Final Results

RNS Number : 4945S

Paragon Group Of Companies PLC

22 November 2011

 



Under embargo until Stock Exchange announcement: 7am, Tuesday 22 November 2011

PARAGON PRELIMINARY RESULTS

The Paragon Group of Companies PLC ("Paragon"), the specialist buy-to-let and consumer finance group, today announces its results for the year ended 30 September 2011.

Highlights

Financial Performance

·    Profit before tax of £80.8 million (2010: £71.8 million)

·    Underlying profit increased by 22.7% to £81.1 million (2010: £66.1 million)

·    Final dividend at 2.65p per share (2010: 2.40p per share)

·    Strong cash position and positive cash flow, with free cash standing at £195.0 million (2010: £147.8 million)

·    Shareholders' funds £742.0 million (2010 (restated): £692.0 million)

·    Net asset value 250p per share (2010: 234p per share)

Strategic development

·    Three consumer loan portfolio investments, total £22.7 million, completed during the year

·    £43.2 million consumer loan portfolio purchase completed post year end

·    New buy-to-let origination franchise re-established, £127.0 million advanced

·    First securitisation of buy-to-let loans since 2007 completed post year end

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

"The performance of the Group has been strong across the year, with great progress also evident in the delivery of valuable new opportunities. Through Idem Capital we have made a number of portfolio investments during the year and after the year end, all of which should be immediately earnings enhancing. Further, we have successfully re‑established our buy-to-let new lending business and completed a securitisation of buy-to-let assets originated during the year, our first since 2007. This augurs well for a strong start to 2012."

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]
	Paul Farrow
	Tel: [phone]
	Mobile: [phone]

The Paragon Group of Companies PLC

 

MANAGEMENT REPORT

The Group has made considerable progress during the year ended 30 September 2011, with new investments in portfolios, new servicing contracts, new buy-to-let lending and strong credit performance and customer retention contributing to a significant increase in profits.  Since the year end, a further, significant, portfolio acquisition and the Group's first securitisation since 2007 have been completed. The Group is well placed for future growth.

During the year ended 30 September 2011 the Group earned a profit of £80.8 million before taxation (2010: £71.8 million after exceptional gains on debt repurchase), an increase of 12.5%. Underlying profit, before exceptional and fair value items, increased by 22.7% to £81.1 million for the year (2010: £66.1 million).

Earnings per share were 20.2p (2010: 18.3p), the increase from last year reflecting the improved profits earned by the Group.

The Group's strategic focus has remained unchanged, to deliver value to shareholders by close management of the existing loan portfolio, which continued to perform well in the year, and by exploiting new opportunities, principally through investment in loan portfolios and through the re-establishment of our buy-to-let origination franchise.

These new developments have been of particular significance this year. Idem Capital, our dedicated investment subsidiary, has successfully built on the two portfolios purchased in prior years with three further investments during the financial year and another substantial portfolio purchase shortly after the year end. Paragon Mortgages and Mortgage Trust, our buy-to-let origination brands, have also re-established themselves in the lending market, supported by the £200.0 million warehouse facility signed in September 2010.  New loans of £127.0 million were advanced and a strong pipeline of business was in place at the end of the year.

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 2.65p per share (2010: 2.40p) which, when added to the interim dividend of 1.35p, gives a total dividend of 4.00p per share for the year (2010: 3.60p), an increase of 11.1%. Subject to approval at the Annual General Meeting on 9 February 2012, the dividend will be paid on 13 February 2012, by reference to a record date of 13 January 2012.

FINANCIAL REVIEW

CONSOLIDATED RESULTS

For the year ended 30 September 2011

		2011	2010
		£m	£m
Interest receivable		258.0	275.6
Interest payable and similar charges		(122.2)	(142.2)
Net interest income		135.8	133.4
Other operating income		15.1	14.5
Total operating income		150.9	147.9
Operating expenses		(45.4)	(42.6)
Provisions for losses		(24.4)	(39.2)
Underlying profit		81.1	66.1
Gains on debt repurchases		-	5.7
Fair value net (losses)		(0.3)	-
Operating profit being profit on ordinary activities before taxation		80.8	71.8
Tax charge on profit on ordinary activities		(21.2)	(17.9)
Profit on ordinary activities after taxation		59.6	53.9
Dividend - Rate per share for the year		4.0p	3.6p
Basic earnings per share		20.2p	18.3p
Diluted earnings per share		19.6p	17.8p

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. Both divisions include internally originated and acquired assets. 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 20 and are summarised below.

		2011	2010
		£m	£m
Underlying operating profit
First Mortgages		67.3	50.6
Consumer Finance		13.8	15.5
		81.1	66.1

Net interest income increased by 1.8% to £135.8 million (2010: £133.4 million), reflecting improved margins and the impact of new loan assets, both acquired and originated, on the balance sheet, partially offset by a 2.1% reduction in the size of the loan book during the year. At 30 September 2011, 95.8% (2010: 95.1%) of the Group's loan assets were first mortgages.

Other operating income was £15.1 million for the year, an increase of 4.1% from £14.5 million in 2010, increased income from third party account servicing and insurance commissions being partially offset by lower levels of account fees.

Operating expenses during the year were 6.6% higher at £45.4 million (2010: £42.6 million). The increase is primarily due to staff costs, following the recruitment of additional staff to support loan administration and increasing lending volumes, and increased expenditure on enhancing the Group's IT capabilities to support future growth. The cost:income ratio was in line with our expectations at 30.1% for the year (Note 19) and remains significantly below the industry average. Notwithstanding the strong growth in profits, the Board will remain focused on controlling operating costs through the application of rigorous budgeting and monitoring procedures.

The charge for impairment provisions of £24.4 million was 37.8% lower than the charge of £39.2 million for 2010, reflecting an improvement in arrears performance. As a percentage of loans to customers (note 8) the charge has reduced to 0.28% from 0.44% in 2010. 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.

During 2010 gains on repurchases of the Group's own debt securities of £5.7 million were made. No such repurchases took place during the year ended 30 September 2011 as increased bond prices made similar transactions less attractive.

Yield curve movements during the year resulted in hedging instrument fair value net losses of £0.3m (2010: £nil), which do not affect cash flow. As the fair value movements of hedged assets or liabilities are expected to trend to zero over time, this item is merely a timing difference. The Group remains economically and appropriately hedged.

Cash generation has remained strong over the period, with free cash balances increasing to £195.0 million at 30 September 2011 from £147.8 million a year earlier.

Corporation tax has been charged at an effective tax rate of 26.2%, compared to 24.9% last year. 

Profits after taxation of £59.6 million (2010: £53.9 million) have been transferred to shareholders' funds, which totalled £742.0 million at the year-end (2010 (restated - note 2): £692.0 million), representing 250p per share (2010: 234p per share) (Note 21).

BUSINESS REVIEW

NEW BUSINESS VOLUMES

Year ended 30 September 2011

	2011	2010	2011	2010
	£m	£m	Number	Number
First Mortgages
Buy-to-let	132.8	14.6	841	254
Consumer Finance
Secured lending	0.1	0.5	5	34
	132.9	15.1	846	288

FIRST MORTGAGES

Following the Group's return to new lending in September 2010, application levels have increased as the distribution base has been expanded and the product range widened. By 30 September 2011 business agreements were in place with the major mortgage adviser networks, directly authorised mortgage intermediaries and buy-to-let specialist advisers and the Group's product range had been widened to optimise the value of those arrangements.

By 30 September 2011, £127.0 million of loans had been advanced under the Group's new products and a further £5.8 million (2010: £14.6 million) of further advances had been made to existing borrowers. The credit quality of the new lending business written in the year has been excellent, with an average loan to value ratio of 69.2% and no loans in arrears.

At 30 September 2011, the buy-to-let portfolio was £8,231.7 million, compared with £8,323.9 million a year earlier. The credit performance of the portfolio over the year has again been exemplary, with the percentage of loans three months or more in arrears standing at 0.63%, including acquired loans and receivership cases, at 30 September 2011 (30 September 2010: 0.94%) and remains considerably better than the market average of 1.91% as recorded by the Council of Mortgage Lenders at that date. This improved performance is reflected in the reduction in the impairment charge attributable to first mortgages, to £5.6 million for the year ended 30 September 2011 from £18.6 million in the previous year. At 30 September 2011 there were 1,483 properties, across all portfolios, where a receiver had been appointed (30 September 2010: 1,398). Of those available for letting, 93.9% were let (30 September 2010: 93.5%) with rental income comfortably covering the mortgage payments.

The buy-to-let portfolio redemption rate has fallen to 2.2% for the year (2010: 3.0%). This is a consequence of market conditions: landlords continue to display a long-term commitment to property investment; and alternative offerings from other lenders remain unattractive as a result of generally higher funding and capital costs. At a broader level, the performance of the housing market continues to be characterised by historically low transaction levels, weak first-time buyer demand and flat-to-falling house prices. There are significant regional variations, with the market generally performing better in the South, particularly in London, and less well in the North where low demand is impacting both transactions and house prices. With the social rented sector constrained, demand has inevitably focussed on the private rented sector. The Royal Institute of Chartered Surveyors noted in its latest Residential Lettings Survey that rents continue to increase, driven by high tenant demand and a shortage in the supply of homes available to rent. This was supported by the Association of Residential Letting Agents who, in their third quarter 2011 report, noted that tenant demand remained high and that in some regions the sector is nearing capacity.

This high demand is benefitting landlords who are seeing rental levels improve and are experiencing little in the way of void periods. Nevertheless landlords are not expanding the supply of rented property rapidly for a variety of reasons: there remain supply constraints on the finance available; house price weakness and tight lending criteria mean that they do not have access to the same levels of equity that were available for new purchases prior to the credit crunch; and landlords are cautious in the current economic environment and are not compelled to buy when prices are flat or indeed trending down marginally. The buy-to-let mortgage market has, however, returned to growth with the Council of Mortgage Lenders reporting that the value of buy-to-let advances increased by 37% to £12.5 billion in the course of the financial year (2010: £9.1 billion) whilst credit quality in the sector continues to improve with industry-wide buy-to-let arrears once again lower than in the owner-occupied market.

The owner-occupied book reduced to £128.7 million from £151.7 million during the year ended 30 September 2011 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, portfolio acquisitions and other sources of revenue generation.

CONSUMER FINANCE

At 30 September 2011, the total loans outstanding on the Consumer Finance books were £363.8 million, compared with £435.6 million at 30 September 2010. The redemption rate remains low relative to pre credit crunch rates as a result of the shortage of alternative offerings from other lenders, itself a consequence of tight credit conditions and the low level of housing activity.  Lending during the period has been limited to a small number of further advances to existing customers.

The Group's secured loan portfolio at 30 September 2011 was £340.1 million (2010: £391.9 million). The percentage of accounts in this book with arrears of two months and over, excluding the portfolio acquired in August 2011, has increased from 10.03% at 30 September 2010 to 12.96% at 30 September 2011, reflecting both the effects of economic conditions on borrower performance and the contraction in the size of the portfolio. The arrears performance continues to compare favourably with the industry data recorded by the Finance & Leasing Association ("FLA") of 19.3% at 30 September 2011 (2010: 18.8%).

The residual unsecured loan, retail finance and car finance portfolios, totalling £23.7 million at 30 September 2011 (30 September 2010: £43.7 million) performed satisfactorily and in line with expectations.

PORTFOLIO OPPORTUNITIES

A major area of strategic focus for the Group has been the development of new sources of recurring income with the acquisition of loan portfolios through Idem Capital and the servicing of third party loan portfolios through Moorgate Loan Servicing. Progress has been excellent and has resulted in a 55.1% increase in operating profits in these areas to £7.6 million (2010: £4.9 million) during the financial year and the prospect of significant growth in profits in the future. These initiatives take advantage of the opportunities being created by the de-leveraging activities of the larger banks and financial institutions.

Idem Capital

Idem Capital invests in loan portfolios either as principal, where Idem acquires pools in its own right or as co-investor alongside other investors with, typically, Moorgate Loan Servicing appointed to act as servicer.  Co-investing has the potential for higher returns where the Group also derives income from servicing the loans within the underlying portfolio. 

During the financial year Idem invested a total of £22.7 million in three consumer loan transactions and the transfer of the servicing of two of these portfolios to our systems has now been completed and is in progress with the other. In addition, in October 2011 Idem Capital acquired a portfolio of unsecured loans from Royal Bank of Scotland for £43.2 million, paid from the Group's cash resources, bringing the total of portfolio investments since 2009 to £89.5 million. 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 portfolios of second mortgages and buy-to-let loans acquired in previous years have continued to perform well.

Our view remains that a number of loan portfolios owned by banks and other financial institutions will become available for sale as these institutions de-leverage and restructure their balance sheets. This is an important strategic opportunity for the Group, with the potential to deliver excellent returns to shareholders. 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. Moorgate Loan Servicing assumed servicing of a further 49,768 accounts during the year with the result that 58.6% of accounts under management by the Group at 30 September 2011 were managed on behalf of third parties (2010: 54.3%). A further agreement is in place whereby approximately 33,000 accounts will come under the Group's management during the year ended 30 September 2012. Moorgate is well placed to take advantage of other opportunities that may arise over the coming years, particularly as portfolio disposals take place as part of the wider financial sector de-leveraging process.

FUNDING

On 10 November 2011 the Group completed a £163.8 million securitisation of buy‑to‑let loans, through Paragon Mortgages (No. 16) PLC, despite very poor market conditions. This securitisation, the Group's first securitisation since 2007, released warehouse capacity to accommodate further lending growth. Notes, rated Aaa by Moody's Investors Service and AAA by Fitch Ratings, totalling £131.7 million were sold to investors with the Group retaining the remaining unrated notes. This was the Group's 54th securitisation since first pioneering the methodology in 1987 and was an important landmark for the Group, being the first buy-to-let securitisation by any issuer in the UK since the credit crunch.

The notes were priced at LIBOR plus 275 basis points, reflecting bond market conditions. Whilst the notes match-fund the collateralised loans to maturity, we have the ability to call the notes after three years, should more attractive funding rates be achievable at that time. 

The Group funds its mortgage originations through a £200.0 million revolving warehouse provided by Macquarie Bank, in which loans are warehoused prior to arranging term funding in the securitisation markets and, following the successful completion of the issuance by Paragon Mortgages (No.16), we plan to return to the securitisation markets regularly as business volumes increase. Dependant on volume and market conditions, additional warehousing capacity may be sought in due course.

CAPITAL MANAGEMENT

The Group's cash flow has been strong during the year, leading to an increase in free cash balances to £195.0 million at the year-end (30 September 2010: £147.8 million) after investments to support new buy-to-let originations and acquisitions by Idem Capital. The Company sees opportunities going forward to deploy capital for new lending activities, which should grow over time, and to invest in loan portfolios, through Idem Capital, as banks and other financial institutions de-leverage in the coming years. These cash balances, together with net cash receipts going forward, will support the Group's investments in these areas.

Consistent with our aim to follow a progressive dividend policy, the Company has declared a final dividend for the year of 2.65p per share which, when added to the interim dividend, makes a total dividend of 4.00p per share. The Company will keep under review the appropriate level of capital for the business to meet its operational requirements and strategic development objectives.

In accordance with our usual practice, we will be proposing at the forthcoming Annual General Meeting a special resolution seeking authority from shareholders for the Company to purchase up to 29.9 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.

REGULATION

Further consultation and rules flowing from the FSA's Mortgage Market Review, including the provision of enhanced prudential supervision of non-bank lenders, had been expected during the Summer but have been delayed and are still awaited.  Certain of the Group's operations are already authorised by the FSA in respect of residential mortgage and insurance activity and we expect the Group to be well placed to comply with any changes in the regulatory framework.

The European Commission has recently published its proposed directive on credit agreements relating to residential property, which proposes additional disclosure and underwriting requirements for all mortgage lending to consumers secured on residential property. It is unclear at this stage whether regulation will be extended to buy-to-let lending and we are engaged with the authorities on their proposal.

We will continue to maintain an active dialogue with the UK and European regulatory authorities as any proposals develop.

CORPORATE GOVERNANCE

The Board of Directors is committed to the principles of corporate governance contained in the UK Corporate Governance Code ('Code') issued by the Financial Reporting Council in May 2010. A detailed explanation of how those principles are applied will be given in the Group's annual report and accounts for the year.

BOARD OF DIRECTORS

On 11 February 2011, Peter Hartill was appointed by the Board as a non-executive director. Mr Hartill, a Chartered Accountant, is currently Non-Executive Chairman of Deeley Group and a non-executive director of Scott Bader Limited. Previously, he spent forty years with Deloitte, becoming a senior audit partner and a business advisor with experience across a wide range of industries and business issues. Specifically he has considerable experience in acquisitions and disposals, capital raising, risk control and corporate governance in the financial services sector.

On 27 July 2011 Terry Eccles, who remains on the Board, stepped down from his previous position as Senior Independent Director and Christopher Newell stepped down as Chairman of the Audit and Compliance Committee.  They were replaced by Ted Tilly and Peter Hartill respectively. Alan Fletcher replaced Ted Tilly as Chairman of the Remuneration Committee.

On 31 October 2011 Christopher Newell resigned from the Board of Directors after ten years of service. The Board would like to record its gratitude for his considerable support during the years he has been a director.

CONCLUSION

During the year the Group has successfully pursued its strategy to deliver shareholder value through purchasing portfolios, recommencing new lending, entering into new servicing agreements and continuing the careful management of the extant portfolios. Since the year-end the Group has completed a further, substantial, portfolio acquisition and successfully executed a £163.8 million securitisation under difficult market conditions, the Group's first since 2007.

The current difficulties in the Eurozone create serious uncertainties for the future course of the UK economy, with continued weakness being likely for some considerable time. However, Paragon continues to manage, actively and prudently, its portfolio of high quality originated assets, whilst looking to extract value from the acquired assets and use its strong liquidity for new lending and portfolio investment opportunities. We believe that the opportunities being created by the de-leveraging activities of the larger banks and financial institutions will create acquisition and servicing opportunities for the Group, where our proven experience and expertise in taking over the running of portfolios and extracting value makes Paragon a natural partner or co‑investor for larger transactions. Sound foundations are therefore in place for further growth in the present financial year.

The Paragon Group of Companies PLC

 

CONSOLIDATED INCOME STATEMENT

For the year ended 30 September 2011

			2011		2010
	Note		£m		£m
Interest receivable			258.0		275.6
Interest payable and similar charges			(122.2)		(142.2)
Net interest income			135.8		133.4
Other operating income	4		15.1		14.5
Total operating income			150.9		147.9
Operating expenses			(45.4)		(42.6)
Provisions for losses			(24.4)		(39.2)
Operating profit before gains and fair value items			81.1		66.1
Gains on debt repurchase			-		5.7
Fair value net (losses)	5		(0.3)		-
Operating profit being profit on ordinary activities before taxation			80.8		71.8
Tax charge on profit on ordinary activities			(21.2)		(17.9)
Profit on ordinary activities after taxation for the financial year			59.6		53.9
			2011		2010
	Note
Earnings per share
- basic	6		20.2p		18.3p
- diluted	6		19.6p		17.8p

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 2011

	2011		2010
	£m	£m	£m	£m
Profit for the year		59.6		53.9
Other comprehensive income
Actuarial (loss) on pension scheme	(0.3)		(5.7)
Cash flow hedge gains taken to equity	0.4		0.3
Tax on items taken directly to equity	(0.3)		1.3
Other comprehensive income for the year net of tax		(0.2)		(4.1)
Total comprehensive income for the year		59.4		49.8

 

 

The Paragon Group of Companies PLC

 

CONSOLIDATED BALANCE SHEET

30 September 2011

			2011	2010	2009
				(restated)	(restated)
	Note		£m	£m	£m
Assets employed
Non-current assets
Intangible assets	7		9.3	9.2	9.6
Property, plant and equipment			11.4	12.2	15.5
Financial assets	8		9,891.2	10,080.1	10,640.8
Deferred tax asset			-	1.5	2.8
			9,911.9	10,103.0	10,668.7
Current assets
Current tax assets			-	-	1.7
Other receivables			4.7	5.9	5.5
Cash and cash equivalents	10		571.6	536.7	480.4
			576.3	542.6	487.6
Total assets			10,488.2	10,645.6	11,156.3
Financed by
Equity shareholders' funds
Called-up share capital	11		299.7	299.4	299.1
Reserves	12		490.7	445.8	408.1
Share capital and reserves			790.4	745.2	707.2
Own shares			(48.4)	(53.2)	(56.7)
Total equity			742.0	692.0	650.5
Current liabilities
Financial liabilities	14		1.8	1.2	1.3
Current tax liabilities			10.7	16.2	-
Provisions			-	-	0.5
Other liabilities			38.3	32.4	30.4
			50.8	49.8	32.2
Non-current liabilities
Financial liabilities	14		9,674.5	9,885.7	10,459.6
Retirement benefit obligations			14.4	16.5	11.5
Deferred tax			5.0	-	-
Other liabilities			1.5	1.6	2.5
			9,695.4	9,903.8	10,473.6
Total liabilities			9,746.2	9,953.6	10,505.8
			10,488.2	10,645.6	11,156.3

Comparative amounts are restated as described in note 2.

Approved by the Board of Directors on 22 November 2011.

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 2011

			2011	2010
				(restated)
	Note		£m	£m
Net cash generated by operating activities	16		246.1	470.5
Net cash (utilised) / generated by investing activities	17		(2.1)	0.3
Net cash (utilised) by financing activities	18		(209.6)	(414.3)
Net increase in cash and cash equivalents			34.4	56.5
Opening cash and cash equivalents			536.6	480.1
Closing cash and cash equivalents			571.0	536.6
Represented by balances within:
Cash and cash equivalents			571.6	536.7
Financial liabilities			(0.6)	(0.1)
			571.0	536.6

Comparative amounts are restated as described in note 2.

The Paragon Group of Companies PLC

 

STATEMENT OF MOVEMENTS IN EQUITY

For the year ended 30 September 2011

				2011	2010
					(restated)
	Note			£m	£m
Total comprehensive income for the year				59.4	49.8
Dividends paid	13			(11.1)	(10.0)
Net movement in own shares				4.8	3.5
(Deficit) on transactions in own shares				(5.2)	(3.5)
Charge for share based remuneration				2.0	1.4
Tax on share based remuneration				0.1	0.3
Net movement in equity in the year				50.0	41.5
Equity at 30 September 2010				692.0	650.5
Equity at 30 September 2011				742.0	692.0

Comparative amounts are restated as described in note 2.

The Paragon Group of Companies PLC

NOTES TO THE FINANCIAL INFORMATION

For the year ended 30 September 2011

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 2009, 30 September 2010 or 30 September 2011, 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 2009 and 30 September 2010 have been delivered to the Registrar of Companies and those for the year ended 30 September 2011 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.

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 2011 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 2011 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 2010, except for the adoption of the amendment to IAS 17 - Leases in respect of accounting for leases of land included in the IASB 'Improvements to IFRSs' issued in April 2009;

As a result of the retrospective adoption of the amendment to IAS 17, as required by the Standard, one lease of land held by the Group which has been previously accounted for as an operating lease is now accounted for as a finance lease. The changes in the consolidated financial statement line items as a result of the change in policy are as follows:

	30 September 2011	30 September 2010	30 September 2009
	£m	£m	£m
Balance sheets
Fixed assets	1.5	1.8	2.0
Finance lease liability
Current	(0.2)	(0.2)	(0.2)
Non-current	(1.6)	(1.9)	(2.1)
Equity	(0.3)	(0.3)	(0.3)
Cash flow statements
Net cash generated by operating activities	0.2	0.2
Net cash utilised by financing activities	(0.2)	(0.2)
Net increase in cash and cash equivalents	-	-

The change in policy caused no change in the amounts reported in the income statement.

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 35 and 36.

Note 5 to the accounts for the year ended 30 September 2010 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 policies 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 announcement, except as disclosed in note 15. The Group has a formalised process of budgeting, reporting and review, which provides information to the directors which is used to ensure the adequacy of resources available for the Group to meet its business objectives.

The securitisation funding structures described in note 6 ensure that substantially all of the Group's remaining loan portfolios are match-funded to maturity. Repayment of the securitisation borrowings is restricted to funds generated by the underlying assets and there is no recourse to the Group's general funds. The Group's only working capital debt is the £110.0 million corporate bond which does not mature until 2017. 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 annual report and accounts.

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 the consumer loans. Both of these divisions include assets originated internally and assets acquired from third parties.

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 2011

	First Mortgages	Consumer Finance	Total
	£m	£m	£m
Interest receivable	214.7	43.3	258.0
Interest payable	(114.0)	(8.2)	(122.2)
Net interest income	100.7	35.1	135.8
Other operating income	7.0	8.1	15.1
Total operating income	107.7	43.2	150.9
Operating expenses	(34.8)	(10.6)	(45.4)
Provisions for losses	(5.6)	(18.8)	(24.4)
	67.3	13.8	81.1
Gains on debt repurchases	-	-	-
Fair value net (losses) / gains	(0.2)	(0.1)	(0.3)
Operating profit	67.1	13.7	80.8
Tax charge			(21.2)
Profit after tax			59.6

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
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
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

The assets and liabilities attributable to each of the segments at 30 September 2011, 30 September 2010 and 30 September 2009 were:

		First Mortgages	Consumer Finance	Total
		£m	£m	£m
30 September 2011
Segment assets		10,009.3	478.9	10,488.2
Segment liabilities		(9,400.2)	(346.0)	(9,746.2)
		609.1	132.9	742.0
30 September 2010	(restated)
Segment assets		10,083.0	562.6	10,645.6
Segment liabilities		(9,531.6)	(422.0)	(9,953.6)
		551.4	140.6	692.0
30 September 2009	(restated)
Segment assets		10,445.3	711.0	11,156.3
Segment liabilities		(9,931.8)	(574.0)	(10,505.8)
		513.5	137.0	650.5

Comparative amounts are restated as described in note 2.

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

4.    OTHER OPERATING INCOME

			2011	2010
			£m	£m
Loan account fee income			5.7	6.5
Insurance income			1.9	0.7
Third party servicing			5.8	5.6
Other income			1.7	1.7
			15.1	14.5

5.    FAIR VALUE NET (LOSSES)

The fair value net (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.

6.    Earnings per share

Earnings per ordinary share is calculated as follows:

	2011	2010
Profit for the year (£m)	59.6	53.9
Basic weighted average number of ordinary shares ranking for dividend during the year (million)	295.3	295.3
Dilutive effect of the weighted average number of share options and incentive plans in issue during the year (million)	8.2	8.3
Diluted weighted average number of ordinary shares ranking for dividend during the year (million)	303.5	303.6
Earnings per ordinary share                                        - basic	20.2p	18.3p
- diluted	19.6p	17.8p

7.    INTangible assets

Intangible assets at net book value comprise:

		2011	2010	2009
		£m	£m	£m
Goodwill		1.6	1.6	1.6
Computer software		1.1	0.4	0.3
Other intangibles		6.6	7.2	7.7
		9.3	9.2	9.6

Other intangible assets comprise brands and the benefit of business networks recognised on the acquisition of subsidiary companies.

8.    FInancial Assets

	Note	2011	2010	2009
		£m	£m	£m
Loans to customers		8,724.2	8,911.2	9,314.3
Fair value adjustments from portfolio hedging		3.4	8.6	39.0
Investments in securities		11.8	-	-
Derivative financial assets	9	1,151.8	1,160.3	1,287.5
		9,891.2	10,080.1	10,640.8

On 27 October 2011 the Group acquired an additional portfolio of unsecured consumer loans from Royal Bank of Scotland PLC. The consideration for the purchase was £43.2 million. The acquisition was financed from the Group's cash.

9.    Derivative Financial Assets and Liabilities

	Note	2011	2010	2009
		£m	£m	£m
Derivative financial assets	8	1,151.8	1,160.3	1,287.5
Derivative financial liabilities	14	(9.1)	(17.3)	(56.6)
		1,142.7	1,143.0	1,230.9
Of which:
Foreign exchange basis swaps		1,145.8	1,148.7	1,273.5
Other derivatives		(3.1)	(5.7)	(42.6)
		1,142.7	1,143.0	1,230.9

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.

10.  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:

		2011	2010	2009
		£m	£m	£m
Free cash		195.0	147.8	84.0
Securitisation cash		374.1	387.2	394.7
ESOP cash		2.5	1.7	1.7
		571.6	536.7	480.4

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

11.  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:

			2011	2010
			Number	Number
Ordinary shares of £1 each
At 1 October 2010			299,454,078	299,159,605
Shares issued			291,367	294,473
At 30 September 2011			299,745,445	299,454,078

During the year the Company issued 291,367 shares at par (2010: 294,473) to the trustees of its ESOP Trusts in order that they could fulfil their obligations under the Group's share based award arrangements.

12.  RESERVES

		2011	2010	2009
			(restated)	(restated)
		£m	£m	£m
Share premium account		64.1	64.1	64.1
Merger reserve		(70.2)	(70.2)	(70.2)
Cash flow hedging reserve		1.8	1.4	1.2
Profit and loss account		495.0	450.5	413.0
		490.7	445.8	408.1

Comparative amounts are restated as described in note 2.

13.  equity Dividend

Amounts recognised as distributions to equity shareholders in the period:

	2011	2010	2011	2010
	Per share	Per share	£m	£m
Equity dividends on ordinary shares
Final dividend for the year ended 30 September 2010	2.40p	2.20p	7.1	6.5
Interim dividend for the year ended 30 September 2011	1.35p	1.20p	4.0	3.5
	3.75p	3.40p	11.1	10.0

Amounts paid and proposed in respect of the year:

	2011	2010	2011	2010
	Per share	Per share	£m	£m
Interim dividend for the year ended 30 September 2011	1.35p	1.20p	4.0	3.5
Proposed final dividend for the year ended 30 September 2011	2.65p	2.40p	7.9	7.1
	4.00p	3.60p	11.9	10.6

The proposed final dividend for the year ended 30 September 2011 will be paid on 13 February 2012, subject to approval at the Annual General Meeting, with a record date of 13 January 2012. The dividend will be recognised in the accounts when it is paid.

14.  FInancial Liabilities

	Note	2011	2010	2009
			(restated)	(restated)
		£m	£m	£m
Current liabilities
Finance lease liability		1.2	1.1	1.0
Bank loans and overdrafts		0.6	0.1	0.3
		1.8	1.2	1.3
Non-current liabilities
Asset backed loan notes		8,049.7	8,336.2	8,819.2
Corporate bond		112.0	115.8	116.8
Finance lease liability		11.6	12.8	13.9
Bank loans and overdrafts		1,492.1	1,403.6	1,453.1
Derivative financial instruments	9	9.1	17.3	56.6
		9,674.5	9,885.7	10,459.6

Financial liabilities have been restated as described in note 2.

Further details of the above borrowings and further details of asset backed loan notes and bank loans are given in note 15.

15.  BORROWINGS

All borrowings described in the Group Accounts for the year ended 30 September 2010 remained in place throughout the period.

During the year the Group made its first drawings on the warehouse facility made available to Paragon Fourth Funding Limited, a 100% subsidiary of the Group, to fund new mortgage advances. At 30 September 2011 £123.0m had been drawn under this facility and the carrying value of this drawing in the accounts was £121.3m. As with the Group's other securitisation borrowings, the new warehouse is structured so that payments of interest and principal are limited to cash generated from the funded assets and there is no recourse to Group funds. Therefore the activation of the new facility does not impact on the liquidity risk of the Group.

Repayments made in respect of the Group's borrowings are shown in note 18.

On 10 November 2011 the Group issued £131.7m of AAA rated mortgage backed floating rate notes. The proceeds of the issue were used to refinance existing loan balances.

16.  net cash flow from operating activities

	2011	2010
		(restated)
	£m	£m
Profit before tax	80.8	71.8
Non-cash items included in profit and other adjustments:
Depreciation of property, plant and equipment	2.0	2.5
Amortisation of intangible assets	0.9	0.7
Profit on repurchase of debt	-	(5.7)
Foreign exchange movement on borrowings	(3.2)	(124.8)
Other non-cash movements on borrowings	(1.2)	0.6
Impairment losses on loans to customers	24.4	39.2
Charge for share based remuneration	2.0	1.4
(Profit) / loss on disposal of property, plant and equipment	(0.1)	0.2
Net decrease / (increase) in operating assets:
Loans to customers	150.8	363.9
Derivative financial instruments	8.5	127.2
Fair value of portfolio hedges	5.2	30.4
Other receivables	1.2	(0.4)
Net (decrease) / increase in operating liabilities:
Derivative financial instruments	(8.2)	(39.3)
Other liabilities	3.4	(0.1)
Cash generated by operations	266.5	467.6
Income taxes (paid) / received	(20.4)	2.9
	246.1	470.5

Comparative amounts are restated as described in note 2.

17.  net cash flow from investing activities

		2011	2010
		£m	£m
Proceeds on disposal of property, plant and equipment		0.9	1.6
Purchases of property, plant and equipment		(2.0)	(1.0)
Purchases of intangible assets		(1.0)	(0.3)
Net cash (utilised) / generated by investing activities		(2.1)	0.3

18.  net cash flow from financing activities

		2011	2010
			(restated)
		£m	£m
Dividends paid (note 13)		(11.1)	(10.0)
Repayment of asset backed floating rate notes		(284.1)	(345.5)
Repurchase of debt		-	(8.3)
Capital element of finance lease payments		(1.1)	(1.0)
Movement on bank facilities		87.1	(49.5)
Purchase of shares		(1.2)	-
Sale of shares		0.8	-
Net cash (utilised) by financing activities		(209.6)	(414.3)

Comparative amounts are restated as described in note 2.

19.  COST:INCOME RATIO

Cost:income ratio is derived as follows:

	2011	2010
	£m	£m
Cost - operating expenses	45.4	42.6
Total operating income	150.9	147.9
Cost / Income	30.1%	28.8%

20.  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.

		2011	2010
		£m	£m
First Mortgages
Profit before tax for the period (note 3)		67.1	56.1
Less:    Gain on debt repurchase		-	(5.7)
Fair value losses / (gains)		0.2	0.2
		67.3	50.6
Consumer Finance
Profit before tax for the period (note 3)		13.7	15.7
Less:    Gain on debt repurchase		-	-
Fair value losses / (gains)		0.1	(0.2)
		13.8	15.5
Total
Profit before tax for the period (note 3)		80.8	71.8
Less:    Gain on debt repurchase		-	(5.7)
Fair value losses / (gains)		0.3	-
		81.1	66.1

21.  Net asset value per share

Net asset value per share is derived as follows:

	Note	2011	2010
			(restated)
Total equity (£m)		742.0	692.0
Outstanding issued shares (m)	11	299.7	299.5
Treasury shares (m)		(0.7)	(0.7)
Shares held by ESOP schemes (m)		(2.5)	(3.4)
		296.5	295.4
Net asset value per £1 ordinary share		250p	234p

Comparative amounts are restated as described in note 2.

22.  RELATED PARTY TRANSACTIONS

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 £10,000 in the year ended 30 September 2011 by Paragon Finance plc, the sponsoring company of the Plan (2010: £3,000).

The Group had no other transactions with related parties other than key management compensation.

The Paragon Group of Companies PLC

STATEMENT OF DIRECTORS RESPONSIBILITIES

In relation to financial statements for the year ended 30 September 2011

The responsibility statement below has been prepared in connection with the full annual accounts of the Company for the year ended 30 September 2011. 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 2011, 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

22 November 2011

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

A 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 management report.

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 2010.

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 management report 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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