Final Results

RNS Number : 6928G

Paragon Group Of Companies PLC

24 November 2015

PARAGON FULL YEAR RESULTS

The Paragon Group of Companies PLC ('Paragon' or the 'Group') today announces its results for the year ended 30 September 2015.

HIGHLIGHTS

Strong profit growth underpinning improving shareholder returns

· Underlying profit before tax increased by 10.2% to £134.7 million (2014: £122.2 million)

· Statutory profit before tax increased by 9.3% to £134.2 million (2014: £122.8 million)

· Earnings per share increased 11.3% to 35.5p (2014: 31.9p)

· Return on underlying tangible equity improved to 12.1% ‡ (2014: 11.5%) (11.4% including start-up losses attributable to Paragon Bank (2014: 10.9%))

· Total dividend for the year increased by 22.2% to 11.0p per share (2014: 9.0p), taking dividend cover ratio to 3.2 times

· Share buy-back programme to be extended into 2016, by up to £50.0 million

Strong growth in origination levels

· New buy-to-let lending increased by 102.0% to £1,326.6 million

· Buy-to-let pipeline up 72.1% to £713.7 million (2014: £414.8 million)

· Paragon Bank origination flows building:

o Buy-to-let: £350.0 million

o Other consumer loans: £59.1 million

· Idem Capital new investments of £104.4 million

Funding capacity increased with further diversification

· Paragon Bank deposit balances increased to £708.7 million

· Third successful retail bond issued, raising £112.5 million

· Warehouse capacity increased to £950.0 million

· Corporate investment grade rating assigned by Fitch

Strategic developments

· On 3 November 2015, the Group acquired Five Arrows Leasing Group Limited from Rothschild & Co for £117.0 million

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

"I am delighted to report another year of excellent progress for Paragon, as we continue our strategy of diversifying the Group's income and funding streams, whilst continuing to improve shareholder returns. Paragon Bank's development over a short space of time has been significant and the recent acquisition of Five Arrows Leasing Group takes us into the SME finance market. We are looking forward to working closely with the Five Arrows management team on a business that has substantial growth potential under Paragon's ownership.

The Group's financial performance has been strong, including profit growth of 10.2%. Buy-to-let volumes increased by 102% and our pipeline at the year-end was up 72%. The level of capacity and diversification we have achieved in our funding, including over £950 million in retail deposits raised to date through Paragon Bank, will allow us to capitalise on future growth opportunities.

Capital management remains a priority for the Group. We have delivered improved return on equity, increased the dividend by over 22% and have extended the share buy-back programme by a further £50.0 million as we continue to balance strong growth with increased shareholder returns.

This set of results demonstrates the strength of the Group's existing franchises which are being extended by the ongoing diversification of both our funding and income streams."

The Paragon Group of Companies PLC

FINANCIAL HIGHLIGHTS

	2015	2014	Change	% change
Profit before tax	£134.2m	£122.8m	+£11.4m	+9.3%
Underlying profit §	£134.7m	£122.2m	+£12.5m	+10.2%
Basic EPS	35.5p	31.9p	+3.6p	+11.3%
Dividend per share	11.0p	9.0p	+2.0p	+22.2%
ROTE	11.4%	10.9%
Underlying ROTE ‡	12.1%	11.5%
Cost:income ratio	33.7%	32.0%
Underlying cost:income ratio *	29.3%	28.8%
Core Tier 1 ratio	19.1%	19.9%
Share buy-backs †	£49.7m	-

§ Note 24 * Note 23

‡ Note 25 † £50.0m share buy-back programme

New Business	Originations and investments		Pipeline
	2015	2014	2015	2014
Buy-to-let
Paragon Mortgages	£976.6m	£656.1m	£404.2m	£369.5m
Paragon Bank	£350.0m	£0.5m	£309.5m	£45.3m
Total buy-to-let	£1,326.6m	£656.6m	£713.7m	£414.8m
Consumer lending	£59.1m	£5.3m
Idem Capital net investments	£104.4m	£175.7m

For further information, please contact:

The Paragon Group of Companies PLC	Fishburn
Nigel Terrington, Chief Executive
Richard Woodman, Group Finance Director	Del Jones
Tel: 020 7786 8455	Tel: 020 7092 2313

Paragon will be holding a results presentation for analysts on Tuesday 24 November 2015, presentation material will be available on the Group's website at www.paragon-group.co.uk/investors from 11:00am.

The Paragon Group of Companies PLC

MANAGEMENT REPORT

The year ended 30 September 2015 saw strong profit growth underpinning enhanced returns for shareholders as the Group successfully pursued its strategy of developing and expanding its specialist lending and investment activities across a broader product range, whilst diversifying its funding sources and improving the efficiency of its capital resources.

Underlying profit (note 24) increased by 10.2% to £134.7 million (2014: £122.2 million) with statutory profit before tax increasing by 9.3% to £134.2 million (2014: £122.8 million) as the loan book grew and margins were enhanced.

This result led to earnings per share increasing by 11.3% to 35.5p (2014: 31.9p) and underlying return on tangible equity, excluding start-up losses attributable to Paragon Bank, improving to 12.1% from 11.5% in 2014 (unadjusted 11.4% (2014: 10.9%)). The performance in the year has enabled the directors to propose an increase of 22.2% in the dividend for the year to 11.0p per share (2014: 9.0p per share), taking the dividend cover ratio to 3.2 times (2014: 3.5 times). £49.7 million of the Company's own shares were acquired in the market under the buy-back programme announced last year, which will be extended by a further amount of up to £50.0 million in the new financial year, improving capital efficiency and further enhancing shareholder returns.

The Group's average loan book grew by 7.0%, driving the increase in the Group's profit and earnings. New buy-to-let lending increased by 102.0% to £1,326.6 million (2014: £656.6 million), with the pipeline of new business being 72.1% greater at £713.7 million at 30 September 2015 (2014: £414.8 million), which should lead to a positive start to the new financial year. Paragon Bank continued to build its flows of originations, with £350.0 million of the buy-to-let completions noted above (2014: £0.5 million) and £59.1 million of consumer finance completions (2014: £5.3 million). Idem Capital added new investments of £104.4 million (2014: £175.7 million net of dedicated funding).

The Group's funding capacity was increased and further diversified in the year. Paragon Bank deposit balances increased to £708.7 million (2014: £60.1 million); a third retail bond was issued, raising £112.5 million; three mortgage backed securitisations raised £828.7 million in total; and warehouse capacity increased to £950.0 million (2014: £550.0 million). The Group was also assigned an investment grade corporate rating by Fitch.

Immediately following the year end the Group announced the purchase by Paragon Bank of the Five Arrows Leasing Group, an established SME asset finance business, from Rothschild & Co for £117.0 million. The purchase, completed on 3 November, has diversified the Group's product range and given additional scale to Paragon Bank's operations and deposit-taking activities. The acquisition provides a significant opportunity for growth and was financed from the Group's existing resources, in line with its objective of improving its capital efficiency over time.

The progress made during 2015 leaves the Group well placed to continue to expand its business through greater levels of organic growth and additional product diversification. There is a strong demand for the Group's products across its various divisions and despite challenges that may arise from increased regulation and taxation changes, further growth is expected to continue in the future. The larger and more diversified funding base supports strong growth, together with giving capacity for other potential acquisitions and capital management activity that will in turn provide increasing returns for the Group's shareholders.

The Paragon Group of Companies PLC

MANAGEMENT REPORT

FINANCIAL REVIEW

The financial year saw the Group's underlying profit increase by 10.2% to £134.7 million (30 September 2014: £122.2 million) while on the statutory basis profit increased by 9.3% to £134.2 million (30 September 2014: £122.8 million). Earnings per share increased by 11.3% to 35.5p (30 September 2014: 31.9p).

CONSOLIDATED RESULTS

For the year ended 30 September 2015

	2015	2014
	£m	£m

Interest receivable	341.0	302.4
Interest payable and similar charges	(143.6)	(123.0)
Net interest income	197.4	179.4
Other operating income	14.1	18.5
Total operating income	211.5	197.9
Operating expenses	(71.2)	(63.4)
Provisions for losses	(5.6)	(12.3)
Underlying profit	134.7	122.2
Fair value net (losses) / gains	(0.5)	0.6
Operating profit being profit on ordinary activities before taxation	134.2	122.8
Tax charge on profit on ordinary activities	(27.1)	(25.6)
Profit on ordinary activities after taxation	107.1	97.2

Dividend - rate per share for the year	11.0p	9.0p
Basic earnings per share	35.5p	31.9p
Diluted earnings per share	34.8p	31.1p

Total operating income increased by 6.9% to £211.5 million (2014: £197.9 million). Within this, net interest income increased to £197.4 million from £179.4 million for the year ended 30 September 2014. This increase reflects both improving margins and growth in the size of the average loan book, which rose by 7.0% to £9,659.2 million (2014: £9,028.7 million) (note 26). Net interest margins increased slightly in 2015 to 2.04% compared to 1.99% last year (note 26), driven by new originations and portfolio purchases having higher margins than those assets redeeming in the period and despite some tightening of market funding margins and the cost of funding an increased new business pipeline.

Other operating income was £14.1 million for the year, compared with £18.5 million in 2014. The decrease reflects a lower level of third party fee income earned in Idem Capital with the focus of its operations having been on direct, rather than co-investment opportunities from 2014 onwards.

Operating expenses increased by 12.3% to £71.2 million from £63.4 million for 2014. The operational costs of Paragon Bank, where expenditure will exceed associated revenues whilst the business becomes established, had a significant impact on Group costs in the period. This resulted in the cost:income ratio increasing to 33.7% from 32.0% for 2014 (note 23), although it remains significantly below the industry average. The underlying cost:income ratio excluding the Paragon Bank segment was, however, broadly stable at 29.3% compared to 28.8% in the year ended 30 September 2014. The increase in non-bank costs was attributable principally to additional employee numbers being required to support increased business levels, with average headcount rising by 9.3% in the year. The Board remains focused on controlling operating costs through the application of rigorous budgeting and monitoring procedures.

The charge of £5.6 million for loan impairment has reduced from that for 2014 (2014: £12.3 million). As a percentage of average loans to customers (note 26) the impairment charge has reduced to 0.06% compared to 0.14% in 2014. 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 served to decrease average loan to value ratios in the portfolio and in turn to reduce the overall exposure to losses on enforcement of security. The performance of the Group's post credit crisis lending has been particularly pleasing. 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 losses of £0.5 million (2014: £0.6 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. These, together with debt raisings, financed investments in further loan portfolios, the capital requirements of Paragon Bank and credit enhancement for mortgage originations. Cash was also utilised in the share buy-back programme, which commenced during December 2014 and where £49.7 million had been deployed by 30 September 2015. Free cash balances were £199.9 million at 30 September 2015 (2014: £177.3 million) (note 12).

Corporation tax has been charged at the rate of 20.2%, compared with 20.8% for the last year; the reduction being principally a result of the lower UK Corporation Tax rate applicable to the Group in the year ended 30 September 2015.

Decreasing gilt yields have increased the accounting value placed on the liabilities of the Group's defined benefit pension plan over the year ended 30 September 2015, leading to the deficit under IAS 19 increasing to £21.5 million (2014: £17.3 million). This resulted in an actuarial loss in other comprehensive income of £4.3 million before tax (2014: £2.1 million).

Profits after taxation of £107.1 million (2014: £97.2 million) have been transferred to shareholders' funds, which totalled £969.5 million at the year end (2014: £947.1 million).

The Group continues to adopt the segmental reporting format introduced in 2014, which analyses the business between the three divisions described below.

· 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 other assets remaining in 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

These are the principal divisions of the Group for which performance is monitored.

The underlying operating profits of these business segments are detailed fully in note 4 and are summarised below.

	2015	2014
	£m	£m
Underlying operating profit / (loss)
Paragon Mortgages	94.0	80.5
Idem Capital	49.3	48.1
Paragon Bank	(8.6)	(6.4)
	134.7	122.2

The Group's loan assets include:

· First mortgage assets, with new originations and legacy assets in Paragon Mortgages, new originations in Paragon Bank and purchased assets in Idem Capital

· Second mortgages, with new originations in Paragon Bank, legacy assets in Paragon Mortgages and purchased assets in Idem Capital

· Car finance loans, with new originations in Paragon Bank and legacy assets in Paragon Mortgages

· Other unsecured consumer lending with purchased assets in Idem Capital and legacy assets in Paragon Mortgages

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

The Paragon Group of Companies PLC

MANAGEMENT REPORT

BUSINESS REVIEW

OPERATING SEGMENTS

The Group's investments in loans and the amounts invested in the year for each division are summarised below:

	Advances and investments in the year		Investments in loans at the year end
	2015	2014	2015	2014
	£m	£m	£m	£m

Paragon Mortgages	976.6	656.1	9,221.7	8,842.9
Idem Capital	104.4	175.7	451.0	426.5
Paragon Bank	409.1	5.8	407.8	5.8
	1,490.1	837.6	10,080.5	9,275.2

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 sector of the UK mortgage market that continues to show strong growth. Trading activity in the year was very strong, with the segment contributing £94.0 million to underlying Group profit (2014: £80.5 million), an increase of 16.8%. The strong pipeline of new business, and the continued success of new business operations indicate good potential for further growth.

Total loan assets of the Paragon Mortgages segment at 30 September 2015 were £9,221.7 million, 4.3% higher than the £8,842.9 million a year earlier, of which £8,999.1 million were buy-to-let mortgage assets (30 September 2014: £8,575.6 million).

Buy-to-let

	Completions in year		Pipeline at year end
	2015	2014	2015	2014
	£m	£m	£m	£m

Paragon Mortgages	976.6	656.1	404.2	369.5
Paragon Bank	350.0	0.5	309.5	45.3
	1,326.6	656.6	713.7	414.8

A wide range of social, demographic, political and economic factors continue to drive strong growth in private renting, alongside general issues of affordability in the owner occupied sector. Significant amongst these over the year have been the impact of the FCA's Mortgage Market Review ('MMR'), high levels of migration to the UK and the continuing challenge of improving the supply of housing in the UK in the face of population growth and the rate of household formation. This strong and sustained increase in rental demand has led, in turn, to strong demand for buy-to-let finance. The Group has been able to capitalise upon this to a greater extent this year because of the progress made with the Group's strategy of diversification of funding sources, with Paragon Bank making a significant contribution to the Group's performance in buy-to-let lending over the year for the first time. Total advances grew as a result to £1,326.6 million, an increase of 102.0% over the previous year (2014: £656.6 million) with £350.0 million of this advanced by Paragon Bank, as described further below.

Over the year the Group has expanded its operations to match the enhanced funding capability. This in turn has allowed it to compete more effectively across a wider range of products for landlord customers, illustrated by the expansion of buy-to-let lending to Scotland, funded by retail deposits. As a result the Group saw strong growth in application volumes from January 2015 which in turn has driven a significant increase in completions since the half-year. The pipeline of new business was maintained at high levels across the second half of the year resulting in a pipeline of new business (live cases between application and completion), of £713.7 million at the period end, £309.5 million of which was in Paragon Bank. This total was 72.1% greater than the pipeline of £414.8 million at the end of September 2014 and supports continued high levels of new lending into the next financial year. The credit quality of the new lending business written in the year has remained excellent.

The introduction in the MMR of tougher regulatory requirements for owner-occupier mortgages in the spring of 2014 coincided with the onset of a period of weaker activity in the housing market. However, there has been strong growth in housing transactions reported by the Council of Mortgage Lenders ('CML') since January 2015, with these peaking at 121,000 in July 2015, the highest level seen since the financial crisis. An improved outlook for the economy combined with a decisive outcome in the General Election to drive up consumer confidence, which has resulted in mortgage approvals also reaching a post-crisis high of 136,000 in July with the level of activity in the owner-occupied market boosted by government intervention including the Help-to-Buy scheme. Despite this improved level of activity, house price growth has remained stable with Nationwide assessing the annual rate of growth at 3.8% at the end of September and Halifax reporting 8.6%.

The private rented sector has continued to grow strongly. Data in the annual Survey of English Housing for 2013-14, published in February 2015 by the Department of Communities and Local Government indicated that the private rented sector, comprising 19% of households in England, is now larger than the social rented sector and remains the only growing form of tenure. In broad terms we continue to see a weakening of demand for owner-occupied housing, a static social rented sector and a private rented market that is expanding to fill the gap.

Strong tenant demand continued to drive demand for buy-to-let mortgages with CML data for the year ended September 2015 showing £35.2 billion of lending compared to £25.8 billion for the previous year. Whilst growth is strong, in real terms this is a continuation of the recovery rather than a 'boom' in buy-to-let, illustrated by the fact that buy-to-let lending in 2014 was little different to the levels seen ten years ago.

The policy environment for the private rented sector has become more challenging following recent Government announcements. In the summer budget the Chancellor of the Exchequer announced changes to the tax regime for rented property that will result in landlords only being able to claim relief on finance costs at the basic rate of tax, currently 20%, along with the cessation of the 'wear and tear' allowance. An extended lead-in period has, however, been allowed, giving landlords time to adjust their strategies. Research to date by the industry has indicated that the changes will have a muted impact on the motivation for landlords to invest although some reduction in the rate of growth is anticipated and some landlords are expected to look to increase rents to compensate for their increase in costs. We also expect a number of larger scale landlords to transfer their properties into a corporate structure, an area of the market in which the Group has considerable experience and where there is less competitor capability.

The Group's outstanding buy-to-let balances are analysed below:

	2015	2014
	£m	£m

Paragon Mortgages	8,999.1	8,575.6
Idem Capital	14.5	16.0
Paragon Bank	349.6	0.5
	9,363.2	8,592.1

At 30 September 2015 the Group's buy-to-let portfolio stood at £9,363.2 million, 9.0% higher than the £8,592.1 million reported a year earlier. The annualised redemption rate on the overall buy-to-let book, although higher than the 4.1% reported for 2014, still remains low at 5.8%, despite the increasing numbers of post credit crisis accounts included in the portfolio. The annualised redemption rate on these loans, at 12.1% (2014: 9.2%), is, as expected, approaching the levels seen before the credit crisis as the book matures. The annualised redemption rate on pre-crisis lending, at 4.4% is little changed from the 4.0% seen in the year ended 30 September 2014. This performance indicates that the Group's landlord customers continue to display a long-term commitment to property investment.

The Group's approach to underwriting remains robust with a focus on the credit quality and financial capability of our customers underpinned by a detailed and thorough assessment of the value and suitability of the property as a security. This approach continues to deliver market leading credit performance across historic and current lending.

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 more than three months in arrears (note 9) standing at 0.19% as at 30 September 2015 (30 September 2014: 0.25%) and remaining considerably better than the CML's comparable market average of 0.67% at that date (30 September 2014: 0.85%).

Security values have also benefitted from the effect of increased house prices. The Nationwide House Price Index showed appreciation in residential property values of 3.8% over the year (2014: 9.4%), while the indexed loan-to-value ratio of the buy-to-let portfolio at 30 September 2015, at 69.7%, was broadly similar to its level a year earlier of 71.7%. 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 13.3% to 1,062 at 30 September 2015 (30 September 2014: 1,225), and 96.9% of the properties available for letting in the receiver of rent portfolio were let at that date (30 September 2014: 97.2%).

Other assets

The Paragon Mortgages operating segment also includes income generated from 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 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.

	2015	2014
	£m	£m

Owner-occupied mortgages	47.6	59.6
Secured loans	170.0	201.0
Unsecured loans	5.0	6.7
	222.6	267.3

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 is one of the UK's principal consumer debt buyers and is a servicer of loans for third parties and for co-investment partners. The division's portfolios performed strongly in the year to 30 September 2015 and, with the benefit of new investments made during the year and a firm control of costs, Idem Capital's underlying profit contribution increased by 2.5% to £49.3 million (30 September 2014: £48.1 million).

Activity in the UK debt purchase market remained at a high level during the year, with UK based financial institutions continuing to dispose of both paying and non-paying consumer loans, either as business-as-usual sales or through deleveraging processes. These financial institutions have continued to actively manage and reduce the size of their purchaser panels in recent years, for operational efficiency and to facilitate compliance with regulatory obligations. Idem Capital has maintained its position as an active panel member for the major UK based debt sellers and has participated in several transactions during the course of the financial year.

Idem Capital's investments are summarised below.

	Outstanding balance		Current year net investment
	2015	2014	2015	2014
	£m	£m	£m	£m

Loan portfolios	432.9	407.2	104.4	175.7
Co-investments	18.1	19.3	-	-
	451.0	426.5	104.4	175.7

The value of Idem Capital's investments totalled £451.0 million at the year-end (30 September 2014: £426.5 million). Of the total carrying value, including co-investments, 51.9% related to loans secured on property (2014: 63.2%).

At 30 September 2015, the 120 month gross estimated remaining collections ('ERC') for the Company's portfolio stood at £677.7 million (30 September 2014: £682.2 million). ERC is a common measure of scale in the debt purchase industry reflecting likely future cash flows from the acquired assets over the next ten years, which will reduce over time as balances are collected. At 30 September 2015 cumulative cash receipts totalled 107.2% of the values predicted at the point the loans were acquired (30 September 2014: 105.3%).

During the year, the Idem Capital division acquired and assumed servicing of a further 107,800 accounts in three principal transactions. After taking into account portfolio run-off, acquired accounts under management increased by 44.7% and total accounts under management (including third-party serviced assets) increased by 14.3%.

The numbers of loan assets managed by Idem Capital and the wider Group are shown below.

	30 September 2015		30 September 2014
	Number	%	Number	%

Idem owned	277,063	59.2%	191,454	46.1%
Third party	109,806	23.4%	146,981	35.4%
Idem managed	386,869	82.6%	338,435	81.5%
Group originated	81,521	17.4%	76,890	18.5%
Group managed assets	468,390	100.0%	415,325	100.0%

Following the year end, Idem Capital successfully concluded a transaction to raise external finance for its existing unencumbered unsecured portfolio and to refinance an existing facility on more favourable terms, the division's third external funding transaction. This is discussed further in the funding review below.

Idem Capital utilises the Group's highly developed loan servicing and collection capability which is used for its own purchases and for co-invested and third party assets. The Group has invested heavily in its compliance infrastructure in recent years and is well placed to deliver the operational standards required by the UK regulatory authorities and by portfolio vendors.

Paragon Bank

Paragon Bank provides the Group with diversification of both income streams and funding sources. It saw strong development in the year and after the year end its profile was significantly enhanced by the acquisition of Five Arrows Leasing Group, adding capability in asset finance and related businesses to the Group's offerings.

The initial costs of developing the Bank's business and product offerings, together with the fixed costs necessitated by the regulatory environment in which it operates, resulted in an underlying loss for the year in this segment of £8.6 million (2014: £6.4 million). This was higher than expected due to the cost of carrying a higher level of retail deposits against the growing loan pipeline. Following the Five Arrows Leasing Group acquisition, the Bank is expected to report a profit in 2016.

Paragon Bank funds its new lending advances and pipeline though savings deposits. The Bank's funding position at 30 September 2015 is summarised below.

	2015	2014
	£m	£m

Retail deposits	708.7	60.1
Loans to customers	(407.8)	(5.8)
Surplus deposits to cover growth and liquidity	300.9	54.3

The Group provided capital of £33.0 million to Paragon Bank during the period (2014: £48.9 million) and its policy is to provide the Bank with sufficient capital to cover its planned requirements over each twelve month period.

During the previous year ended 30 September 2014 Paragon Bank launched car finance, secured personal loan, buy-to-let mortgage and savings products, all of which it has continued to develop through the year. The car finance and secured personal finance businesses are relatively new operations and during the year have focussed on establishing distribution. Buy-to-let loans are generated through existing Group channels and as a result volume growth has been strongest in this area. Further information on each of these businesses is given below. Paragon Bank's loan assets at 30 September 2015 are analysed as follows.

	Current year advances		Outstanding balance
	2015	2014	2015	2014
	£m	£m	£m	£m

Buy-to-let	350.0	0.5	349.6	0.5
Car finance	43.9	5.3	43.2	5.3
Personal finance	15.2	-	15.0	-
	409.1	5.8	407.8	5.8

Investment in these product lines during the year is expected to produce further organic growth in future periods.

In November 2015 the Bank also launched a short term property development finance product, supported by specialist employees, to broaden the Group's offering to property investors. It 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 to identify potential asset purchases that fit with its risk appetite and business model, thereby broadening the scope of both parts of the Group.

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. The Bank's first full year of buy-to-let lending has been very successful, with £350.0 million of advances made (2014: £0.5 million), and a healthy pipeline of business of £309.5 million ready to complete in the new financial year (2014: £45.3 million). Most of this business has been written on 2-year fixed rate products, with an average loan size of just under £200,000, an average loan-to-value ratio ('LTV') of less than 75% and interest coverage ratio of over 140%. There have been no arrears on the business written so far by the Bank. The buy-to-let market is discussed in more detail under 'Paragon Mortgages' above.

Having established itself as a credible provider of good quality buy-to-let products, the Bank will seek further opportunities to lend to good quality applicants on good quality properties with a demonstrable ability to achieve a strong and sustainable rent.

Car finance

The UK car market has continued to grow during the year ended 30 September 2015. During September 2015 463,000 new cars were registered (2014: 426,000) which was the highest number ever recorded for a month, representing the 43rd consecutive month of growth. Calendar year-to-date registrations were 2,097,000 which is a 7.1% increase on the comparable period in 2014 (2014: 1,958,000).

The UK car finance market has also experienced considerable growth, with total finance for the year ended September 2015 reported by the Finance and Leasing Association ('FLA') up 13.2% at £36.1 billion (2014: £31.9 billion), with similar percentage increases witnessed for new and used car funding at £23.7 billion and £12.4 billion respectively (2014: £20.8 billion and £11.1 billion).

The new regulatory authorisation regime introduced by the Financial Conduct Authority ('FCA'), based upon its Consumer Credit Sourcebook ('CONC') is now well progressed with the first application period for firms closing on 1 April 2016. The new regime has been widely adopted in the car market and the new requirements implemented, however, challenges still remain in respect of individual interpretations, particularly those relating to commission arrangements and affordability, both of which are being further reviewed by the FCA in early 2016.

Paragon Car Finance has continued to make good progress during the year and has considerably expanded both its product range and distribution network. Business volumes continue to rise on a monthly basis with the extant book delivering better than expected performance, with total advances of £43.9 million in the year (2014: £5.3 million). None of the Bank's car finance accounts were more than two months in arrears at 30 September 2015 (2014: none).

Personal finance

The second charge mortgage market has experienced significant growth over the year with new business volumes in September 2015 showing a year on year increase by value of 22% to £67 million (September 2014: £55 million) according to FLA data. In contrast, the number of new second charge mortgages fell by 6.8% to 1,577 over the same period (September 2014: 1,692). The average second charge mortgage advance in September was therefore £42,500, a year-on-year increase of 30.8% (September 2014: £32,500).

During the year, Paragon Personal Finance has established relationships with over 60 brokers enabling the business to gain a firm foothold with an estimated monthly market share now approaching 5%. Advances in the year were £15.2 million (2014: £nil) with a pipeline of new business of £4.4 million (2014: £nil). None of the Bank's second charge mortgage accounts were in arrears at 30 September 2015.

Second charge mortgages will become regulated under the FCA's MCOB regime in March 2016 and lenders, brokers and trade bodies are heavily involved in ongoing preparation for the new regulatory environment. Paragon Personal Finance itself is well advanced in terms of systems, procedures and employee training and considers itself well placed to make further market gains over the next twelve months.

Asset finance

The Group acquired Five Arrows Leasing Group Limited, through Paragon Bank, on 3 November 2015, after the year end. This represents a significant strategic broadening of the Bank's scope into the SME asset finance market.

Five Arrows Leasing Group was formed in 1988 and has been owned by Rothschild & Co since 1996. It offers a range of asset finance products, through its subsidiary brands, to UK SMEs, including equipment, vehicle and construction equipment finance and is also a provider of lease servicing.

The Group has identified the SME market as presenting an attractive opportunity to deliver growth, addressing a different market to its existing offerings, whilst using elements of the same skill base. The FLA reports total market for asset finance for businesses at 30 September 2015 covered £66.3 billion of outstanding balances, with £28.4 billion of advances in the year then ended, and is forecast to grow in coming years. The market is addressed by a range of companies, many with specialist offerings.

The Five Arrows Leasing Group team is highly regarded, has a strong credit ethos and will have a good cultural fit within the wider Paragon business. The product suite of the business currently addresses several distinct segments of the SME market, including some specialised niches, and has several growth opportunities. Five Arrows Leasing Group will form the basis for further SME finance development within Paragon Bank, organically or by further acquisitions. It will be re-branded in the near future to reflect its change in ownership.

Savings

The UK savings market continues to grow strongly, with household savings balances reported by the Bank of England increasing by over £40 billion in the year to 30 September 2015. This strong supply has helped to maintain relatively low savings rates, which only increased marginally in fixed term bond segments over the year.

Retail deposits at 30 September 2015 had reached £708.7 million (30 September 2014: £60.1 million) even though the Bank's savings product range remains reflective of its stage of development, with a focus on attracting term funding to manage interest rate risk and often limiting product availability for short periods of time. Accounts are offered through the internet and include fixed and variable rate savings products. Our straightforward approach and consistently competitive products have been recognised in the industry and by our customers.

Paragon Bank was named as Best New Savings Provider at the fifth annual Moneynet Awards in February 2015 and nominated as a finalist for the Best Online Savings Provider award by Moneyfacts for the second consecutive year in October 2015.

In customer feedback 91% of those opening a savings account with the Bank between August and September 2015 rated the overall savings process as 'good' or 'very good', while 84% stated that they would 'probably' or 'definitely' take a second product with Paragon Bank.

RISK

Following a review in 2014, the Group's risk governance framework is now based upon a formal three lines of defence model which is being embedded in all areas. Credit, Asset and Liability and Operational Risk and Compliance committees, formed of executive management, report to the Board Risk and Compliance Committee, the membership of which comprises the Chairman and the independent non-executive directors of the Group.

In the last year we have also consolidated a number of established risk functions into an independent second line Risk and Compliance division headed by a Chief Risk Officer.

The Group's governance structure provides an effective basis for the management of risk within which:

· The first line of defence, comprising executive directors, managers and employees, holds primary responsibility for designing, operating and monitoring risk management and control processes

· The second line of defence is provided by the Risk and Compliance division, the Board Risk and Compliance Committee and its supporting sub-committees

· The third line of defence is provided by Group Internal Audit function and the Board Audit Committee which are responsible for reviewing the effectiveness of the first and second lines of defence

REGULATION

In March 2015 the Mortgage Credit Directive Order introduced legislation to move second charge mortgages from the FCA's consumer credit regime to its residential mortgage regime and to implement a new regulatory regime, to be overseen by the FCA, in relation to consumer buy-to-let mortgage contracts. Both these new regimes are to take effect in March 2016.

The Group is putting in place the necessary processes and procedures to comply with both regimes from March 2016 and we do not believe that they will have a material impact on the operation of any of our businesses.

During the period the Financial Policy Committee of the Bank of England ('FPC') was granted powers to regulate owner occupied mortgage lending. The FPC has also requested the power to regulate buy-to-let mortgage lending by reference to loan-to-value, debt to income and interest coverage ratios. HM Government is currently consulting on this request. The Group will keep this exercise under review to determine what impact it might have on its business model.

All relevant Group companies hold the requisite interim permissions from the FCA under the new consumer credit regime and have applied, or will apply, for full authorisations under the consumer credit, second charge mortgage and consumer buy-to-let mortgage contract regimes.

Paragon Bank is authorised by the Prudential Regulation Authority ('PRA') and regulated by the PRA and the FCA. The Group is subject to consolidated supervision by the PRA. The current and projected rate of regulatory change, driven by domestic and European policy, is significant, as further aspects of the Basel III supervisory regime are rolled out and the Basel Committee on Banking Supervision consults on further changes. 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. Regular reports on key regulatory developments are therefore received at both executive and board risk committees.

The Paragon Group of Companies PLC

MANAGEMENT REPORT

FUNDING REVIEW

During the year the Group has continued to pursue its funding strategy of broadening its asset specific financing channels and enhancing its central debt capacity while making increased use of retail savings funding to take advantage of the defensive attributes of this form of funding.

The Group's funding at 30 September 2015 are summarised as follows:

	2015	2014	2013
	£m	£m	£m

Paragon Mortgages	9,597.1	9,367.8	9,204.4
Idem Capital	102.9	145.1	-
Paragon Bank	708.7	60.1	-
Business specific funding	10,408.7	9,573.0	9,204.4
Corporate borrowings	404.9	293.2	169.1
	10,813.6	9,866.2	9,373.5

Funding markets have been dominated by three key themes during the financial year; the launch of the ECB's quantitative easing programme, the renegotiation of Greece's funding arrangements with the ECB and IMF and concerns surrounding US interest rates. These themes were most pronounced in the latter six months of the financial year.

Paragon Mortgages funding

Buy-to-let mortgage originations outside of Paragon Bank are initially funded through four revolving warehouse facilities totalling £950.0 million at 30 September 2015 (2014: £550.0 million). Existing facilities with Lloyds Bank and Macquarie Bank were increased by £200.0 million in total during the year and a further facility of £200.0 million was agreed with Bank of America Merrill Lynch. This enhanced capacity within the Group, together with the option of using Paragon Bank funding supports the Group's growth plans in the buy-to-let market.

In the longer term buy-to-let mortgage loans are funded through the securitisation markets. Three new public securitisation deals totalling £828.7 million, with senior notes rated AAA were completed in the year. In order to diversify its funding beyond the sterling market, the Group included euro denominated tranches on its Paragon Mortgages (No. 22) PLC and Paragon Mortgages (No. 23) PLC transactions, and these tranches were successfully placed with euro investors.

The Group's 62nd transaction, Paragon Mortgages (No. 24) PLC ('PM24'), for £350.1 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. 24) PLC	350.1	November 2015	175
Paragon Mortgages (No. 23) PLC	292.5	July 2015	123
Paragon Mortgages (No. 22) PLC	292.5	March 2015	95
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

During the first six months of the financial year, sterling credit markets were favourable, with swap spreads stable and gilt yields declining to historical lows as inflation expectations reduced. The improved funding backdrop led to an increase in note issuance which was increasingly backed by non-conforming assets and offered to investors at a higher margin than the Group's issuance. This increase in supply led to margins on new issues widening significantly as the year progressed.

PM24 priced in difficult market conditions, reflecting an expectation of increased issuance. In recent months several very large mortgage portfolio sales have taken place, with more expected to follow. We understand that bond investors expect these transactions to be refinanced through the securitisation market during 2016, resulting in substantial additional supply of issuance. This is turn has led to an assumption than wider margins will be needed to achieve that volume, substantially in excess of those at which PM24 was priced, and this expectation has led to higher present margins being demanded by investors on new issues. The Group has significant warehouse capacity and intends to expand the proportion of its buy to let advances funded by Paragon Bank, providing the Group options regarding the timing of its next securitisation transaction.

Alternative markets for Paragon Mortgages funding to the traditional sterling investor base will continue to be rigorously assessed in the interim, including the potential for US dollar issuance.

Idem Capital funding

Following the year end, in October 2015, an Idem Capital special purpose vehicle company ('SPV') entered into an agreement to issue £117.3 million of sterling floating rate notes to Citibank NA. These notes bear interest at a rate of one month LIBOR plus 3.5% and the funds raised were used to re-finance existing Idem Capital unsecured loan assets, previously funded intra-group and through an existing SPV, and are secured on those assets. The transaction raised net new funding of £65.5 million and, following the transaction, 37.9% of Idem Capital's loan investment balances by value at 30 September 2015 were externally funded.

The new borrowings bear interest at a lower rate than the funding they replace and the increase in structured borrowings, on a limited recourse basis, represents a development in funding for Idem Capital, broadening its sources of finance and demonstrating its ability to access third party funding on a more regular basis, offering greater flexibility to the business.

Paragon Bank funding

The Bank currently targets the UK savings market and deposits are accepted over the internet and processed by a highly automated system with significant scope for future expansion.

Initially deposits accepted by the Bank were used to finance its car finance lending operations, expanding into secured lending and increasingly into buy-to-let during the year. By 30 September 2015 Paragon Bank held deposits of £708.7 million (2014: £60.1 million).

Savings balances at the year end are analysed below.

	Average interest rate		Average initial balance		Proportion of deposits
	2015	2014	2015	2014	2015	2014
	%	%	£000	£000	%	%

Fixed rate deposits	2.33%	1.90%	34	33	71.7%	66.2%
Variable rate deposits	1.62%	1.85%	16	25	28.3%	33.8%
All balances	2.13%	1.88%	28	31	100.0%	100.0%

The average initial term of fixed rate deposits was 29 months (2014: 14 months).

Following the year end savings deposits were used to finance a large part of the cash requirement for the Five Arrows Leasing Group acquisition, with balances having exceeded £950 million by the date of this report. With the 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.

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.

The Group is now rated by Fitch Ratings, which has ascribed it an initial BBB- rating. With a strategy to increase holding company leverage levels over time, the rating will support long dated corporate debt issuance in both scale and pricing terms. The achievement of this investment grade rating represents a further significant development in the Group's growth and diversification strategy.

The concerns in the funding markets from mid-year onwards also impacted the retail bond market, with demand more subdued than in previous years. Nonetheless, in August 2015, the Group issued £112.5 million of 6.0% sterling bonds due August 2024. The bonds, listed on the London Stock Exchange Order Book for Retail Bonds ('ORB'), were issued to provide additional working capital for the Group. This was the third transaction under a £1.0 billion Euro Medium Term Note Programme announced in January 2013 and renewed to allow further issuance in October 2014. This brought the total issued under the programme to £297.5 million.

Further information on all of the above borrowings is given in note 18.

The additional sources of finance for the Group, together with the Fitch rating, 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 £199.9 million at the year-end (30 September 2014: £177.3 million) (note 12) after investments to support the growth 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, both in the Bank and in the wider group, to invest further amounts in loan portfolios through Idem Capital as banks and other financial institutions continue to dispose of assets and potentially to invest in corporate acquisitions. These cash balances, together with future operational cash flow, will support the Group's growth through investment in these areas.

In view of the strong position of the Group and its confidence in the prospects for the business, the Board is proposing, subject to approval at the Annual General Meeting on 11 February 2016, a final dividend of 7.4p per share which, when added to the interim dividend of 3.6p, gives a total dividend of 11.0p per share for the year. This represents an increase of 22.2% from 2014, bringing the dividend cover to 3.2 times (2014: 3.5 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 and it 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 19.1% at 30 September 2015 (2014: 19.9%) and a leverage ratio at 7.7% (2014: 8.3%) (note 3) leaving the Group's capital at 30 September 2015 comfortably in excess of the regulatory requirement. Following the acquisition of Five Arrows Leasing Group after the year end, the CET1 ratio will reduce by a little over two percentage points, the final amount to be determined as part of the acquisition accounting.

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 should seek to utilise greater levels of debt to support growth and reduce its over-reliance on equity capital, improving returns for shareholders. To enhance this strategy the Group regularly reviews the opportunities available to it to access the sterling senior unsecured debt market and the UK retail bond market to add incremental long-dated debt to the Group balance sheet.

In November 2014 the Group announced a share buy-back programme, initially for 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. During the year the Group bought back 11.7 million of its ordinary shares at a cost of £49.7 million, which are held in treasury. The Board intends to extend the programme by up to £50.0 million in the financial year ended 30 September 2016. These shares will also 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 2016 Annual General Meeting, when a special resolution seeking authority for the Company to purchase up to 29.6 million of its own shares (10% of the issued share capital excluding treasury shares) will be put to shareholders.

The Paragon Group of Companies PLC

MANAGEMENT REPORT

MANAGEMENT AND PEOPLE

During the year ended 30 September 2014 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 this review, 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.

On 1 July 2015 Edward Tilly retired from the Board. Mr Tilly had been a director of the Company since 2008, serving for over two years as Chairman of the Remuneration Committee, before becoming Senior Independent Director in July 2011. Ted's experience and wisdom have been invaluable and his presence on the Board will be greatly missed.

Following a handover period, Fiona Clutterbuck succeeded Mr Tilly in the role of Senior Independent Director of the Group and continues as Chairman of the Risk and Compliance Committee.

The Group has always recognised that its people are its most important asset and are key to its future growth and development. The learning and development of its employees, together with a rigorous recruitment process are a key part of the Group's organic growth strategy and underpin the strong progress it has made. It retains its Gold Investor in People status, reflecting the quality of its internal processes and during the year has continued to act, by invitation, as an Investor in People Champion, sharing its experience with other businesses. This places it in the top 1% of companies in the UK for people development.

The Group prides itself on the fact that its people stay with it for a long time. Its annual employee attrition rate of 11% is below the national average and 33% of its people have been with Paragon for more than ten years, with 12% having achieved over 20 years with the Group. We believe this is due to providing quality development opportunities and creating a place at which people want to work, which has in turn meant that knowledge and experience have been retained in each of our specialist areas. We have continued to add to the team over the past year with an excellent set of people at all levels of the organisation, increasing numbers by 4.9% over the year. We believe our people are well positioned to support the Group's future growth strategy.

The existing operation of Five Arrows Leasing Group, including its people, will transfer across to form part of Paragon Bank. We are looking forward to working with our new colleagues and learning from their skills and experience in asset finance, to further develop our future growth plans.

Succession planning strategy has been an important area of focus during the year, with our key roles identified from a leadership and specialist perspective. Immediate successors are in place for the short term to provide business continuity and our longer term succession plans are being developed, for those with career ambitions and strong potential. This area will remain a priority for the Board during the forthcoming year.

The Paragon Group of Companies PLC

MANAGEMENT REPORT

CONCLUSION

I am delighted to report another year of excellent progress for Paragon, as we continue our strategy of diversifying the Group's income and funding streams, whilst continuing to improve shareholder returns. Paragon Bank's development over a short space of time has been significant and the recent acquisition of Five Arrows Leasing Group takes us into the SME finance market. We are looking forward to working closely with the Five Arrows management team on a business that has substantial growth potential under Paragon's ownership.

This set of results demonstrates the strength of the Group's existing franchises which are being extended by the ongoing diversification of both our funding and income streams.

NIGEL S TERRINGTON

Chief Executive

24 November 2015

The Paragon Group of Companies PLC

CONSOLIDATED INCOME STATEMENT

For the year ended 30 September 2015

		2015	2014
	Note	£m	£m

Interest receivable		341.0	302.4
Interest payable and similar charges		(143.6)	(123.0)
Net interest income		197.4	179.4
Other operating income	5	14.1	18.5
Total operating income		211.5	197.9
Operating expenses		(71.2)	(63.4)
Provisions for losses		(5.6)	(12.3)
Operating profit before fair value items		134.7	122.2
Fair value net (losses) / gains	6	(0.5)	0.6
Operating profit being profit on ordinary activities before taxation		134.2	122.8
Tax charge on profit on ordinary activities		(27.1)	(25.6)
Profit on ordinary activities after taxation for the financial year		107.1	97.2

		2015	2014
	Note
Earnings per share
- basic	7	35.5p	31.9p
- diluted	7	34.8p	31.1p

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

The Paragon Group of Companies PLC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2015

		2015		2014
	Note	£m	£m	£m	£m

Profit for the year			107.1		97.2
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial (loss) on pension scheme		(4.3)		(2.1)
Tax thereon		0.9		0.4
			(3.4)		(1.7)
Items that may be reclassified subsequently to profit or loss
Cash flow hedge (losses) / gains taken to equity		(3.1)		(1.4)
Tax thereon		0.6		0.3
			(2.5)		(1.1)
Other comprehensive income for the year net of tax			(5.9)		(2.8)
Total comprehensive income for the year			101.2		94.4

The Paragon Group of Companies PLC

CONSOLIDATED BALANCE SHEET

30 September 2015

		2015	2014	2013
	Note	£m	£m	£m
Assets employed
Non-current assets
Intangible assets	8	7.7	7.9	8.5
Property, plant and equipment		22.1	22.9	9.6
Financial assets	9	10,745.8	9,969.6	9,715.3
		10,775.6	10,000.4	9,733.4
Current assets
Other receivables		6.2	6.5	7.6
Short term investments	11	41.1	39.4	-
Cash and cash equivalents	12	1,056.0	848.8	587.3
		1,103.3	894.7	594.9
Total assets		11,878.9	10,895.1	10,328.3

Financed by
Equity shareholders' funds
Called-up share capital	13	309.3	307.3	306.2
Reserves	14	760.2	688.0	614.7
Share capital and reserves		1,069.5	995.3	920.9
Own shares		(100.0)	(48.2)	(47.6)
Total equity		969.5	947.1	873.3

Current liabilities
Financial liabilities	16	339.6	54.4	3.0
Current tax liabilities		12.5	11.9	5.9
Other liabilities		43.0	40.1	36.2
		395.1	106.4	45.1

Non-current liabilities
Financial liabilities	16	10,481.4	9,814.0	9,383.4
Retirement benefit obligations		21.5	17.3	15.7
Deferred tax		11.3	10.1	9.9
Other liabilities		0.1	0.2	0.9
		10,514.3	9,841.6	9,409.9
Total liabilities		10,909.4	9,948.0	9,455.0
		11,878.9	10,895.1	10,328.3

Approved by the Board of Directors on 24 November 2015.

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 2015

		2015	2014
	Note	£m	£m

Net cash (utilised) by operating activities	20	(25.9)	(269.5)
Net cash (utilised) by investing activities	21	(3.6)	(65.2)
Net cash generated by financing activities	22	237.1	596.5
Net increase in cash and cash equivalents		207.6	261.8
Opening cash and cash equivalents		847.7	585.9
Closing cash and cash equivalents		1,055.3	847.7

Represented by balances within:
Cash and cash equivalents		1,056.0	848.8
Financial liabilities		(0.7)	(1.1)
		1,055.3	847.7

The Paragon Group of Companies PLC

CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY

For the year ended 30 September 2015

		2015	2014
	Note	£m	£m
Total comprehensive income for the year		101.2	94.4
Dividends paid	15	(29.1)	(23.7)
Net movement in own shares		(51.8)	(0.6)
(Deficit) / surplus on transactions in own shares		(3.6)	(0.8)
Charge for share based remuneration		4.5	3.2
Tax on share based remuneration		1.2	1.3
Net movement in equity in the year		22.4	73.8
Opening equity		947.1	873.3
Closing equity		969.5	947.1

The Paragon Group of Companies PLC

NOTES TO THE FINANCIAL INFORMATION

For the year ended 30 September 2015

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 2013, 30 September 2014 or 30 September 2015, 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 2013 and 30 September 2014 have been delivered to the Registrar of Companies and those for the year ended 30 September 2015 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 2015 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 and on the Group's website at www.paragon-group.co.uk.

2. ACCOUNTING POLICIES

The annual financial statements of the Group for the year ended 30 September 2015 have been prepared in accordance with International Financial Reporting Standards ('IFRS') 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 2014.

Going concern

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 are described on page 54.

Note 6 to the accounts for the year ended 30 September 2014 includes an analysis of the Group's working and regulatory capital position and policies, while note 7 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 5. The position and polices described in these notes remain materially unchanged to the date of this preliminary announcement.

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 7 to the accounts for the year ended 30 September 2014 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 £708.7m, accepted through Paragon Bank are repayable within five 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 2015 Paragon Bank held £364.4m in liquid assets, comprising £41.1m of short term investments (note 11) and £323.3m of cash (note 12).

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

During the year the Group raised a further £112.5m of working capital though the issue of retail bonds, increasing the outstanding balance to £297.5m, none of which is repayable before December 2020. The Group was also granted a public BBB- rating by Fitch, which should increase its access to debt.

The Group also raised external debt finance for its acquired assets in the past year and after the period end. The Group has therefore significantly enhanced its access to funding for its business during the year and at 30 September 2015 the Group had free cash balances of £199.9m immediately available for use (note 12).

In order to assess the appropriateness of the going concern basis the directors considered the Group's financial position, the cash flow requirements laid out in its forecasts, its access to funding, the assumptions underlying the forecasts and the potential risks affecting them.

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 most common measure of dividend cover used by financial analysts is based on earnings and dividend per share. The Group has confirmed that its dividend cover target will be based on this calculation. The expected level of dividend cover on this basis in respect of the year, subject to the approval of the final dividend at the Annual General Meeting, is shown below.

	Note	2015	2014

Earnings per share (p)	7	35.5	31.9
Proposed dividend per share in respect of the year (p)	15	11.0	9.0
Dividend cover (times)		3.2	3.5

(b) Return on tangible equity

Return on tangible equity ('ROTE') is a measure of an entity's profitability used by investors. ROTE is defined by the Group by comparing the profit after tax for the year to the average of the opening and closing equity positions, excluding intangible assets and goodwill.

The Group's ROTE for the year ended 30 September 2015 is derived as follows:

	Note	2015	2014
		£m	£m

Profit for the year		107.1	97.2
Amortisation of intangible assets		1.4	1.3
Adjusted profit		108.5	98.5

Divided by
Opening equity		947.1	873.3
Opening intangible assets	8	(7.9)	(8.5)
Opening tangible equity		939.2	864.8

Closing equity		969.5	947.1
Closing intangible assets	8	(7.7)	(7.9)
Closing tangible equity		961.8	939.2
Average tangible equity		950.5	902.0
Return on Tangible Equity		11.4%	10.9%

In previous years the Group has disclosed return on equity ('ROE'), defined by the Group by comparing the profit after tax for the year to the average of the opening and closing equity positions, but it is considered that ROTE is a more widely used measure.

There is no significant difference in the values of ROE and ROTE for either of the years shown.

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 2015 the Group's regulatory capital of £976.3m (2014: £981.1m) was comfortably in excess of that required by the regulator.

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 2015 is set out below.

	Note	2015	2014
		£m	£m

Total equity		969.5	947.1
Deductions
Proposed final dividend	15	(21.8)	(18.3)
Intangible assets	8	(7.7)	(7.9)
Deferred tax adjustment	*	(0.3)	(0.5)
Common Equity Tier 1 ('CET1') capital		939.7	920.4
Other tier 1 capital		-	-
Total Tier 1 capital		939.7	920.4

Corporate bond	16	110.0	110.0
Less: amortisation adjustment	†	(75.8)	(53.8)
		34.2	56.2
Collectively assessed credit impairment allowances		2.4	4.5
Total Tier 2 capital		36.6	60.7
Total regulatory capital		976.3	981.1

* 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 total exposure amount 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.

	2015	2014
	£m	£m

Credit risk
Balance sheet assets	4,426.8	4,146.6
Off balance sheet	88.7	37.1
Total credit risk	4,515.5	4,183.7
Operational risk	363.6	337.1
Market risk	-	-
Other	50.2	108.7
Total exposure amount	4,929.3	4,629.5

	%	%
Solvency ratios
CET1	19.1	19.9
Total regulatory capital	19.8	21.2

The CRD IV risk weightings for credit risk exposures are calculated using the Standardised approach, while the basic indicator approach for operational risk is used.

The table below shows the calculation of the leverage ratio, based on the consolidated balance sheet assets adjusted as shown below.

	2015	2014
	£m	£m

Total balance sheet assets	11,878.9	10,895.1
Less: Derivative assets	(660.1)	(693.9)
On-balance sheet items	11,218.8	10,201.2
Less: Intangible assets	(7.7)	(7.9)
Total on balance sheet exposures	11,211.1	10,193.3

Derivative assets	660.1	693.9
Potential future exposure on derivatives	69.1	70.7
Total derivative exposures	729.2	764.6

Post offer pipeline at gross notional amount	482.3	209.8
Adjustment to convert to credit equivalent amounts	(241.1)	(104.9)
Off balance sheet items	241.2	104.9

Tier 1 capital	939.7	920.4
Total leverage exposure	12,181.5	11,062.8
Basel III leverage ratio	7.7%	8.3%

The Group has revised its calculation of the leverage ratio above to take account of the CRD IV rules for leverage disclosures, which the Financial Policy Committee of the Bank of England has indicated will be used for regulatory purposes in the UK.

The Group has also revised its calculation of the credit conversion factors in respect of pipeline assets used in both leverage and capital ratios to more closely correspond with CRD IV guidance. Corresponding figures have been adjusted for consistency, although the recalculated ratios differ from those already reported by insignificant amounts.

4. SEGMENTAL INFORMATION

The Group continues to adopt the segmental reporting format introduced in 2014. This analysis is based on the entities within the Group generating its assets and reflects current internal management structures and the differing regulatory environments in which the Group operates. It is also used for reporting internally.

The business is analysed between the three divisions described below.

· 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 and segment is shown in note 9.

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

Year ended 30 September 2015

	Paragon Mortgages	Idem Capital	Paragon Bank	Total
	£m	£m	£m	£m

Interest receivable	263.2	71.6	6.2	341.0
Interest payable	(128.1)	(9.9)	(5.6)	(143.6)
Net interest income	135.1	61.7	0.6	197.4
Other operating income	8.5	5.3	0.3	14.1
Total operating income	143.6	67.0	0.9	211.5
Operating expenses	(44.0)	(17.7)	(9.5)	(71.2)
Provisions for losses	(5.6)	-	-	(5.6)
	94.0	49.3	(8.6)	134.7
Fair value net gains / (losses)	(0.4)	-	(0.1)	(0.5)
Operating profit / (loss)	93.6	49.3	(8.7)	134.2
Tax charge				(27.1)
Profit after tax				107.1

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 / (losses)	0.6	-	-	0.6
Operating profit / (loss)	81.1	48.1	(6.4)	122.8
Tax charge				(25.6)
Profit after tax				97.2

The assets and liabilities attributable to each of the segments at 30 September 2015, 30 September 2014 and 30 September 2013 were:

	Paragon Mortgages	Idem Capital	Paragon Bank	Total
	£m	£m	£m	£m
30 September 2015
Segment assets	10,622.9	481.2	774.8	11,878.9
Segment liabilities	(9,927.7)	(276.5)	(705.2)	(10,909.4)
	695.2	204.7	69.6	969.5

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

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

5. OTHER OPERATING INCOME

	2015	2014
	£m	£m

Loan account fee income	6.7	4.9
Insurance income	1.2	2.0
Third party servicing	4.9	10.8
Other income	1.3	0.8
	14.1	18.5

6. FAIR VALUE NET (losses) / 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:

	2015	2014

Profit for the year (£m)	107.1	97.2

Basic weighted average number of ordinary shares ranking for dividend during the year (million)	301.9	304.6
Dilutive effect of the weighted average number of share options and incentive plans in issue during the year (million)	5.9	7.6
Diluted weighted average number of ordinary shares ranking for dividend during the year (million)	307.8	312.2

Earnings per ordinary share - basic	35.5p	31.9p
- diluted	34.8p	31.1p

8. INTangible assets

	2015	2014	2013
	£m	£m	£m

Goodwill	1.6	1.6	1.6
Computer software	1.6	1.3	1.4
Other intangible assets	4.5	5.0	5.5
At 30 September 2015	7.7	7.9	8.5

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

9. FInancial Assets

	Note	2015	2014	2013
		£m	£m	£m

Loans to customers		10,062.4	9,255.9	8,801.5
Fair value adjustments from portfolio hedging		5.2	0.5	-

Investments in structured entities		18.1	19.3	23.8
Derivative financial assets	10	660.1	693.9	890.0
		10,745.8	9,969.6	9,715.3

The Group's loan assets and investments in structured entities at 30 September 2015, 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 2015
First mortgages	9,046.7	14.5	349.6	9,410.8
Consumer loans	175.0	418.4	58.2	651.6
Loans to customers	9,221.7	432.9	407.8	10,062.4
Investments in structured entities	-	18.1	-	18.1
Total investments in loans	9,221.7	451.0	407.8	10,080.5

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

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 Capital 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.

	2015	2015	2015	2014	2014	2014
	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	432.9	555.1	647.3	407.2	554.8	649.9
Investments in structured entities	18.1	25.7	30.4	19.3	26.6	32.3
	451.0	580.8	677.7	426.5	581.4	682.2

Amounts shown as loans to customers above include loans disclosed as first mortgages and other loans.

10. Derivative Financial Assets and Liabilities

	Note	2015	2014	2013
		£m	£m	£m

Derivative financial assets	9	660.1	693.9	890.0
Derivative financial liabilities	16	(6.7)	(1.1)	(1.3)
		653.4	692.8	888.7

Of which:
Foreign exchange basis swaps		659.8	693.5	889.6
Other derivatives		(6.4)	(0.7)	(0.9)
		653.4	692.8	888.7

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 2015 was £40.0m (2014: £37.5m), the weighted average coupon was 4.41% (2014: 3.88%) and their carrying value was £41.1m (2014: £39.4m).

12. Cash and CASH EQUIVALENTS

	2015	2014	2013
	£m	£m	£m

Balances with central banks	286.0	-	-
Balances with other banks	770.0	848.8	587.3
	1,056.0	848.8	587.3

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:

	2015	2014	2013
	£m	£m	£m

Free cash	199.9	177.3	170.8
Securitisation cash	530.9	609.0	414.1
Bank cash	323.3	60.6	-
ESOP cash	1.9	1.9	2.4
	1,056.0	848.8	587.3

'Cash and Cash Equivalents' includes current bank balances, money market placements and fixed rate sterling term deposits with London banks, and balances with the Bank of England.

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:

	2015	2014
	Number	Number
Ordinary shares
At 1 October 2014	307,308,283	306,213,215
Shares issued	2,041,033	1,095,068
At 30 September 2015	309,349,316	307,308,283

During the year the Company issued 1,050,000 shares at par (2014: 1,060,000) 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 991,033 shares (2014: 35,068) to satisfy options granted under sharesave schemes for a consideration of £1,365,944 (2014: £36,884).

14. RESERVES

	2015	2014	2013
	£m	£m	£m

Share premium account	64.6	64.1	64.1
Merger reserve	(70.2)	(70.2)	(70.2)
Cash flow hedging reserve	(1.9)	0.6	1.7
Profit and loss account	767.7	693.5	619.1
	760.2	688.0	614.7

15. equity Dividend

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

	2015	2014	2015	2014
	Per share	Per share	£m	£m
Equity dividends on ordinary shares
Final dividend for the year ended 30 September 2014	6.0p	4.8p	18.3	14.6
Interim dividend for the year ended 30 September 2015	3.6p	3.0p	10.8	9.1
	9.6p	7.8p	29.1	23.7

Amounts paid and proposed in respect of the year:

	2015	2014	2015	2014
	Per share	Per share	£m	£m
Interim dividend for the year ended 30 September 2015	3.6p	3.0p	10.8	9.1
Proposed final dividend for the year ended 30 September 2015	7.4p	6.0p	21.8	18.3
	11.0p	9.0p	32.6	27.4

The proposed final dividend for the year ended 30 September 2015 will be paid on 15 February 2016, subject to approval at the Annual General Meeting, with a record date of 8 January 2016. The dividend will be recognised in the accounts when it is paid.

16. FInancial Liabilities

	Note	2015	2014	2013
		£m	£m	£m
Current liabilities
Finance lease liability		-	-	1.6
Retail deposits	17	338.9	53.3	-
Bank loans and overdrafts		0.7	1.1	1.4
		339.6	54.4	3.0
Non-current liabilities
Asset backed loan notes		8,274.6	8,115.0	7,893.2
Corporate bond		110.0	110.0	110.0
Retail bonds		294.9	183.2	59.1
Finance lease liability		-	-	8.6
Retail deposits	17	369.8	6.8	-
Bank loans and overdrafts		1,425.4	1,397.9	1,311.2
Derivative financial instruments	10	6.7	1.1	1.3
		10,481.4	9,814.0	9,383.4

Further details of asset backed loan notes, bank loans, corporate and retail bonds are given in note 18.

17. Retail deposits

The Group's retail deposits, held by Paragon Bank PLC, were received from customers in the United Kingdom and are denominated in sterling. The deposits comprise principally term deposits and 120 day notice accounts. The method of interest calculation on these deposits is analysed as follows:

	2015	2014	2013
	£m	£m	£m

Fixed rate	508.3	39.8	-
Variable rates	200.4	20.3	-
	708.7	60.1	-

The weighted average interest rate on retail deposits at 30 September 2015, analysed by charging method, was:

	2015	2014	2013
	%	%	%

Fixed rate	2.33	1.90	-
Variable rates	1.62	1.85	-

The contractual maturity of these deposits is analysed below.

	2015	2014	2013
	£m	£m	£m
Amounts repayable
In less than three months	9.1	-	-
In more than three months but not more than one year	242.6	52.8	-
In more than one year, but not more than two years	181.7	6.8	-
In more than two years, but not more than five years	188.1	-	-
Total term deposits	621.5	59.6	-
Repayable on demand	87.2	0.5	-
	708.7	60.1	-

Total falling due in less than one year	338.9	53.3	-
Total falling due in more than one year	369.8	6.8	-
	708.7	60.1	-

18. BORROWINGS

All borrowings described in the Group Accounts for the year ended 30 September 2014 remained in place throughout the period, except as described below.

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% on 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 25 March 2015, a Group company, Paragon Mortgages (No. 22) PLC, issued €164.0m of euro mortgage backed floating rate notes and £175.7m of sterling mortgage backed floating rate notes to external investors at par. The euro notes were class A1 notes, rated AAA by Fitch and Aaa by Moody's and bearing interest at 0.5% above EURIBOR. £151.7m of the sterling notes were class A2 notes, rated AAA by Fitch and Aaa by Moody's, £12.0m were class B notes, rated AA by Fitch and Aa2 by Moody's and £12.0m were class C notes rated A+ by Fitch and A1 by Moody's. The interest margins above LIBOR on the sterling notes were 0.80% on the A2 notes, 1.35% on the B notes and 1.65% on the C notes. Cross-currency basis swaps were entered into at the time of the transaction, effectively translating the euro notes into a LIBOR linked sterling liability. The average interest margin on the transaction, taking swap costs into account was 0.95% and the proceeds were used to pay down existing warehouse debt. The Group retained £7.5m of class E notes and also invested £7.5m in the first loss fund, bringing its total investment to £15.0m, or 5.0% of the issued notes.

On 23 July 2015, a Group company, Paragon Mortgages (No. 23) PLC, issued €105.0m of euro mortgage backed floating rate notes and £219.2m of sterling mortgage backed floating rate notes to external investors at par. The euro notes were class A1 notes, rated AAA by Fitch and Aaa by Moody's and bearing interest at 0.7% above EURIBOR. £188.6m of the sterling notes were class A2 notes, rated AAA by Fitch and Aaa by Moody's, £14.8m were class B notes, rated AA by Fitch and Aa2 by Moody's and £15.8m were class C notes rated A+ by Fitch and A1 by Moody's. The interest margins above LIBOR on the sterling notes were 1.10% on the A2 notes, 1.65% on the B notes and 2.20% on the C notes. Cross-currency basis swaps were entered into at the time of the transaction, effectively translating the euro notes into a LIBOR linked sterling liability. The average interest margin on the transaction, taking swap costs into account was 1.23% and the proceeds were used to pay down existing warehouse debt. The Group retained £7.5m of class E notes and also invested £7.5m in the first loss fund, bringing its total investment to £15.0m, or 5.0% of the issued notes.

After the year end, on 20 October 2015, a Group company, Idem Luxembourg (No. 8) entered into an agreement to issue £117.3m of sterling floating rate notes to Citibank NA on a limited recourse basis. These notes bear interest at a rate of one month LIBOR plus 3.50%. The Group investment in this company to support these notes was £84.9m. The facility was used to refinance existing Idem Capital borrowings and to refinance further existing Idem Capital unsecured loan assets and is secured on those assets.

After the year end, on 19 November 2015, a Group company, Paragon Mortgages (No. 24) PLC, issued €125.0m of euro mortgage backed floating rate notes and £253.0m of sterling mortgage backed floating rate notes to external investors at par. The euro notes were class A1 notes, rated AAA by Fitch and Aaa by Moody's and bearing interest at 1.10% above EURIBOR. £208.3m of the sterling notes were class A2 notes, rated AAA by Fitch and Aaa by Moody's, £19.3m were class B notes, rated AA by Fitch and Aa2 by Moody's and £25.4m were class C notes rated A by Fitch and A1 by Moody's. The interest margins above LIBOR on the sterling notes were 1.50% on the A2 notes, 2.45% on the B notes and 3.20% on the C notes. Cross-currency basis swaps were entered into at the time of the transaction, effectively translating the euro notes into a LIBOR linked sterling liability. The average interest margin on the transaction, taking swap costs into account was 1.75% and the proceeds were used to pay down existing warehouse debt. The Group retained £8.8m of class Z notes and also invested £8.7m in the first loss fund, bringing its total investment to £17.5m, or 5.0% of the issued notes.

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.

During the year ended 30 September 2014 the facility provided by Macquarie Bank plc to Paragon Fourth Funding 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, and on 8 May 2015 the facility was increased from £250.0m to £300.0m. Also during the year, on 15 May 2015 the facility provided by Lloyds Bank to Paragon Fifth Funding was increased from £200.0m to £350.0m on its existing terms.

On 26 September 2015, a Group company, Paragon Seventh Funding Limited, entered into an additional £200.0m committed sterling facility with Bank of America Merrill Lynch International Limited. This facility is secured on all the assets of Paragon Seventh Funding Limited and is available for drawings and redrawings until 8 October 2017. Loans originated in this warehouse are refinanced in the mortgage backed securitisation market from time to time when appropriate. This facility bears interest at a rate of three month LIBOR plus 1.30%. The facility has a renewal process that allows the Group to agree a new commitment period prior to the expiry of the existing commitment period. As with the other warehouses, repayments on this facility are limited to principal cash received from the funded assets.

On 11 February 2013 the Company inaugurated a £1,000.0m Euro Medium Term Note Programme under which it may issue retail bonds, or other notes, within a twelve month period. The prospectus was updated, renewing the programme for a further twelve month period on 23 October 2014 and in August 2015 £112.5m of sterling bonds were issued through it. These bonds are listed on the London Stock Exchange, carry a fixed interest rate of 6.0% per annum and are repayable in August 2024, but are callable at the option of the Company. This issue raised £111.3m of cash, net of issue costs.

Repayments made in respect of the Group's borrowings are shown in note 22.

19. CONTINGENT LIABILITIES

Over recent years, in common with other financial services firms, the Group has followed guidance issued by the FCA in respect of redress to customers in respect of the misselling of payment protection insurance ('PPI'), though the sums involved have not been material.

In November 2014 the UK Supreme Court handed down its decision in Plevin v Paragon Personal Finance Limited ('Plevin'), which addressed potential liability in respect of PPI claims under section 140 of the Consumer Credit Act 1974, where commission charged to the customer was particularly high. On 2 October 2015 the FCA published a statement outlining proposed rules addressing the handling of PPI cases in the light of the Plevin decision and including a deadline beyond which no further new PPI claims would be required to be considered.

The Group has reviewed its current exposure to PPI claims in the light of the Court's judgement in Plevin and the draft FCA rules and its current expectation is that it will suffer no material additional costs from PPI claims. However, this assessment is based on our current interpretation of both the Plevin judgement and the draft rules, which may be revised before finalisation, while interpretations may develop as both the judgement and the rules are implemented. Therefore it is possible that the maximum possible liability may be greater, but it is impracticable to evaluate the potential impact at this stage.

20. net cash flow from operating activities

	2015	2014
	£m	£m

Profit before tax	134.2	122.8

Non-cash items included in profit and other adjustments:
Depreciation of property, plant and equipment	1.5	1.6
Amortisation of intangible assets	1.4	1.3
Foreign exchange movement on borrowings	(30.8)	(194.5)
Other non-cash movements on borrowings	4.8	4.9
Impairment losses on loans to customers	5.6	12.3
Charge for share based remuneration	4.5	3.2

Net (increase) / decrease in operating assets:
Loans to customers	(810.9)	(462.2)
Derivative financial instruments	33.8	196.1
Fair value of portfolio hedges	(4.7)	(0.5)
Other receivables	0.4	0.3

Net increase / (decrease) in operating liabilities:
Retail deposits	648.6	60.1
Derivative financial instruments	5.6	(0.2)
Other liabilities	2.7	2.7
Cash (utilised) by operations	(3.3)	(252.1)
Income taxes (paid)	(22.6)	(17.4)
	(25.9)	(269.5)

21. net cash flow from investing activities

	2015	2014
	£m	£m

Purchases of property, plant and equipment	(0.7)	(25.1)
Purchases of intangible assets	(1.2)	(0.7)
(Increase) in short term investments	(1.7)	(39.4)
Net cash (utilised) by investing activities	(3.6)	(65.2)

22. net cash flow from financing activities

	2015	2014
	£m	£m

Shares issued (note 13)	1.5	-
Dividends paid (note 15)	(29.1)	(23.7)
Issue of asset backed floating rate notes	823.8	862.8
Repayment of asset backed floating rate notes	(638.3)	(450.2)
Issue of retail bonds	111.3	123.9
Movement on bank facilities	24.8	85.1
Purchase of shares	(56.9)	(1.4)
Net cash generated by financing activities	237.1	596.5

23. COST:INCOME RATIO

Cost:income ratio is derived as follows:

	2015	2014
	£m	£m

Cost - operating expenses	71.2	63.4
Total operating income	211.5	197.9
Cost / Income	33.7%	32.0%

Cost:income ratio excluding Paragon Bank is derived as follows:

	Note	2015	2014
		£m	£m

Cost - operating expenses		71.2	63.4
Paragon Bank operating expenses	4	(9.5)	(6.3)
		61.7	57.1
Total operating income		211.5	197.9
Paragon Bank operating income	4	(0.9)	0.1
Total operating income		210.6	198.0
Cost / Income		29.3%	28.8%

24. 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.

	2015	2014
	£m	£m
Paragon Mortgages
Profit before tax for the period (note 4)	93.6	81.1
Less: Fair value losses / (gains)	0.4	(0.6)
	94.0	80.5
Idem Capital
Profit before tax for the period (note 4)	49.3	48.1
Less: Fair value losses / (gains)	-	-
	49.3	48.1
Paragon Bank
(Loss) before tax for the period (note 4)	(8.7)	(6.4)
Less: Fair value losses / (gains)	0.1	-
	(8.6)	(6.4)
Total
Profit before tax for the period (note 4)	134.2	122.8
Less: Fair value losses / (gains)	0.5	(0.6)
	134.7	122.2

25. RETURN ON TANGIBLE EQUITY EXCLUDING PARAGON BANK

The underlying ROTE excluding Paragon Bank is calculated as follows:

	Note	2015	2014
		£m	£m

Profit for the year		107.1	97.2
Amortisation of intangible assets		1.4	1.3
Adjusted profit for the year		108.5	98.5
Loss of Paragon Bank	4	8.7	6.4
Tax thereon at effective rate for the year		(1.8)	(1.3)
Adjusted profit after tax		115.4	103.6

Average tangible equity	3	950.5	902.0
Return on Tangible Equity excluding Paragon Bank		12.1%	11.5%

26. Average NET MARGIN

The average net interest margin is calculated as follows:

	Note	2015	2014
		£m	£m

Opening loans to customers	9	9,255.9	8,801.5
Closing loans to customers	9	10,062.4	9,255.9
Average loans to customers		9,659.2	9,028.7

Net interest		197.4	179.4
Net interest margin		2.04%	1.99%

Impairment provision		5.6	12.3
Impairment as a percentage of average loan balance		0.06%	0.14%

27. RELATED PARTY TRANSACTIONS

In the year ended 30 September 2015, the Group has continued the related party relationships described in note 62 on page 171 of the Annual Report and Accounts of the Group for the financial year ended 30 September 2014. Related party transactions in the period comprise the compensation of the Group's key management personnel, transactions with the Group Pension Plan 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 2015.

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 2015. 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 2015, 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

24 November 2015

Board of Directors

R G Dench	J A Heron	F J Clutterbuck
N S Terrington	A K Fletcher	H R Tudor
R J Woodman	P J N Hartill

The Paragon Group of Companies PLC

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks to which the Group is exposed and which could impact significantly on its ability to conduct its business successfully are summarised below.

Category	Risk	Description
Business	Economic	A severe downturn in the UK would impact on demand for loans, customer ability to pay and security values
	Concentration	The Group is particularly exposed to the performance of the UK private rented sector, through its buy-to-let activities
	Competition	Operating in actively competitive markets, profitability or market share could be eroded by competitor activity
Credit	Customer	Lending may be incorrectly targeted or customers may become less able to service debt, exposing the Group to loss
	Counterparty	Failure of an institution holding the Group's cash deposits or providing hedging facilities for risk mitigation could expose the Group to loss or liquidity issues
Conduct	Fair outcomes	Failure to deliver appropriate customer outcomes would impact on the Group's reputation and its financial performance
Operational	People	Failure to retain appropriately skilled employees would impact upon the Group's ability to deliver its business plans
	Systems	Substantial IT systems are required to support the operations of the Group and guard against cyber risks. Failure in these systems might result in loss
	Regulation	The Group operates in sectors which are highly regulated and are becoming more so. Compliance failures would risk financial and reputational damage
Liquidity and Capital	Funding	Inability to raise new funds could restrict lending, while changes in the retail savings market could impact the liquidity of Paragon Bank
Market	Interest rates	Reduction in margins between market lending and borrowing rates or mismatches in the Group balance sheet would impact profit
Pension Obligation	Pensions	The obligation to support the Group's defined benefit pensions plan might deplete resources
The Group has considered and responded to all of these risks, mitigating the exposure as far as practicable.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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