REG - Paragon Grp Co PLC - Final Results <Origin Href="QuoteRef">PARA.L</Origin> - Part 2
23/11/2016 07:06
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for short periods of time.
The Group's straightforward approach and consistently competitive products have been recognised in the industry and by
customers and Paragon Bank was nominated as a finalist for the Best Online Savings Provider award by Moneyfacts for the
second consecutive year in October 2015.
During the second half of the year the Bank launched its first ISA product, initially to existing customers. This
represents a significant broadening of the Group's offering into a key part of the UK savings market, with ISA accounts
representing £271.6 billion, or 24.6%, of the savings balances reported in the Bank of England data at 30 September 2016.
In customer feedback 95% of those opening a savings account with Paragon Bank in the year, who provided data, rated the
overall savings process as 'good' or 'very good', while 87% stated that they would 'probably' or 'definitely' take a second
product with the Bank.
Savings balances at the year end are analysed below.
Average interest rate Average initial balance Proportion of deposits
2016 2015 2016 2015 2016 2015
% % £000 £000 % %
Fixed rate deposits 2.11% 2.33% 28 34 71.0% 71.7%
Variable rate deposits 1.65% 1.62% 15 16 29.0% 28.3%
All balances 1.98% 2.13% 25 28 100.0% 100.0%
The average initial term of fixed rate deposits was 26 months (2015: 29 months).
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.
Securitisation funding
Sentiment within the capital markets was dominated by the build-up to and result of the Brexit Referendum, with significant
volatility before and immediately after the event, in addition to a series of other macro-economic concerns troubling
investors. The increased volatility produced unattractive conditions for issuance. Given the Group's strategic focus on
retail deposit funding, securitisations will only be undertaken on a tactical basis when market conditions support
effective execution. With pricing unattractive and demand volatile the Group has not accessed the securitisation market
since November 2015.
Buy-to-let mortgage originations outside Paragon Bank are initially funded through three revolving warehouse facilities
which totalled £850.0 million at 30 September 2016 (30 September 2015: £950.0 million). Following a review of the available
funding one facility, for £100.0 million, was closed in the period, having become redundant through the increased focus on
retail deposit funding. Further rationalisation of warehouse capacity is expected as facilities fall due for renewal given
the Group's present focus on more cost-effective retail deposit funding opportunities through the Bank.
In the longer term these mortgage loans may be funded through the securitisation markets, subject to favourable market
conditions or may be sold to Paragon Bank. The Group's 62nd transaction, Paragon Mortgages (No. 24) PLC ('PM24'), for
£350.1 million, was completed during November 2015. It priced in difficult market conditions, reflecting an anticipation of
increased issuance resulting from several very large portfolio acquisition transactions expected to be refinanced through
the securitisation market. This expectation led to higher margins being demanded by investors on new issues.
The Group's public securitisations issued in the current and previous years are summarised below.
Securitisation Amount raised £m Date Averagefunding marginover LIBOR(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
During the period the mortgage assets held by Paragon Mortgages (No. 17) PLC were sold to Paragon Bank and are now financed
with retail deposits.
Following the issue of PM24, conditions in the securitisation markets deteriorated further through the early part of the
financial year and then recovered somewhat towards the year end, resulting in issuance being at its lowest level in recent
years. Conditions remain volatile and with the availability of the alternative retail deposit funding route, the Group has
not returned to the securitisation market. The Group continues to keep developments in the securitisation market under
review and will continue to use it as a funding source on a tactical basis.
Due to the lack of securitisation issues, the amounts drawn on the warehouse facilities at 30 September 2016 had increased
to £489.0 million (2015: £254.0 million). The warehouse balances will either be securitised during 2017 or will be acquired
by Paragon Bank to be pre-positioned with the Bank of England, for use in the TFS or other such arrangements. This funding
scheme, announced on 4 August 2016, gives Paragon Bank access to cost effective funding, in the form of central bank
reserves, against eligible collateral during a four-year period. The availability of the TFS is likely to reduce further
the Group's reliance on the securitisation market during 2017.
Funding for purchased assets
Idem Capital has continued its funding strategy of financing smaller scale acquisitions from the Group's equity while
keeping under review the opportunities to introduce external funding when asset volumes make that economically
appropriate.
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. This agreement
was extended by £74.9 million in the year.
During the year other Idem Capital borrowings were repaid following the sale of the underlying assets to Paragon Bank,
reducing funding costs, and the Bank joined with Idem Capital in a portfolio purchase transaction. As a result of these
transactions, at 30 September 2016 the funding of certain of the Group's debt purchase assets was distributed as shown
below.
2016 2015 2014
£m £m £m
Purchased assets by funding source
Externally funded 269.1 275.6 324.4
Retail deposit funded 250.6 - -
Funded through Group resources 14.1 157.3 82.8
533.8 432.9 407.2
This demonstrates the increased flexibility in the Group's funding for its debt purchase activities, broadening its sources
of finance and demonstrating its ability to access third party funding on a more regular basis. The participation of
Paragon Bank in debt purchase transactions offers greater flexibility in terms of deal size and asset class, where
increasingly the focus will move to more strongly performing portfolios.
Corporate funding
While the Group's working capital has primarily been 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.
During September 2016, the tone of capital markets improved for a short period, as UK economic activity experienced less of
an immediate downturn than expected following the outcome of the Brexit referendum. The improved conditions allowed the
Company to issue £150.0 million of Subordinated Tier 2 Notes due September 2026, the proceeds of which will be used, in
part, to repay the £110.0 million Subordinated Notes due April 2017 as well as for general corporate purposes. The
transaction was rated BB+ by Fitch and subscribed for by over 70 investors. This is the first issue of its kind by the
Group and demonstrates the continuing broadening of its corporate funding.
The Group is rated by Fitch Ratings, and maintains its BBB- senior debt rating, with Fitch confirming this rating with a
stable outlook on 5 May 2016. 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 Group's £1.0 billion Euro Medium Term Note Programme announced in January 2013 remains in place and while no issuance
was made in the period the programme was renewed in January 2016 to allow further issuance and continues to form part of
the Group's long-term funding strategy.
Further information on all of the above borrowings is given in note 23.
Capital Management
The Group has continued to enjoy strong cash generation during the year. Free cash balances were £366.5 million at the
year-end (30 September 2015: £199.9 million) (note 17) after investments to support the asset finance acquisitions and
other organic growth within Paragon Bank, new buy-to-let originations and acquisitions by Idem Capital. The free cash
balance also includes the proceeds of the £150.0 million Tier 2 Bond issue, £110.0 million of which will be required to
repay existing corporate debt maturing in April 2017. The Company sees opportunities to deploy capital to support organic
growth and invest in portfolio purchases and potentially in further M&A opportunities.
Dividend and dividend policy
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 9 February 2017, a final dividend of 9.2 pence per share which, when
added to the interim dividend of 4.3 pence, gives a total dividend of 13.5 pence per share for the year. This represents an
increase of 22.7% from 2015, bringing the dividend cover to 3.0 times (2015: 3.2 times) (note 3).
This level of dividend cover is in line with the Company's stated policy, established in 2012, to target a cover ratio of
3.0 to 3.5 times by the financial year ended 30 September 2016. Annual dividend per share has grown at a compound rate of
27.5% from the 4.0 pence per share for the year ended 30 September 2011, the last year before the policy was adopted, to
the 13.5 pence per share proposed for the current year.
The Company intends to pursue a progressive dividend policy, maintaining its dividend cover ratio at three times.
Regulatory capital
The Group is subject to supervision by the PRA on a consolidated basis, as a group containing an authorised bank. As part
of this supervision, the regulator will issue individual capital guidance setting an amount of regulatory capital, defined
under the international Basel III rules, implemented through the Capital Requirements Regulation and Directive ('CRD IV'),
which the Group is required to hold relative to its risk weighted assets in order to safeguard depositors against the risk
of losses being incurred by the Group.
The Group maintains extremely strong capital and leverage ratios, with a CET1 ratio of 15.9% at 30 September 2016 (2015:
19.1%) and a leverage ratio at 6.2% (2015: 7.7%) (note 3) leaving the Group's capital at 30 September 2016 comfortably in
excess of the regulatory requirement. The reduction in the CET1 ratio in the year results principally from the effect of
the PBAF acquisition on risk weighted assets and the impact of the asset finance acquisitions, the share buy-back programme
and the deficit on the Group's pension plan on regulatory capital.
The Group notes the consultation paper issued by the BCBS on 15 December 2015 regarding the proposed amendments to the
Standardised Approach ('SA') for assessing the capital adequacy of institutions. The most material proposal for the Group
relates to a potential increase in the risk weightings applicable to buy-to-let lending assets. The Group considers that
the proposed risk weightings do not properly reflect the strong credit performance of the asset class in the UK and has
engaged with both the PRA and the BCBS as part of the consultation process. The BCBS has also issued a consultation paper
in March 2016, proposing revisions to the Internal Ratings Basis ('IRB') for assessing capital, which is based on firms'
own internal calculations and subject to supervisory approval. The proposals may serve to limit the comparative advantage
available to IRB users over SA users through the use of floors.
Notwithstanding the outcome of these consultations, the Group has substantial performance data and excellent credit metrics
to support the adoption of an IRB approach for determining appropriate risk weightings for its buy-to-let mortgage assets.
Other UK institutions that currently use the IRB approach for their buy-to-let portfolios achieve materially lower risk
weightings than the 35% required by the present SA, with figures reported by the PRA in July 2015 as being typically in the
low to mid-teen percentages.
In addition to the potential capital advantages from adopting the IRB approach, the Group sees broader business benefits
from adopting the disciplines required by IRB as a core part of its risk management structure. Additional resources have
been dedicated to this project.
The Group will be closely monitoring developments in both of these consultations as they progress and has commenced a
project to prepare an application to the PRA to adopt the IRB in future, which will build on the Group's existing core
competencies in credit risk and data handling and should lead to further enhancements in the internal risk governance
framework.
Gearing and share buy-backs
Given 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. In pursuit of this strategy the Group issued £150.0 million of Tier 2 Corporate Bonds in the
period and will continue to review the opportunities available to it to access the sterling senior unsecured debt market
and the UK retail bond market to add further 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 and extended to £100.0
million in November 2015, 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 16.6 million of its
ordinary shares at a cost of £51.0 million. These shares being initially held in treasury. The Board intends to extend the
programme by up to £50.0 million in the financial year ending 30 September 2017. These shares will also be initially held
in treasury, but may be cancelled subsequently.
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 2017 Annual General Meeting, when a special resolution seeking
authority for the Company to purchase up to 28.0 million of its own shares (10% of the issued share capital excluding
treasury shares) will be put to shareholders.
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 upon which to develop the Group's next phase of growth.
FINANCIAL REVIEW
The financial year ended 30 September 2016 saw the Group's underlying profit (note 32) increase by 9.1% to £146.9 million
(30 September 2015: £134.7 million) while on the statutory basis profit before tax increased by 6.7% to £143.2 million (30
September 2015: £134.2 million). Earnings per share increased by 14.1% to 40.5p (30 September 2015: 35.5p).
Results for the year
CONSOLIDATED RESULTS
For the year ended 30 September 2016
2016 2016 2016 2015
Acquisition Extant Total
£m £m £m £m
Interest receivable 22.4 389.0 411.4 341.0
Interest payable and similar charges (5.3) (182.9) (188.2) (143.6)
Net interest income 17.1 206.1 223.2 197.4
Other leasing income 13.0 - 13.0 -
Related costs (10.0) - (10.0) -
Net leasing income 3.0 - 3.0 -
Other income 4.8 13.0 17.8 -
Other operating income 7.8 13.0 20.8 14.1
Total operating income 24.9 219.1 244.0 211.5
Operating expenses (18.2) (74.3) (92.5) (71.2)
Provisions for losses (0.4) (7.3) (7.7) (5.6)
6.3 137.5 143.8 134.7
Fair value net (losses) - (0.6) (0.6) (0.5)
Operating profit being profit on ordinary activities before taxation 6.3 136.9 143.2 134.2
Tax charge on profit on ordinary activities (27.2) (27.1)
Profit on ordinary activities after taxation 116.0 107.1
2016 2015
Dividend - rate per share for the year 13.5p 11.0p
Basic earnings per share 40.5p 35.5p
Diluted earnings per share 39.7p 34.8p
The acquisition of PBAF took place on 3 November 2015. To aid comparison the Group's results for the year are analysed
above between the acquisition and extant business. The acquisition results include transaction costs of £1.7 million and
other consequential costs of £1.1 million.
The acquisition of Premier took place on 30 September 2016 and hence no trading results from this business are included in
the Group's results for the year. However, transaction costs of £0.3 million are included in the acquisition result above.
Total operating income increased by 15.4% to £244.0 million (2015: £211.5 million). This represents a 3.6% organic increase
combined with the £24.9 million of net income arising from the acquisition.
Within this, net interest income increased to £223.2 million from the £197.4 million recorded in the year ended 30
September 2015. The increase reflects improving margins and growth in the size of the average loan book, which rose by 7.7%
to £10,400.0 million (2015: £9,659.2 million) (note 30).
Net interest margins in the year ended 30 September 2016 increased to 2.15% compared to the 2.04% in the previous year
(note 30), driven by new originations and portfolio purchases having higher margins than those assets redeeming in the
period.
Other operating income was £20.8 million for the year, compared with £14.1 million in 2015. The increase principally
results from the acquisition which contributed £3.0 million of net leasing income and £3.4 million of third party servicing
fees. The decrease in the extant business reflects a lower level of third party fee income earned in Idem Capital with
formerly administered third party assets being purchased by the Group.
Operating expenses excluding the acquired business increased by 4.4% to £74.3 million from £71.2 million reported in the
previous year, partly reflecting the increase in the average number of employees outside the acquired businesses to 1,040,
a 2.0% rise (2015: 1,020).
Costs in the acquired business were £18.2 million, including those relating to the acquisition. The asset finance business
naturally operates with a higher cost:income ratio than the rest of the Group, in particular with respect to maintenance
and specialist servicing options offered alongside the provision of asset finance, resulting in it accounting for 19.0% of
the Group's headcount at the year end. This resulted in the overall underlying cost:income ratio (excluding acquisition
related costs) increasing to 36.7% from 33.7% for the corresponding period last year (note 31), although it remains
significantly below the industry average. The unadjusted cost:income ratio for the year was 37.9% (2015: 33.7%) (note 31).
The cost:income ratio excluding the acquired business was broadly similar to that in the preceding year at 33.9%. The Board
remains focused on controlling operating costs through the application of rigorous budgeting and monitoring procedures, and
expects the overall cost:income ratio for the asset finance business to improve as it is integrated into the Group and
starts to see the benefits of income growth from its expanded operations.
The charge of £7.7 million for loan impairment has increased from that for 2015 (2015: £5.6 million), partly as a result of
provisions arising in the acquired business. As a percentage of average loans to customers (note 30) the impairment charge
remains broadly stable at 0.07% compared to 0.06% in 2015. The Group has seen favourable trends in arrears performance over
the period, both in terms of new cases reducing and customers correcting past arrears, whilst increasing property values
have served to reduce overall exposure to losses on enforcement of security. The loan books continue to be carefully
managed and the credit performance of the buy-to-let book remains exemplary.
Yield curve movements during the period resulted in hedging instrument fair value net losses of £0.6 million (2015: £0.5
million net losses), 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.
Corporation tax has been charged at the rate of 19.0%, compared with 20.2% for the last year; the decrease principally
resulting from the impact of reductions in the UK Corporation Tax rate on both current year results and deferred tax
liabilities.
Profits after taxation of £116.0 million (2015: £107.1 million) have been transferred to shareholders' funds, which
totalled £969.5 million at the year end (2015: £969.5 million), representing a tangible net asset value of £3.12 per share
(2015: £3.26) and an unadjusted net asset value of £3.50 per share (2015: £3.28).
Segmental Results
The Group analyses its results between three segments, which are the principal divisions for which performance is
monitored:
· 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 consumer
portfolios;
· Idem Capital includes revenue generated from assets purchased by the Group's debt investment business, Idem Capital
Holdings Limited, other than those financed by Paragon Bank and from third party consumer loan administration activity;
and
· Paragon Bank includes revenue generated from the Group's regulated banking business, Paragon Bank PLC and its
subsidiaries including the acquired asset finance companies.
The underlying operating profits of these business segments are detailed fully in note 32 and are summarised below.
2016 2015
£m £m
Underlying operating profit / (loss)
Paragon Mortgages 89.9 94.0
Idem Capital 45.4 49.3
Paragon Bank 11.6 (8.6)
146.9 134.7
Paragon Mortgages
Trading activity during the year in the Paragon Mortgages division was very strong, with the segment contributing £89.9
million to underlying Group profit (2015: £94.0 million). The division's reduced profit level resulted from its underlying
growth from net new lending being broadly counterbalanced by the sale of seasoned assets to Paragon Bank in the year,
together with the higher funding costs allocated to the segment following the Group's retail bond issue in August 2015.
Idem Capital
The Idem Capital division's portfolios performed strongly in the year to 30 September 2016 and, while the division
benefitted from new investments made during the year and a firm control of costs, the transfer of previously acquired
assets to the Paragon Bank division reduced Idem Capital's underlying profit contribution to £45.4 million (30 September
2015: £49.3 million).
Paragon Bank
The increasing maturity of Paragon Bank and the acquisition of the PBAF asset finance business towards the start of the
year have resulted in this segment achieving an underlying profit of £11.6 million (2015: loss of £8.6 million), excluding
acquisition costs of £3.1 million. This includes £9.4 million of profit arising in the acquired business. Paragon Bank has
invested heavily both in the development of the risk and compliance structure required for regulatory purposes and to
provide the foundations for organic growth across its product lines. As these product lines grow the Bank will naturally
increase the utilisation of the present fixed cost base improving its overall cost effectiveness.
Assets and Liabilities
SUMMARY BALANCE SHEET
30 September 2016
2016 2015
£m £m
Intangible assets 105.4 7.7
Investment in customer loans 10,737.5 10,062.4
Derivative financial assets 1,366.4 660.1
Free cash 366.5 199.9
Other cash 871.1 856.1
Other assets 71.5 92.7
Total assets 13,518.4 11,878.9
Equity 969.5 969.5
Retail deposits 1,873.9 708.7
Borrowings 10,502.6 10,105.6
Pension deficit 58.4 21.5
Other liabilities 114.0 73.6
Total equity and liabilities 13,518.4 11,878.9
The increase in intangible assets reflects the goodwill and intangible assets recognised on the acquisitions of PBAF (£80.1
million) and Premier (£17.8 million) which are carried on the balance sheet in accordance with the requirements of
International Financial Reporting Standards ('IFRS') 3. The carrying amount was reviewed at the year end and was not found
to be impaired.
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;
· Asset finance loans, originated by the acquired PBAF business and included in the Paragon Bank segment; and
· 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 13. Movements in these balances are discussed in the
business review section.
Movements in the Group's loan asset balances are discussed in the lending review section.
Movements in derivative financial assets arise principally as a result of the effect of changes in exchange rates on
instruments forming cash flow hedges for the Group's floating rate notes. These movements do not impact on the Group's
results.
Cash flows from the Group's securitisation vehicle companies and the acquired portfolios remain strong. These, together
with debt raisings, financed further investments in 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 £100.7 million (including costs) had been deployed by 30 September 2016. Free cash balances were
£366.5 million at 30 September 2016 (2015: £199.9 million) following the receipt of cash from the Group's £150.0 million
Tier 2 Corporate Bond issue in September (note 23).
Movements in the Group's funding are discussed in the funding review section.
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 2016, leading to the deficit under International Accounting Standard ('IAS') 19
increasing to £58.4 million (2015: £21.5 million). This resulted in an actuarial loss in other comprehensive income of
£37.2 million before tax (2015: £4.3 million).
OPERATIONAL REVIEW
Management and People
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 is proud to have signed the Women in Finance Charter, sponsored by HM Treasury, during the year. The Charter's
objectives reflect the Group's own aspirations in the field of gender diversity and the Group will be responding to its
requirements in the future periods.
The Group prides itself on the fact that its people remain with it for a long time. Its annual employee attrition rate of
6.5% is below the national average and 28.7% of its people have been with Paragon for more than ten years, with 8.3% having
achieved over 20 years with the Group. We believe this is due to providing quality development opportunities and creating a
place where people want to work, which has 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 excellent people at all levels of the organisation,
increasing numbers by 23.4% over the year, which includes the acquisition of Five Arrows Leasing Group. We believe our
people are well positioned to support the Group's future growth strategy.
During 2017 the Board, initially through the Nomination Committee, will give in depth consideration to the appointment of
an additional non-executive director, particularly one who has retail and SME banking experience.
The Group's succession planning strategy has been an important area of focus during the year, with key roles in the Group
identified from a leadership and specialist perspective. Immediate successors are in place for these roles for the short
term to provide business continuity and longer term succession plans are being developed for those with career aspirations
and strong potential. This area will remain a priority for the Board, with the assistance of the Nomination Committee,
during the forthcoming year.
Risk
The Group's risk governance framework is based upon a formal three lines of defence model. Within this framework the
Credit, Asset and Liability and Operational Risk and Compliance Committees, formed of senior management, report to the
board level Risk and Compliance Committee. This committee comprises the Chairman and the independent non-executive
directors of the Company.
In the last year the Group has strengthened its risk resource in areas such as operational risk and credit risk. These
appointments have been made to ensure that subject matter experts are in place ahead of planned future growth to help shape
policy and process. They will also ensure that the Risk and Compliance function has sufficient capability and capacity to
provide effective oversight of the Group's expanding activities, including the acquired asset finance business.
The Group's governance structure therefore 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 the Group Internal Audit function and the board Audit Committee which are
responsible for reviewing the effectiveness of the first and second lines of defence
The principal changes in the risk environment faced by the Group during the year include:
· Impact of the Brexit referendum result on the UK economy and capital markets
· Transitional risk on the asset finance transaction as the business is integrated into the Group
· New operational risks arising from the acquired operations
· Increasing cyber-security risks, through the increased scope of the retail deposit operation and the increasing
sophistication of cyber-attacks on the financial sector
· Potential impact of changes in the regulatory and fiscal environment for buy-to-let mortgages in the UK, in particular
for the Group's future advances and redemption levels
· Impact of new proposals on capital regulation from the BCBS
The Group is carefully monitoring these risks as they develop and considers itself well placed to mitigate their impact.
Regulation
The Mortgage Credit Directive Order took effect on 21 March 2016 and was arguably the largest change to the structure of
consumer credit since the introduction of the Consumer Credit Act in 1974. The Directive's implementation in the UK
resulted in second charge residential mortgages moving from the FCA's CONC to its residential mortgage regime ('MCOB'). It
also resulted in the introduction of regulation to a limited area of the buy-to-let segment through specific consumer
buy-to-let requirements ('CBTL').
In anticipation of these changes, the Group commenced a formal programme of work in 2015 to ensure that any necessary
operational changes were made and regulatory permissions obtained by March 2016. Whilst the programme of work was
extensive, it is pleasing to note that it was delivered on time, with no adverse impact for our customers nor any material
impact on the operation of our businesses.
All relevant Group companies now hold the required permissions from the FCA under the CONC, MCOB for second mortgage and
CBTL regimes as appropriate. As part of a wider strategy to enter the first charge residential mortgage market, the Group's
principal servicing business, Paragon Finance PLC, now holds the requisite permission from the FCA to administer both
second and first charge residential mortgages. Following the year end, Paragon Bank has received the FCA / PRA permissions
required to undertake first charge residential lending.
The Financial Policy Committee of the Bank of England ('FPC') has powers to regulate owner-occupied mortgage lending and
these powers were extended to buy-to-let lending by HM Treasury on 16 November 2016. This will mean that from early 2017,
the FPC will be able to direct the PRA and FCA to require regulated lenders to place limits on buy-to-let mortgage lending
in relation to LTV and ICR ratios.
In March 2016, the PRA issued a Consultation Paper setting out proposals to enhance underwriting standards in the
buy-to-let segment to support the FPC's ability to act from a macro-prudential perspective. In September 2016, the PRA
published its resulting Policy Statement which was broadly in line with the proposals within the original Consultation
Paper. The Group's historically conservative approach to the underwriting of buy-to-let lending is entirely consistent with
the PRA's objective of ensuring that lenders conduct their buy-to-let business in a prudent manner, avoiding inappropriate
lending and the potential for excessive credit losses. As a result, whilst a formal programme of work is already in place
to ensure the Group meets the detailed PRA requirements, these changes are not expected to have a material impact on the
operation of our business.
Paragon Bank is authorised by the PRA and regulated by the PRA and the FCA. The Group is subject to consolidated
supervision by the PRA and a number of its subsidiaries are authorised and regulated by the FCA. As a result, the current
and projected rate of regulatory change, driven by domestic and European policy, is significant, particularly as additional
aspects of the Basel III supervisory regime are rolled out and the BCBS consults on further changes. The governance and
control structure within Paragon Bank and the wider Group has therefore been established and developed to ensure that the
impacts of all new regulatory requirements on the business are clearly understood and planned for. Regular reports on key
regulatory developments are received at both executive and board risk committees. Current BCBS consultations on regulatory
capital requirements and their potential impact on the Group are discussed under 'Capital Management' above.
Paragon Bank provided the required submissions to the PRA and FCA in relation to the Senior Managers Regime and
Certification Regime during the year. Steps are well advanced within the Bank to ensure it complies with all the
requirements of the regimes by the relevant dates. In addition, the Group is conscious of the extension of the regimes to
other Financial Services and Markets Acts firms with effect from 2018 and is taking appropriate steps to ensure it is able
to comply with the requirements.
CONCLUSION
I am pleased to report a strong set of results in which we significantly increased revenue, strengthened net interest
margins and improved return on equity, whilst maintaining pricing and credit discipline. Whilst the year has been disrupted
by fiscal and regulatory changes, as well as political and macro economic factors, our customers' performance has been
exemplary and new business activity has seen encouraging growth recently.
The Group's operating model is undergoing significant change, as it transitions from a non-bank, securitised, monoline
lender into a retail funded banking group. Paragon Bank is increasingly at the heart of the Group's development, with its
deposit book now exceeding £2 billion and its franchise firmly established. This has facilitated further progress in our
diversification strategy, notably through the acquisition of Five Arrows Leasing Group and, more recently, Premier Asset
Finance, which together have given Paragon a strong platform to build on the significant growth potential in the UK SME
finance market.
We have put in place the foundations for strong and sustainable growth. The business is well funded and well capitalised
with a robust operating model and an exemplary track record. We continue to believe that over the medium term the banking
markets will undergo structural change which will favour specialist lending institutions such as Paragon and we are well
positioned to take advantage of the opportunities that will arise.
The Paragon Group of Companies PLC
CONSOLIDATED INCOME STATEMENT
For the year ended 30 September 2016
2016 2016 2015 2015
Note £m £m £m £m
Interest receivable 411.4 341.0
Interest payable and similar charges (188.2) (143.6)
Net interest income 223.2 197.4
Other leasing income 13.0 -
Related costs (10.0) -
Net leasing income 3.0 -
Other income 9 17.8 14.1
Other operating income 20.8 14.1
Total operating income 244.0 211.5
Operating expenses (92.5) (71.2)
Provisions for losses (7.7) (5.6)
Operating profit before fair value items 143.8 134.7
Fair value net (losses) 10 (0.6) (0.5)
Operating profit being profit on ordinary activities before taxation 143.2 134.2
Tax charge on profit on ordinary activities (27.2) (27.1)
Profit on ordinary activities after taxation for the financial year 116.0 107.1
2016 2015
Earnings per share
- basic 40.5p 35.5p
- diluted 39.7p 34.8p
The results for the current and preceding years relate entirely to continuing operations.
The Paragon Group of Companies PLC
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2016
2016 2015
£m £m £m £m
Profit for the year 116.0 107.1
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial (loss) on pension scheme (37.2) (4.3)
Tax thereon 6.8 0.9
(30.4) (3.4)
Items that may be reclassified subsequently to profit or loss
Cash flow hedge gains /(losses) taken to equity 5.0 (3.1)
Tax thereon (1.0) 0.6
4.0 (2.5)
Other comprehensive income for the year net of tax (26.4) (5.9)
Total comprehensive income for the year 89.6 101.2
The Paragon Group of Companies PLC
CONSOLIDATED BALANCE SHEET
30 September 2016
2016 2015 2014
Note £m £m £m
Assets employed
Non-current assets
Intangible assets 12 105.4 7.7 7.9
Property, plant and equipment 39.2 22.1 22.9
Financial assets 13 12,116.4 10,745.8 9,969.6
12,261.0 10,775.6 10,000.4
Current assets
Other receivables 12.7 6.2 6.5
Short term investments 16 7.1 41.1 39.4
Cash and cash equivalents 17 1,237.6 1,056.0 848.8
1,257.4 1,103.3 894.7
Total assets 13,518.4 11,878.9 10,895.1
Financed by
Equity shareholders' funds
Called-up share capital 18 295.9 309.3 307.3
Reserves 19 736.1 760.2 688.0
Share capital and reserves 1,032.0 1,069.5 995.3
Own shares (62.5) (100.0) (48.2)
Total equity 969.5 969.5 947.1
Current liabilities
Financial liabilities 21 1,128.3 339.6 54.4
Current tax liabilities 16.7 12.5 11.9
Other liabilities 56.3 43.0 40.1
1,201.3 395.1 106.4
Non-current liabilities
Financial liabilities 21 11,264.8 10,481.4 9,814.0
Retirement benefit obligations 24 58.4 21.5 17.3
Deferred tax 2.0 11.3 10.1
Other liabilities 22.4 0.1 0.2
11,347.6 10,514.3 9,841.6
Total liabilities 12,548.9 10,909.4 9,948.0
13,518.4 11,878.9 10,895.1
Approved by the Board of Directors on 23 November 2016.
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 2016
2016 2015
Note £m £m
Net cash generated / (utilised) by operating activities 26 865.2 (25.9)
Net cash (utilised) by investing activities 27 (278.6) (3.6)
Net cash (utilised) / generated by financing activities 28 (405.5) 237.1
Net increase in cash and cash equivalents 181.1 207.6
Opening cash and cash equivalents 1,055.3 847.7
Closing cash and cash equivalents 1,236.4 1,055.3
Represented by balances within:
Cash and cash equivalents 1,237.6 1,056.0
Financial liabilities (1.2) (0.7)
1,236.4 1,055.3
The Paragon Group of Companies PLC
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
For the year ended 30 September 2016
2016 2015
Note £m £m
Total comprehensive income for the year 89.6 101.2
Dividends paid 20 (33.9) (29.1)
Shares cancelled (94.0) -
Net movement in own shares 37.5 (51.8)
(Deficit) on transactions in own shares (3.4) (3.6)
Charge for share based remuneration 4.4 4.5
Tax on share based remuneration (0.2) 1.2
Net movement in equity in the year - 22.4
Opening equity 969.5 947.1
Closing equity 969.5 969.5
The Paragon Group of Companies PLC
NOTES TO THE FINANCIAL INFORMATION
For the year ended 30 September 2016
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 2014, 30 September 2015 or 30 September 2016, 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 2014 and 30 September 2015
have been delivered to the Registrar of Companies and those for the year ended 30 September 2016 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 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.
Copies of the Annual Report and Accounts for the year ended 30 September 2016 will be distributed 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 2016 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 2015.
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 100.
Note 6 to the accounts for the year ended 30 September 2015 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 that 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 Group's securitisation funding structures described in note 7 to the accounts for the year ended 30 September 2015
ensure that both a substantial proportion of its 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 or retail deposits from time to
time.
The Group's retail deposits of £1,873.9m (note 22), accepted through Paragon Bank are repayable within five years, with
54.3% of this balance (£1,017.1m) payable within twelve months of the balance sheet date. 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
2016 Paragon Bank held £322.1m in liquid assets, £7.1m of short term investments (note 16) and £315.0m of cash (note 17). A
further £108.8m of liquidity was provided by the Bank of England FLS, bringing the total to £430.9m.
Paragon Bank manages its liquidity in line with the Board's risk appetite and the requirements of the PRA, which are
formally documented in the Board's approved Individual Liquidity Adequacy Assessment Process ('ILAAP'). The Bank maintains
a liquidity framework that includes a short to medium term cash flow requirement analysis, a longer term funding plan and
access to the Bank of England's liquidity insurance facilities, where an additional £428.1m has been prepositioned.
The earliest maturity of any of the Group's working capital debt is in April 2017, when the £110.0m corporate bond is
repayable. The issue of the £150.0m tier 2 bond in September 2016 is intended to replace this borrowing in the Group's
capital structure and has raised the necessary cash to make the repayment on the due date.
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 2016 the
Group had free cash balances of £199.9m immediately available for use.
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 performing this assessment, the directors concluded that it was appropriate for them to continue to adopt the going
concern basis in preparing the Annual Report and Accounts.
3. Capital management
(a) Dividend cover
The Group's dividend policy, announced in 2012 has been to target a dividend cover ratio of between 3.0 and 3.5 times by
the end of this financial year. The dividend cover ratio had reached 3.2 times in respect of the year ended 30 September
2015 and the target of 3.0 times was achieved in respect of the
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