetime ECL and interest revenue is calculated based on the carrying amount of the asset, net of the loss allowance, rather than its gross carrying amount. Provisions are therefore calculated based on an unbiased probability-weighted outcome which take into account historic performance and considers the outlook for macro-economic conditions. The Group reviews its portfolio of loans and receivables for impairment at each balance sheet date.

The Group applies the IFRS 9 staging methodology with reference to the arrears stage of the customer loans, reflecting the weekly payment cycle in home credit (Loans at Home) and monthly payment cycles in branch-based lending (Everyday Loans) and guarantor loans division (comprising TrustTwo and George Banco). The Group recognises that the customer demographic and loans provided by each entity are inherently different in nature and therefore the assumptions and the methodology used to calculate ECL under IFRS 9 have been applied to reflect this and is detailed below.

All customer accounts in home credit are categorised into the three broad stages as defined in IFRS 9. Categorisation into these stages has been made in accordance with their arrears stage which is based on equivalent missed payments in the last 13 weeks. As the new standard requires that lenders provide for the ECL from performing assets over the following year (stage 1), although the underlying cash flows from those loans which are currently performing in line with expectations are unchanged, this effectively results in the recognition of expected losses at the point of issue and captures all loans which do not fall under stages 2 and 3. This contrasts to IAS 39 where losses are only provided for when two to four contractual weekly payments (depending on length of relationship with the customer) have been missed in the previous 13 weeks.

Under IFRS 9, ECL assessment is based upon forward looking modelled probability of default (PD), exposure at default (EAD) and loss given default (LGD) parameters which are run at account level, and applied across all receivables from the point of origination/booking. ECL in home credit is estimated by reference to future cash flows based upon observed historical data and updated as management considers appropriate to reflect current and future conditions. Impairment losses are thereby calculated by reference to their stage and are measured as the difference between the carrying value of the loans and the present value of estimated future cash flows discounted at the original effective interest rate. This methodology encapsulates PD, EAD and LGD collectively. Given the short- term nature of lending in the home credit division, the difference between 12 month ECL and lifetime expected losses is minimal.

IFRS9 also requires the external environment to be considered as part of the calculation of ECL in the form of a macro-economic overlay. Due to the nature of the home credit industry and historical evidence, management have determined that the effect of traditional macro-economic downside indicators is minimal and therefore such an overlay is currently not necessary. Management will continue to monitor external macro-economic trends and their impact and apply an overlay should it become reasonable to do so.

Customer accounts in the branch-based lending and the guarantor loan divisions have been categorised into the 3 stages as defined in IFRS 9 with reference to the following criteria:

- Loans in stage 1 which comprise all customer receivables which do not fall into stages 2 and 3

- Loans in stage 2 which comprise those which show a significant increase in credit risk since origination, as determined by management to be:

o The point at which the credit status of a loan has deteriorated to such an extent that had the future performance been expected, it would not have been written in the first place (or had the declined state been presented initially, it would not have been written), or

o Loans over 30 days past due but less than 90 days past due

- Loans in stage 3 which comprise accounts in default as well as those accounts identified as insolvent (in line with IFRS 9 regulations the definition of default is over 90 days in arrears).

The branch-based lending and the guarantor loan divisions use historical data and risk models to determine the PD, LGD and the EAD. ECL are then predicted by multiplying these three forward-looking parameters and the result is discounted at the original effective interest rate. The ECL drivers of PD, EAD and LGD are modelled at an account level which considers vintage, maturity, exogenous and other credit factors and applied across all receivables from the points of origination/booking. The result is therefore an unbiased probability-weighted estimation of credit losses as determined by evaluating a range of possible outcomes and considering future economic conditions. When there is a non-linear relationship between forward-looking economic scenarios and their associated credit losses, multiple scenarios are modelled to ensure an unbiased representative sample of the complete distribution when determining the expected loss.

Stress testing methodologies are also leveraged within forecasting economic scenarios for IFRS 9 purposes. The macro-economic variables which are modelled include Bank of England base rate, GDP, CPI, HPI and unemployment rate. Management overlays and other exceptions to model outputs are applied only if consistent with the objective of identifying significant increases in credit risk.

3.3.3 Revenue recognition

Interest income is recognised in the statement of comprehensive income for all loans and receivables measured at amortised cost using the EIR method. The EIR is calculated using estimated cash flows, being contractual payments adjusted for the impact of customers repaying early and the anticipated impact of customers paying late or not at all. Under IFRS 9, the EIR is applied to the customer receivable before applying any impairment provisions for loans falling under stage 1 and 2, whilst for those loans in stage 3, the EIR is applied to net customer receivable (i.e. the customer receivable net of charges and provision). This differs from IAS39 whereby the EIR was applied to the net customer receivable balance at every stage. For detail of interest income for the six months ended 30 June 2018 under IFRS 9 - see note 3.2.3.

4. Segment information

Management has determined the operating segments by considering the financial and operational information that is reported internally to the chief operating decision-maker, the Board of Directors, by management. For management purposes, the Group is currently organised into four operating segments branch-based lending (Everyday Loans), home credit (Loans at Home), guarantor loans (TrustTwo and George Banco) and central (head office activities). The Group's operations are all located in the United Kingdom and all revenue is attributable to customers in the United Kingdom.

All inter-segment transactions are transacted on an arm's-length basis. The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.

5. Loss per share

The loss per share was calculated on the basis of net loss attributable to Ordinary Shareholders divided by the weighted average number of Ordinary Shares. The basic and diluted loss per share is the same, as the exercise of share options would reduce the loss per share and is anti-dilutive. At 30 June 2018, 5,000,000 shares were held in treasury (2017: nil)

The weighted average number of potential Ordinary shares that are not currently dilutive includes the ordinary shares that the Company may potentially issue relating to its share option schemes and share awards under the Group's long-term incentive plans and Save As You Earn schemes.

6. Taxation

The tax charge for the period has been calculated by applying the Directors' best estimate of the effective tax rate for the financial year of 19% (2017: 19%), to the profit before tax for the period.

7. Dividends

The Directors have declared an interim dividend in respect of the six months ended 30 June 2018 of 0.6 pence per share (interim dividend 2017: 0.5 pence per share) which will amount to a dividend payment of £1,872,298 (2017: £1,585,248). This dividend is not reflected in the balance sheet as it will be paid after the balance sheet date.

8. Amounts receivable from customers

The movement on the loan loss provision for the period relates to the provision at branch-based lending, the Guarantor loans division and home credit for the period. The amounts receivable from customers were recognised at fair value (net loan book value) at the date of acquisition, the amounts receivable are subsequently measured at amortised cost net of any impairment.

Analysis of overdue receivables from customers

Analysis on movement of loan loss provision

The average EIR used during the period ended 30 June 2018 for branch-based lending was 50.2% (2017: 46.9%), for Guarantor loans 39.2% (2017: n/a) and for home credit was 253% (2017: 305%).

9. Net cash used in operating activities

10. Related party transactions

Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. There have been no changes in the nature of related party transactions as described in note 27 to the 2017 Annual Report & Financial Statements.

11. Subsequent events

Since 30 June 2018, there have been no events that require disclosure in or adjustment to the financial statements.

Alternative performance measures glossary