Final Results

RNS Number : 8713X

Paragon Group Of Companies PLC

25 November 2014

 



Under embargo until Stock Exchange announcement: 7am, Tuesday 25 November 2014

PARAGON PRELIMINARY RESULTS

The Paragon Group of Companies PLC ('Paragon') today announces its full year results for the year ended 30 September 2014.

HIGHLIGHTS

Underlying profits increased by 18.1% to £122.2 million from £103.5 million in 2013

	2014	2013 (restated*)	Change	% change
Profit before tax	£122.8m	£104.8m	+£18.0m	+17.2%
Basic EPS	31.9p	28.2p	+3.7p	+13.1%
Dividend per share	9.0p	7.2p	+1.8p	+25%
Dividend cover ratio	3.5 times	3.9 times
Return on equity	10.7%	10.1%
Cost:income ratio	32.0%	33.2%

* note 2

Strong progress in buy-to-let and debt purchase divisions. Banking franchise established. All divisions showing strong growth prospects

·    Buy-to-let completions increased by 82.5% to £656.6 million (2013: £359.8 million); pipeline increased by 78.9% to £414.8 million (2013: £231.9 million)

·    Idem Capital increased its investments, net of debt, by 89.3% to £175.7 million (2013: £92.8 million)

·    Paragon Bank launched car finance, second mortgage and buy-to-let operations

Significant progress achieved in Group's funding diversification strategy

·    Paragon Bank's retail deposit taking activities commenced in June 2014, with £60.1 million of deposits by the year end

·    Second retail bond completed, taking cumulative issuance to £185.0 million

·    Two bespoke financing packages, totalling £185.6 million raised to support Idem Capital

·    Warehouse facilities for buy-to-let lending increased to £550.0 million

·    Securitisation issuance totalled £929.7 million over the last 12 months

Capital management

·    Strong increase of 20.2% in net cash generation to £157.8 million (2013: £131.3 million)

·    Group capital ratios remain strong with Core Tier 1 ratio of 19.7% and leverage ratio of 8.3%

·    2014 dividend cover ratio at top of the targeted range of 3.0 to 3.5 times, two years ahead of expectations

·    Initial £50.0 million share buy-back programme announced

Outlook

·    Strong new lending and debt purchase pipelines, together with the development of Paragon Bank, present significant growth prospects

·    Funding diversification programme and improving debt capacity underpin sustainable growth

·    Shareholder returns enhanced by higher dividends and capital management programme

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

"The past year has seen considerable progress in the Group's strategic plans and in the performance of its businesses. Paragon Mortgages and Idem Capital have witnessed significantly increased new business and are well positioned for further growth. Significant progress has also been achieved in diversifying further the Group's funding sources. In particular, the formation of Paragon Bank has provided us with the opportunity to diversify further both income streams and funding and we expect it to play an important role in the Group's future plans.

The Group benefits from a strong capital position and I am pleased to announce a 25% increase in the dividend, as well as an initial £50 million share buy-back programme, as we seek to complement strong and sustainable growth with improving shareholder returns."

For further information, please contact:

The Paragon Group of Companies PLC	Fishburn
Nigel Terrington, Chief Executive	Paul Farrow
Richard Woodman, Group Finance Director	Del Jones
Tel: [phone]	Tel: [phone]

Paragon will be holding a results presentation for analysts on Tuesday 25 November 2014 at 9:30am at UBS, 1 Finsbury Avenue, London EC2M 2PP. The presentation material will be available on the Group's website at www.paragon-group.co.uk/investors from 11:30am.

The Paragon Group of Companies PLC

EXECUTIVE SUMMARY

Results for the year

The year ended 30 September 2014 has been a successful period for the Group, the business has performed strongly and significant progress has been made in laying the foundations for further, sustainable growth for the future. Profits have grown strongly to a record level for the Group and our portfolio of loans, including acquired assets, continues to perform well. Other key performance metrics show trends consistent with recent periods: organic cash generation remains strong; net interest margins have increased; redemptions remain low; the cost:income ratio has improved; and, across the portfolio, credit performance is strong, in line with our expectations.

During the year ended 30 September 2014 the Group's profit before taxation increased by 17.2% to £122.8 million (2013 (restated): £104.8 million). Underlying profit, before fair value items, increased by 18.1% to £122.2 million for the year (2013 (restated): £103.5 million).

Earnings per share were 31.9p (2013 (restated): 28.2p), the increase of 13.1% from last year reflecting the improved profits earned by the Group. The increase in profit has also improved the Group's return on equity to 10.7% from 10.1% for the previous year (note 3).

In view of the results achieved the Board has proposed a final dividend of 6.0p per share (2013: 4.8p) which, when added to the interim dividend of 3.0p, gives a total dividend of 9.0p per share for the year (2013: 7.2 p), an increase of 25.0%, covered 3.5 times by earnings.

Review of operations

Paragon Mortgages

Buy-to-let completions rose 82.5% to £656.6 million in 2014 as the Group broadened its distribution through its Paragon Mortgages and Mortgage Trust brands.  Included within this total was £0.5 million of lending by Paragon Bank, which commenced its buy-to-let operations during September 2014. The buy-to-let market continues to grow, supporting the Private Rented Sector ('PRS') which now accounts for 18% of the housing stock in England. Tenant demand has strengthened throughout the year and recent forecasts suggest the PRS share of total housing stock will continue to grow in the future. The competitiveness of the Group's product offerings reflects the improving funding environment, evidenced by both the increased scale and more attractive pricing of Paragon's securitisation programme when compared to 2013, and, more recently, the addition of retail deposit funding through Paragon Bank.

The credit quality of the buy-to-let portfolio remains excellent, with arrears levels improving across the year to 0.25% (2013: 0.35%). The indexed loan-to-value of the overall buy-to-let portfolio stood at 71.7% at 30 September 2014 compared to 78.4% at the end of 2013.

The annualised redemption rate on the total buy-to-let portfolio was 4.1% in 2014 compared to 2.5% in 2013, reflecting increased housing market activity.

Paragon Mortgages maintains a significant presence for the Group in this growing sector of the UK mortgage market, contributing £80.5 million to underlying Group profit (2013 (restated): £70.3 million), a 14.5% increase.

The aggregate new business pipeline stood at £414.8 million at the year-end, 78.9% above the level at 30 September 2013, underpinning strong growth rates into the new financial year.

Idem Capital

Idem Capital, the Group's debt purchase business, completed its busiest year in 2014, with net investments totalling £175.7 million (2013: £92.8 million) and with balances outstanding reaching £426.5 million (2013: £193.7 million). Idem Capital has established itself as one of the largest acquirers of paying debt in the UK, with a 120-month estimated remaining collections ('ERC') balance of £682.2 million at 30 September 2014 (2013: £353.9 million). ERC is a standard measure of scale in the debt purchase market, reflecting the expected gross future recoveries from purchased assets over the coming ten years. During the year Idem Capital raised a bi-lateral non-recourse funding facility of £130.6 million from Bank of America Merrill Lynch to support the purchase of a newly acquired portfolio, resulting in pre-debt investment levels of £306.3 million for the year. In addition it completed a £55.0 million non-recourse facility from Goldman Sachs to finance certain portfolios purchased in earlier periods.

The growth in investment levels, strong cash performance and a continued focus on cost control have led to Idem Capital contributing £48.1 million to underlying profit (2013 (restated): £34.5 million).

Idem Capital sees a strong pipeline leading into 2015. Benefiting from a position on the approved purchaser panels of all the major UK banks, Idem Capital will maintain its strategy of augmenting direct investment with co-investments over the coming year.

Paragon Bank

Since its formal authorisation in February 2014 by the Prudential Regulation Authority ('PRA'), Paragon Bank has launched three lending product lines and successfully established its retail deposit taking activities. Paragon Bank provides the Group with an opportunity to diversify both its income streams and its funding sources.

Paragon Bank's initial lending businesses; car finance, personal finance and buy-to-let, have now come on-stream, with the primary focus on establishing distribution with lending growth following in due course. Paragon Bank launched its first internet-only savings products over the summer, initially in pilot mode to test systems and then, more fully, to test the marketing and distribution propositions. Each proved successful, with Paragon Bank taking £60.1 million of deposits by the year end. The UK retail savings market, totalling in excess of £1 trillion, is a deep and reliable source of funding for Paragon Bank and is capable of supporting its substantial growth opportunities.

In order to support the volumes anticipated in 2015, the Group injected a further £36.2 million of equity into Paragon Bank at the end of September 2014, taking its aggregate investment to £48.9 million. The initial costs of setting up Paragon Bank, obtaining regulatory authorisation and developing business systems and processes resulted in a loss of £6.4 million (2013 (restated): £1.3 million), in line with expectations.

Financing and capital

The Board's strategy includes the delivery of a sustainable and well diversified funding base. The most notable development over the past year has been the establishment of Paragon Bank, which is expected to provide a reliable and cost-efficient funding route for new consumer product lines, in addition to financing an increasing proportion of buy-to-let business over time.

The addition of financing facilities totalling £185.6 million into Idem Capital during the year has materially enhanced both the scale and return potential for the debt purchase business. The Group also completed its second retail bond issue in January 2014, raising £125.0 million with a 2022 maturity. 

The past year has seen significant progress in the Group's traditional warehouse to securitisation financing structures, with significantly improved terms for warehouse funding, the addition of a new £100.0 million facility from Natixis and a greater scale of issuance and year-on-year pricing improvements for its securitised bonds. In addition to financing new originations, the securitisations in 2014 also refinanced two legacy transactions, improving funding costs and releasing inefficient cash reserves.

The creation of Paragon Bank results in regulatory supervision for the bank by the PRA and the Financial Conduct Authority ('FCA') and also consolidated supervision for the Group. The Group has extremely strong consolidated capital and leverage ratios when compared to its regulatory requirement, with a Common Equity Tier 1 ratio at 30 September of 19.7% and a leverage ratio of 8.3%.

The Board keeps under review the appropriate level of capital for the business to meet its operational requirements and strategic development objectives. The strength of the Paragon Mortgages and Idem Capital businesses, the diversification in the funding base in recent years and the further opportunities for growth and sustainability provided by Paragon Bank, have created the foundations on which to develop its next phase of growth.

In view of the strong capital base and low leverage in the Company's balance sheet the Board has determined that the Group balance sheet should be rebalanced to deliver returns at a higher rate to shareholders. The Group expects to access either the sterling senior unsecured debt market or the UK retail bond market during the coming year to add incremental long-dated debt to the Group balance sheet. The Group will also commence a share buy-back programme, initially up to £50.0 million, to be reviewed periodically to take account of anticipated investment opportunities and the balance of the Group's debt and equity capital resources.

The Group's dividend policy, established in 2012, is to target a cover ratio of 3.0 to 3.5 times by 2016. Whilst the top end of this range has been reached as a result of today's announcement, the Group will continue to target reductions in the cover ratio towards the lower end of the range by 2016.

Operating environment

Regulation affects the business in a number of ways, with significant developments either completed or proposed during 2014. The Group is well progressed in the authorisation process for its various operating subsidiaries, necessary as a result of the transfer of consumer regulation from the Office of Fair Trading to the FCA. Additionally, the Group is well placed to comply with changes in the second charge conduct rules which come into force in 2016. Finally, Paragon welcomes the debate on appropriate regulation of the buy-to-let market and notes the application of the EU Mortgage Credit Directive to a small subset of the buy-to-let market. We believe this will have little impact on our activities.

Rising house prices have been the subject of much debate over the last year, although the rate of growth has slowed more recently. The Group has consistently applied prudent lending criteria and maintains an in-house surveyor team to maximise its understanding of local and regional markets, both from the house price and letting demand perspectives. This supports the Group's wider credit approach, maintaining its existing tight management of risk, and allows the Group to continue to develop its buy-to-let business with confidence.

It is likely we will see an increase in base rates during 2015 and beyond, albeit gradual, and significantly below pre-financial crisis levels. The impact of potential interest rate increases on our customers (both current and future) is kept under close scrutiny; however, both the strong credit and affordability metrics displayed by Paragon's customer base mean the Group is well positioned to manage this change.

Board changes

Nick Keen, who had been Group Finance Director since 1995, retired from the Board on 31 May 2014. Nick had been an outstanding member of the team over the years and we are pleased to have retained Nick's services as part-time chairman of the Idem Capital division.

Richard Woodman, previously Director of Corporate Development, was appointed as Group Finance Director with effect from 31 May 2014. Richard, who is a member of the Chartered Institute of Management Accountants, joined the Group in 1989 and has a wealth of experience within the Group having held a number of senior strategic and financial roles, including line management responsibility for internal audit and serving as Director of Business Analysis and Planning, prior to being appointed to the Board in February 2012. Richard worked closely with Nick over many years which ensured a smooth transition of responsibility.

Following the year end, on 24 November 2014, Hugo Tudor was appointed to the Board as a non-executive director. He spent 26 years in the fund management industry, originally with Schroders and most recently with BlackRock, covering a wide range of UK equities. He is a Chartered Financial Analyst and a Chartered Accountant and brings a strong strategic and investor perspective to the Board.

Outlook

The developments delivered during 2014, enhancing both the scale and breadth of Paragon's business activity, together with the funding diversification progress leave the Group in a position to continue to deliver strong growth into the future. The authorisation of Paragon Bank has provided a catalyst to add incremental income streams and diversify further the Group's funding sources. Excellent progress has been achieved in growing profits and shareholder returns have been improved through the proposed increase in dividend and share buy-back programme.

We see significant opportunities for growth from our existing businesses and the potential to develop additional products, leaning on the Group's skills and expertise. The highly efficient cost base and improving funding terms provide a strong foundation from which to offer competitive products for our customers. Nevertheless, we remain firmly committed to maintaining a robust and defensive risk appetite, reflected in prudent capital and liquidity policies, together with a rigorous approach to credit and conduct risk for the benefit of our customers, shareholders, and wider stakeholders.

Each of our buy-to-let and debt purchase businesses have firmly established franchises and are achieving strong growth with good profits. We expect Paragon Bank to grow strongly, targeting a break even in 2016, and the generation of substantial profits and returns thereafter.

The Paragon Group of Companies PLC

 

MANAGEMENT REPORT

During the year ended 30 September 2014 the Group successfully pursued its strategy to deliver shareholder value through developing new lending, purchasing portfolios, entering into new servicing agreements, diversifying its funding base and continuing the careful management of the extant portfolios. The funding and income diversification strategy has been materially advanced by the authorisation of Paragon Bank PLC, the Group's retail deposit funded banking subsidiary, which was granted in February 2014.

FINANCIAL REVIEW

CONSOLIDATED RESULTS

For the year ended 30 September 2014

		2014	2013
			(restated)
		£m	£m
Interest receivable		302.4	269.0
Interest payable and similar charges		(123.0)	(108.0)
Net interest income		179.4	161.0
Other operating income		18.5	16.6
Total operating income		197.9	177.6
Operating expenses		(63.4)	(58.9)
Provisions for losses		(12.3)	(15.2)
Underlying profit		122.2	103.5
Fair value net gains		0.6	1.3
Operating profit being profit on ordinary activities before taxation		122.8	104.8
Tax charge on profit on ordinary activities		(25.6)	(20.1)
Profit on ordinary activities after taxation		97.2	84.7
Dividend - rate per share for the year		9.0p	7.2p
Basic earnings per share		31.9p	28.2p
Diluted earnings per share		31.1p	27.3p

Amounts shown above for 2013 have been restated for the change in accounting policy described in note 2.

Total operating income increased by 11.4% to £197.9 million (2013 (restated): £177.6 million). Within this, net interest income increased to £179.4 million from £161.0 million (restated) for the year ended 30 September 2013. The increase reflects both improving margins and growth in the size of the average loan book, which rose by 3.2% to £9,028.7 million (2013: £8,748.0 million) (note 23). Net interest margins increased in 2014 to 1.99% compared to 1.84% last year (note 23) driven by new originations and portfolio purchases having higher margins than those assets redeeming in the period and general improvements in the financing costs of the Group's warehouse and new securitisation structures.

Other operating income was £18.5 million for the year, compared with £16.6 million in 2013. The increase reflects a higher level of third party fee income resulting from the number of third party assets brought under the Group's administration in this and the preceding period, together with strong performance-related fees earned on historic servicing contracts.

Operating expenses increased by 7.6% to £63.4 million from £58.9 million for 2013 (restated), principally as a result of increased staff numbers to service the loan portfolios administered by Idem Capital, with average headcount increasing by 14.6% in the year. The operational costs of Paragon Bank, where costs will exceed associated revenues whilst the business becomes established, also had an impact on Group costs in the year. Strong income growth, however, resulted in the cost:income ratio reducing to 32.0% from 33.2% (restated) last year (note 21), remaining significantly below the industry average. The Board remains focused on controlling operating costs through the application of rigorous budgeting and monitoring procedures and targets a medium term cost:income ratio below 30.0%.

The charge of £12.3 million for loan impairment has reduced from that for 2013 (2013: £15.2 million). As a percentage of average loans to customers (note 23) the impairment charge has reduced to 0.14% compared to 0.17% in 2013. The Group has seen positive trends in arrears performance over the period, with the incidence of new cases reducing and customers correcting past arrears, whilst increasing property values have served to reduce overall exposure to losses on enforcement of security. The loan books continue to be carefully managed and the credit performance of the buy-to-let book remains exemplary.

Yield curve movements during the period resulted in hedging instrument fair value net gains of £0.6 million (2013: £1.3 million net gains), which do not affect cash flow. The fair value movements of hedged assets or liabilities are expected to trend to zero over time, as such this item represents a timing difference. The Group remains economically and appropriately hedged.

Cash flows from the Group's securitisation vehicle companies and the acquired portfolios remain strong, financing, alongside debt raisings, investments in further loan portfolios, the capital requirements of Paragon Bank and credit enhancement for mortgage originations. Free cash balances were £177.3 million at 30 September 2014 (2013: £170.8 million) (note 12).

Corporation tax has been charged at the rate of 20.8%, compared with 19.2% for the last year; the lower UK Corporation Tax rate in 2014 partially offset the effect of the downward revaluation of deferred tax liabilities made during the previous period.

Profits after taxation of £97.2 million (2013 (restated): £84.7 million) have been transferred to shareholders' funds, which totalled £947.1 million at the year end (2013: £873.3 million).

Following the authorisation of Paragon Bank in the year, the Board conducted a review of its internal reporting requirements and a new segmental reporting format has been adopted.

·    Paragon Mortgages includes revenue, in the form of interest and ancillary income, from the Group's first mortgage operations, other than the buy-to-let lending of Paragon Bank, and from assets remaining in other, legacy, portfolios.

·    Idem Capital includes revenue generated from assets purchased by the Group's debt investment business, Idem Capital Holdings Limited and third party loan administration activity.

·    Paragon Bank includes revenue generated from the Group's regulated banking business, Paragon Bank PLC.

An analysis of the Group's financial assets by type is shown in note 9.

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

		2014	2013
			(restated)
		£m	£m
Underlying operating profit / (loss)
Paragon Mortgages		80.5	70.3
Idem Capital		48.1	34.5
Paragon Bank		(6.4)	(1.3)
		122.2	103.5

In November 2013, the Group acquired the freehold of its head office building, which it had previously occupied under the terms of a sale and leaseback agreement. The cash consideration paid was £23.7 million and, on the completion of the transaction, the leasehold fixed asset included within Property, Plant and Equipment at £5.4 million and the related lease creditor of £10.2 million included within financial liabilities were both extinguished. The resulting credit of £4.8 million was offset against the purchase consideration.

The Paragon Group of Companies PLC

 

MANAGEMENT REPORT

BUSINESS REVIEW

OPERATING SEGMENTS

Paragon Mortgages

Paragon Mortgages is one of the longest established lending brands in the buy-to-let mortgage market. Alongside its sister brand, Mortgage Trust, Paragon Mortgages maintains a significant presence for the Group in this growing sector of the UK mortgage market. Trading activity in the year has been strong, with the segment contributing £80.5 million to underlying Group profit (2013 (restated): £70.3 million), an increase of 14.5%.

Total loan assets of the segment at 30 September 2014 were £8,842.9 million, 2.4% higher than the £8,631.6 million a year earlier, of which £8,575.6 million were buy-to-let mortgage assets (30 September 2013: £8,306.9 million).

Buy-to-let

	Outstanding balance		Completions		Pipeline
	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m
Paragon Mortgages	8,575.6	8,306.9	656.1	359.8	369.5	231.9
Paragon Bank	0.5	-	0.5	-	45.3	-
Idem Capital	16.0	17.5	-	-	-	-
	8,592.1	8,324.4	656.6	359.8	414.8	231.9

Buy-to-let completions increased by 82.5% to £656.6 million for the period (2013: £359.8 million). Further expansion of the Group's mortgage capacity, supported by improvements in funding costs, enabled the Group to increase business volumes significantly, resulting in a pipeline of new business of £414.8 million at the year end. This was 78.9% greater than the £231.9 million at the end of September 2013 and supports growth levels into the new financial year. The credit quality of the new lending business written in the year has remained excellent.

The increase in available warehouse capacity and the success of the Group's securitisation activity have ensured that the Paragon Mortgages business has been well placed over the year to offer competitive products. It has taken advantage of the opportunities arising from the strength of the private rented sector and the continuing robustness of the housing market during 2014. The Group has maintained two distinct propositions, one targeting professional landlords and the other private investor landlords, which together ensured that it has maintained and developed its market position throughout the year. A recent development has been the alternative funding source for buy-to-let completions provided by Paragon Bank, which enables a wider range of products to be offered and broadens the financing options for the existing production.

The UK housing market has continued to grow throughout 2014 albeit at a reduced pace from the strong recovery reported in 2013. It is clear that the general improvement in the economy, improving customer confidence and historic and current Government stimuli, including the first time buyers initiative, have assisted in increasing levels of house purchase and remortgage activity. The Bank of England reported that gross residential mortgage lending in the year ended 30 September 2014 increased by 26.1% compared to the previous year.

Tenant demand has remained robust and landlord activity has continued to increase during the year. The Council of Mortgage Lenders ('CML') reported that the number of buy-to-let transactions in the year increased by 27.5% while values of buy-to-let advances increased by 35.8% to £25.8 billion (2013: £19.0 billion). The English Housing Survey for 2012-13, published during the year by the Department for Communities and Local Government, found that the private rented sector in England now provides a home for 18.0% of households and has eclipsed the social rented sector for the first time since the 1960s.

At 30 September 2014 the Group's buy-to-let portfolio stood at £8,592.1 million, compared with £8,324.4 million a year earlier. The redemption rate on the overall buy-to-let book, although higher than the 2.5% reported for 2013, still remains low at 4.1%. This performance indicates that Paragon's landlords continue to display a long-term commitment to property investment.

New loans continue to be of a high quality, with a good affordability profile, low average loan-to-value ratios and strong customer credit profiles. The credit performance of the portfolio over the year continued to be exemplary, with the percentage of loans three months or more in arrears (note 9) standing at 0.25% as at 30 September 2014 (30 September 2013: 0.35%) and remaining considerably better than the CML's comparable market average of 0.78% at that date (30 September 2013 1.16%).

Security values have also benefitted from the effect of increased house prices. The Nationwide house price index showed appreciation in residential property values of 9.4% over the year, causing the indexed loan-to-value ratio of the buy-to-let portfolio to reduce to 71.7% from 78.4% at 30 September 2013. The increase in average prices, however, is part of a more volatile picture, which has been particularly marked at the local and regional level. The Group maintains a specialist team of in-house surveyors to maximise its understanding of particular markets, both from a valuation and lettings standpoint.

The number of properties with an appointed receiver of rent reduced by 12.2% to 1,225 at 30 September 2014 (30 September 2013: 1,395). At the end of September 2014, 97.2% of the properties available for letting in the receiver of rent portfolio were let (30 September 2013: 94.8%).

Other assets

The Paragon Mortgages operating segment includes income generated from other, legacy, loan books, including owner-occupied mortgages, car loans, secured consumer loans and unsecured consumer loans. Save for the management of these books in run-off, there has been little activity in recent years in these areas. These assets form a very small part of the segment's results, when compared to buy-to-let assets and performed in line with our expectations. Their values are shown below.

			2014	2013
			£m	£m
Owner-occupied mortgages			59.6	77.4
Secured loans			201.0	237.7
Unsecured loans			6.7	9.6
			267.3	324.7

Although the Group has returned to lending in the car finance and secured loan markets, this new lending is through Paragon Bank and is reported under that segment.

Idem Capital

Idem Capital has continued to focus on the acquisition of paying loan portfolios and the servicing of its own and third party loan portfolios. Opportunities are created through the ongoing process of financial institutions disposing of loan assets, either through de-leveraging activities or business as usual sales.

The UK debt purchase market has remained strong during the year ended 30 September 2014 with each of the larger purchasers reporting increased levels of investments over the period. The major banks continue to trade both paying and non-paying assets and the market is also supported by continued de-leveraging activity and on-sells. Idem Capital has established itself as a major purchaser of consumer debt in the UK, both on its own account and with co-investment partners, and is an active panel member of all the major UK based financial service institutions.

The division has a highly developed loan servicing and collections capability which is used for its own purchases, third party assets and co-investment portfolios. Idem Capital has invested heavily in its compliance infrastructure over the years and is well-placed to meet the requirements of the change of responsibility for the regulation of consumer credit which passed from the Office of Fair Trading ('OFT') to the Financial Conduct Authority ('FCA') in April 2014.

The financial year has been successful for Idem Capital, with £306.3 million invested in consumer finance assets. Of this total, £254.7 million was invested in secured portfolios with the balancing £51.6 million invested in unsecured loans (2013: £71.9 million of unsecured loan purchases and £20.9 million as a co-investor).

These acquisitions were financed by £130.6 million of dedicated external funding; the first raised by the Group to be secured on Idem Capital assets, resulting in a total net investment of £175.7 million of Group funds in loan portfolios (2013: £92.8 million).

Idem Capital's investments are summarised below.

			Outstanding balance		Current year investment
			2014	2013	2014	2013
			£m	£m	£m	£m
Loan portfolios			407.2	169.9	306.3	71.9
Co-investments			19.3	23.8	-	20.9
			426.5	193.7	306.3	92.8

These investments helped to increase the outstanding value of Idem Capital investments by 120.2% to £426.5 million at 30 September 2014 (30 September 2013: £193.7 million). Of the total carrying value, including co-investments, 63.2% related to loans secured on property, a key point in differentiating the Idem Capital performance from the broader debt purchase sector, where the focus remains on unsecured loans.

The performance of the portfolios acquired and managed by Idem Capital remains strong, with 120 month gross estimated remaining collections ('ERC') of £682.2 million (2013: £353.9 million) (note 9). ERC is a standard measure of scale in the debt purchase industry, reflecting likely future cash flows from the acquired portfolios over the next ten years. At 30 September 2014, cumulative cash receipts totalled 105.3% of the values predicted at the point the loans were acquired.

During the year the division assumed the servicing of a further 26,300 accounts (2013: 50,000 accounts). At 30 September 2014 the Group managed 146,981 accounts on behalf of third parties (30 September 2013: 161,842), 35.4% of the total managed by the Group (30 September 2013: 43.8%), the reduction being due in part to the acquisition by Idem Capital of previously serviced assets. With increased availability of funding for investments in the year, the Group's strategy has been to focus its servicing capability on its own investments.

The growth in investment levels, strong cash performance and a continued focus on cost management have led to Idem Capital's contribution to underlying profit for the period reaching £48.1 million (2013 (restated): £34.5 million), an increase of 39.4%.

During the year, new financing opportunities for purchased assets have been developed, both for new acquisitions and extant assets, expanding the scale and scope of the portfolio investment opportunities the Group is able to consider. Together with the prospects of continuing vendor activity and the investments made in the year in systems and personnel, the division is well placed as it moves into the new financial year.

Paragon Bank

On 18 February 2014 the Group launched its banking subsidiary, Paragon Bank PLC, following authorisation by the Prudential Regulation Authority ('PRA'). Paragon Bank offers savings and loan products, broadening competition and choice in the UK banking market.

Paragon Bank, regulated by the PRA and by the FCA, is a wholly owned subsidiary of the Company. It is led by Managing Director Richard Doe, previously Chief Executive of ING Direct UK, together with an experienced banking and consumer finance management team and Board of Directors.

During the year, Paragon Bank launched car finance, secured personal loan, buy-to-let mortgage and savings products. The Group provided capital of £48.9 million to Paragon Bank during the year and expects to provide additional capital over time to support its growth. The initial costs of setting up the bank, obtaining regulatory authorisation and developing its business systems resulted in a loss for the year in this segment of £6.4 million (2013 (restated): £1.3 million).

The new lending businesses within Paragon Bank have only recently become operational and as a result, only modest lending volumes were achieved during 2014 while their franchises are being established. This should, however, lead to significant growth in lending in the coming year.

Paragon Bank continues to investigate further product developments, where these match its risk appetite. In addition to organic product development, it intends to work with the Idem Capital team where potential asset purchases fit with its risk appetite and business model, thereby broadening the scope of both parts of the Group.

Car finance

The UK car market has continued to grow during the year. September 2014 witnessed 426,000 new car registrations ('64 plate') which was the highest number for a decade and was the 31st consecutive month of growth. Additionally, calendar year-to-date registrations to 30 September 2014 were 1,958,000 which is a 9.1% increase on the same period in 2013.

The UK car finance market has also experienced considerable growth with the Finance and Leasing Association ('FLA') reporting total finance granted in the year ended 30 September 2014 up 17.6% at £31.4 billion (2013: £26.7 billion). There were similar percentage increases for new and used car funding at £20.4 billion and £11.0 billion respectively (2013: £17.5 billion and £9.2 billion).

Paragon Bank launched Paragon Car Finance in February 2014 and has progressed in the establishment of its dealer panel and the promotion of products that meet the new regulatory requirements established following the transfer of responsibility for the regulation of consumer credit from the OFT to the FCA in April 2014. The initial focus has been on the development of the franchise. Advances of £5.3 million were made by the year end.

Personal finance

The secured personal loans market has enjoyed successive year-on-year growth since October 2012. Statistics released by the FLA for September 2014 showed year-on-year growth of 34.6% to £548 million (2013: £407 million). The total lending volume for the three months ended 30 September 2014 at £150 million represented an increase of 32.7% compared to the corresponding period in 2013 (2013: £113 million).

Paragon Bank entered the market, trading as Paragon Personal Finance, on 30 September 2014 with an experienced workforce recruited from the Group's previous secured loan business. The initial activity will centre on ensuring systems perform as expected with broker distribution strengthened quickly thereafter. Initial broker feedback has been very encouraging.

New market entrants over the last year (including Paragon Personal Finance) have provided additional stimulus to the market and consumers are benefitting from competitive pricing and product development. However, at present volumes still remain significantly below pre-crisis levels. The move in April 2014 from OFT to FCA regulation has not led to any noticeable fall in market activity. We see longer term growth in the market and look forward to becoming a market leader in it.

Buy-to-let

During September 2014 Paragon Bank commenced offering buy-to-let mortgages, using the Group's existing systems and distribution channels, with distinct and complementary products to those offered by Paragon Mortgages. By the year end £0.5 million of advances had been made with a pipeline of £45.3 million. The buy-to-let market is discussed in more detail under 'Paragon Mortgages' above.

Savings

The UK savings market continues to grow strongly, with household balances increasing by nearly £40 billion in the year. This strong supply has driven down the rates on offer, with term deposit rates falling by 0.57% over the year.

Paragon Bank offered its first savings accounts to new customers in June 2014 and over the remainder of the year expanded its savings activity; increased rates offered, diversified its product range and invested in advertising. Accounts are offered through the internet and include fixed and variable rate savings products.

Retail deposits at 30 September 2014 had reached £60.1 million (2013: £nil). Paragon Bank savings products featured in 89 best buy tables during August, September and October 2014 and during October Moneyfacts announced Paragon Bank as a finalist for their Online Savings Provider of the Year award.

The initially restricted savings product range is reflective of the stage of development of the bank. It has the capability and capacity to extend this range as its funding requirements grow. The current objective is to offer a limited range of competitive products which meet the needs of our customers. 

In addition, in July 2014 the FCA published an interim Cash Savings Market Study, with its key findings being consistent, we consider, with the approach to banking which Paragon Bank has adopted since its launch, positioning it for future regulatory developments.

We expect to build on this initial success and to serve those savers looking for a combination of straightforward systems and competitive products.

REGULATION

In September 2014, HM Treasury published a consultation paper setting out details of the legislative changes necessary to implement the Mortgage Credit Directive and move second-charge mortgages from the FCA's consumer credit regime to its mortgage regime. In the same month the FCA published a consultation paper which sets out its proposals for the new second-charge lending regime alongside its plans for implementation of the Directive. We will monitor the progress of the consultations but do not believe that either the implementation of the Directive or change of regime for second charge mortgages will have a material impact on the operation of any of our businesses.

Paragon welcomes the debate on appropriate regulation of the buy-to-let market and notes the application of the Directive to a small subset of the buy-to-let market. We believe this will have little impact on our activities.

All relevant Group companies hold the requisite interim permissions from the FCA under the new consumer credit regime and have been allocated a prescribed period during 2015 in which to make applications for full authorisation.

Paragon Bank is regulated by the PRA and the FCA and the Group is subject to consolidated supervision by the PRA. The current and projected rate of regulatory change in this environment, driven by domestic and European policy, is significant. The governance and control structure within Paragon Bank and the wider Group has been established and developed to ensure that the impact of new requirements on the business are clearly understood and planned for.

The Paragon Group of Companies PLC

 

MANAGEMENT REPORT

FUNDING REVIEW

Conditions were favourable in the Group's principal funding markets throughout the financial year. Government monetary policy maintained short-term interest rates at very low levels and swap rates and gilt yields also approached historic lows. The amount of bonds issued in the sterling securitisation market remained subdued, similar to 2013/14, at approximately one-third of the amount seen prior to the financial crisis. This lack of supply contributed to a narrowing of credit spreads. Swap rates trended higher until July 2014, in anticipation of a rise in interest rates before the calendar year end, but subsequently reduced as a rise became less likely. Bank funding became more available and on better terms, as demonstrated by an increase in the Group's warehouse capacity.

During the period the Group has made significant progress in diversifying its financing, increasing capacity and reducing borrowing costs. In particular, a banking franchise was established, new funding lines were developed for all of its operations and a further retail bond issue added to the Group's central funding.

Paragon Mortgages funding

Buy-to-let mortgage originations outside of Paragon Bank are initially funded through three revolving warehouse facilities totalling £550.0 million. Facilities with Lloyds Bank and Macquarie Bank were renewed on improved terms during the year and a further facility of £100.0 million was agreed with Natixis. This enhanced capacity within the Group, together with the option of using Paragon Bank, supports our growth plans in the buy-to-let market.

In the longer term, buy-to-let mortgage loans are funded through the securitisation markets. Two new public securitisation deals totalling £700.0 million, with senior notes rated AAA were completed in the year. The Group's 59th transaction, Paragon Mortgages (No. 21) PLC, for £250.0 million, completed post year-end.

The Group's public securitisations in the current year, the previous year and post year-end are summarised below.

Securitisation	Amount raised £m	Date	Average funding margin (basis points)
Paragon Mortgages (No. 21) PLC	£243.7	November 2014	88
Paragon Mortgages (No. 20) PLC	£343.0	July 2014	70
Paragon Mortgages (No. 19) PLC	£343.0	March 2014	90
Paragon Mortgages (No. 18) PLC	£267.5	September 2013	125
Paragon Mortgages (No. 17) PLC	£195.5	October 2012	146

Funding cost margins have improved year-on-year since 2013, reflecting market sentiment and prevailing pricing at the point deals were completed. This trend reflects the strong credit profile of the Group's buy-to-let assets, our experience as an issuer of high quality bonds in the mortgage backed securities market and the general improvement in market conditions for issuers of this type of security.

Included in this year's transactions were the first refinancing of legacy assets in a new Paragon Mortgages securitisation since 2007 and the first refinancing of a post 2010 securitisation. The refinancing of earlier deals has two benefits to the Group; firstly the cost of funding of the assets is reduced; and secondly cash reserves in the deals are released back to the Group's general funds.

Mortgage assets acquired through Idem Capital, previously funded by Group resources, were also included in a securitisation for the first time in the year. This proves the viability of this funding channel for Idem Capital and releases free cash for future development of the business.

Idem Capital funding

In January 2014 an Idem special purpose vehicle company ('SPV') issued £130.6 million of sterling floating rate notes to Bank of America Merrill Lynch International Limited. These notes bear interest at a rate of one month LIBOR plus 3.00% and the proceeds of the issue were used to part-fund the purchase of a portfolio of UK second charge residential mortgage loans, on which the borrowing is secured.

In April 2014, another Idem SPV entered into a £55.0 million bank facility with Goldman Sachs Bank, USA. This facility, which bears interest at a rate of one month LIBOR plus 3.75%, was used to re-finance existing Idem Capital unsecured loan assets, previously funded intra-group and is secured on those assets.

These structured borrowings, on a limited recourse basis, are the first completed by Idem Capital, broadening its sources of finance and demonstrating its ability to access third party funding, both at the point of the acquisition of assets and during their lifetimes, significantly increasing the range of propositions which the Group is able to consider.

Paragon Bank funding

During the year Paragon Bank was authorised to accept deposits in the retail banking market by the PRA. Paragon Bank has initially targeted the savings market in the UK and deposits are accepted over the internet and processed by a highly automated system with significant scope for future expansion. With Paragon Bank expected to contribute increasingly to the Group's originations, the scale of its deposit taking activities is expected to expand materially over the next few years.

Initially deposits accepted by the Paragon Bank were used to finance its car finance lending operations, expanding into buy-to-let towards the end of the year. By 30 September 2014 Paragon Bank held deposits of £60.1 million.

Corporate funding

While the Group's working capital has been primarily provided by equity since 2008, in recent years it has expanded its use of corporate debt funding, allowing it to diversify its funding base and extend the tenor of its borrowings.

In February 2014, the Group issued £125.0 million of 6.125% sterling bonds due January 2022. The bonds, listed on the London Stock Exchange Order Book for Retail Bonds, were issued to provide additional working capital for the Group. This was the second transaction under a £1.0 billion Euro Medium Term Note Programme announced in January 2013, following the previous issuance of £60.0 million in March 2013 and brought the total issued under the programme to £185.0 million. Following the year end, in October 2014, this programme was renewed to allow further issuance.

Further information on all of the above borrowings is given in note 17.

The additional sources of finance for the Group extend and diversify its funding sources, better placing it to support future growth. In the medium term, the Group is targeting a balance between securitised and retail deposit funding for its new lending activities.

CAPITAL MANAGEMENT

The Group has continued to enjoy strong cash generation during the year. Free cash balances were £177.3 million at the year-end (30 September 2013: £170.8 million) (note 12) after investments to support the launch of Paragon Bank, 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 continue to increase, and to invest further amounts in loan portfolios through Idem Capital as banks and other financial institutions continue to dispose of assets. These cash balances, together with future operational cashflow, will support the Group's growth through investment in these areas. 

In pursuance of its dividend policy and in view of the strong position of the Group and its confidence in the prospects for the business, the Board proposes, subject to approval at the Annual General Meeting on 12 February 2015, a final dividend of 6.0p per share which, when added to the interim dividend of 3.0p, gives a dividend of 9.0p per share for the year. This represents an increase of 25.0% from 2013, bringing the dividend cover to 3.5 times (2013: 3.9 times) (note 3). The Group's dividend policy, established in 2012, is to target a cover ratio of 3.0 to 3.5 times by 2016. Whilst the top end of this range has been reached as a result of this proposed final dividend, the Group will continue to target reductions in the cover ratio to the lower end of the target range by 2016.

The PRA supervision of the Group referred to above imposes capital adequacy rules upon it. The Group maintains extremely strong capital and leverage ratios, with a CET1 ratio of 19.7% at 30 September 2014 and a leverage ratio at 8.3% (note 3), leaving the Group's capital at 30 September 2014 comfortably in excess of the regulatory requirement.

The Board keeps under review the appropriate level of capital for the business to meet its operational requirements and strategic development objectives. The strength of the Paragon Mortgages and Idem Capital businesses, the diversification which has been achieved in the funding base in recent years and the further opportunities for growth and sustainability provided by Paragon Bank, have now created the foundations on which to develop the Group's next phase of growth.

In view of the strong capital base and low leverage in the Company's balance sheet, the Board has determined that the Group's debt and equity capital resources should be rebalanced to deliver returns at a higher rate to shareholders. The Group expects to access either the sterling senior unsecured debt market or the UK retail bond market during the coming year to add incremental long-dated debt to the Group balance sheet. The Group will also commence immediately a share buy-back programme which will take place over the coming year, initially up to £50.0 million, to be reviewed periodically to take account of anticipated investment opportunities and the balance of the Group's debt and equity capital resources. The Company intends that the repurchased shares will be held in treasury.

The Company currently has the necessary shareholder approval to undertake such share buy-backs and will propose the appropriate renewal of the relevant authority at its 2015 Annual General Meeting, when a special resolution seeking authority for the Company to purchase up to 30.6 million of its own shares (10% of the issued share capital) will be put to shareholders.

The Paragon Group of Companies PLC

                                       

MANAGEMENT REPORT

MANAGEMENT AND PEOPLE

Nick Keen, who had been Finance Director since 1995, retired from the Board on 31 May 2014. Nick had been an outstanding member of the team over the years and we are pleased to have retained Nick's services as part-time chairman of the Idem Capital division.

Richard Woodman, previously Director of Corporate Development, was appointed as Finance Director with effect from 31 May 2014. Richard, who is a member of the Chartered Institute of Management Accountants, joined the Group in 1989 and has a wealth of experience within the Group having held a number of senior strategic and financial roles, including line management responsibility for internal audit and serving as Director of Business Analysis and Planning, prior to being appointed to the Board in February 2012. Richard worked closely with Nick over many years which ensured a smooth transition of responsibility.

During the year, the Board reviewed the governance arrangements for the Group. For the purposes of succession planning and to ensure that the Board had in place sufficient non-executive directors to maintain its independence balance in the future (taking into account the dates at which the current non-executive directors would cease to be independent under the requirements of the UK Code on Corporate Governance), it determined that an additional non-executive director should be appointed. It also considered that the increasing demands placed on non-executive directors by the growing size and complexity of the Group further supported this decision.

Following the year end, on 24 November 2014, Hugo Tudor was appointed to the Board as a non-executive director. He spent 26 years in the fund management industry, originally with Schroders and most recently with BlackRock, covering a wide range of UK equities. He is a Chartered Financial Analyst and a Chartered Accountant and brings a strong strategic and investor perspective to the Board.

Dave Newcombe, the Group's former Director of Consumer Loan Servicing, has succeeded Richard Woodman in the role of Managing Director of Idem Capital. In September, Pam Rowland joined the Group as Chief Operating Officer. Pam was formerly Managing Director Change Delivery at Barclays UK Retail and Business Banking.

Our people are important to us and to the future growth and development of the Group. The training and development of our employees together with our rigorous recruitment process are a key part of the Group's organic growth strategy and underpin the strong progress it has made. In May 2014 the Group achieved Investor in People Champion status, placing it in the top 1% of companies in the UK.

The Paragon Group of Companies PLC

 

CONSOLIDATED INCOME STATEMENT

For the year ended 30 September 2014

			2014		2013
					(restated)
	Note		£m		£m
Interest receivable			302.4		269.0
Interest payable and similar charges			(123.0)		(108.0)
Net interest income			179.4		161.0
Other operating income	5		18.5		16.6
Total operating income			197.9		177.6
Operating expenses			(63.4)		(58.9)
Provisions for losses			(12.3)		(15.2)
Operating profit before fair value items			122.2		103.5
Fair value net gains	6		0.6		1.3
Operating profit being profit on ordinary activities before taxation			122.8		104.8
Tax charge on profit on ordinary activities			(25.6)		(20.1)
Profit on ordinary activities after taxation for the financial year			97.2		84.7
			2014		2013
	Note				(restated)
Earnings per share
- basic	7		31.9p		28.2p
- diluted	7		31.1p		27.3p

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

Comparative information has been restated for the change in accounting standards described in note 2.

The Paragon Group of Companies PLC

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2014

	2014		2013
			(restated)
	£m	£m	£m	£m
Profit for the year		97.2		84.7
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial (loss) on pension scheme	(2.1)		(2.2)
Tax thereon	0.4		-
		(1.7)		(2.2)
Items that may be reclassified subsequently to profit or loss
Cash flow hedge (losses) / gains taken to equity	(1.4)		1.2
Tax thereon	0.3		(0.2)
		(1.1)		1.0
Other comprehensive income for the year net of tax		(2.8)		(1.2)
Total comprehensive income for the year		94.4		83.5

 

Comparative information has been restated for the change in accounting standards described in note 2.

 

The Paragon Group of Companies PLC

 

CONSOLIDATED BALANCE SHEET

30 September 2014

			2014	2013	2012
	Note		£m	£m	£m
Assets employed
Non-current assets
Intangible assets	8		7.9	8.5	9.1
Property, plant and equipment			22.9	9.6	10.7
Financial assets	9		9,969.6	9,715.3	9,505.2
			10,000.4	9,733.4	9,525.0
Current assets
Other receivables			6.5	7.6	7.3
Short term investments	11		39.4	-	-
Cash and cash equivalents	12		848.8	587.3	504.8
			894.7	594.9	512.1
Total assets			10,895.1	10,328.3	10,037.1
Financed by
Equity shareholders' funds
Called-up share capital	13		307.3	306.2	301.8
Reserves	14		688.0	614.7	550.2
Share capital and reserves			995.3	920.9	852.0
Own shares			(48.2)	(47.6)	(48.5)
Total equity			947.1	873.3	803.5
Current liabilities
Financial liabilities	16		54.4	3.0	2.0
Current tax liabilities			11.9	5.9	13.3
Other liabilities			40.1	36.2	36.7
			106.4	45.1	52.0
Non-current liabilities
Financial liabilities	16		9,814.0	9,383.4	9,159.0
Retirement benefit obligations			17.3	15.7	13.9
Deferred tax			10.1	9.9	7.6
Other liabilities			0.2	0.9	1.1
			9,841.6	9,409.9	9,181.6
Total liabilities			9,948.0	9,455.0	9,233.6
			10,895.1	10,328.3	10,037.1

Approved by the Board of Directors on 25 November 2014.

Signed on behalf of the Board of Directors

N S Terrington                                                             R J Woodman

Chief Executive                                                             Group Finance Director

The Paragon Group of Companies PLC

 

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 30 September 2014

			2014	2013
	Note		£m	£m
Net cash (utilised) by operating activities	18		(269.5)	(31.9)
Net cash (utilised) by investing activities	19		(65.2)	(1.6)
Net cash generated by financing activities	20		596.5	115.2
Net increase in cash and cash equivalents			261.8	81.7
Opening cash and cash equivalents			585.9	504.2
Closing cash and cash equivalents			847.7	585.9
Represented by balances within:
Cash and cash equivalents			848.8	587.3
Financial liabilities			(1.1)	(1.4)
			847.7	585.9

The Paragon Group of Companies PLC

 

CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY

For the year ended 30 September 2014

				2014	2013
	Note			£m	£m
Total comprehensive income for the year				94.4	83.5
Dividends paid	15			(23.7)	(20.7)
Net movement in own shares				(0.6)	0.9
(Deficit) on transactions in own shares				(0.8)	(0.4)
Charge for share based remuneration				3.2	3.1
Tax on share based remuneration				1.3	3.4
Net movement in equity in the year				73.8	69.8
Opening equity				873.3	803.5
Closing equity				947.1	873.3

The Paragon Group of Companies PLC

 

NOTES TO THE FINANCIAL INFORMATION

For the year ended 30 September 2014

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 2012, 30 September 2013 or 30 September 2014, 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 2012 and 30 September 2013 have been delivered to the Registrar of Companies and those for the year ended 30 September 2014 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.

Sections of this preliminary announcement, including but not limited to the Executive Summary and Management Report, 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. These have been made by the directors in good faith using information available up to the date on which they approved this report. 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 and depend upon circumstances that may or may not occur in the future. There are a number of factors that could cause actual future financial conditions, business performance, results or developments to differ materially from the plans, goals and expectations expressed or implied by these forward-looking statements and forecasts. 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 2014 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 at 51 Homer Road, Solihull, West Midlands, B91 3QJ.

2.   ACCOUNTING POLICIES

The annual financial statements of the Group for the year ended 30 September 2014 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. Except as noted below, the particular accounting policies adopted are those described in the Annual Report and Accounts of the Group for the year ended 30 September 2013.

New accounting standards

IFRS 10 - 'Consolidated Financial Statements' and IFRS 12 - 'Disclosure of Interests in Other Entities' form part of the new IFRS regime for consolidation, and are applicable to the Group's accounts for the first time in the year ending 30 September 2014. The adoption of these standards does not change the entities included within the consolidated accounts from those presently consolidated, nor do consolidated results presented under the new standards differ from how they would formerly have appeared.

IFRS 13, which has been adopted in the preparation of the condensed financial information, applies to the Group's accounts from the year ending 30 September 2014. It sets out new guidance on the establishment of fair value for accounting purposes and applies to all amounts in the Group's financial statements presented at fair value. The adoption of this standard has had no material impact on the Group's results or financial position.

In compiling this condensed financial information, the directors have adopted the revision to IAS 19 - 'Employee Benefits', which applies to the Group's accounts for the year ending 30 September 2014. While this revision does not affect the calculation of the deficit in the Group's defined benefit pension plan, shown in the balance sheet, the presentation of the movements in that balance in the income statement and statement of total comprehensive income is amended.

In particular:

·     The funding cost of the plan liabilities and the expected return on the plan assets are no longer recognised in 'Interest Payable' and Interest Receivable' respectively. Instead the funding cost of the net deficit is recognised in interest payable, at the rate which would previously have been applied to the scheme's total liabilities.

·     The administrative costs of the plan are no longer included in the calculation of service cost, which is included within wages and salaries, but are instead calculated as a separate annual cost, included in 'Operating Expenses'.

·     The actuarial gain or loss will reflect any movements in the deficit no longer reflected in the income statement.

·     As a deferred tax asset is recognised on the deficit, movements in deferred tax in current year income and reserves are adjusted to reflect the new accounting.

The effect of these restatements on the results for the year ended 30 September 2013 is shown below.

	As originally reported	Restatement	As restated
	£m	£m	£m
Interest receivable	272.6	(3.6)	269.0
Interest payable	(111.3)	3.3	(108.0)
Net interest receivable	161.3	(0.3)	161.0
Other operating income	16.6	-	16.6
Total operating income	177.9	(0.3)	177.6
Operating expenses	(58.6)	(0.3)	(58.9)
Provisions for losses	(15.2)	-	(15.2)
Operating profit	104.1	(0.6)	103.5
Fair value net gains	1.3	-	1.3
Profit before tax	105.4	(0.6)	104.8
Tax charge	(20.2)	0.1	(20.1)
Profit on ordinary activities after taxation	85.2	(0.5)	84.7
Earnings per share
Basic	28.4p	(0.2)p	28.2p
Diluted	27.5p	(0.2)p	27.3p

The effect of these restatements on the consolidated statement of comprehensive income for the year ended 30 September 2013 is shown below.

	As originally reported	Restatement	As restated
	£m	£m	£m
Profit on ordinary activities after taxation	85.2	(0.5)	84.7
Actuarial gain on pension scheme	(2.8)	0.6	(2.2)
Tax thereon	0.1	(0.1)	-
Cash flow hedge gains taken to equity	1.2	-	1.2
Tax thereon	(0.2)	-	(0.2)
Other comprehensive income	(1.7)	0.5	(1.2)
Total comprehensive income	83.5	-	83.5

The adoption of the revised standard has no effect on the consolidated balance sheet or cash flow statement of the Group.

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 Management Report. The principal risks and uncertainties affecting the Group, and the steps taken to mitigate these risks are described on pages 53 to 55.

Note 5 to the accounts for the year ended 30 September 2013 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 17.

The Group has a formalised process of budgeting, reporting and review. The Group's planning procedures forecast its profitability, capital position, funding requirement and cash flows. Detailed plans are produced for a rolling 24 month period with longer term forecasts covering a 5 year period. These plans provide information to the directors which is used to ensure the adequacy of resources available for the Group to meet its business objectives, both on a short term and strategic basis.

The securitisation funding structures described in note 6 to the accounts for the year ended 30 September 2013 ensure that both a substantial proportion of the Group's originated loan portfolio and a significant amount of its acquired Idem Capital assets are match-funded. Repayment of the securitisation borrowings is restricted to funds generated by the underlying assets and there is limited recourse to the Group's general funds. Recent and current loan originations utilising the Group's available warehouse facilities are refinanced through securitisation from time to time.

The Group's retail deposits of £60.1 million, accepted through Paragon Bank are repayable within two years. The liquidity exposure represented by these deposits is monitored, a process supervised by the Asset and Liability Committees of the Group and Paragon Bank. The Group is required to hold liquid assets in Paragon Bank to mitigate this liquidity risk. At 30 September 2014 Paragon Bank held £100.0 million in liquid assets, £39.4 million of short term investments (note 11) and £60.6 million of cash (note 12).

None of the Group's working capital debt matures before 2017, when the £110.0 million corporate bond is repayable.

During the year the Group raised a further £125.0 million of working capital though the issue of retail bonds, under a programme renewed after the year end. This increases the outstanding balance to £185.0 million, none of which is repayable before December 2020.

The Group also raised external debt finance for its acquired assets for the first time during the year. The Group has therefore significantly enhanced its access to funding for its business during the year and at 30 September 2014 the Group had free cash balances of £177.3 million immediately available for use (note 12).

Having considered all of the factors described above the directors believe that the Group is well placed to manage its business risks, including solvency and liquidity risks, successfully.

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.   Capital management

(a)   Dividend cover

Following its rights issue in 2008 the Group pursued a progressive dividend policy with the dividend being increased from 3.0p in respect of that year to 4.0p in respect of the year ended 30 September 2011. In 2012 as a result of the progress of the business, the directors adopted a new policy under which the dividends will increase so that, by the year ending 30 September 2016, the level of dividend cover will be maintained in the range 3.0 to 3.5 times.

The expected level of dividend cover in respect of the year, subject to the approval of the final dividend at the Annual General Meeting, is shown below.

		2014	2013
			(restated)
Profit after tax for the year (£m)		97.2	84.7
Proposed dividend in respect of the year (£m)		27.4	21.8
Dividend cover (times)		3.5	3.9

(b)   Return on equity

Return on equity ('ROE') is defined by the Group by comparing the profit after tax for the year to the average of the opening and closing equity positions.

The Group's ROE for the year ended 30 September 2014 is derived as follows:

		2014	2013
			(restated)
		£m	£m
Profit for the year		97.2	84.7
Divided by
Opening equity		873.3	803.5
Closing equity		947.1	873.3
Average equity		910.2	838.4
Return on Equity		10.7%	10.1%

(c)   Regulatory capital

The Group is subject to supervision by the PRA on a consolidated basis, as a group containing an authorised bank. As part of this supervision the regulator will issue individual capital guidance setting an amount of regulatory capital, defined under the international Basel III rules, implemented through the Capital Requirements Regulation and Directive ('CRD IV'), which the Group is required to hold relative to its risk weighted assets in order to safeguard depositors against the risk of losses being incurred by the Group.

The Group's regulatory capital is monitored by the Board of Directors and the Asset and Liability Committee, who ensure that appropriate action is taken to ensure compliance with the regulator's requirements. The future regulatory capital requirement is also considered as part of the Group's forecasting and strategic planning process.

At 30 September 2014 the Group's regulatory capital of £981.1m (2013: £934.0m) was comfortably in excess of that required by the regulator. Although the Group was not subject to supervision at 30 September 2013, disclosures at that date are provided in this section for comparative purposes.

The Group's regulatory capital differs from its equity as certain adjustments are required by the regulator. A reconciliation of the Group's equity to its regulatory capital determined in accordance with CRD IV at 30 September 2014 is set out below.

		Note	2014	2013
			£m	£m
Total equity			947.1	873.3
Deductions
Proposed final dividend		15	(18.3)	(14.6)
Intangible assets		8	(7.9)	(8.5)
Deferred tax adjustment		*	(0.5)	(0.6)
Common Equity Tier 1 ('CET1') capital			920.4	849.6
Other tier 1 capital			-	-
Total Tier 1 capital			920.4	849.6
Corporate bond		16	110.0	110.0
Less: amortisation adjustment		†	(53.8)	(31.8)
			56.2	78.2
Collectively assessed credit impairment allowances			4.5	6.2
Total Tier 2 capital			60.7	84.4
Total regulatory capital			981.1	934.0

*        Deferred tax assets in subsidiary companies are required to be deducted from regulatory capital. This balance is offset against the deferred tax liability in the consolidated accounts.

†        When tier 2 capital instruments have less than five years to maturity the amount eligible as regulatory capital reduces by 20% per annum. As the Group's £110m Corporate Bond matures in 2017, this adjustment is required.

The risk weighted assets calculated under the CRD IV framework, against which this capital is held, and the proportion of these assets it represents, are calculated as shown below.

			2014	2013
			£m	£m
Credit risk
Balance sheet assets			4,220.8	4,001.2
Other			108.7	108.7
			4,329.5	4,109.9
Operational risk			337.1	291.9
Market risk			-	-
Total risk weighted assets			4,666.6	4,401.8
			%	%
Solvency ratios
CET1			19.7	19.3
Total regulatory capital			21.0	21.2

The CRD IV risk weightings for credit risk exposures are calculated using the Standardised approach. As risk weightings and credit valuation adjustments are not available at 30 September 2013, those for 30 September 2014 have been used in calculating the comparative amounts above for illustrative purposes.

The table below shows the calculation of the leverage ratio, based on the consolidated balance sheet assets adjusted for the post offer pipeline of loan assets at 30 September 2014.

			2014	2013
			£m	£m
Total balance sheet assets			10,895.1	10,328.3
Post offer pipeline			207.7	116.5
Exposure			11,102.8	10,444.8
Tier 1 capital			920.4	849.6
Leverage ratio			8.3%	8.1%

4.   SEGMENTAL INFORMATION

Following the authorisation of its banking subsidiary in the year the Group conducted a review of its internal reporting requirements and concluded that the most relevant analysis of its business was that based on the entities within the Group generating its assets. This reflects current internal management structures and the differing regulatory environments in which the Group operates.

This new format of reporting was adopted for internal use and therefore the segments presented in these financial statements have been determined in a similar way.

·    Paragon Mortgages includes revenue, in the form of interest and ancillary income, from the Group's first mortgage operations, other than the buy-to-let lending of Paragon Bank, and from assets remaining in other, legacy, portfolios.

·    Idem Capital includes revenue generated from assets purchased by the Group's debt investment business, Idem Capital Holdings Limited and third party loan administration activity.

·     Paragon Bank includes revenue, in the form of interest and ancillary income, generated from the Group's regulated banking business, Paragon Bank PLC.

Each of these businesses invests in consumer finance assets, and an analysis of the Group's financial assets by type is shown in note 9.

Dedicated financing and administration costs of each of these businesses are allocated to the segment and shared costs, and the financing costs of the Group's working capital invested, are allocated based on the segments' use of those resources.

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, prepared on the same basis as used in the consolidated accounts of the Group, is shown below. Results for the year ended 30 September 2013 have been reanalysed on the basis of the new segments, as well as being restated for the change in accounting standard described in note 2.

Year ended 30 September 2014

	Paragon Mortgages	Idem Capital	Paragon Bank	Total
	£m	£m	£m	£m
Interest receivable	241.9	60.4	0.1	302.4
Interest payable	(115.3)	(7.5)	(0.2)	(123.0)
Net interest income	126.6	52.9	(0.1)	179.4
Other operating income	7.5	11.0	-	18.5
Total operating income	134.1	63.9	(0.1)	197.9
Operating expenses	(41.3)	(15.8)	(6.3)	(63.4)
Provisions for losses	(12.3)	-	-	(12.3)
	80.5	48.1	(6.4)	122.2
Fair value net gains	0.6	-	-	0.6
Operating profit	81.1	48.1	(6.4)	122.8
Tax charge				(25.6)
Profit after tax				97.2

Year ended 30 September 2013

	Paragon Mortgages	Idem Capital	Paragon Bank	Total
	£m	£m	£m	£m
Interest receivable	231.6	37.4	-	269.0
Interest payable	(106.9)	(1.1)	-	(108.0)
Net interest income	124.7	36.3	-	161.0
Other operating income	7.0	9.6	-	16.6
Total operating income	131.7	45.9	-	177.6
Operating expenses	(46.2)	(11.4)	(1.3)	(58.9)
Provisions for losses	(15.2)	-	-	(15.2)
	70.3	34.5	(1.3)	103.5
Fair value net gains	1.3	-	-	1.3
Operating profit	71.6	34.5	(1.3)	104.8
Tax charge				(20.1)
Profit after tax				84.7

The assets and liabilities attributable to each of the segments at 30 September 2014, 30 September 2013 and 30 September 2012 were:

	Paragon Mortgages	Idem Capital	Paragon Bank	Total
	£m	£m	£m	£m
30 September 2014
Segment assets	10,343.3	445.8	106.0	10,895.1
Segment liabilities	(9,658.8)	(226.6)	(62.6)	(9,948.0)
	684.5	219.2	43.4	947.1
30 September 2013
Segment assets	10,127.4	200.9	-	10,328.3
Segment liabilities	(9,338.6)	(115.1)	(1.3)	(9,455.0)
	788.8	85.8	(1.3)	873.3
30 September 2012
Segment assets	9,896.2	140.9	-	10,037.1
Segment liabilities	(9,116.8)	(116.8)	-	(9,233.6)
	779.4	24.1	-	803.5

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

5.   OTHER OPERATING INCOME

			2014	2013
			£m	£m
Loan account fee income			4.9	4.4
Insurance income			2.0	2.0
Third party servicing			10.8	9.5
Other income			0.8	0.7
			18.5	16.6

6.   FAIR VALUE NET GAINS

The fair value net gain 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.

7.   Earnings per share

Earnings per ordinary share is calculated as follows:

	2014	2013
		(restated)
Profit for the year (£m)	97.2	84.7
Basic weighted average number of ordinary shares ranking for dividend during the year (million)	304.6	300.5
Dilutive effect of the weighted average number of share options and incentive plans in issue during the year (million)	7.6	9.9
Diluted weighted average number of ordinary shares ranking for dividend during the year (million)	312.2	310.4
Earnings per ordinary share              - basic	31.9p	28.2p
- diluted	31.1p	27.3p

8.   INTangible assets

Intangible assets at book value comprise

		2014	2013	2012
		£m	£m	£m
Goodwill		1.6	1.6	1.6
Computer software		1.3	1.4	1.4
Other intangible assets		5.0	5.5	6.1
		7.9	8.5	9.1

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

9.   FInancial Assets

	Note	2014	2013	2012
		£m	£m	£m
Loans to customers		9,255.9	8,801.5	8,694.6
Fair value adjustments from portfolio hedging		0.5	-	1.1
Investments in structured entities		19.3	23.8	9.1
Derivative financial assets	10	693.9	890.0	800.4
		9,969.6	9,715.3	9,505.2

The Group's loan assets and investments in structured entities at 30 September 2014, analysed between the segments described in note 4 are as follows:

	Paragon Mortgages	Idem Capital	Paragon Bank	Total
	£m	£m	£m	£m
At 30 September 2014
First mortgages	8,635.2	16.0	0.5	8,651.7
Consumer loans	207.7	391.2	5.3	604.2
Loans to customers	8,842.9	407.2	5.8	9,255.9
Investments in structured entities	-	19.3	-	19.3
Total investments in loans	8,842.9	426.5	5.8	9,275.2
At 30 September 2013
First mortgages	8,384.3	17.5	-	8,401.8
Consumer loans	247.3	152.4	-	399.7
Loans to customers	8,631.6	169.9	-	8,801.5
Investments in structured entities	-	23.8	-	23.8
Total investments in loans	8,631.6	193.7	-	8,825.3

The Group calculates its headline arrears measure for buy-to-let mortgages based on the numbers of accounts three months or more in arrears, including purchased Idem assets, but excluding those cases in possession and receiver of rent cases designated for sale. Other receivership cases are included. This is consistent with the methodology used by the CML in compiling statistics for the buy-to-let mortgage market as a whole.

In the debt purchase industry, Estimated Remaining Collections ('ERC') is commonly used as a measure of the value of a portfolio. This is defined as the sum of the undiscounted cash flows expected to be received over a specified future period. In the Group's view, this measure may be suitable for heavily discounted, unsecured, distressed portfolios, but is less applicable for the types of portfolio in which the Group has invested, where cash flows are higher on acquisition, loans may be secured on property and customers may not be in default. In such cases, the IAS 39 amortised cost balance, at which these assets are carried in the Group balance sheet, provides a better indication of value.

However, to aid comparability the 84 and 120 month ERC values for the Group's purchased assets included in the Idem Capital division, are set out below, analysed by the balance sheet line on which they appear. These are derived using the same models and assumptions used in the EIR calculations, but the differing bases of calculation lead to different outcomes.

	2014	2014	2014	2013	2013	2013
	Carrying value	84 month ERC	120 month ERC	Carrying value	84 month ERC	120 month ERC
	£m	£m	£m	£m	£m	£m
Loans to customers	407.2	554.8	649.9	169.9	272.6	313.3
Investments in structured entities	19.3	26.6	32.3	23.8	31.7	40.6
	426.5	581.4	682.2	193.7	304.3	353.9

10. Derivative Financial Assets and Liabilities

	Note	2014	2013	2012
		£m	£m	£m
Derivative financial assets	9	693.9	890.0	800.4
Derivative financial liabilities	16	(1.1)	(1.3)	(4.6)
		692.8	888.7	795.8
Of which:
Foreign exchange basis swaps		693.5	889.6	799.5
Other derivatives		(0.7)	(0.9)	(3.7)
		692.8	888.7	795.8

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.

11. SHORT TERM INVESTMENTS

This amount represents fixed rate securities issued by the UK government for which a liquid market exists and are held as part of the liquidity requirement of Paragon Bank PLC. As such they are designated as 'Available for Sale', as defined by IAS 39 - 'Financial Instruments: Recognition and Measurement' and are consequently shown at fair value which corresponds to their market value.

The total nominal value of the securities at 30 September 2014 was £37.5m (2013: £nil), the weighted average coupon was 3.88% (2013: nil%) and their carrying value was £39.4m (2013: £nil).

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 held in the Group's banking subsidiary is subject to regulatory rules covering liquidity and capital adequacy, and is shown as 'Bank Cash' below.

'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:

		2014	2013	2012
		£m	£m	£m
Free cash		177.3	170.8	127.7
Securitisation cash		609.0	414.1	374.9
Bank cash		60.6	-	-
ESOP cash		1.9	2.4	2.2
		848.8	587.3	504.8

Cash and Cash Equivalents includes current bank balances, money market placements 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:

			2014	2013
			Number	Number
Ordinary shares
At 1 October 2013			306,213,215	301,841,614
Shares issued			1,095,068	4,371,601
At 30 September 2014			307,308,283	306,213,215

During the year the Company issued 1,060,000 shares at par (2013: 3,975,993) to the trustees of its ESOP Trusts in order that they could fulfil their obligations under the Group's share based award arrangements. It also issued 35,068 shares (2013: 395,608) to satisfy options granted under sharesave schemes for a consideration of £36,884 (2013: £398,281).

14. RESERVES

		2014	2013	2012
		£m	£m	£m
Share premium account		64.1	64.1	64.1
Merger reserve		(70.2)	(70.2)	(70.2)
Cash flow hedging reserve		0.6	1.7	0.7
Profit and loss account		693.5	619.1	555.6
		688.0	614.7	550.2

15. equity Dividend

Amounts recognised as distributions to equity shareholders in the Group and the Company in the period:

	2014	2013	2014	2013
	Per share	Per share	£m	£m
Equity dividends on ordinary shares
Final dividend for the year ended 30 September 2013	4.8p	4.5p	14.6	13.5
Interim dividend for the year ended 30 September 2014	3.0p	2.4p	9.1	7.2
	7.8p	6.9p	23.7	20.7

Amounts paid and proposed in respect of the year:

	2014	2013	2014	2013
	Per share	Per share	£m	£m
Interim dividend for the year ended 30 September 2014	3.0p	2.4p	9.1	7.2
Proposed final dividend for the year ended 30 September 2014	6.0p	4.8p	18.3	14.6
	9.0p	7.2p	27.4	21.8

The proposed final dividend for the year ended 30 September 2014 will be paid on 16 February 2015, subject to approval at the Annual General Meeting, with a record date of 9 January 2015. The dividend will be recognised in the accounts when it is paid.

16. FInancial Liabilities

		2014	2013	2012
		£m	£m	£m
Current liabilities
Finance lease liability		-	1.6	1.4
Retail deposits		53.3	-	-
Bank loans and overdrafts		1.1	1.4	0.6
		54.4	3.0	2.0
Non-current liabilities
Asset backed loan notes		8,115.0	7,893.2	7,580.9
Corporate bond		110.0	110.0	110.0
Retail bonds		183.2	59.1	-
Finance lease liability		-	8.6	10.2
Retail deposits		6.8	-	-
Bank loans and overdrafts		1,397.9	1,311.2	1,453.3
Derivative financial instruments		1.1	1.3	4.6
		9,814.0	9,383.4	9,159.0
Total financial liabilities
Asset backed loan notes		8,115.0	7,893.2	7,580.9
Corporate bond		110.0	110.0	110.0
Retail bonds		183.2	59.1	-
Finance lease liability		-	10.2	11.6
Retail deposits		60.1	-	-
Bank loans and overdrafts		1,399.0	1,312.6	1,453.9
Derivative financial instruments		1.1	1.3	4.6
		9,868.4	9,386.4	9,161.0

Further details of asset backed loan notes, bank loans, corporate and retail bonds are given in note 17.

17. BORROWINGS

All borrowings described in the Group Accounts for the year ended 30 September 2013 remained in place throughout the period, except as described below.

On 18 March 2014 a Group company, Paragon Mortgages (No. 19) PLC, issued £343.0m of sterling mortgage backed floating rate notes to external investors at par. £313.2m of the notes were class A notes, rated AAA by Standard and Poor's and Fitch and Aaa by Moody's, £15.8m were class B notes, rated AA by Standard and Poor's and Fitch and Aa2 by Moody's and £14.0m were class C notes rated A by Standard and Poor's, A+ by Fitch and A1 by Moody's. The interest margins above LIBOR on the notes were 0.85% on the A notes, 1.20% on the B notes and 1.60% on the C notes, an average of 0.90% and the proceeds were used to pay down existing warehouse debt and £66.6m of the £70.4m securitisation debt of First Flexible No. 4 PLC, which was satisfied in full in April 2014. The Group retained £7.0m of D notes and also invested £10.5m in the first loss fund, bringing its total investment to £17.5m, or 5.0% of the issued notes.

On 17 July 2014 a Group company, Paragon Mortgages (No. 20) PLC, issued £343.0m of sterling mortgage backed floating rate notes to external investors at par. £319.0m of the notes were class A notes, rated AAA by Fitch and Aaa by Moody's and £24.0m were class B notes, rated AA- Fitch and Aa1 by Moody's. The interest margins above LIBOR on the notes were 0.68% on the A notes and 1.00% on the B notes, an average of 0.70% and the proceeds were used to pay down existing warehouse debt and the securitisation debt of Paragon Mortgages (No. 16) PLC, which was satisfied in full in October 2014, after the year end. A further £3.8m of purchased buy-to let assets, previously financed from Group resources, were also included in the transaction. The Group retained £7.0m of D notes and also invested £10.5m in the first loss fund, bringing its total investment to £17.5m, or 5.0% of the issued notes.

After the year end on 13 November 2014 a Group company, Paragon Mortgages (No. 21) PLC, issued £243.7m of sterling mortgage backed floating rate notes to external investors at par. £217.9m of the notes were class A notes, rated AAA by Standard and Poor's and Aaa by Moody's, £17.7m were class B notes, rated AA by Standard and Poor's and Aa2 by Moody's and £8.1m were class C notes rated A by Standard and Poor's and A1 by Moody's. The interest margins above LIBOR on the notes were 0.80% on the A notes, 1.40% of the B notes and 1.75% on the C notes, an average of 0.88% and the proceeds were used to pay down existing warehouse debt. The Group retained £6.3m of D notes and also invested £6.2m in the first loss fund, bringing its total investment to £12.5m, or 5.0% of the issued notes.

On 31 January 2014 a Group company, Idem Capital Securities (No. 1) s.à r.l. issued £130.6m of sterling floating rate notes to Bank of America Merrill Lynch International Limited on a limited recourse basis. These notes bear interest at a rate of one month LIBOR plus 3.00%. The initial Group investment in this company was £92.2m. The proceeds of the issue were used to part-fund the purchase of a portfolio of UK second charge residential mortgage loans, on which the borrowing is secured.

On 2 April 2014, a Group company, Idem First Finance Limited, entered into a £55.0m bank facility with Goldman Sachs Bank USA on a limited recourse basis. The initial Group investment in this company was £75.2m. The facility was used to refinance existing Idem Capital unsecured loan assets and is secured on those assets. This facility bears interest at a rate of one month LIBOR plus 3.75%.

On 30 April 2014, a Group company, Paragon Sixth Funding Limited, entered into an additional £100.0m bank facility with Natixis. This facility was available for a twelve month period, which was extended to 24 months when a refinancing target was met after the year end. This facility bears interest at a rate of one month LIBOR plus 1.40% and brings the total warehouse capacity to £550.0m.

As with the Group's existing securitisation borrowings, these financings are structured so that payments of interest and principal are limited to cash generated from the funded assets and there is no recourse to other Group funds. Therefore the issue of these new borrowings do not impact on the liquidity risk of the Group.

In January 2014 the £200.0m warehouse facility provided to Paragon Fifth Funding Limited by Lloyds Bank was renewed and is now available for drawing until June 2016. The interest margin above LIBOR reduced from 2.75% to 1.75%.

During the year the £200.0m warehouse facility provided by Macquarie Bank plc was renewed on substantially the same terms with a reduced margin of 1.750% above LIBOR, with effect from 12 December 2014 for a further two year period.

During the period the Group issued £125.0m of sterling bonds under the £1,000.0m Euro Medium Term Note Programme inaugurated in February 2013. These bonds are listed on the London Stock Exchange, carry a fixed interest rate of 6.125% per annum and are repayable in January 2022, but are callable at the option of the Company. This issue raised £123.9m of cash, net of issue costs. The programme was renewed in October 2014, after the period end.

Repayments made in respect of the Group's borrowings are shown in note 20.

18. net cash flow from operating activities

	2014	2013
		(restated)
	£m	£m
Profit before tax	122.8	104.8
Non-cash items included in profit and other adjustments:
Depreciation of property, plant and equipment	1.6	2.1
Amortisation of intangible assets	1.3	1.2
Foreign exchange movement on borrowings	(194.5)	88.8
Other non-cash movements on borrowings	4.9	5.9
Impairment losses on loans to customers	12.3	15.2
Charge for share based remuneration	3.2	3.1
Net (increase) / decrease in operating assets:
Loans to customers	(462.2)	(136.8)
Derivative financial instruments	196.1	(89.6)
Fair value of portfolio hedges	(0.5)	1.1
Other receivables	0.3	(1.3)
Net increase / (decrease) in operating liabilities:
Retail deposits	60.1	-
Derivative financial instruments	(0.2)	(3.3)
Other liabilities	2.7	(1.1)
Cash (utilised) by operations	(252.1)	(9.9)
Income taxes (paid)	(17.4)	(22.0)
	(269.5)	(31.9)

19. net cash flow from investing activities

			2014	2013
			£m	£m
Purchases of property, plant and equipment			(25.1)	(1.0)
Purchases of intangible assets			(0.7)	(0.6)
(Increase) in short term investments			(39.4)	-
Net cash (utilised) by investing activities			(65.2)	(1.6)

20. net cash flow from financing activities

		2014	2013
		£m	£m
Shares issued (note 13)		-	0.4
Dividends paid (note 15)		(23.7)	(20.7)
Issue of asset backed floating rate notes		862.8	459.1
Repayment of asset backed floating rate notes		(450.2)	(237.5)
Issue of retail bonds		123.9	59.0
Capital element of finance lease payments		-	(1.4)
Movement on bank facilities		85.1	(143.8)
Purchase of shares		(1.4)	(0.5)
Sale of shares		-	0.6
Net cash generated by financing activities		596.5	115.2

21. COST:INCOME RATIO

Cost:income ratio is derived as follows:

		2014	2013
			(restated)
		£m	£m
Cost - operating expenses		63.4	58.9
Total operating income		197.9	177.6
Cost / Income		32.0%	33.2%

22. UNDERLYING PROFIT

Underlying profit is determined by excluding from the operating result any identified costs of a one‑off nature, which do not reflect the underlying business performance of the Group, and fair value accounting adjustments arising from the Group's hedging arrangements.

		2014	2013
			(restated)
		£m	£m
Paragon Mortgages
Profit before tax for the period (note 4)		81.1	71.6
Less:    Fair value (gains)		(0.6)	(1.3)
		80.5	70.3
Idem Capital
Profit before tax for the period (note 4)		48.1	34.5
Less:    Fair value (gains)		-	-
		48.1	34.5
Paragon Bank
(Loss) / profit before tax for the period (note 4)		(6.4)	(1.3)
Less:    Fair value (gains)		-	-
		(6.4)	(1.3)
Total
Profit before tax for the period (note 4)		122.8	104.8
Less:    Fair value (gains)		(0.6)	(1.3)
		122.2	103.5

23. Average NET MARGIN

The average net interest margin is calculated as follows:

	Note	2014	2013
			(restated)
		£m	£m
Opening loans to customers	9	8,801.5	8,694.6
Closing loans to customers	9	9,255.9	8,801.5
Average loans to customers		9,028.7	8,748.0
Net interest		179.4	161.0
Net interest margin		1.99%	1.84%
Impairment provision		12.3	15.2
Impairment as a percentage of average loan balance		0.14%	0.17%

24. RELATED PARTY TRANSACTIONS

In the year ended 30 September 2014, the Group has continued the related party relationships described in note 59 on page 145 of the Annual Report and Accounts of the Group for the financial year ended 30 September 2013. Related party transactions in the period comprise the compensation of the Group's key management personnel and fees paid to a non-executive director in respect of his appointment as a director of the Corporate Trustee of the Group Pension Plan. 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 2014.

The Paragon Group of Companies PLC

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

in relation to financial statements

The responsibility statement below has been prepared in connection with the full annual accounts of the Company for the year ended 30 September 2014. Certain parts of these accounts are not presented within this announcement.

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. 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 2014, 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;

·     make an assessment of the ability of the Group's and the Company's ability to continue as a going concern;

·     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;

·     the Directors' Report, including those other sections of the Annual Report incorporated by reference, comprises a management report for the purposes of the Disclosure and Transparency Rules, which includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

·     the Annual Report, taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy.

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

PANDORA SHARP

Company Secretary

25 November 2014

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 previous or expected results. To identify and control these risks the Group utilises a Risk Management Framework. Through this framework its principal risks are identified and assessed within the key categories of Business Risk, Credit Risk, Liquidity Risk, Market Risk, Operational Risk, Conduct Risk and Pension Obligation Risk.

The Group's system of risk management includes the Credit Committee, Operational Risk Committee and Asset and Liability Committee ('ALCO'), an experienced Group Risk function and active internal audit functions. This risk management framework is monitored by Board level committees, the Audit Committee before June 2014 and the Risk and Compliance Committee thereafter.

The principal risks inherent in the Group's business model include the following:

Business risk

The risk that UK economic conditions impact on the Group

Deterioration in the economy of the UK, where all of the Group's operations are situated, might adversely affect all aspects of the Group's business.

Demand for the Group's buy-to-let products is influenced by the performance of the UK's private rented sector, which in turn is dependent on underlying factors such as house prices, supply of rental property, demographic changes and government housing policy. Demand for all of the Group's loan products is dependent on such factors as market interest rates, employment levels and other factors that determine disposable income.

Adverse economic conditions might increase the number of borrowers that default on their loans or adversely affect funding structures, which may in turn increase the Group's costs and could result in losses on some of the Group's assets, or restrict the ability of the Group to develop in the future.

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.

The risk that the Group is unable to procure new assets

The UK financial services market is highly competitive and the Group faces strong competition in all of the core markets in which it operates, including its lending markets, debt purchase and asset servicing. There is a danger that the Group's profitability and / or market share may be impaired if its offerings do not remain competitive.

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.

Credit risk

The risk that the Group's loan assets will not be realised in cash

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

The Group's approach to the management of credit risk and the systems in place to mitigate that risk on both originated and purchased assets are described in the Annual Report and Accounts.

Liquidity risk

The risk that the Group will not be able to finance its future plans

The Group relies on its access to sources of funding to finance the origination of new business, portfolio acquisitions and working capital. If access to funding became restricted, either through market movements or regulatory or governmental action, this might result in the scaling back or cessation of some business lines.

The Group's banking business relies on retail deposits, therefore changes in market liquidity could impact the ability of the business to maintain the level of liquidity required to sustain normal business activity. In addition there is a risk that the Group could face sudden, unexpected and large cash outflows from customer withdrawals.

The Group, through ALCO, seeks to mitigate this risk by investigating alternative sources of finance which are, or might become, available to the Group and by keeping its funding and working capital position under review. Paragon Bank is required, under regulation, to hold prescribed levels of liquid funds in order that requests for retail withdrawals can be met.

The Group's capital position and its policies in respect of capital management and their application are described more fully in the section of the Management Report headed 'Capital Management'.

Market risk

The risk that net income from loan assets will be reduced

Changes in interest rates may adversely affect the Group's net income and profitability. In particular the Group's profitability is determined by the difference between the rates at which it lends and those at which it can borrow. Therefore any changes in market interest rates which result in a mismatch can impact the Group's profit.

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 the Annual Report and Accounts.

Conduct risk

The risk of inappropriate or poor customer treatment leading to customer detriment

The Group provides a range of financial services products across several brands to consumers and small business customers. As a result, the Group is exposed to potential conduct risk should it fail to treat its customers fairly. This could arise, for example, if certain products fail to meet the needs of customers or customer complaints are handled ineffectively.

The manner in which financial services companies treat their customers is subject to considerable regulatory scrutiny. There is therefore a risk that regulatory bodies may determine that the Group is not ensuring that its customers receive fair treatment. Systemic poor customer treatment may lead to regulatory censure, reputational damage and resulting reductions in the Group's profitability.

As a result, the Group undertakes various mitigating actions in those areas of its business where the potential for this risk is greatest.  These actions include the assessment of risks and controls by business owners, separate oversight and assurance, ongoing staff training and the escalation of material risks and issues to appropriate Group risk committees.

Operational risk

The risk that regulation or legal changes will increase the cost or reduce the scope of the Group's activities

The customers and market sectors to which the Group supplies products, and the capital markets from which it obtains much of its funding, have been subject to legislative and other intervention by UK Government, European Union and other regulatory bodies. Certain of the Group's own activities are also subject to direct regulation. These levels of intervention have increased over recent years and this trend is expected to continue in the future

Current regulatory developments are discussed in the part of the Management Report headed 'Regulation'. To the extent that such actions disadvantage the Group, when compared to other market participants, or serve to depress levels of market activity or returns, 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. In order to ensure compliance with the various regulatory regimes it is, or may become, subject to, the Group maintains a compliance function which reviews procedures, examines compliance with them and evaluates knowledge levels across relevant functions. The Group also ensures that all employees receive appropriate regulatory training.

The risk that the Groups systems will be unable to support its operational needs

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 Operational Risk and Compliance Committee is responsible for reviewing key risk indicators and key controls to ensure that they remain adequate for their purpose. The Group has a business continuity plan, accredited under the International Standard ISO 22301, which is kept under regular review and is designed to ensure that any breakdown in systems would not cause significant disruption to the business.

The risk that the Group will not have the required staff to execute its plans

The success of the Group is dependent on recruiting and retaining skilled senior management and personnel at all levels of the organisation. The levels of regulation surrounding business conduct mean that highly trained operational staff are vital to the Group's ability to conduct business. Failure to maintain the necessary skill levels across the workforce would put the Group's ability to successfully carry out its plans at risk.

The Group has developed employment policies, which are designed to mitigate this exposure by ensuring that an appropriately skilled workforce is, and remains, in place.

 

END

 

 

FR USAKRSVAAUAA