Final Results

RNS Number : 6978W

Paragon Group Of Companies PLC

24 November 2010

 



PARAGON MAKES EXCELLENT PROGRESS

The Paragon Group of Companies PLC ("Paragon"), the specialist buy-to-let and consumer finance lender, today announces its results for the year ended 30 September 2010.

Highlights

Financial Performance

·    Profit before tax of £71.8 million (2009: £54.3 million)

·    Underlying profit increased by 45.9% to £66.1 million (2009: £45.3 million)

·    Redemption rates low, margins improving

·    Final dividend at 2.4p per share (2009: 2.2p per share)

·    Strong cash position and positive cash flow, with free cash standing at £147.8 million (2009: £84.0 million)

·    Shareholders' funds £692.3 million (2009: £650.8 million)

·    Net asset value 234p per share (2009: 221p per share)

Strategic development

·    £200.0 million warehouse facility agreed, new lending recommenced

·    £14.0 million Group debt acquired for £8.3 million consideration

·    Further progress in portfolio acquisitions and loan servicing programme

Commenting on the results, Nigel Terrington, Chief Executive of Paragon, said:

"The Group has made excellent progress during the year, materially increasing profits, witnessing further growth in its new ventures and importantly securing funding to support the relaunch of new buy-to-let lending. We fully expect that our new lending programme will expand over time and will be complemented by increasing opportunities to acquire loan portfolios and take on new servicing contracts, all of which should provide the basis for continued growth in shareholder value. The Group's financial position is strong, leaving us well placed to deal with the economy's uncertainties and to exploit the opportunities ahead."

For further information, please contact:

The Paragon Group of Companies PLC	Fishburn Hedges
Nigel Terrington, Chief Executive	Andy Berry
Nick Keen, Finance Director	Tel: [phone]
Tel: [phone]	Mobile: [phone]
	Jane Padgham
	Tel: [phone]
	Mobile: [phone]
	Michelle James
	Tel: [phone]
	Mobile: [phone]

The Paragon Group of Companies PLC

MANAGEMENT REPORT

The Group has made excellent progress towards achieving its strategic objectives in the year ended 30 September 2010.  Strong customer retention and an improving credit performance contributed to a significant increase in profits and strong cash generation which, together with a return to new lending at the end of the year and further new initiative activity, have placed the Group in a strong position for continued growth in shareholder value.

During the year ended 30 September 2010 the Group earned a profit of £71.8 million before taxation and after exceptional gains on debt repurchase and the charges for impairment and losses on fair valued hedge instruments (2009: £54.3 million), an increase of 32.2%. Underlying profit, before exceptional and fair value items, increased by 45.9% to £66.1 million for the year (2009: £45.3 million).

Earnings per share were 18.3p (2009: 13.9p), the increase from last year reflecting the improved profits earned by the Group.

During the year the Group's activities have been managed in accordance with three clear strategic objectives: positioning the business to enable new lending to recommence when funding capacity returns to the market at commercial terms; the protection of the embedded value of the business by close management of the loan portfolio; and the development of new sources of recurring income using the skills and resources of the business.

Excellent progress has been made in all three areas during the year. In September we announced the Group's return to new lending, following the signing of a £200.0 million warehouse facility and the recovery in the mortgage backed securities market during the year. The loan portfolio has continued to perform well, with arrears steadily reducing over the year and redemptions running at low levels.  New sources of income, developed over the past two years, performed well, a further portfolio acquisition was completed at the end of the period and the management of additional third party loan accounts was assumed during the year. The opportunities for further progress in these initiatives have increased in recent months.

In view of the results achieved and in line with the progressive dividend policy outlined in prior years, the Board has declared a final dividend of 2.4p per share (2009: 2.2p) which, when added to the interim dividend of 1.2p, gives a total dividend of 3.6p per share for the year (2009: 3.3p), an increase of 9.1%. Subject to approval at the Annual General Meeting on 10 February 2011, the dividend will be paid on 14 February 2011, by reference to a record date of 14 January 2010.

FINANCIAL REVIEW

CONSOLIDATED RESULTS

For the year ended 30 September 2010

		2010	2009
		£m	£m
Interest receivable		275.6	508.2
Interest payable and similar charges		(142.2)	(373.4)
Net interest income		133.4	134.8
Other operating income		14.5	16.0
Total operating income		147.9	150.8
Underlying operating expenses		(42.6)	(39.3)
Provisions for losses		(39.2)	(66.2)
Underlying profit		66.1	45.3
Gains on debt repurchases		5.7	18.4
Impairment of goodwill		-	(6.0)
Fair value net (losses)		-	(3.4)
Operating profit being profit on ordinary activities before taxation		71.8	54.3
Tax charge on profit on ordinary activities		(17.9)	(13.2)
Profit on ordinary activities after taxation		53.9	41.1
Dividend - Rate per share for the year		3.6p	3.3p
Basic earnings per share		18.3p	13.9p
Diluted earnings per share		17.8p	13.7p

The Group is organised into two major operating divisions: First Mortgages, which includes the buy-to-let and owner-occupied first mortgage assets and other sources of income derived from first charge mortgages; and Consumer Finance, which includes secured lending, the residual car, retail finance and unsecured loan books and other sources of income derived from consumer loans. These divisions are the basis on which the Group reports primary segmental information.

The underlying operating profits of these business segments are detailed fully in note 22 to the financial information and are summarised below.

		2010	2009
		£m	£m
Underlying operating profit
First Mortgages		50.6	44.7
Consumer Finance		15.5	0.6
		66.1	45.3

An improvement in margins earned on loans to customers was offset by a 4.3% reduction in the size of the book during the year and by the lower level of interest earned on cash balances as a consequence of lower LIBOR rates over the year.  As a result, net interest income decreased by 1.0% to £133.4 million from £134.8 million in the previous year. At 30 September 2010, 95.1% (2009: 94.1%) of the Group's loan assets were first mortgages.

Other operating income was £14.5 million for the year, compared with £16.0 million in 2009, increased income from third party account servicing being offset by lower levels of commissions and fees associated with reduced lending activity and reduced insurance commissions.

Operating expenses during the year were 8.4% higher at £42.6 million (2009: £39.3 million). The increase is due to staff costs, following the recruitment of staff for the third party loan servicing business and to support the return to new lending. The cost:income ratio was in line with expectations at 28.8% for the year, compared with 26.1% for the previous year (Note 21) reflecting both the reduction in income referred to above and the increase in servicing activities, where the cost:income ratio is higher than for lending activities.

The charge for impairment provisions of £39.2 million was 40.5% lower than the charge of £65.9 million for 2009 (note 5), reflecting an improvement in arrears performance.  Low interest rates have increased affordability for customers, reducing the incidence of new arrears and assisting the correction of past arrears. The loan books continue to be carefully managed and credit performance remains in line with our expectations.

Gains on debt repurchases of £5.7 million (2009: £18.4 million) are detailed under Strategic Developments, below.

Net hedging instrument fair value movements for the year were £nil (2009: £3.4 million losses). In prior years gains and losses on hedging instrument fair values, which do not affect cash flow, have arisen from the IFRS requirement that movements in the fair value of hedging instruments attributable to ineffectiveness in the hedging arrangements should be credited or charged to income and expense.

Cash generation from the Group's securitisation vehicle companies has remained strong over the period, with free cash balances increasing to £147.8 million at 30 September 2010 from £84.0 million a year earlier, after the payment of £20.7 million for the purchase of a first mortgage portfolio in September 2010.

Corporation tax has been charged at an effective tax rate of 24.9%, compared to 24.3% last year. 

Profits after taxation of £53.9 million (2009: £41.1 million) have been transferred to shareholders' funds, which totalled £692.3 million at the year-end (2009: £650.8 million), representing 234p per share (2009: 221p per share) (Note 23).

BUSINESS REVIEW AND STRATEGY

NEW BUSINESS VOLUMES

Year ended 30 September 2010

	2010	2009	2010	2009
	£m	£m	Number	Number
First Mortgages
Buy-to-let	14.6	25.2	254	487
Consumer Finance
Secured lending	0.5	60.4	34	2,119
	15.1	85.6	288	2,606

FIRST MORTGAGES

The most significant development in the First Mortgage business during the year was the return to new lending following the signing of a £200.0 million warehouse facility in September 2010. The Group's aim is to re-establish its position as the leading mortgage lender to experienced professional landlords, extended, where appropriate, to other areas of buy-to-let service provision in the private rented sector. The initial focus of activity is the re-establishment of distribution arrangements.  Completed loan business will naturally flow from this roll-out after the normal mortgage lead-in times and the level of applications received since September has been encouraging.

At 30 September 2010, the buy-to-let portfolio was £8,323.9 million, compared with £8,585.0 million a year earlier. From the end of February 2008 until the recommencement of new lending, new business origination by the Group's buy-to-let brands, Paragon Mortgages and Mortgage Trust, had been restricted to further advances to existing borrowers where there is adequate equity in the property. Aggregate completions of such loans were £14.6 million for the year ended 30 September 2010, compared with £25.2 million for the previous year.

The credit performance of the Group's buy-to-let mortgages over the year as a whole has again been exemplary. Those cases that have gone into arrears have, for the most part, responded well to the careful management that our specialist arrears team have supplied. At the year end Paragon's three month plus arrears in buy-to-let (excluding the portfolio acquired on 30 September 2010) stood at 0.83%, compared with the market average of 2.45% as recorded by the CML.  

Where an account is not responding well to the normal arrears management processes, a receiver of rent may be appointed. The function of the receiver is to manage the property on behalf of the landlord and forward the rent collected to the lender. This is a flexible tool that can allow a borrower an opportunity to work his or her way through a period of difficulty whilst the receiver ensures that the property and the tenant are managed professionally and that value is protected. At 30 September 2010 there were 1,398 properties across all portfolios where a receiver had been appointed (30 September 2009: 1,420). Of those available for letting, 93.5% were let.

Landlords continue to display a long-term commitment to property investment and the buy-to-let portfolio redemption rate has fallen to 3.0% for the year (2009: 7.1%).  Landlords are witnessing very high levels of rental demand, strong rental growth and low finance costs. With limited availability of alternative, competitively priced, buy-to-let products, customer retention levels are likely to remain high.

Activity in the housing market remains subdued due, in part, to continuing tight credit conditions. The effect on the private rented sector, however, has been to maintain high levels of tenant demand.  The low level of purchase transactions means that would-be home buyers are renting in larger numbers and for longer periods. The latest RICS Residential Lettings Survey confirmed that tenant demand remains high, creating upward pressure on rents. A similar picture is painted by The Association of Residential Letting Agents, whose members reported increased achievable rents at the end of the third quarter. The latest data, for September 2010, from Findaproperty.com shows rents increasing by 1.4% in the third quarter, with rental prices at their highest since the Autumn of 2008.

The constraints impacting on the owner-occupier sector seem likely to continue for the foreseeable future. At the same time there appears to be little likelihood of significant public funding being made available to support the social rented sector.  As a result, the demand for private renting is expected to remain high.

Owner-occupied book

The owner-occupied book reduced to £151.7 million from £179.3 million during the year ended 30 September 2010 and performed in line with the Group's expectations. Save for the management of this book in run-off, there has been little activity in recent years in this area as the Group has focused on other lending markets.

CONSUMER FINANCE

Lending during the period has been limited to a small number of further advances to existing customers. At 30 September 2010, the total loans outstanding on the Consumer Finance books were £435.6 million, compared with £550.0 million at 30 September 2009, the redemption rate being kept low by the shortage of alternative offerings in the market, as a result of lack of funding, and by the low level of housing activity.

The percentage of accounts with arrears of two months and over on the secured loan book has increased from 7.94% at 30 September 2009 to 9.36% at 30 September 2010, reflecting both the effects of economic conditions on borrower performance and the contraction in the size of the portfolio. The arrears performance compares favourably with the industry data recorded by the Finance & Leasing Association ("FLA") of 24.4% (2009: 19.8%).

REGULATION

There has been an increasing trend towards greater regulation in the financial sector, which is likely to continue for the foreseeable future. Paragon is not directly affected by many of these changes, although the consequences of changing market conditions can affect the competitive landscape. Basel III does not apply to the Group although its wider implications for the banking sector are uncertain.

There is uncertainty as to whether buy-to-let lending will become regulated, although secured consumer lending is expected to be FSA regulated in due course.

We continue to engage with government bodies regarding the future course of regulatory processes and participated in the consultation on possible revised prudential and conduct of business obligations for non-bank lenders.  We shall maintain an active dialogue with the FSA and HM Treasury as the process of consultation develops.

STRATEGIC DEVELOPMENTS

Last year we reported on the specific areas of strategic focus for the generation of new sources of income to enhance shareholder value, these being the acquisition of loan portfolios through Idem Capital, the servicing of third party loan portfolios through Moorgate Loan Servicing and Arden Credit Management and the expansion of products and services for existing customers. Good progress has been made in these areas.

Idem Capital

The portfolio of second mortgages purchased in September 2009 has performed well during the year and in September 2010 we acquired a further portfolio, consisting of buy-to-let loans, from Morgan Stanley Bank International Limited for £20.7 million. The full transfer of the servicing of these loans to our systems has been completed. The Group has a long and established track record in acquiring loan portfolios and successfully transferring the loan servicing in-house and managing the books effectively thereafter.

The Group has acquired some £3 billion of loan portfolios in the past across a range of asset classes. We continue to believe that a number of portfolios owned by banks and other financial institutions will become available for sale as these institutions de-leverage and restructure their balance sheets. We see this as an important strategic opportunity, with the potential to deliver excellent returns to shareholders and we will continue to pursue opportunities in this area.

Moorgate Loan Servicing

Good progress has been made with the development of third party loan servicing through Moorgate Loan Servicing and its division, Arden Credit Management, which utilises our core administration and collection skills. Our experience in loan management established over many years has enabled us to extend this service to our third party clients, providing significant added value to the performance of their loan portfolios.  Arden Credit Management assumed servicing of a further 15,000 accounts during the year with the result that 54.3% of accounts under management by the Group at 30 September 2010 were managed on behalf of third parties. We believe increasing opportunities will arise over the coming years, particularly as portfolio disposals take place as part of the wider banking de-leveraging process.

The range of services we offer to the private rented sector under our "Redbrick" brand, which include the provision of energy performance certificates, survey and valuation services, specialist insurance services for landlords and tenant credit checks and assessments, continued to be developed during the year and we have been encouraged by the growth in business levels in these areas.

The activities of Idem Capital and Moorgate Loan Servicing contributed £4.9 million to operating profit (2009: £1.4 million) during the financial year.

In addition, following the buyback of £37.7 million (nominal) of Group debt during the year ended 30 September 2009 at a cost of £18.9 million, we invested a further £8.3 million during the period in the purchase of £14.0 million (nominal) of the Group's securitisation debt, creating an exceptional profit of £5.7 million. The scope for further purchases is limited as increased bond prices now make further transactions less attractive.

FUNDING

As previously reported, the Group entered into a £200.0 million revolving warehouse agreement with Macquarie Bank in September, providing the warehouse funding for the recommencement of buy-to-let lending.  The facility, to be rated by Fitch Ratings, is available for a four year term to Paragon Fourth Funding Limited, a 100% owned subsidiary, and interest will be charged on the amount drawn at one month LIBOR plus 2.875%.  The Group's intention is to use the facility to warehouse loans prior to arranging term funding in the mortgage backed securitisation markets.  Consequently, the facility is structured to permit drawings and re-drawings in its first two years. The Group continues to engage in a dialogue with other potential counterparties to expand the warehouse funding available.

During the year the Group has engaged with bond investors in the UK and in Europe to update investors on the Group's progress and to determine market appetite for new Paragon debt securities. Taking account of the positive feedback received from investors and the improvement seen during the course of the past year in both the primary and secondary securitisation markets, the Group continues to focus on securitisation issuance as offering the most cost-effective access to long-term funding for new lending.

CAPITAL MANAGEMENT

The Group's free cash flow has been strong during the year, leading to an increase in free cash balances to £147.8 million (30 September 2009: £84.0 million) after investments totalling £29.0 million in respect of the purchase of a portfolio of buy-to-let loans at the end of the financial year and the purchase of the Group's securitisation debt. These balances, together with net cash receipts going forward, will support the Group's future lending and portfolio purchase activities.

Consistent with our aim to follow a progressive dividend policy, the Company has declared a final dividend for the year of 2.4p per share which, when added to the interim dividend, makes a total dividend of 3.6p per share. The Company sees opportunities going forward to deploy capital in support of our new lending activities, which should grow over time. Additionally, opportunities exist to acquire loan portfolios, through Idem Capital, as banks and other financial institutions de-leverage in the coming years. The Company will keep under review the appropriate level of capital for the business to meet its operational requirements and strategic development objectives.

We will be proposing at the forthcoming Annual General Meeting a special resolution seeking authority from shareholders for the Company to purchase up to 29.8 million of its own shares (10% of the issued share capital). It is customary for companies to seek such authority but we would not expect to utilise the authority unless, in the light of market conditions prevailing at the time, we consider that to do so would enhance earnings per share and would be in the best interests of shareholders generally. Given the operational and strategic opportunities described above, the Board has no current intention of using this authority.

 

CONCLUSION

The Group has made excellent progress during the year, increasing profits, improving the credit quality of the portfolio, expanding business activities and securing funding to support new buy-to-let lending. Whilst the UK economic environment remains challenging with the outlook for growth, unemployment and house prices all uncertain, the Group enters the new financial year with a term-funded, high quality loan book. We expect that our new lending programme will expand over time and will be complemented by increasing opportunities to acquire loan portfolios and take on new servicing contracts, all of which should leave us well placed for continued growth in shareholder value.

24 November 2010

The Paragon Group of Companies PLC

 

CONSOLIDATED INCOME STATEMENT

For the year ended 30 September 2010

			2010		2009
	Notes		£m		£m
Interest receivable			275.6		508.2
Interest payable and similar charges			(142.2)		(373.4)
Net interest income			133.4		134.8
Share of results of associate			-		-
Other operating income	4		14.5		16.0
Total operating income			147.9		150.8
Operating expenses			(42.6)		(39.3)
Provisions for losses	5		(39.2)		(66.2)
Operating profit before gains and fair value items			66.1		45.3
Gains on debt repurchase	6		5.7		18.4
Impairment of goodwill			-		(6.0)
Fair value net (losses)	7		-		(3.4)
Operating profit being profit on ordinary activities before taxation			71.8		54.3
Tax charge on profit on ordinary activities			(17.9)		(13.2)
Profit on ordinary activities after taxation for the financial year			53.9		41.1
			2010		2009
	Notes
Earnings per share
- basic	8		18.3p		13.9p
- diluted	8		17.8p		13.7p

The results for the current and preceding years relate entirely to continuing operations.

The Paragon Group of Companies PLC

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2010

		2010		2009
		£m	£m	£m	£m
Profit for the year			53.9		41.1
Other comprehensive income
Actuarial (loss) on pension scheme		(5.7)		(7.7)
Cash flow hedge gains taken to equity		0.3		1.9
Tax on items taken directly to equity		1.3		1.6
Other comprehensive income for the year net of tax			(4.1)		(4.2)
Total comprehensive income for the year			49.8		36.9

The Paragon Group of Companies PLC

 

CONSOLIDATED BALANCE SHEET

30 September 2010

			2010	2009	2008
	Notes		£m	£m	£m
Assets employed
Non-current assets
Intangible assets	9		9.2	9.6	0.4
Property, plant and equipment			10.4	13.5	18.5
Interest in associate			-	-	-
Financial assets	10		10,080.1	10,640.8	10,647.6
Deferred tax asset			1.5	2.8	10.3
			10,101.2	10,666.7	10,676.8
Current assets
Current tax assets			-	1.7	-
Other receivables			5.9	5.5	6.6
Cash and cash equivalents	12		536.7	480.4	826.3
			542.6	487.6	832.9
Total assets			10,643.8	11,154.3	11,509.7
Financed by
Equity shareholders' funds
Called-up share capital	13		299.4	299.1	299.1
Reserves	14		446.1	408.4	378.7
Share capital and reserves			745.5	707.5	677.8
Own shares			(53.2)	(56.7)	(56.3)
Total equity			692.3	650.8	621.5
Current liabilities
Financial liabilities	16		1.0	1.1	0.9
Current tax liabilities			16.2	-	6.3
Provisions			-	0.5	0.3
Other liabilities			32.4	30.4	79.4
			49.6	32.0	86.9
Non-current liabilities
Financial liabilities	16		9,883.8	10,457.5	10,791.5
Retirement benefit obligations			16.5	11.5	5.0
Provisions			-	-	0.2
Other liabilities			1.6	2.5	4.6
			9,901.9	10,471.5	10,801.3
Total liabilities			9,951.5	10,503.5	10,888.2
			10,643.8	11,154.3	11,509.7

The preliminary financial information was approved by the Board of Directors on 24 November 2010.

Signed on behalf of the Board of Directors

N S Terrington                      N Keen

Chief Executive                     Finance Director

The Paragon Group of Companies PLC

 

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 30 September 2010

			2010	2009
	Notes		£m	£m
Net cash generated by operating activities	17		470.3	738.8
Net cash generated by investing activities	18		0.3	1.3
Net cash (utilised) by financing activities	19		(414.1)	(1,086.2)
Net increase / (decrease) in cash and cash equivalents			56.5	(346.1)
Opening cash and cash equivalents			480.1	826.2
Closing cash and cash equivalents			536.6	480.1
Represented by balances within:
Cash and cash equivalents			536.7	480.4
Financial liabilities			(0.1)	(0.3)
			536.6	480.1

 

STATEMENT OF MOVEMENTS IN CONSOLIDATED EQUITY

For the year ended 30 September 2010

			2010	2009
	Notes		£m	£m
Total comprehensive income for the year			49.8	36.9
Dividends paid	15		(10.0)	(9.2)
Net movement in own shares			3.5	(0.4)
(Deficit) / surplus on transactions in own shares			(3.5)	(0.6)
Charge for share based remuneration			1.4	1.2
Tax on share based remuneration			0.3	1.4
Net movement in equity in the year			41.5	29.3
Equity at 30 September 2009			650.8	621.5
Equity at 30 September 2010			692.3	650.8

The Paragon Group of Companies PLC

NOTES TO THE FINANCIAL INFORMATION

For the year ended 30 September 2010

1.   GENERAL INFORMATION

The financial information set out in the announcement does not constitute the Company's statutory accounts for the years ended 30 September 2008, 30 September 2009 or 30 September 2010, but is derived from those statutory accounts, which have been reported on by the Company's auditors. Statutory accounts for the years ended 30 September 2008 and 30 September 2009 have been delivered to the Registrar of Companies and those for the year ended 30 September 2010 will be delivered to the Registrar following the Company's Annual General Meeting. The reports of the auditors in each case were unqualified, did not draw attention to any matters by way of emphasis and did not contain an adverse statement under sections 498(2) or 498(3) of the Companies Act 2006, or equivalent preceding legislation.

This document may contain forward-looking statements with respect to certain of the plans and current goals and expectations relating to the future financial condition, business performance and results of the Group. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of the Group including, amongst other things, UK domestic and global economic and business conditions, market related risk such as fluctuation in interest rates and exchange rates, inflation, deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which the Group and its affiliates operate. As a result, the Group's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. Nothing in this document should be construed as a profit forecast.

A copy of the Annual Report and Accounts for the year ended 30 September 2010 will be posted to shareholders in due course. Copies of this announcement can be obtained from the Group Company Secretary, The Paragon Group of Companies PLC, St. Catherine's Court, Herbert Road, Solihull, West Midlands, B91 3QE.

2.   ACCOUNTING POLICIES

The annual financial statements of the Group for the year ended 30 September 2010 have been prepared in accordance with International Financial Reporting Standards as adopted for use in the European Union. Accordingly, the preliminary financial information has been prepared in accordance with the recognition and measurement criteria of IFRS. The particular accounting policies adopted are those described in the Annual Report and Accounts of the Group for the year ended 30 September 2009, except for the adoption of International Financial Reporting Standard 8 - 'Operating Segments' ('IFRS 8') and the revisions to International Accounting 1 - 'Presentation of Financial Statements' ('IAS 1 (revised)').

As a result of the adoption of IFRS 8 the disclosures on operating segments given in note 3 are presented on a different basis from in previous years and certain disclosures have been changed. The segments reported and their results, however, remain as previously disclosed under IAS 14 - 'Segment Reporting'.

As a result of the adoption of IAS 1 (revised) the format of certain disclosures made in the financial statements and notes differs from previous years. Comparative figures have been reanalysed on a consistent basis.

Neither of these accounting changes has any effect on the results of the Group for the current or preceding period, its balance sheets or its cash flows.

Going concern basis

The business activities of the Group, its current operations and those factors likely to affect its future results and development, together with a description of its financial position and funding position, are described in the preliminary announcement. The principal risks and uncertainties affecting the Group, and the steps taken to mitigate against these risks are described on pages 32 and 33.

Note 5 to the accounts for the year ended 30 September 2009 includes an analysis of the Group's working capital position and policies, while note 6 includes a detailed description of its funding structures, its use of financial instruments, its financial risk management objectives and polices and its exposure to credit, interest rate and liquidity risk. Critical accounting estimates affecting the results and financial position disclosed in this annual report are discussed in note 4. The position and policies described in these notes remain materially unchanged to the date of this preliminary financial information.

Substantially all of the Group's remaining loan portfolios are funded through securitisation structures and are thus match-funded to maturity. None of the Group's debt matures before 2017, when the £110.0 million corporate bond is repayable. As a consequence the directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

After making enquiries, the directors have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the preliminary financial information.

3.   SEGMENTAL INFORMATION

For internal reporting purposes the Group is organised into two major operating divisions, First Mortgages and Consumer Finance. These divisions are the basis on which the Group reports segmental information.

The revenue generated by the First Mortgages segment includes interest and fees generated by the buy-to-let and owner-occupied mortgage assets and other income derived from first charge mortgages. Consumer Finance revenue includes interest and fees generated by second charge loans, the residual car, retail finance and unsecured loan assets, and other sources of income derived from consumer loans.

All of the Group's operations are conducted in the United Kingdom, all revenues arise from external customers and there are no inter-segment revenues. No customer contributes more than 10% of the revenue of the Group.

Financial information about these business segments is shown below.

Year ended 30 September 2010

	First Mortgages	Consumer Finance	Total
	£m	£m	£m
Interest receivable	228.4	47.2	275.6
Interest payable	(133.6)	(8.6)	(142.2)
Net interest income	94.8	38.6	133.4
Share of associate result	-	-	-
Other operating income	6.5	8.0	14.5
Total operating income	101.3	46.6	147.9
Operating expenses	(32.1)	(10.5)	(42.6)
Provisions for losses	(18.6)	(20.6)	(39.2)
	50.6	15.5	66.1
Gains on debt repurchases	5.7	-	5.7
Impairment of goodwill	-	-	-
Fair value net (losses) / gains	(0.2)	0.2	-
Operating profit	56.1	15.7	71.8
Tax charge			(17.9)
Profit after tax			53.9

Year ended 30 September 2009

	First Mortgages	Consumer Finance	Total
	£m	£m	£m
Interest receivable	443.8	64.4	508.2
Interest payable	(347.8)	(25.6)	(373.4)
Net interest income	96.0	38.8	134.8
Share of associate result	-	-	-
Other operating income	11.4	4.6	16.0
Total operating income	107.4	43.4	150.8
Operating expenses	(31.2)	(8.1)	(39.3)
Provisions for losses	(31.5)	(34.7)	(66.2)
	44.7	0.6	45.3
Gains on debt repurchases	15.9	2.5	18.4
Impairment of goodwill	(6.0)	-	(6.0)
Fair value net (losses) / gains	(3.6)	0.2	(3.4)
Operating profit	51.0	3.3	54.3
Tax charge			(13.2)
Profit after tax			41.1

The assets and liabilities attributable to each of the segments at 30 September 2010, 30 September 2009 and 30 September 2008 were:

		First Mortgages	Consumer Finance	Total
		£m	£m	£m
30 September 2010
Segment assets		10,081.3	562.5	10,643.8
Segment liabilities		(9,529.6)	(421.9)	(9,951.5)
		551.7	140.6	692.3
30 September 2009
Segment assets		10,443.4	710.9	11,154.3
Segment liabilities		(9,929.5)	(574.0)	(10,503.5)
		513.9	136.9	650.8
30 September 2008
Segment assets		10,580.8	928.9	11,509.7
Segment liabilities		(10,095.4)	(792.8)	(10,888.2)
		485.4	136.1	621.5

All of the assets shown above were located in the United Kingdom.

4.   OTHER OPERATING INCOME

			2010	2009
			£m	£m
Loan account fee income			6.5	10.4
Insurance income			0.7	2.5
Third party servicing			5.6	1.0
Other income			1.7	2.1
			14.5	16.0

5.   PROVISIONS FOR LOSSES

		2010	2009
		£m	£m
Impairment of financial assets		39.2	65.9
Other provisions		-	0.3
		39.2	66.2

6.   GAINS ON DEBT REPURCHASE

			2010	2009
			£m	£m
On asset backed loan notes			5.7	13.9
On corporate bond			-	4.5
			5.7	18.4

These gains have arisen on the repurchase by the Group, on the open market, of its debt securities at less than their carrying value.

The cash consideration paid on these purchases, including transaction costs of £nil (2009: £0.3m) was:

			2010	2009
			£m	£m
On asset backed loan notes			8.3	13.9
On corporate bond			-	5.4
			8.3	19.3

Despite the gains made on the repurchase of these debt instruments, the directors consider that the carrying values of the remaining borrowings are not materially different from their fair values. The directors currently expect that these borrowings will be repaid in full and the present values of such cash flows will not be materially different to the carrying value. The gains described above have been made on purchases in a market with a very low level of activity, where the prices which can be achieved in one off transactions will not necessarily be representative of the fair value of the liabilities concerned. 

7.   FAIR VALUE NET GAINS / (LOSSES)

The fair value net gain / (loss) represents the accounting volatility on derivative instruments which are matching risk exposure on an economic basis generated by the requirements of IAS 39. Some accounting volatility arises on these items due to accounting ineffectiveness on designated hedges, or because hedge accounting has not been adopted or is not achievable on certain items. The losses and gains are primarily due to timing differences in income recognition between the derivative instruments and the economically hedged assets and liabilities. Such differences will reverse over time and have no impact on the cash flows of the Group.

8.   Earnings per share

Earnings per ordinary share is calculated as follows:

	2010	2009
Profit for the year (£m)	53.9	41.1
Basic weighted average number of ordinary shares ranking for dividend during the year (million)	295.3	295.7
Dilutive effect of the weighted average number of share options and incentive plans in issue during the year (million)	8.3	5.2
Diluted weighted average number of ordinary shares ranking for dividend during the year (million)	303.6	300.9
Earnings per ordinary share                                        - basic	18.3p	13.9p
- diluted	17.8p	13.7p

9.   INTANGIBLE Assets

Intangible assets at net book value comprise:

		2010	2009	2008
		£m	£m	£m
Goodwill		1.6	1.6	-
Computer software		0.4	0.3	0.4
Other intangibles		7.2	7.7	-
		9.2	9.6	0.4

10. FInancial Assets

		2010	2009	2008
		£m	£m	£m
Loans to customers		8,911.2	9,314.3	10,053.2
Fair value adjustments from portfolio hedging		8.6	39.0	(12.0)
Loans to associate		-	-	15.5
Derivative financial assets		1,160.3	1,287.5	590.9
		10,080.1	10,640.8	10,647.6

11. derivative financial assets and liabilites

	2010	2009	2008
	£m	£m	£m
Derivative financial assets (note 10)	1,160.3	1,287.5	590.9
Derivative financial liabilities (note 16)	(17.3)	(56.6)	(25.7)
	1,143.0	1,230.9	565.2
Of which:
Foreign exchange basis swaps	1,148.7	1,273.5	551.9
Other derivatives	(5.7)	(42.6)	13.3
	1,143.0	1,230.9	565.2

The Group's securitisation borrowings are denominated in sterling, euros and US dollars. All currency borrowings are swapped at inception so that they have the effect of sterling borrowings. These swaps provide an effective hedge against exchange rate movements, but the requirement to carry them at fair value leads, when exchange rates have moved significantly since the issue of the notes, to large balances for the swaps being carried in the balance sheet. This is currently the case with both euro and US dollar swaps, although the debit balance is compensated for by retranslating the borrowings at the current exchange rate.

12. Cash and CASH EQUIVALENTS

Only 'Free Cash' is unrestrictedly available for the Group's general purposes. Cash received in respect of loan assets is not immediately available, due to the terms of the warehouse facilities and the securitisations. 'Cash and Cash Equivalents' also includes balances held by the Trustees of the Paragon Employee Share Ownership Plans which may only be used to invest in the shares of the Company, pursuant to the aims of those plans.

The total consolidated 'Cash and Cash Equivalents' balance may be analysed as shown below:

		2010	2009	2008
		£m	£m	£m
Free cash		147.8	84.0	73.2
Securitisation cash		387.2	394.7	750.6
ESOP cash		1.7	1.7	2.5
		536.7	480.4	826.3

Cash and Cash Equivalents includes current bank balances and fixed rate sterling term deposits with London banks.

13. Called-up share capital

The share capital of the company consists of a single class of £1 ordinary shares.

Movements in the issued share capital in the year were:

			2010	2009
			Number	Number
Ordinary shares of £1 each
At 1 October 2009			299,159,605	299,159,605
Shares issued			294,473	-
At 30 September 2010			299,454,078	299,159,605

During the year the Company issued 294,473 shares at par to the trustees of its ESOP Trusts in order that they could fulfil their obligations under the Group's share based award arrangements.

14. RESERVES

		2010	2009	2008
		£m	£m	£m
Share premium account		64.1	64.1	64.1
Merger reserve		(70.2)	(70.2)	(70.2)
Cash flow hedging reserve		1.4	1.2	(0.1)
Profit and loss account		450.8	413.3	384.9
		446.1	408.4	378.7

15. equity Dividend

Amounts recognised as distributions to equity shareholders in the period:

	2010	2009	2010	2009
	Per share	Per share	£m	£m
Equity dividends on ordinary shares
Final dividend for the year ended 30 September 2009	2.2p	2.0p	6.5	5.9
Interim dividend for the year ended 30 September 2010	1.2p	1.1p	3.5	3.3
	3.4p	3.1p	10.0	9.2

Amounts paid and proposed in respect of the year:

	2010	2009	2010	2009
	Per share	Per share	£m	£m
Interim dividend for the year ended 30 September 2010	1.2p	1.1p	3.5	3.3
Proposed final dividend for the year ended 30 September 2010	2.4p	2.2p	7.1	6.5
	3.6p	3.3p	10.6	9.8

The proposed final dividend for the year ended 30 September 2010 will be paid on 14 February 2011, subject to approval at the Annual General Meeting, with a record date of 14 January 2011. The dividend will be recognised in the accounts when it is paid.

16. FInancial Liabilities

		2010	2009	2008
		£m	£m	£m
Current liabilities
Finance lease liability		0.9	0.8	0.8
Bank loans and overdrafts		0.1	0.3	0.1
		1.0	1.1	0.9
Non-current liabilities
Asset backed loan notes		8,336.2	8,819.2	9,028.7
Corporate bond		115.8	116.8	117.9
Finance lease liability		10.9	11.8	12.6
Bank loans and overdrafts		1,403.6	1,453.1	1,606.6
Derivative financial instruments		17.3	56.6	25.7
		9,883.8	10,457.5	10,791.5

17. net cash flow from operating activities

	2010	2009
	£m	£m
Profit before tax	71.8	54.3
Non-cash items included in profit and other adjustments:
Depreciation of property, plant and equipment	2.3	3.2
Amortisation of intangible assets	0.7	0.7
Impairment of goodwill	-	6.0
Share of result of associated undertakings	-	-
Profit on repurchase of debt	(5.7)	(18.4)
Foreign exchange movement on borrowings	(124.8)	719.1
Other non-cash movements on borrowings	0.6	12.3
Impairment losses on loans to customers	39.2	66.2
Charge for share based remuneration	1.4	1.2
Loss on disposal of property, plant and equipment	0.2	0.5
Net decrease / (increase) in operating assets:
Loans to customers	363.9	673.0
Loans to associates	-	0.1
Derivative financial instruments	127.2	(696.6)
Fair value of portfolio hedges	30.4	(51.0)
Other receivables	(0.4)	(0.1)
Net (decrease) / increase in operating liabilities:
Derivative financial instruments	(39.3)	30.9
Other liabilities	(0.1)	(52.7)
Cash generated by operations	467.4	748.7
Income taxes paid	2.9	(9.9)
	470.3	738.8

18. net cash flow from investing activities

	2010	2009
	£m	£m
Proceeds on disposal of property, plant and equipment	1.6	1.6
Purchases of property, plant and equipment	(1.0)	(0.2)
Purchases of intangible assets	(0.3)	(0.1)
Net cash generated by investing activities	0.3	1.3

19. net cash flow from financing activities

	2010	2009
	£m	£m
Dividends paid (note 15)	(10.0)	(9.2)
Repayment of asset backed floating rate notes	(345.5)	(902.4)
Repurchase of debt (note 6)	(8.3)	(19.3)
Capital element of finance lease payments	(0.8)	(0.8)
Movement on bank facilities	(49.5)	(153.5)
Purchase of shares	-	(1.0)
Net cash (utilised) by financing activities	(414.1)	(1,086.2)

20. purchase of subsidiary undertakings

On 25 January 2007 the Group acquired a 33% interest in the equity of The Business Mortgage Company Limited and its subsidiary companies ('TBMC'), a mortgage broker, as part of a transaction in which the Company supported the purchase of TBMC by its management, providing facilities of £15.75 million. With the significant downturn in market activity during 2008 the business of TBMC suffered and, in order to secure the future of this strategically important business channel, the Group agreed to a reorganisation of TBMC whereby it accepted the remaining 67% of the equity on 17 December 2008, bringing the company within the Group, and suspended interest payments on its loan to TBMC. No payment was made in respect of the shares accepted. This transaction was accounted for by the purchase method of accounting. The fair values of the assets acquired and the liabilities assumed as a result of the acquisition were as follows:

		The Group
		2009
		£m
Intangible assets		8.2
Tangible fixed assets		0.1
Deferred tax assets		0.8
Other receivables		0.2
Other liabilities		(0.1)
		9.2
Liabilities owed to Group		(16.8)
		(7.6)
Goodwill		7.6
		-
Total cash consideration		-
Less: cash acquired		-
Cash flow on acquisition less cash acquired		-

21. COST:INCOME RATIO

Cost:income ratio is derived as follows:

	2010	2009
	£m	£m
Cost - operating expenses	42.6	39.3
Total operating income	147.9	150.8
Cost / Income	28.8%	26.1%

22. UNDERLYING PROFIT

Underlying profit is determined by excluding from the operating result certain costs of a one‑off nature, which do not reflect the underlying business performance of the Group, gains on the repurchase of debt which result from the illiquidity of the credit markets rather than the fair value of the security and fair value accounting adjustments arising from the Group's hedging arrangements.

		2010	2009
		£m	£m
First Mortgages
Profit before tax for the period (note 3)		56.1	51.0
Less:    Gain on debt repurchase		(5.7)	(15.9)
Impairment of goodwill		-	6.0
Fair value losses / (gains)		0.2	3.6
		50.6	44.7
Consumer Finance
Profit before tax for the period (note 3)		15.7	3.3
Less:    Gain on debt repurchase		-	(2.5)
Impairment of goodwill		-	-
Fair value losses / (gains)		(0.2)	(0.2)
		15.5	0.6
Total
Profit before tax for the period (note 3)		71.8	54.3
Less:    Gain on debt repurchase		(5.7)	(18.4)
Impairment of goodwill		-	6.0
Fair value losses / (gains)		-	3.4
		66.1	45.3

23. Net asset value per share

Net asset value per share is derived as follows:

	Note	2010	2009
Total equity (£m)		692.3	650.8
Outstanding issued shares (m)	13	299.5	299.2
Treasury shares (m)		(0.7)	(0.7)
Shares held by ESOP schemes (m)		(3.4)	(3.4)
		295.4	295.1
Net asset value per £1 ordinary share		234p	221p

24. RELATED PARTY TRANSACTIONS

In the year ended 30 September 2010, the Group has continued the related party relationships described in note 66 on page 114 of the annual report and accounts of the Group for the financial year ended 30 September 2009. In addition, on 27 May 2010, Mr A K Fletcher, an independent non-executive director of the Company, was appointed as a trustee of the Group Pension Plan. In respect of this appointment he was paid £3,000 in the year ended 30 September 2010 by Paragon Finance plc, the sponsoring company of the Plan. Other related party transactions in the period comprise the compensation of the Group's key management personnel and the charging of loan interest, payment of commissions and provision of management services to the associated undertaking before it became a subsidiary. Except as noted above there have been no changes in these relationships which could have a material effect on the financial position or performance of the Group in the period.

Save for the transactions referred to above, there have been no related party transactions in the year ended 30 September 2010.

The Paragon Group of Companies PLC

STATEMENT OF DIRECTORS' RESPONSIBILITIES

In relation to the financial statements for the year ended 30 September 2010

The responsibility statement below has been prepared in connection with the full annual accounts of the Company for the year ended 30 September 2010. Certain parts of these accounts are not presented within this announcement.

The directors are responsible for preparing the Annual Report and the financial statements. The directors are required to prepare accounts for the Group in accordance with International Financial Reporting Standards ('IFRS') and have also elected to prepare company financial statements in accordance with IFRS. In respect of the financial statements for the year ended 30 September 2010 company law requires the directors to prepare such financial statements in accordance with International Financial Reporting Standards, the Companies Act 2006 and Article 4 of the IAS Regulation. 

International Accounting Standard 1 - 'Presentation of Financial Statements' requires that financial statements present fairly for each financial year the Company's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the Preparation and Presentation of Financial Statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. Directors are also required to:

·    properly select and apply accounting policies;

·    present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and

·    provide additional disclosures when compliance with the specific requirements in International Financial Reporting Standards is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance.

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a directors' report and directors' remuneration report which comply with the applicable requirements of the Companies Act 2006.

The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions.

The directors confirm that, to the best of their knowledge:

·    the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and of the Group taken as a whole; and

·    the business review, which is incorporated into the Directors' Report, includes a fair review of the development and performance of the business and the position of the Group taken as a whole, together with a description of the principal risks and uncertainties it faces.

Approved by the Board of Directors and signed on behalf of the Board.

JOHN G GEMMELL

Company Secretary

24 November 2010

The Paragon Group of Companies PLC

PRINCIPAL RISKS AND UNCERTAINTIES 

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance and could cause actual results to differ materially from expected and historical results. The Group's system of risk management, which includes risk review and an active internal audit function, is monitored by the Audit and Compliance Committee.

The principal risks to which the Group is exposed include the following:

Economic environment

Further deterioration in the general economy may adversely affect all aspects of the Group's business. Adverse economic conditions might increase the number of borrowers that default on their loans, which may increase the Group's costs and could result in losses on some of the Group's assets.

The general economic factors affecting the Group in the period going forward, together with the steps taken by the Group's management to address these issues are described in more detail in the preliminary announcement.

Changes in interest rates may adversely affect the Group's net income and profitability. The steps taken by the Group to mitigate against the long term effects of interest rate movements, through the structuring of its products and the use of hedging procedures are described in note 6 to the accounts for the year ended 30 September 2009.

Credit risk

As a primary lender the Group faces credit risk as an inherent component of its lending activities. Adverse changes in the credit quality of the Group's borrowers, a general deterioration in UK economic conditions or adverse changes arising from systematic risks in financial systems could reduce the recoverability and value of the Group's assets.

Operational risk

The activities of the Group subject it to operational risks relating to its ability to implement and maintain effective systems to process the high volume of transactions with customers. A significant breakdown of the IT systems of the Group might adversely impact the ability of the Group to operate its business effectively.

To address these risks, the Group's internal audit function carries out targeted reviews of critical systems to ensure that they remain adequate for their purpose. The Group has a business continuity plan, which is kept under regular review and is designed to ensure that any breakdown in systems would not cause significant disruption to the business.

Competitor risk

The Group faces strong competition in all of the core markets in which it operates. There is a danger that its profitability and /or market share may be impaired.

To mitigate this risk the Group maintains relationships with its customers, business introducers and other significant participants in the markets in which it is active, as well as being active in industry-wide organisations and initiatives. This enables market trends to be identified and addressed within the relevant business strategy.

Governmental, legislative and regulatory risk

The market sectors to which the Group supplies products, and the capital markets from which it has historically obtained much of its funding, have been subject to intervention by United Kingdom Government, European Union and other regulatory bodies. Current regulatory developments are discussed in the section of the preliminary announcement headed 'Regulation'. To the extent that such actions disadvantage the Group, when compared to other market participants, they present a risk to the Group.

In order to mitigate this risk the Group has been active in explaining its position to the authorities in order that it is not inadvertently disadvantaged.

Management

The success of the Group is dependent on recruiting and retaining skilled senior management and personnel.

Working capital

The Group's capital position and its policies in respect of capital management are described in the accounts.

Financial risk

The Group's exposure to other financial risks, including liquidity risk and foreign currency risk, and the procedures in place to mitigate those risks are described in detail in the accounts.

 

END

 

 

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