Interim Results

Paragon Group Of Companies PLC
26 May 2004



Under embargo until Stock Exchange announcement: 7am Wednesday 26 May 2004

STRONG PROFIT GROWTH FOR PARAGON

The Paragon Group of Companies PLC ('Paragon'), one of the UK's largest
independent specialist lenders offering buy-to-let mortgages, secured personal
loans, vehicle finance and retail finance, today announces its interim results
for the six months ended 31 March 2004.

Highlights include:

  • Pre-tax profit up 41.5% to £33.1m (2003 H1: £23.4m)
  • Interim dividend up 50% to 3.9p (2003 H1: 2.6p)
  • New lending up 81.8% to £1,025.4 m (2003 H1: £563.9 m)
  • Mortgage Trust transformed from loss maker to profit contributor.
  • Secured lending accounts for 92% of new business (2003 H1: 81%)
  • Trading strong in both first mortgages and consumer finance

Commenting on the results, Jonathan Perry, Chairman of Paragon, said:

'I am delighted with the progress we have made in the first six months of the
year, particularly the integration of Mortgage Trust which has been transformed
from a loss making business prior to our acquisition last year to a healthy
contributor to Group profits. I look forward to reporting further progress after
the end of the financial year.'

For further information, please contact :

The Paragon Group of Companies PLC                  The Wriglesworth Consultancy

Nigel Terrington, Chief Executive                   Mark Baker
Nick Keen, Finance Director                         John Wriglesworth
Tel: [phone]                                  Tel: [phone]
                                                    Mob: [phone] (MB)

CHAIRMAN'S STATEMENT

During the six months ended 31 March 2004, the Group has enjoyed further strong
growth in profits and lending volumes and has now completed the integration of
Mortgage Trust (formerly Britannic Money) which was acquired on 30 June 2003.

During the period, profit before tax increased by 41.5% to £33.1 million (2003
H1: £23.4 million) and earnings per share increased to 22.4p (2003 H1: 16.1p).
Total advances increased by 81.8% to £1,025.4 million (2003 H1: £563.9 million).
Of these, 92% were secured on residential property (2003 H1: 81%). At 31 March
2004, net loan assets, inclusive of those held by the off-balance sheet
companies managed by Mortgage Trust, were £5,600.4 million (note 7), compared
with £5,287.1 million at 30 September 2003 and £2,746.5 million (prior to the
acquisition of Mortgage Trust) at 31 March 2003.

As a result of the growth achieved, your Board has declared an interim dividend
of 3.9p per share, payable on 30 July 2004 to shareholders on the register on 2
July 2004, an increase of 50.0% from last year's interim dividend of 2.6p per
share.

The growth in the loan book increased net interest income by 14.8% to £41.2
million from £35.9 million for the corresponding period last year. Other
operating income was £18.8 million (2003 H1: £13.0 million), an increase of
44.6% resulting from the growth in fees and commissions arising from increased
new business and the growth of the book.

Operating expenses, excluding the £2.7 million credit for amortisation of
negative goodwill, were £22.7 million, compared with £16.7 million for the
corresponding period in 2003. The cost : income ratio, at 37.8%, increased from
34.2% for the first half of 2003 (note 4) as a result of the inclusion of the
full costs of Mortgage Trust during the period. Excluding Mortgage Trust, the
cost : income ratio decreased from 34.2% to 33.7% (note 4).

Prior to acquisition on 30 June 2003, Mortgage Trust had incurred substantial
losses as a result of poor margins on loans being serviced by a high cost
operation. Our focus since acquisition has been to discontinue low margin
business whilst introducing operational efficiencies to reduce the cost base. By
31 March 2004 substantially all of the support and administrative functions of
Mortgage Trust's Epsom operation had been transferred to the Group's offices in
Solihull and London. The number of staff employed at Epsom has been reduced from
247 at the time of acquisition to 103 by 31 March and further reductions have
been effected subsequent to the period end. The resulting cost savings will
impact favourably on the cost : income ratio in the second half of the year.
Including the amortisation of goodwill, Mortgage Trust contributed £7.2 million
to the Group's profit before tax during the six months ended 31 March 2004.

The reduction in the charge for provisions for losses to £6.9 million for the
period (2003 H1: £8.8 million) is in line with our expectations and reflects the
shift in our lending in recent years in favour of more credit defensive
products. The books continue to perform to plan across all our new business
areas, with no deterioration in credit quality across the portfolio.

After providing for corporation tax at a charge rate of 23%, which we anticipate
will apply for the year, and providing for the proposed interim dividend,
retained profits of £21.0 million have been transferred to shareholders' funds.

REVIEW OF OPERATIONS

FIRST MORTGAGES

Total first mortgage completions by Paragon Mortgages and Mortgage Trust were
£797.7 million for the six months to 31 March 2004, an increase of 141.1% from
£330.9 million advanced by Paragon Mortgages in the corresponding period of
2003. At 31 March 2004, total first mortgage assets, including those managed by
Mortgage Trust, were £4,648.4 million, an increase of 152.7% from £1,839.2
million at 31 March 2003.

New lending by Paragon Mortgages increased by 57.9% to £522.4 million whilst
Mortgage Trust advanced new loans of £275.3 million, over 91% of which were
buy-to-let, the remainder relating to the tail of owner occupied completions on
products discontinued shortly after our acquisition of the business.

Our strategy for Mortgage Trust has led to the rationalisation of the product
portfolio in favour of more profitable buy-to-let products and a complete
withdrawal from the owner occupied sector. While this resulted in a temporary
reduction in business volumes this is already reversing as Mortgage Trust's
established introducers offer increasing volumes of buy-to-let applications and
new introducers are brought on stream.

In both of the Group's first mortgage businesses the steady rise in application
levels during the second quarter and pipeline levels at the end of the period
auger well for lending volumes in the second half of the year.

Shortage of supply continues to be the most dominant feature of the UK housing
market. Despite the strong growth in house prices, the relatively low cost of
borrowing, which has been augmented by fierce competition amongst lenders in the
commodity mortgage market, has kept affordability close to its long term
average.

The Group's primary focus remains the experienced professional landlord and the
record low level of first time buyers and structural constraints in the social
rented sector have resulted in rental demand being maintained. Landlords have
continued to expand their property portfolios to meet the growing demand. The
shortage of affordable housing was a particular focus for the recent Barker
Review of Housing Supply and it is clear that the private rented sector will
need to play a central role in meeting future demand for more modest housing.

The NHL book reduced to £155.3 million at 31 March 2004, from £202.5 million at
31 March 2003 and recorded a satisfactory performance over the period.

CONSUMER FINANCE

At 31 March 2004, the Consumer Finance book stood at £895.3 million, an increase
of 4.1% from £859.9 million at 31 March 2003.

Personal Finance

Secured personal finance advances were £146.0 million in the period (2003 H1:
£126.0 million), an increase of 15.9% from the corresponding period last year.
This growth has been achieved without relaxing credit quality and in the face of
strong competitive pressure. We continue to benefit from strong introducer
support, which we expect to underpin continued growth during the second half.

Sales Aid Finance

As we explained at the year end, we have continued to limit originations within
the retail and car finance sectors, where returns have been inadequate. As a
result, new loan advances by the division were £81.7 million, compared with
£99.0 million for the corresponding period last year, the reduction in volumes
being in line with plan. However, as the reduction in volumes has arisen from
the removal of unprofitable distribution sources and products, the profitability
of new business written has improved and should provide a base for further
development. In particular, an enhanced retail finance sales and service
proposition has been established to provide a platform for increased business,
whilst in car finance we continue to focus our sales activity on the more
profitable introducers.

FUNDING

During October 2003, the Group completed a £715 million securitisation by
Paragon Mortgages (No. 6) PLC. The securitisation contained a £98 million
pre-funding reserve which was used to purchase further mortgage assets from the
Paragon warehouse in November 2003.

In January 2004 a further £500 million securitisation of Mortgage Trust
originated assets was completed by First Flexible No. 6 PLC. The securitisation
contained a £75 million pre-funding reserve which was used to acquire further
mortgage assets from the Mortgage Trust warehouse facility in March 2004.

An £800 million securitisation by Paragon Mortgages (No.7) PLC is expected to
complete on 26 May. This securitisation will include loans originated by both
Paragon Mortgages and Mortgage Trust.

The notes issued from our recent securitisation transactions have been placed in
the Sterling, US dollar and euro markets and favourable conditions have led to
improved pricing.

The Group has been voted Best Issuer for Investor Reporting in the 2003
Structured Finance International Awards, from over twenty issuers nominated.



CONCLUSION

In my end of year statement I reported that our objectives for the current year
were to complete the integration of Mortgage Trust and to continue to grow
profitably our core lending divisions whilst maintaining our focus on cost
control and our strong stance on credit quality. I am delighted with the
progress we have made in the first six months of the year, particularly the
integration of Mortgage Trust which has been transformed from a loss making
business prior to our acquisition last year to a healthy contributor to Group
profits.

As shareholders are aware, we have concentrated our efforts over recent years on
the buy-to-let sector, primarily aiming our services at professional landlords.
The credit record of this sector to date is markedly superior to that of the
owner occupied sector. Despite this, buy-to-let lending continues to receive
mixed reviews in the press. If market conditions were to deteriorate, we believe
that our triple underwriting approach, encompassing a critical review of each
property, likely rental cover and borrower covenant would see the buy-to-let
sector, particularly in respect of professional borrowers, outperform other
residential mortgage portfolios.


I look forward to reporting further progress after the end of the financial
year.

Jonathan Perry
Chairman

26 May 2004

CONSOLIDATED PROFIT AND LOSS ACCOUNT

For the six months ended 31 March 2004 (Unaudited)

                                                     Six months to      Six months to      Year to
                                                     31 March           31 March           30 September
                                                     2004               2003               2003
                                                     £m                 £m                 £m

Interest receivable                                  192.7              120.0              272.0
Interest payable and similar charges                 (151.5)            (84.1)             (195.5)

Net interest income                                  41.2               35.9               76.5
Other operating income                               18.8               13.0               31.0

Total operating income                               60.0               48.9               107.5

Operating expenses
   Exceptional reorganisation costs                     -                 -                  (3.9)
   Other operating expenses                          (22.7)            (16.7)               (37.9)
   Amortisation of negative goodwill                   2.7                -                  2.1

Total operating expenses                             (20.0)             (16.7)             (39.7)

Provisions for losses                                (6.9)              (8.8)              (15.9)

Operating profit being profit on ordinary activities 
before taxation                                       33.1               23.4               51.9
Tax charge on profit on ordinary activities          (7.6)              (5.1)              (11.6)

Profit on ordinary activities after taxation         25.5               18.3               40.3
Equity dividend                                      (4.5)              (3.1)              (7.5)

Retained profit                                      21.0               15.2               32.8


Dividend - Rate per share                            3.9p               2.6p               6.3p
Basic earnings per share                             22.4p              16.1p              35.5p
Diluted earnings per share                           21.6p              15.9p              34.8p


The results for the periods shown above relate entirely to continuing
operations.

CONSOLIDATED BALANCE SHEET

31 March 2004 (Unaudited)
                                                     31 March           31 March           30 September
                                                     2004               2003               2003
                                                                        (Restated)         (Restated)

ASSETS EMPLOYED                                      £m                 £m                 £m
Fixed assets
Intangible assets - negative goodwill                (16.1)             -                  (18.8)
Tangible assets                                      3.6                3.9                4.2
Investments
   Assets subject to non-recourse finance           1,797.5             -                  2,361.6
   Non-recourse finance                            (1,751.6)            -                  (2,285.3)

                                                      45.9              -                  76.3
   Loans to customers                               3,909.2           2,746.5             3,051.3

                                                     3,955.1            2,746.5            3,127.6


                                                     3,942.6            2,750.4            3,113.0

Current assets
Stocks                                               3.4                4.4                3.8
Debtors falling due within one year                  10.6               7.2                9.4
Cash at bank and investments                         345.9              203.0              295.3

                                                     359.9              214.6              308.5

                                                     4,302.5            2,965.0            3,421.5

FINANCED BY

Called-up share capital                              12.0               11.8               11.9
Share premium account                                68.6               65.5               67.6
Merger reserve                                       (70.2)             (70.2)             (70.2)
Profit and loss account                              247.2              208.8              225.8

Share capital and reserves                           257.6              215.9              235.1
Own shares                                           (11.5)             (10.8)             (9.8)

Equity shareholders' funds                           246.1              205.1              225.3

Provisions for liabilities and charges               5.3                0.8                7.6
Creditors Amounts falling due within one year        45.9               37.6               128.0
          Amounts falling due after more than one    
          year                                       4,005.2            2,721.5            3,060.6

                                                     4,302.5            2,965.0            3,421.5


The interim financial information was approved by the Board of Directors on 26
May 2004.

CONSOLIDATED CASH FLOW STATEMENT

For the six months to 31 March 2004 (Unaudited)
                                                      Six months to     Six months to       Year to
                                                      31 March          31 March            30 September
                                                      2004              2003                2003
                                                      £m                £m                  £m

Net cash inflow from operating activities             55.0              45.9                108.2
Taxation                                              (10.6)            (7.5)               (14.4)
Capital expenditure and financial investment
   Net decrease / (increase) in assets subject to     
   non-recourse funding                               562.6             -                   (78.2)
   Net increase in loans to customers                 (881.9)           (248.8)             (546.9)
   Other                                              (1.8)             (2.8)               (2.1)
Acquisitions and disposals                            -                 -                   (26.7)
Equity dividends paid                                 (4.2)             (3.5)               (6.6)
Management of liquid resources                        (37.5)            55.6                (27.5)
Financing                                             331.5             172.4               613.6

Increase in cash in the period                        13.1              11.3                19.4


 1. Reconciliation of operating profit to net cash inflow from operating
    activities

    Operating profit                                      33.1              23.4                51.9
    Provision for losses                                  6.9               8.8                 15.9
    Depreciation                                          0.7               0.6                 1.9
    Amortisation of broker commissions                    19.1              15.2                33.6
    Amortisation of negative goodwill                     (2.7)             -                   (2.1)
    Charge for long term incentive plan                   0.7               -                   0.2
    Decrease in stock                                     0.2               0.3                 0.5
    (Increase) / decrease in debtors                      (1.2)             0.5                 (0.1)
    (Decrease) / increase in creditors                    (1.8)             (2.9)               6.4

                                                          55.0              45.9                108.2

 2. Reconciliation of movement in cash with movement in net debt

                                                      Six months to     Six months to       Year to
                                                      31 March          31 March            30 September
                                                      2004              2003                2003
                                                                        (restated)          (restated)
                                                      £m                £m                  £m

Increase in cash in the period                        13.1              11.3                19.4
Cash inflow from increase in debt                     (330.7)           (172.4)             (612.3)
Cash movement from change in liquid resources         37.5              (55.6)              27.5

Change in net debt arising from cash flows            (280.1)           (216.7)             (565.4)
Non-recourse finance acquired with subsidiary         -                 -                   (2,212.7)
Loans acquired with subsidiary                        -                 -                   (53.4)

Movement in net debt                                  (280.1)           (216.7)             (2,831.5)
Opening net debt                                      (5,130.2)         (2,298.7)           (2,298.7)

Closing net debt                                      (5,410.3)         (2,515.4)           (5,130.2)


NOTES TO THE INTERIM FINANCIAL INFORMATION

For the six months ended 31 March 2004 (Unaudited)

 1. The interim financial information, which has not been audited, has been
    prepared on the basis of the accounting policies set out in the group
    accounts for the year ended 30 September 2003, except as disclosed in note
    2.

 2. The balance sheets as at 31 March 2003 and 30 September 2003 have been
    restated to reflect the implementation of UITF Abstract 38 - 'Accounting for
    ESOP Trusts' which requires that shares held by the trustee of the Group's
    share option schemes are shown on the balance sheet as a deduction in
    arriving at Equity Shareholders' Funds, rather than as investment in own
    shares within fixed assets, as was required by the previous UITF Abstract
    13, which has now been withdrawn. The impact of this change on the profit
    and loss account and the cash flow statement is immaterial for both periods.

 3. An interim dividend of 3.9p per share is proposed, payable on 30 July 2004
    with a record date of 2 July 2004.

 4. The cost : income ratio for the six months ended 31 March 2004 is calculated
    by dividing operating expenses, excluding the amortisation of negative
    goodwill (£2.7m - 2003: £nil), of £22.7m (2003: £16.7m) by total operating
    income of £60.0m (2003: £48.9m) to give 37.8% (2003: 34.2%). The cost :
    income ratio for the six months ended 31 March 2004 excluding Mortgage Trust
    is calculated by dividing operating expenses of £16.5m (2003: £16.7m) by
    total operating income of £49.0m (2003: £48.9m) to give 33.7% (2003: 34.2%).

 5. The basic earnings per share figures have been calculated by dividing the
    profit attributable to shareholders (being the profit on ordinary activities
    after taxation) by the weighted average number of ordinary shares
    outstanding during the period. For the six months ended 31 March 2004 the
    weighted average number of ordinary shares outstanding was 113.9 million
    (2003: 113.6 million). For the year ended 30 September 2003 the weighted
    average was 113.4 million.

 6. The diluted earnings per share figures have been calculated by adjusting the
    weighted average number of shares outstanding for the effects of all
    dilutive potential ordinary shares. For the six months ended 31 March 2004
    the adjusted weighted average number of ordinary shares outstanding was
    118.3 million, (2003: 115.0 million). For the year ended 30 September 2003
    the adjusted weighted average was 115.8 million.

 7. Net loan assets includes Loans to Customers shown on the face of the balance
    sheet of £3,909.2m (2003: £2,746.5m) and similar assets subject to
    non-recourse finance arrangements of £1,691.2m (2003: £nil).

 8. The figures shown above for the year ended 30 September 2003 are not
    statutory accounts. A copy of the statutory accounts has been delivered to
    the Registrar of Companies, contained an unqualified audit report and did
    not contain an adverse statement under sections 237 (2) or 237 (3) of the
    Companies Act 1985.

 9. A copy of the Interim Statement will be posted to shareholders and additional
    copies can be obtained from The Company Secretary, The Paragon Group of
    Companies PLC, St. Catherine's Court, Herbert Road, Solihull, West Midlands,
    B91 3QE.


Independent Review Report to the Paragon Group of Companies PLC

Introduction

We have been instructed by the company to review the financial information for
the six months ended 31 March 2004 which comprises the profit and loss account,
the balance sheet, the cash flow statement and related notes 1 to 9 together
with the reconciliation of operating profit to net cash flow from operating
activities and the reconciliation of movement in cash with movement in net debt.
We have read the other information contained in the interim report and
considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.

This report is made solely to the company in accordance with Bulletin 1999/4
issued by the Auditing Practices Board. Our work has been undertaken so that we
might state to the company those matters which we are required to state to them
in an independent review report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the company for our review work, for this report or for the conclusions we have
formed.

Directors' responsibilities

The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures are consistent with
those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.

Review work performed

We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with United Kingdom auditing standards and therefore
provides a lower level of assurance than an audit. Accordingly, we do not
express an audit opinion on the financial information.

Review conclusion

On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 31 March 2004.

Deloitte & Touche LLP
Chartered Accountants
Birmingham

26 May 2004

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