23rd May 2006 07:02
Paragon Group Of Companies PLC23 May 2006 Under embargo until Stock Exchange announcement: 7am, Tuesday 23 May 2006 BUY-TO-LET GROWTH BOOSTS PARAGON -------------------------------- The Paragon Group of Companies PLC ("Paragon"), one of the UK's largestindependent specialist lenders offering buy-to-let mortgages and consumerfinance, today announces its interim results for the six months ended 31 March2006. Highlights include: •Profit before tax increased by 16.4% on a statutory basis to £39.0 million (2005 H1: £33.5 million) and by 13.0% on a proforma basis (2005 H1 proforma*: £34.5 million) •Earnings per share increased by 26.9% on a statutory basis to 28.8p (2005 H1: 22.7p) and by 23.6% on a proforma basis (2005 H1 proforma*: 23.3p) •Interim dividend increased by 32.7% to 6.9p per share (2005 H1 : 5.2p) •Loan advances increased by 86.5% to £1,525.0 million (2005 H1: £817.9 million) •Buy-to-let loan advances increased by 111.4% to £1,334.5 million (2005 H1: £631.4 million) •Loan assets increased by 18.8% to £7,232.9 million on a statutory basis (2005 H1: £6,087.0 million) and by 20.7% on a proforma basis (2005 H1 proforma*: £5,990.5 million) •Record mortgage pipeline gives strong start to second half year •Pension scheme deficit at 30 September 2005 eliminated by special contribution •Share repurchase programme increased to £30 million * For all references to proforma numbers see note 10 Commenting on the results, Jonathan Perry, Chairman of Paragon, said: "The Group has had an excellent first half, with strong growth in profits andbusiness volumes. We enter the second half of the year with the buy-to-let mortgage pipelinesignificantly higher than last year which, with a continued focus on cost andarrears management, leaves us confident that the Group will meet its businessobjectives for the year." For further information, please contact: The Paragon Group of Companies PLC The Wriglesworth ConsultancyNigel Terrington, Chief Executive Mark BakerNick Keen, Finance Director Tel: 020 7845 7900Tel: 0121 712 2024 Mobile: 07980 635 243______________________________________________________________________________ CHAIRMAN'S STATEMENT The six months ended 31 March 2006 has been a period of further strong growth inprofits, business volumes and loan assets, with buy-to-let mortgages being theprincipal engine for this growth. During the period, profit on ordinary activities before taxation increased by16.4% on a statutory basis to £39.0 million from £33.5 million for the firsthalf of 2005, and by 13.0% from £34.5 million on a proforma basis (see below).Earnings per share increased by 26.9% on a statutory basis to 28.8p (2005 H1:22.7p) and by 23.6% on a proforma basis (2005 proforma 23.3p). Total loan advances during the six months to 31 March 2006 were 86.5% higher at£1,525.0 million compared with £817.9 million for the first half of 2005, withmost of this growth coming from the buy-to-let business. At 31 March 2006, loanassets were £7,232.9 million (note 6), compared with £6,087.0 million on astatutory basis (£5,990.5 million on a proforma basis) at 31 March 2005, anincrease of 20.7% on a proforma basis. The Board has declared an interim dividend of 6.9p per share, payable on 31 July2006 to shareholders on the register at 30 June 2006, an increase of 32.7% fromlast year's interim dividend of 5.2p per share, as we progress towards a marketlevel of dividend cover. In adopting International Financial Reporting Standards ("IFRS") for the firsttime, the Group has not applied IAS 32 and IAS 39 in compiling the statutorycomparative figures for the six months ended 31 March 2005 shown in this report.In order to aid comparison of the 2006 and 2005 results, additional proformainformation has been provided within this statement, showing the results forthat period as they would have been stated had the Group applied thoseprovisions of IAS 32 and IAS 39 relating to accounting for the Group's loanassets. Further information is given in note 10. For all references to proformadisclosures refer to this note. A full statement of the effects of thetransition to IFRS was issued by the Group on 21 February 2006. CONSOLIDATED INCOME STATEMENT For the six months ended 31 March 2006 (Unaudited) Six months to Six months to Six months to 31 March 31 March 31 March 2006 2005 2005 Proforma Statutory £m £m £mInterest receivable 254.9 240.0 241.6Interest payable andsimilar charges (183.6) (178.6) (196.5) _________ _________ _________Net interest income 71.3 61.4 45.1Other operating income 15.2 14.9 18.0 _________ _________ _________Total operating income 86.5 76.3 63.1Operating expenses (24.8) (21.1) (21.1)Provisions for losses (23.6) (20.7) (8.5) _________ _________ _________ 38.1 34.5 33.5Fair value net gains /(losses) 0.9 - - _________ _________ _________Operating profit beingprofit on ordinaryactivities before taxation 39.0 34.5 33.5Tax charge on profit onordinary activities (6.5) (7.9) (7.6) _________ _________ _________Profit on ordinaryactivities after taxation 32.5 26.6 25.9 ========= ========= ========= Proposed dividend - Rateper share 6.9p 5.2p 5.2pBasic earnings per share 28.8p 23.3p 22.7pDiluted earnings per share 27.4p 22.4p 21.8p ========= ========= ========= For management purposes the Group is organised into two major operatingdivisions, Buy-To-Let Mortgages and Consumer Finance, which includes securedlending and car and retail finance. These divisions are the basis on which theGroup reports primary segmental information. Other Operations comprises closed loan books arising from owner-occupiedmortgages and unsecured personal lending operations where no further newbusiness is being written and existing assets are being run down. The adjusted operating results of these business segments are detailed fully innote 3 and are summarised below. Six months Six months Six months to to to 31 March 31 March 31 March 2006 2005 2005 Proforma Statutory £m £m £mOperating result before fair valueadjustmentsBuy-to-Let Mortgages 23.0 17.1 14.8Consumer Finance 12.1 9.5 8.1Other Operations 3.0 7.9 10.6 _________ _________ _________ 38.1 34.5 33.5 ========= ========= ========= Net interest income increased by 16.1% to £71.3 million from £61.4 million on aproforma basis for the first half of 2005, as a result of the growth of the loanportfolio. Average margins were similar to the first half of 2005, reflectingthe predominance of buy-to-let lending in the Group's business, whereimprovements in funding costs compensated for more competitive pricing in thebuy-to-let book. This, in turn, helped to drive the strong book growth seen overthe period. Other operating income was similar to the first half of 2005 at £15.2 million,compared with £14.9 million on a proforma basis. Operating expenses increased by 17.5% to £24.8 million from £21.1 million forthe first half of 2005. Of this increase, £2.0 million relates to the charge forshare based payment and is partially driven by the impact of the increased shareprice over the period on the value of share based awards. Excluding the chargefor share based payment, operating expenses rose 8.8% to £21.1m from £19.4m inthe first half of 2005. Control over operating costs, through tight financialdiscipline and by maintaining cost efficiency, continues to be a major focus ofthe Group's management and is a significant driver for our competitive positionin our lending markets. The charge for impairment provisions of £23.6 million compares with £20.7million on a proforma basis for the first half of 2005. As a percentage of loansto customers (note 6) the charge remained consistent (on the proforma basis)with that for the first half of 2005 at 0.3%. This charge includes amounts inrespect of income which, although accounting standards require it to be charged,is not expected to be received by the Group and hence also increases the chargefor loan impairment. Under UK GAAP such income was not recognised. The loanbooks continue to be carefully managed and the arrears performance remains inline with our expectations, with the buy-to-let book continuing to be exemplary. Fair value net gains of £0.9 million have arisen from the IFRS requirement thatmovements in the fair value of hedging instruments attributable toineffectiveness in the hedging arrangements should be credited or charged toincome and expense. Any ineffectiveness arising from differences between thefair value movements of hedging instruments and the fair value movements of thehedged assets or liabilities should trend to zero over time, so any recordedinefficiencies should be excluded when considering the underlying results of anyaccounting period. The charge to tax has been reduced by an exceptional credit of £4.3 million as aresult of the settlement of a prior year item, reducing the tax charge rate to16.7% for the period.______________________________________________________________________________ REVIEW OF OPERATIONS BUY-TO-LET MORTGAGES Buy-to-let mortgage completions were £1,334.5 million for the six months to31 March 2006, an increase of 111.4% from £631.4 million for the correspondingperiod last year. At 31 March 2006, the aggregate loans outstanding in theParagon Mortgages and Mortgage Trust buy-to-let portfolios had increased by35.6% to £5,964.9 million from £4,400.0 million at 31 March 2005 on the proformabasis (35.6% increase on the statutory basis from £4,398.6 million). A strongpipeline of new business at the end of the period should ensure a strong startto the second half of the year. The housing market has remained robust over the winter period and activityamongst buy-to-let landlords has been building since mid 2005. This is evidencedby the Council of Mortgage Lenders' buy-to-let survey for the second half of2005, which showed a net increase of 70,000 outstanding buy-to-let mortgagesover the six month period. Buy-to-let advances totalled 9% of gross UK mortgageadvances in the six months to December 2005, up from 8% in the previous halfyear. This accords with the latest surveys by the Royal Institution of CharteredSurveyors, which report a rise in new landlord instructions on the back of verystrong tenant demand. Following the acquisition of Mortgage Trust, the Group's strategy has been tooperate on a broad front within the buy-to-let market. The success of thedevelopment of the Mortgage Trust proposition, along with developments atParagon Mortgages has allowed the Group to capitalise on rising tenant demandand on the uplift in landlord activity by competing effectively for the businessof a broad range of residential landlords with differing portfolio sizes andinvestment objectives. CONSUMER FINANCE Completions by the consumer finance businesses were £189.2 million during theperiod, an increase of 4.8% from £180.6 million during the corresponding periodof the previous year. At 31 March 2006, the total loans outstanding on theconsumer finance books were £703.7 million, compared with £711.2 million on theproforma basis at 31 March 2005 (£718.1 million on the statutory basis). Thisfall reflects the general weakness in the consumer lending markets and ourobjective of maintaining portfolio quality. The division continues to focus on writing high quality loans, and bad debtlevels within the business remain below the market averages. Secured personal finance Weaker consumer activity has continued to impact consumer lending. Datapublished by the Finance & Leasing Association during the period has evidencedlower secured lending volumes against the corresponding period last year. Inthis environment we remain cautious and have tightened our credit policy toensure the maintenance of high quality lending. Secured personal financeadvances were £117.6 million, a reduction of 6.2% from £125.4 million in thefirst half of 2005. Sales aid finance The sales aid finance business, incorporating retail and car finance, saw a29.7% increase in volumes to £71.6 million during the six months ended 31 March2006 (2005 H1: £55.2 million). The refocusing of the retail business onexpanding the distribution base has led to many new retailer accounts whereretailers have been attracted by our technology and service. Our objective is tobuild on this progress during the second half of the year. FUNDING The Group continued to be an active issuer in the capital markets during theperiod. In November 2005, a £1.0 billion securitisation was completed by ParagonMortgages (No. 10) PLC and, in March 2006, a further £1.0 billion securitisationwas completed by Paragon Mortgages (No. 11) PLC. Each of these was completed onmore favourable terms than the preceding transaction, reflecting theincreasingly positive attitude of investors in the capital markets to ourbuy-to-let mortgage originations. In order to provide finance for the increased level of loan completions, theGroup's committed sterling warehouse facility, provided by a consortium ofbanks, was increased in April 2006 from £1,425.0 million to £2,325.0 million, onfiner terms. PENSION SCHEME During the period the Group made a special contribution of £14.6 million to theParagon Pension Scheme. The amount was equal to the IAS 19 deficit at30 September 2005 and the special contribution puts the scheme on a more securefinancial footing, as well as minimising the Group's ongoing payments to thePension Protection Fund. CAPITAL MANAGEMENT Last May we reported, as a consequence of the changing mix of the Group'sbusiness, that the Board had identified surplus capital available fordistribution to shareholders. As a consequence the dividend was significantlyincreased and a share repurchase programme of up to £20.0 million wasestablished. During the period the Company bought 429,000 shares from the marketat a cost of £3.2 million with the result that by 31 March 2006 a total of2,219,000 shares had been repurchased, at a total cost of £11.6 million. Afurther 1,000,000 shares have been repurchased since 31 March 2006 at a cost of£6.8 million. Over the period we have continued to reduce the risk profile of the Group's loanassets through a disciplined restructuring of the portfolio from unsecuredtowards less capital demanding secured lending. As a result, the Board willincrease the amount set aside to repurchase shares from the market by a further£10.0 million, within the authority granted by shareholders at the 2006 AnnualGeneral Meeting. This will make available a further £11.6 million to be investedin the repurchase programme going forward. CONCLUSION The Group has had an excellent first half, with strong growth in profits andbusiness volumes and the credit performance of the loan books remains in linewith our expectations. In addition we have continued to develop our buy-to-letproduct proposition to compete for the business of a broad range of investors. Astrong cash position has enabled the Group to make a special contribution to thestaff pension scheme, to announce a further substantial increase in dividend andto extend the share buy-back programme. We enter the second half of the year with the buy-to-let mortgage pipelinesignificantly higher than last year which, with a continued focus on cost andarrears management, leaves us confident that the Group will meet its businessobjectives for the year. Strong tenant demand over the period reflects theincreasing importance of the private rented sector in today's housing market andthe drivers to demand point to a favourable long-term outlook for this business. Jonathan PerryChairman23 May 2006______________________________________________________________________________ CONSOLIDATED INCOME STATEMENT For the six months ended 31 March 2006 (Unaudited) Note Six months Six months Year to to to 31 March 31 March 30 September 2006 2005 2005 £m £m £mInterest receivable 254.9 241.6 485.8Interest payable andsimilar (183.6) (196.5) (390.8)charges _________ _________ _________Net interest income 71.3 45.1 95.0Other operating income 15.2 18.0 37.9 _________ _________ _________Total operating income 86.5 63.1 132.9Operating expenses (24.8) (21.1) (45.2)Provisions for losses (23.6) (8.5) (15.9) _________ _________ _________ 38.1 33.5 71.8Fair value net gains /(losses) 0.9 - - _________ _________ _________Operating profit being profiton ordinary activities beforetaxation 39.0 33.5 71.8Tax charge on profit onordinary activities (6.5) (7.6) (16.0) _________ _________ _________Profit on ordinary activitiesafter taxation 32.5 25.9 55.8 ========= ========= ========= Dividend - Rate per share 5 6.9p 5.2p 12.6pBasic earnings per share 4 28.8p 22.7p 48.9pDiluted earnings per share 4 27.4p 21.8p 46.9p ========= ========= ========= The results for the periods shown above relate entirely to continuingoperations.______________________________________________________________________________ CONSOLIDATED BALANCE SHEET 31 March 2006 (Unaudited) Note 31 March 31 March 30 September 2006 2005 2005ASSETS EMPLOYED £m £m £mNon-current assetsIntangible assets 0.4 0.3 0.3Property, plant and equipment 19.8 20.5 19.7Financial assets 6 7,276.4 6,087.0 6,528.7Deferred tax assets 36.5 5.7 5.7 _________ _________ _________ 7,333.1 6,113.5 6,554.4 _________ _________ _________Current assetsOther receivables 4.7 6.4 6.6Cash and cash equivalents 734.5 549.2 530.4 _________ _________ _________ 739.2 555.6 537.0 _________ _________ _________Total assets 8,072.3 6,669.1 7,091.4 ========= ========= =========FINANCED BYCalled-up share capital 12.1 12.0 12.1Share premium account 70.8 69.5 70.2Merger reserve (70.2) (70.2) (70.2)Cash flow hedging reserve (1.9) - -Profit and loss account 279.7 297.8 323.5 _________ _________ _________ Share capital and reserves 290.5 309.1 335.6Own shares (28.4) (13.8) (22.8) _________ _________ _________Equity shareholders' funds 262.1 295.3 312.8 _________ _________ _________Current liabilities Financial liabilities 28.5 1.0 0.9Current tax liabilities 10.8 13.6 12.9Other liabilities 58.8 59.3 59.9 _________ _________ _________ 98.1 73.9 73.7 _________ _________ _________Non-current liabilitiesFinancial liabilities 7,705.4 6,278.1 6,684.8Deferred tax liabilities 0.7 2.1 0.7Retirement benefit obligations 0.3 14.5 14.6Provisions 2.1 2.4 2.1Other liabilities 3.6 2.8 2.7 _________ _________ _________ 7,712.1 6,299.9 6,704.9 _________ _________ _________Total liabilities 7,810.2 6,373.8 6,778.6 _________ _________ _________ 8,072.3 6,669.1 7,091.4 ========= ========= ========= The interim financial information was approved by the Board of Directors on23 May 2006.______________________________________________________________________________ CONSOLIDATED CASH FLOW STATEMENT For the six months ended 31 March 2006 (Unaudited) Note Six months Six months Year to to to 31 March 31 March 30 September 2006 2005 2005 £m £m £m Net cash flow (used in)operating activities 7 (779.4) (94.0) (500.7)Net cash (used in) / frominvesting activities 8 (2.0) 1.1 (0.3)Net cash from financingactivities 9 985.5 140.8 530.3 _________ _________ _________Net increase in cash and cashequivalents 204.1 47.9 29.3Opening cash and cashequivalents 529.9 500.6 500.6 _________ _________ _________Closing cash and cashequivalents 734.0 548.5 529.9 ========= ========= =========Represented by balanceswithinCash and cash equivalents 734.5 549.2 530.4Financial liabilities (0.5) (0.7) (0.5) _________ _________ _________ 734.0 548.5 529.9 ========= ========= =========______________________________________________________________________________ CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENDITURE Six months ended 31 March 2006 (Unaudited) 31 March 31 March 30 September 2006 2005 2005 £m £m £mProfit for the period 32.5 25.9 55.8Actuarial (loss) on pension deficit (0.6) - -Cash flow hedgesGains / (losses) taken to equity 1.0 - -Tax on items taken directly to equity (0.1) - - _________ _________ _________Total recognised income and expenditurefor the period 32.8 25.9 55.8Adoption of IAS 32 and IAS 39 (72.5) - - _________ _________ _________ (39.7) 25.9 55.8 ========= ========= =========______________________________________________________________________________ RECONCILIATION OF MOVEMENTS IN CONSOLIDATED EQUITY Six months ended 31 March 2006 (Unaudited) Note 31 March 31 March 30 September 2006 2005 2005 £m £m £mTotal recognised income andexpenditure for the period 32.8 25.9 55.8Dividends 5 (8.4) (6.5) (12.4)Net movement in own shares (5.6) (1.5) (10.5)Surplus on transactions in ownshares 0.8 1.3 2.3Charge for share based payments 2.2 1.1 2.6 _________ _________ _________Total movements in equity in the period 21.8 20.3 37.8 _________ _________ _________ Equity at 30 September 2005 312.8 275.0 275.0Adoption of IAS 32 and IAS 39 (72.5) - - _________ _________ _________Equity at 1 October 2005 240.3 275.0 275.0 _________ _________ _________ Closing equity 262.1 295.3 312.8 ========= ========= =========______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 1. GENERAL INFORMATION The interim financial information for the six months ended 31 March 2006 and forthe six months ended 31 March 2005 has not been audited. The next annual financial statements of the Group, for the year ending 30September 2006, will be prepared in accordance with International FinancialReporting Standards as adopted for use in the European Union. Accordingly, theinterim report has been prepared in accordance with the recognition andmeasurement criteria of IFRS. The figures shown above for the year ended 30 September 2005 are not statutoryaccounts. A copy of the statutory accounts, which were prepared under UK GAAP,has been delivered to the Registrar of Companies, contained an unqualified auditreport and did not contain an adverse statement under sections 237 (2) or 237(3) of the Companies Act 1985. This document may contain forward-looking statements with respect to certain ofthe plans and current goals and expectations relating to the future financialconditions, business performance and results of the Group. By their nature, allforward-looking statements involve risk and uncertainty because they relate tofuture events and circumstances that are beyond the control of the Groupincluding, amongst other things, UK domestic and global economic and businessconditions, market related risk such as fluctuation in interest rates andexchange rates, inflation, deflation, the impact of competition, changes incustomer preferences, risks concerning borrower credit quality, delays inimplementing proposals, the timing, impact and other uncertainties of futureacquisitions or other combinations within relevant industries, the policies andactions of regulatory authorities, the impact of tax or other legislation andother regulations in the jurisdictions in which the Group and its affiliatesoperate. As a result, the Group's actual future financial condition, businessperformance and results may differ materially from the plans, goals andexpectations expressed or implied in these forward looking statements. Nothingin this document should be construed as a profit forecast. A copy of the Interim Statement will be posted to shareholders and additionalcopies can be obtained from The Company Secretary, The Paragon Group ofCompanies PLC, St. Catherine's Court, Herbert Road, Solihull, West Midlands, B913QE.______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 2. ACCOUNTING POLICIES The financial information has been prepared in accordance with InternationalFinancial Reporting Standards as endorsed by the European Union expected to beapplicable in the preparation of the Group Financial Statements for the yearending 30 September 2006, except that, as permitted by IFRS 1 - 'First TimeAdoption of International Financial Reporting Standards' the requirements of IAS32 - 'Financial Instruments: Disclosure and Presentation' and IAS 39 -'Financial Instruments: Recognition and Measurement' have not been applied inpreparing the comparative amounts for the year ended 30 September 2005. In thesedisclosures, financial instruments are accounted for using the policies andpractices previously adopted under UK GAAP. The particular policies adopted are described below. (a) Accounting convention The financial information is prepared under the historical cost convention,except as required in the valuation of certain financial instruments which arecarried at fair value. (b) Basis of consolidation The consolidated financial information deals with the accounts of the Companyand its subsidiaries made up to 31 March 2006. Subsidiaries comprise all thoseentities over which the Group has control. The results of businesses acquiredare dealt with in the consolidated accounts from the date of acquisition. In accordance with SIC 12 - 'Consolidation: Special Purpose Entities' companiesowned by charitable trusts into which loans originated by Mortgage Trust Limitedwere sold as part of its securitisation programme where the Group enjoys thebenefits of ownership are treated as subsidiaries. Similarly trusts set up to hold shares in conjunction with the Group's employeeshare ownership arrangements are also treated as subsidiaries. (c) Goodwill Goodwill arising from the purchase of subsidiary undertakings, representing theexcess of the fair values of acquired assets over the fair value of the purchaseconsideration, is held on the balance sheet and annually reviewed to determinewhether any impairment has occurred. Negative goodwill is written off as it arises. As permitted by IFRS 1, the Group has elected not to apply IFRS 3 - 'BusinessCombinations' to combinations taking place before its transition date to IFRS(1 October 2004). Therefore any goodwill which was written off to reserves underUK GAAP will not be charged or credited to the profit and loss account on anyfuture disposal of the business to which it relates. (d) Intangible assets Intangible assets comprise purchased computer software, which is capitalisedwhere it has a sufficiently enduring nature. This is stated at cost lessaccumulated amortisation. Amortisation is provided in equal instalments at arate of 25% per annum.______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 2. ACCOUNTING POLICIES (Continued) (e) Leases Leases are accounted for as operating or finance leases in accordance with IAS17 - 'Leases'. A finance lease is deemed to be one which transfers substantiallyall of the risks and rewards of the ownership of the asset concerned. Any otherlease is an operating lease. Rental income and costs under operating leases are credited or charged to theprofit and loss account over the period of the leases. (f) Contract hire Motor vehicles acquired in connection with contract hire arrangements are soldto finance houses, who lease them to customers for a pre-determined period. TheGroup has undertaken to repurchase these vehicles at the end of the lease term. In accordance with the requirements of IAS 17, the assets are not derecognisedon the sale to the finance house and remain as the Group's assets and theconsideration received is spread over the customer's lease term. (g) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation.Cost for property held under a sale and leaseback transaction represents thesale value. Depreciation is provided on cost in equal annual instalments over the lives ofthe assets. The rates of depreciation are as follows: Short leasehold premises over the term of the leaseComputer hardware 25% per annumFurniture, fixtures and office equipment 15% per annumCompany motor vehicles 25% per annumMotor vehicles subject to contract hire over the term of thearrangements lease______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 2. ACCOUNTING POLICIES (Continued) (h) Loans to customers In the results for the six months ended 31 March 2006 Loans to customers are considered to be 'loans and receivables' as defined byIAS 39 - 'Financial Instruments: Recognition and Measurement'. They aretherefore accounted for on the amortised cost basis. Such loans are valued at inception at the initial advance amount, which is thefair value at that time, inclusive of procuration fees paid to brokers or otherbusiness providers and less initial fees paid by the customer. Thereafter theyare valued at this amount less the cumulative amortisation calculated using theEffective Interest Rate ('EIR') method. The loan balances are then reduced wherenecessary by a provision for balances which are considered to be impaired. The EIR method spreads the expected net income arising from a loan over itsexpected life. The EIR is that rate of interest which, at inception, exactlydiscounts the future cash payments and receipts arising from the loan to theinitial carrying amount. The Group's policy is to hedge against any exposure to fixed rate loan assets. In the results for the year ended 30 September 2005 Loans are stated at cost, inclusive of brokers' commissions payable onorigination, less provision for diminution in value. Brokers' commissions payable on mortgage loans are amortised over an appropriateperiod. Unamortised commission balances are included within 'Loans toCustomers'. Brokers' commissions payable on other loans are amortised on a straight-linebasis over the period of the loans to which they relate. The balances beingamortised are included within 'Loans to Customers'. Amortisation of brokers' commissions is recognised within interest payable. Interest arising on loans is recognised in the profit and loss account as it ischarged to borrowers, to the extent that is expected to be recoverable. Otherfee income arising from borrower accounts is recognised in 'other income' as itis charged. (i) Finance lease receivables Finance lease receivables are included within 'Loans to Customers' at the totalamount receivable less interest not yet accrued, unamortised commissions andprovision for doubtful debts. Income from finance lease contracts is accounted for on the actuarial basis.______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 2. ACCOUNTING POLICIES (Continued) (j) Impairment of Loans and Receivables In the results for the six months ended 31 March 2006 Loans and receivables are reviewed for indications of possible impairmentthroughout the year and at each balance sheet date, in accordance with IAS 39.Where loans exhibit objective evidence of impairment, the carrying value of theloans is reduced to the net present value of their expected future cash flows,including the value of the potential realisation of any security, discounted atthe original EIR. Loans are assessed collectively, grouped by riskcharacteristics and account is taken of any impairment arising due to eventswhich are believed to have taken place but have not been specifically identifiedat the balance sheet date. In the results for the year ended 30 September 2005 The amount provided is an estimate of the amount needed to reduce the carryingvalue of the asset to its expected recoverable amount and is based on theapplication of formulae which take into account the nature of each portfolio,borrower payment profile and expected losses. (k) Cash and Cash Equivalents Balances shown as cash and cash equivalents in the balance sheet comprise demanddeposits and short-term deposits with banks with maturities of not more than90 days. (l) Own shares Shares in The Paragon Group of Companies PLC held in treasury or by the trusteesof the Group's employee share ownership plans are shown on the balance sheet asa deduction in arriving at total equity. Own shares are stated at cost. (m) Taxation The charge for taxation is based on the profit for the period and takes intoaccount taxation deferred because of temporary differences. Temporarydifferences arise from the inclusion of items of income and expenditure intaxation computations in periods different from those in which they are includedin financial statements. Tax relating to items taken directly to equity is also taken directly to equity. (n) Borrowings In the results for the six months ended 31 March 2006 Borrowings are carried in the balance sheet on the amortised cost basis. Theinitial value recognised includes the principal amount received less anydiscount on issue or costs of issuance. Interest and all other costs of the funding are expensed to the income statementas interest payable over the term of the borrowing on an Effective Interest Ratebasis. In the results for the year ended 30 September 2005 Borrowings are stated at their outstanding value less unamortised issue costsand discounts on issue. Discounts on issue of borrowings and initial costsincurred in arranging funding facilities are amortised over the period of thefacility.______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 2. ACCOUNTING POLICIES (Continued) (o) Finance lease payables Balances due on the lease arising from the sale and leaseback of a Groupproperty are recognised in creditors at the total amount payable less interestnot yet accrued. Interest is accrued for on the actuarial basis. The profit which arose on the sale and leaseback transaction is held in accrualsand deferred income and is being credited to profit over the lease term on astraight line basis. (p) Derivative Financial instruments In the results for the six months ended 31 March 2006 Derivative instruments utilised by the Group comprise currency swap, interestrate swap, interest rate option and forward interest rate agreements. All suchinstruments are used for hedging purposes to alter the risk profile of theexisting underlying exposure of the Group in line with the Group's riskmanagement policies. The Group does not enter into speculative derivative contracts. All derivatives are carried at fair value in the balance sheet, as assets wherethe value is positive or as liabilities where the value is negative. Fair valueis based on market prices, where a market exists. If there is no active market,fair value is calculated using present value models which incorporateassumptions based on market conditions and are consistent with accepted economicmethodologies for pricing financial instruments. Changes in the fair value ofderivatives are recognised in the income statement, except where such amountsare permitted to be taken to equity as part of the accounting for a cash flowhedge. In the results for the year ended 30 September 2005 Derivative instruments utilised by the Group comprise currency swap, interestrate swap, interest rate option and forward interest rate agreements. All suchinstruments are used for hedging purposes to alter the risk profile of theexisting underlying exposure of the Group in line with the Group's riskmanagement policies. Amounts payable or receivable in respect of interest rateswaps are recognised as adjustments to interest expense over the period of thecontracts. The Group does not enter into speculative derivative contracts.______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 2. ACCOUNTING POLICIES (Continued) (q) Hedging In the results for the six months ended 31 March 2006 For all hedges, the Group documents, at inception, the relationship between thehedging instruments and the hedged items, as well as its risk managementstrategy and objectives for undertaking the transaction. The Group alsodocuments its assessment, both at hedge inception and on an ongoing basis, ofwhether the hedging arrangement put in place are considered to be 'highlyeffective' as defined by IAS 39. For a fair value hedge, as long as the hedging relationship is deemed 'highlyeffective' and meets the hedging requirements of IAS 39, any gain or loss on thehedging instrument recognised in income can be offset against the fair valueloss or gain arising from the hedged item for the hedged risk. For macro hedges(hedges of interest rate risk for a portfolio of loan assets) this fair valueadjustment is disclosed in the balance sheet alongside the hedged item, forother hedges the adjustment is made to the carrying value of the hedged asset orliability. Only the net ineffectiveness of the hedge is charged or credited toincome. Where a fair value hedge relationship is terminated, or deemedineffective, the fair value adjustment is amortised over the remaining term ofthe underlying item. Where a derivative is used to hedge the variability of cash flows of an asset orliability, it may be designated as a cash flow hedge so long as thisrelationship meets the hedging requirements of IAS 39. For such an instrumentthe effective portion of the change in the fair value of the derivative is takeninitially to equity, with the ineffective part taken to profit or loss. Theamount taken to equity is released to the income statement at the same time asthe hedged item affects the income statement. Where a cash flow hedgerelationship is terminated, or deemed ineffective, the amount taken to equitywill remain there until the hedged transaction is recognised, or is no longerhighly probable. (r) Deferred taxation Deferred taxation is provided in full on temporary differences that result in anobligation at the balance sheet date to pay more tax, or a right to pay lesstax, at a future date, at rates expected to apply when they crystallise based oncurrent tax rates and law. Deferred tax assets are recognised to the extent thatit is regarded as probable that they will be recovered. As required by IAS 12 -'Income Taxes', deferred tax assets and liabilities are not discounted to takeaccount of the expected timing of realisation. It is assumed that all taxable IFRS transition adjustments give rise to taxadjustments to reserves at the current UK tax rate of 30%, although this has yetto be confirmed by HM Revenue and Customs.______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 2. ACCOUNTING POLICIES (Continued) (s) Retirement benefit obligations The expected cost of providing pensions within the funded defined benefitscheme, determined on the basis of annual valuations by professionally qualifiedactuaries using the projected unit method, is charged to the profit and loss.Actuarial gains and losses are recognised in full in the period in which theyoccur and do not form part of the result for the period, being recognised in theStatement of Recognised Income and Expenditure. The retirement benefit obligation recognised in the balance sheet represents thepresent value of the defined benefit obligation, as adjusted for unrecognisedpast service cost, and as reduced by the fair value of scheme assets at thebalance sheet date. Both the return on investment expected in the period and the expected financingcost of the liability, as estimated at the beginning of the period arerecognised in the result for the period. Any variances against these estimatesin the year form part of the actuarial gain or loss. The assets of the scheme are held separately from those of the Group in anindependently administered fund. The charge to the profit and loss account for providing pensions under definedcontribution pension schemes is equal to the contributions payable to suchschemes for the year. (t) Provisions Provisions are recognised where there is a present obligation as a result of apast event, it is probable that this obligation will result in an outflow ofresources and this outflow can be reliably quantified. Provisions are discountedwhere this effect is material. (u) Fee and commission income Other income includes administration fees charged to borrowers, which arecredited when the related service is performed and commissions receivable on thesale of insurances, which are taken to profit at the point at which the Groupbecomes unconditionally entitled to the income. (v) Share based payments In accordance with IFRS 2 - 'Share based payments', the fair value at the dateof grant of awards to be made in respect of options and shares granted under theterms of the Group's various share based employee incentive arrangements ischarged to the profit and loss account over the period between the date of grantand the vesting date. As permitted by IFRS 1, only those options and awards granted after 7 November2002 and not vested at 1 January 2005 have been restated on transition to IFRS. (w) Dividends In accordance with IAS 10 - 'Events after the balance sheet date', dividendspayable on ordinary shares are recognised in equity once they are appropriatelyauthorised and are no longer at the discretion of the Company. Dividendsdeclared after the balance sheet date, but before the authorisation of thefinancial statements remain within shareholders' funds.______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 2. ACCOUNTING POLICIES (Continued) (x) Foreign currency Foreign currency transactions, assets and liabilities are accounted for inaccordance with IAS 21 - 'The Effects of Changes in Foreign Exchange Rates'. Thefunctional currency of the Group is the pound sterling. Transactions which arenot denominated in sterling are translated into sterling at the spot rate ofexchange on the date of transaction. Monetary assets and liabilities which arenot denominated in sterling are translated at the closing rate on the balancesheet date. Gains and losses on retranslation are included in interest payable or interestreceivable depending on whether the underlying instrument is an asset or aliability, except where deferred in equity in accordance with cash flow hedgingprovisions of IAS 39. (y) Segmental reporting Costs attributed to each segment represent the direct costs incurred by thesegment operations and an allocation of the costs of areas of the business whichserve all segments. Such allocations are weighted by the value of loan assets ineach segment, adjusted for the relative effort involved in the administration ofeach asset class.______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 3. SEGMENTAL RESULTS For management purposes the Group is organised into two major operatingdivisions, Buy-To-Let Mortgages and Consumer Lending, which includes securedlending and car and retail finance. These divisions are the basis on which theGroup reports primary segmental information. All of the Group's operations areconducted in the United Kingdom. Other Operations comprises closed loan books arising from owner-occupiedmortgages and unsecured personal lending operations where no further newbusiness is being written and existing assets are being run down. Financial information about these business segments is shown below. Six months ended 31 March 2006 Buy-to-let Consumer Other Total Mortgages Lending Operations £m £m £m £mInterestreceivable 171.8 30.2 52.9 254.9Interestpayable (143.4) (21.0) (19.2) (183.6) _________ _________ _________ _________Net interestincome 28.4 9.2 33.7 71.3Otheroperatingincome 3.7 8.6 2.9 15.2 _________ _________ _________ _________Totaloperatingincome 32.1 17.8 36.6 86.5Operatingexpenses (9.0) (4.4) (11.4) (24.8)Provisions (0.1) (1.3) (22.2) (23.6) _________ _________ _________ _________ 23.0 12.1 3.0 38.1Fair valuegains/ - - 0.9 0.9(losses) _________ _________ _________ _________Operatingprofit 23.0 12.1 3.9 39.0 ========= ========= ========= ========= Six months ended 31 March 2005 Buy-to-let Consumer Other Total Mortgages Lending Operations £m £m £m £mInterestreceivable 145.8 42.3 53.5 241.6Interestpayable (128.7) (34.3) (33.5) (196.5) _________ _________ _________ _________Net interestincome 17.1 8.0 20.0 45.1Otheroperatingincome 5.5 8.3 4.2 18.0 _________ _________ _________ _________Totaloperatingincome 22.6 16.3 24.2 63.1Operatingexpenses (8.3) (3.8) (9.0) (21.1)Provisions 0.5 (4.4) (4.6) (8.5) _________ _________ _________ _________ 14.8 8.1 10.6 33.5Fair value gains/ - - - -(losses) _________ _________ _________ _________Operatingprofit 14.8 8.1 10.6 33.5 ========= ========= ========= =========______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 3. SEGMENTAL RESULTS (Continued) Year ended 30 September 2005 Buy-to-let Consumer Other Total Mortgages Lending Operations £m £m £m £mInterestreceivable 298.2 84.7 102.9 485.8Interestpayable (263.7) (68.6) (58.5) (390.8) _________ _________ _________ _________Net interestincome 34.5 16.1 44.4 95.0Otheroperatingincome 13.7 17.2 7.0 37.9 _________ _________ _________ _________Totaloperatingincome 48.2 33.3 51.4 132.9Operatingexpenses (18.2) (7.9) (19.1) (45.2)Provisions (1.2) (4.6) (10.1) (15.9) _________ _________ _________ _________ 28.8 20.8 22.2 71.8Fair value gains/ - - - -(losses) _________ ________ _________ _________Operatingprofit 28.8 20.8 22.2 71.8 ========= ========= ========= ========= 4. EARNINGS PER SHARE Earnings per ordinary share is calculated as follows: 31 March 31 March 30 September 2006 2005 2005 Profit for the period (£m) 32.5 25.9 55.8 _________ _________ _________ Basic weighted average number of ordinaryshares ranking for dividend during theyear (million) 113.1 114.2 114.1Dilutive effect of the weighted averagenumber of share options and incentiveplans in issue during the year (million) 5.6 4.8 4.9 _________ _________ _________Diluted weighted average number ofordinary shares ranking for dividendduring the year (million) 118.7 119.0 119.0 ========= ========= =========Earnings per ordinary share - basic 28.8p 22.7p 48.9p- diluted 27.4p 21.8p 46.9p ========= ========= =========______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 5. DIVIDENDS Amounts recognised as distributions to equity shareholders in the period: 31 March 31 March 30 September 2006 2005 2005 £m £m £mFinal dividend for the year ended30 September 2004 of 5.7p per share - 6.5 6.5Interim dividend for the year ended30 September 2005 of 5.2p per share - - 5.9Final dividend for the year ended30 September 2005 of 7.4p per share 8.4 - - _________ _________ _________ 8.4 6.5 12.4 ========= ========= ========= An interim dividend of 6.9p per share is proposed (2005: 5.2p per share),payable on 31 July 2006 with a record date of 30 June 2006. This dividend willbe recognised in the accounts when it is paid. 6. FINANCIAL ASSETS 31 March 31 March 30 September 2006 2005 2005 £m £m £m Loans to customers 7,232.9 6,087.0 6,528.7Fair value adjustments from portfoliohedging (1.0) - - Derivative financial assets 44.5 - - _________ _________ _________ 7,276.4 6,087.0 6,528.7 ========= ========= =========______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 7. NET CASHFLOW FROM OPERATING ACTIVITIES Six months Six months Year to to to 31 March 31 March 30 September 2006 2005 2005 £m £m £mProfit before tax 39.0 33.5 71.8 Non-cash items included in profit and otheradjustmentsDepreciation of property plant andequipment 1.6 1.7 3.8Amortisation of intangible assets 0.1 0.1 0.2Non-cash movements on borrowings 61.2 4.0 7.4Impairment losses on loans tocustomers 23.6 8.5 15.9Charge for share based payment 2.2 1.1 2.6Profit on sale of subsidiary - (0.9) (0.9)Loss on disposal of property, plantand equipment 0.1 - - Net (increase) / decrease in operatingassetsLoans to customers (824.9) (145.5) (594.4)Derivative financial instruments (20.6) - -Fair value of portfolio hedges 1.0 - -Other receivables (0.4) 1.1 1.0 Net increase / (decrease) in operatingliabilitiesDerivative financial instruments (39.7) - -Sundry liabilities (14.0) 4.0 4.1 _________ _________ _________Cash utilised by operations (770.8) (92.4) (488.5)Income taxes paid (8.6) (1.6) (12.2) _________ _________ _________Net cash flow used in operatingactivities (779.4) (94.0) (500.7) ========= ========= =========______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 8. NET CASHFLOW USED IN INVESTING ACTIVITIES Six months Six months Year to to to 31 March 31 March 30 September 2006 2005 2005 £m £m £mProceeds on disposal of property,plant and equipment 0.7 0.9 1.6Purchases of property, plant andequipment (2.5) (1.7) (3.7)Purchases of intangible assets (0.2) (0.1) (0.2)Sale of subsidiary undertaking - 2.0 2.0 _________ _________ _________Net cash (used in) / from investing (2.0) 1.1 (0.3)activities ========= ========= ========= 9. NET CASHFLOW FROM FINANCING ACTIVITIES Six months Six months Year to to to 31 March 31 March 30 September 2006 2005 2005 £m £m £m Dividends paid (8.4) (6.5) (12.4)Issue of corporate bond - - 118.0Issue of asset backed floatingrate 1,996.6 1,297.3 2,444.7notesRepayment of asset backed floatingrate notes (468.3) (1,057.4) (2,102.1)Capital element of finance leasepayments (0.3) (0.2) (0.3)Movement on bank facilities (529.3) (92.2) 90.6Purchase of shares (6.7) (2.9) (12.4)Exercise of options under ESOPscheme 1.2 0.7 1.5Exercise of other share options 0.7 2.0 2.7 _________ _________ _________Net cash from financing activities 985.5 140.8 530.3 ========= ========= =========______________________________________________________________________________ NOTES TO THE INTERIM FINANCIAL INFORMATION For the six months ended 31 March 2006 (Unaudited) 10. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS As described in Note 2, these results are presented in accordance withInternational Financial Reporting Standards as endorsed by the European Union('IFRS'). On 21 February 2006 the group announced details of the adjustments toits accounting policies required in order to convert the previously publishedresults to an IFRS basis. All IFRS information relating to the year ended 30September 2005 disclosed in this statement is derived from that announcement.This document also included reconciliations of the balance sheets and profit andloss accounts previously published to those shown as comparative amounts in thisinterim financial information. The Group has taken advantage of the transitionalprovisions of IFRS 1 and these comparative figures do not show the effect of theadoption of IAS 32 and IAS 39. To enable a more meaningful presentation of results, in addition to thestatutory comparative information, the results for the six months ended 31 March2005 and the year ended 30 September 2005 have been compiled on a proformabasis. This shows the Group's customer loan balances, borrowings and interestincome as they would have been shown had IAS 32 and 39 applied to thesebalances. The remaining adjustments required by these standards relate to fairvalues and hedging and cannot be applied as the required documentation for thesearrangements was not in place at 1 October 2004. A reconciliation between thestatutory comparatives and the proforma information was given in theannouncement of 21 February 2006. The differences in the segment results andsegmental 'loans to customers' figures between the statutory and proforma basesare also detailed in the announcement. The cash flow statements have also been restated to comply with the requirementsof IAS 7 - 'Cash Flow Statements'. These changes represent the re-classificationof balances only. Copies of the announcement made on 21 February 2006 are available from theGroup's website at www.paragon-group.co.uk or from the Group Company Secretary,The Paragon Group of Companies PLC, St. Catherine's Court, Herbert Road,Solihull, West Midlands, B91 3QE. ______________________________________________________________________________ INDEPENDENT REVIEW REPORTTO THE PARAGON GROUP OF COMPANIES PLC Introduction We have been instructed by the company to review the financial information forthe six months ended 31 March 2006 which comprises the income statement, thebalance sheet, the cash flow statement, the statement of recognised income andexpenditure, the reconciliation of movements in consolidated equity and relatednotes 1 to 10. We have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone other thanthe company, for our review work, for this report, or for the conclusions wehave formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures are consistent withthose applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. International Financial Reporting Standards As disclosed in note 1, the next annual financial statements of the Group willbe prepared in accordance with International Financial Reporting Standards asadopted for use in the EU. Accordingly, the interim report has been prepared inaccordance with the recognition and measurement criteria of IFRS and thedisclosure requirements of the Listing Rules. Review work performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) 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 thatshould be made to the financial information as presented for the six monthsended 31 March 2006. Deloitte & Touche LLPChartered AccountantsBirmingham23 May 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Paragon Group