Annual Report & Accounts 2010
The Paragon Group of Companies PLC
Contents
Financial highlights
Chairman’s statement
Chief Executive’s review
Board of Directors
Directors’ report
Corporate social responsibility
Report of the Board to the shareholders on directors’ remuneration
Statement of directors’ responsibilities
Independent auditors’ report
Corporate governance
Principal risks and uncertainties
Contacts
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Company balance sheet
Consolidated cash flow statement
Company cash flow statement
Statement of movements in equity
Notes to the accounts
Appendices to the Annual Report
Notice of Annual General Meeting
4
5
7
12
14
18
22
33
34
36
40
42
44
44
45
46
47
47
48
49
110
113
Financial
highlights
32.2%
increase in profit before
tax to £71.8 million
(2009: £54.3 million)
76.0%
increase in free cash
to £147.8 million
(2009: 84.0 million)
9.1%
increase in dividend
for full year to 3.6p
(2009: 3.3p)
5.9%
increase in net asset
value per share to
234p (2009: 221p)
Underlying profit before taxation
Profit before taxation
Profit after taxation
Total loan assets
Shareholders’ funds
Earnings per share
- basic
- diluted
Dividend per £1 ordinary share
Dividend per 10p ordinary share
2010
£m
66.1
71.8
53.9
8,911.2
692.3
2009
£m
45.3
54.3
41.1
9,314.3
650.8
2008
£m
66.9
53.7
37.1
10,053.2
621.5
2007
£m
86.7
91.0
62.8
11,034.9
313.3
2006
£m
80.3
82.8
68.8
8,426.6
279.0
2010
2009
2008
2007
2006
18.3p
17.8p
3.6p
-
13.9p
13.7p
3.3p
-
17.9p
17.9p
3.0p
-
90.5p
87.2p
-
8.0p
97.6p
93.1p
-
17.0p
Earnings per share in the years ended 30 September 2006 and 30 September 2007 have been restated to account for the bonus effect
of the rights issue in 2008.
The derivation of underlying profit before taxation is described in Appendix B.
4
The Paragon Group of Companies PLC
Chairman’s
statement
The Group has made excellent progress towards achieving its
strategic objectives in the year ended 30 September 2010. Strong
customer retention and an improving credit performance
contributed to a significant increase in profits and strong cash
generation which, together with a return to new lending at the
end of the year and further new initiative activity, have placed
the Group in a strong position for continued growth in
shareholder value.
During the year ended 30 September 2010 the Group earned a
profit of £71.8 million before taxation and after exceptional gains
on debt repurchase and the charges for impairment and losses on
fair valued hedge instruments (2009: £54.3 million), an increase
of 32.2%. Underlying profit, before exceptional and fair value
items, increased by 45.9% to £66.1 million for the year
(2009: £45.3 million).
Earnings per share were 18.3p (2009: 13.9p), the increase from
last year reflecting the improved profits earned by the Group.
During the year the Group’s activities have been managed in
accordance with three clear strategic objectives: positioning the
business to enable new lending to recommence when funding
capacity returns to the market at commercial terms; the
protection of the embedded value of the business by close
management of the loan portfolio; and the development of new
sources of recurring income using the skills and resources of
the business.
Excellent progress has been made in all three areas during the
year. In September we announced the Group’s return to new
lending, following the signing of a £200.0 million warehouse
facility and the recovery in the mortgage backed securities market
during the year. The loan portfolio has continued to perform well,
with arrears steadily reducing over the year and redemptions
running at low levels. New sources of income, developed over
the past two years, performed well, a further portfolio acquisition
was completed at the end of the period and the management of
additional third party loan accounts was assumed during the year.
The opportunities for further progress in these initiatives have
increased in recent months.
In view of the results achieved and in line with the progressive
dividend policy outlined in prior years, the Board has declared a
final dividend of 2.4p per share (2009: 2.2p) which, when added
to the interim dividend of 1.2p, gives a total dividend of 3.6p per
share for the year (2009: 3.3p), an increase of 9.1%. Subject to
approval at the Annual General Meeting on 10 February 2011, the
dividend will be paid on 14 February 2011, by reference to a
record date of 14 January 2010.
CAPITAL MANAGEMENT
The Group’s free cash flow has been strong during the year,
leading to an increase in free cash balances to £147.8 million
(30 September 2009: £84.0 million) after investments totalling
£29.0 million in respect of the purchase of a portfolio of buy-to-let
loans at the end of the financial year and the purchase of the
Group’s securitisation debt. These balances, together with net
cash receipts going forward, will support the Group’s future
lending and portfolio purchase activities.
Consistent with our aim to follow a progressive dividend policy,
the Company has declared a final dividend for the year of 2.4p
per share which, when added to the interim dividend, makes a
total dividend of 3.6p per share. The Company sees opportunities
going forward to deploy capital in support of our new lending
time. Additionally,
activities, which should grow over
opportunities exist to acquire loan portfolios, through Idem
Capital, as banks and other financial institutions de-leverage in
the coming years. The Company will keep under review the
appropriate level of capital for the business to meet its operational
requirements and strategic development objectives.
We will be proposing at the forthcoming Annual General Meeting
a special resolution seeking authority from shareholders for the
Company to purchase up to 29.8 million of its own shares (10% of
the issued share capital). It is customary for companies to seek
such authority but we would not expect to utilise the authority
unless, in the light of market conditions prevailing at the time, we
consider that to do so would enhance earnings per share and
would be in the best interests of shareholders generally. Given
the operational and strategic opportunities described above, the
Board has no current intention of using this authority.
The Paragon Group of Companies PLC 5
STAFF
The excellent progress we have made during the year would not
have been achieved without the hard work and dedication of our
staff and my fellow directors. I thank them all for their efforts.
CONCLUSION
The Group has made excellent progress during the year,
increasing profits, improving the credit quality of the portfolio,
expanding business activities and securing funding to support
new buy-to-let lending. Whilst the UK economic environment
remains challenging with the outlook for growth, unemployment
and house prices all uncertain, the Group enters the new financial
year with a term-funded, high quality loan book. We expect that
our new lending programme will expand over time and will be
complemented by increasing opportunities to acquire loan
portfolios and take on new servicing contracts, all of which should
leave us well placed for continued growth in shareholder value.
ROBERT G DENCH
Chairman
24 November 2010
Excellent progress
The Group has made excellent
progress towards achieving its
strategic objectives in the year.
Strong results
Strong customer retention and an
improving credit performance
contributed to a significant
increase in profits and strong cash
generation.
Dedication
The excellent progress we have
made during the year would not
have been achieved without the
hard work and dedication of our
staff and my fellow directors.
6
The Paragon Group of Companies PLC
Chief Executive’s
review
The year ended 30 September 2010 has been one of excellent
progress for the Group, with a return to new lending at the end of the
year and strong growth in profits fuelled by improving margins,
reduced arrears, a low redemption rate and good progress with our
new initiatives.
FINANCIAL REVIEW
CONSOLIDATED RESULTS
For the year ended 30 September 2010
Interest receivable
Interest payable and similar charges
Net interest income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Underlying profit
Gains on debt repurchases
Impairment of goodwill
Fair value net (losses)
Operating profit being profit on ordinary activities before taxation
Tax charge on profit on ordinary activities
Profit on ordinary activities after taxation
Dividend – Rate per share for the year
Basic earnings per share
Diluted earnings per share
2010
£m
275.6
(142.2)
133.4
14.5
147.9
(42.6)
(39.2)
66.1
5.7
-
-
71.8
(17.9)
53.9
3.6p
18.3p
17.8p
2009
£m
508.2
(373.4)
134.8
16.0
150.8
(39.3)
(66.2)
45.3
18.4
(6.0)
(3.4)
54.3
(13.2)
41.1
3.3p
13.9p
13.7p
The Group is organised into two major operating divisions: First Mortgages, which includes the buy-to-let and owner-occupied first
mortgage assets and other sources of income derived from first charge mortgages; and Consumer Finance, which includes secured
lending, the residual car, retail finance and unsecured loan books and other sources of income derived from consumer loans. These
divisions are the basis on which the Group reports primary segmental information.
The Paragon Group of Companies PLC 7
The underlying operating profits of these business segments are detailed fully in Appendix B to the annual report and are
summarised below.
Underlying operating profit
First Mortgages
Consumer Finance
2010
£m
50.6
15.5
66.1
2009
£m
44.7
0.6
45.3
An improvement in margins earned on loans to customers was
offset by a 4.3% reduction in the size of the book during the year
and by the lower level of interest earned on cash balances as a
consequence of lower LIBOR rates over the year. As a result, net
interest income decreased by 1.0% to £133.4 million from
£134.8 million in the previous year. At 30 September 2010, 95.1%
(2009: 94.1%) of the Group’s loan assets were first mortgages.
The charge for impairment provisions of £39.2 million was 40.5%
lower than the charge of £65.9 million for 2009 (note 17),
reflecting an improvement in arrears performance. Low interest
rates have increased affordability for customers, reducing the
incidence of new arrears and assisting the correction of past
arrears. The loan books continue to be carefully managed and
credit performance remains in line with our expectations.
Gains on debt repurchases of £5.7 million (2009: £18.4 million)
are detailed under Strategic Developments, below.
Net hedging instrument fair value movements for the year were
£nil (2009: £3.4 million losses). In prior years gains and losses on
hedging instrument fair values, which do not affect cash flow,
have arisen from the IFRS requirement that movements in the fair
value of hedging instruments attributable to ineffectiveness in the
hedging arrangements should be credited or charged to income
and expense.
Cash generation from the Group’s securitisation vehicle
companies has remained strong over the period, with free cash
balances increasing to £147.8 million at 30 September 2010 from
£84.0 million a year earlier, after the payment of £20.7 million for
the purchase of a first mortgage portfolio in September 2010.
Corporation tax has been charged at an effective tax rate of
24.9%, compared to 24.3% last year.
Profits after taxation of £53.9 million (2009: £41.1 million) have
been transferred to shareholders’ funds, which totalled
£692.3 million at the year-end (2009: £650.8 million),
(2009: 221p per share)
representing 234p per share
(Appendix C).
Other operating income was £14.5 million for the year, compared
with £16.0 million in 2009, increased income from third party
account servicing being offset by lower levels of commissions and
fees associated with reduced lending activity and reduced
insurance commissions.
Operating expenses during the year were 8.4% higher at
£42.6 million (2009: £39.3 million). The increase is due to staff
costs, following the recruitment of staff for the third party loan
servicing business and to support the return to new lending. The
cost:income ratio was in line with expectations at 28.8% for the
year, compared with 26.1% for the previous year (Appendix A)
reflecting both the reduction in income referred to above and the
increase in servicing activities, where the cost:income ratio is
higher than for lending activities.
Strong demand for
private renting
Landlords are witnessing very
high levels of rental demand,
strong rental growth and low
finance costs.
8
The Paragon Group of Companies PLC
BUSINESS REVIEW
NEW BUSINESS VOLUMES
Year ended 30 September 2010
First Mortgages
Buy-to-let
Consumer Finance
Secured lending
First Mortgages
The most significant development in the First Mortgage business
during the year was the return to new lending following the
signing of a £200.0 million warehouse facility in September 2010.
The Group’s aim is to re-establish its position as the leading
mortgage
landlords,
lender to experienced professional
extended, where appropriate to other areas of buy-to-let service
provision in the private rented sector. The initial focus of activity
is towards the re-establishment of distribution arrangements.
Completed loan business will naturally flow from this roll-out after
the normal mortgage lead-in times and the level of applications
received since September has been encouraging.
At 30 September 2010,
the buy-to-let portfolio was
£8,323.9 million, compared with £8,585.0 million a year earlier.
From the end of February 2008 until the recommencement of new
lending, new business origination by the Group’s buy-to-let
brands, Paragon Mortgages and Mortgage Trust, had been
restricted to further advances to existing borrowers where there
is adequate equity in the property. Aggregate completions of
such loans were £14.6 million for the year ended 30 September
2010, compared with £25.2 million for the previous year.
The credit performance of the Group’s buy-to-let mortgages over
the year as a whole has again been exemplary. Those cases that
have gone into arrears have, for the most part, responded well to
the careful management that our specialist arrears team
have supplied. At the year end Paragon’s three month plus
arrears in buy-to-let (excluding the portfolio acquired on
30 September 2010) stood at 0.83%, compared with the market
average of 2.45% as recorded by the CML.
Where an account is not responding well to the normal arrears
management processes a receiver of rent may be appointed. The
function of the receiver is to manage the property on behalf of the
2010
£m
14.6
0.5
15.1
2009
£m
25.2
60.4
85.6
2010
Number
2009
Number
254
34
288
487
2,119
2,606
landlord and forward the rent collected to the lender. This is a
flexible tool that can allow a borrower an opportunity to work his
or her way through a period of difficulty whilst the receiver
ensures that the property and the tenant are managed
professionally and that value is protected. At 30 September 2010
there were 1,398 properties across all portfolios where a receiver
had been appointed (30 September 2009: 1,420). Of those
available for letting, 93.5% were let.
Landlords continue to display a long-term commitment to
property investment and the buy-to-let portfolio redemption rate
has fallen to 3.0% for the year (2009: 7.1%). Landlords are
witnessing very high levels of rental demand, strong rental
growth and low finance costs. With limited availability of
alternative, competitively priced, buy-to-let products, customer
retention levels are likely to remain high.
Activity in the housing market remains subdued due, in part, to
continuing tight credit conditions. The effect on the private
rented sector, however, has been to maintain high levels of tenant
demand. The low level of purchase transactions means that
would-be home buyers are renting in larger numbers and for
longer periods. The latest RICS Residential Lettings Survey
confirmed that tenant demand remains high, creating upward
pressure on rents. A similar picture is painted by The Association
of Residential Letting Agents, whose members reported
increased achievable rents at the end of the third quarter. The
latest data, for September 2010, from Findaproperty.com shows
rents increasing by 1.4% in the third quarter, with rental prices at
their highest since the Autumn of 2008.
The constraints impacting on the owner-occupier sector seem
likely to continue for the foreseeable future. At the same time
there appears to be little likelihood of significant public funding
being made available to support the social rented sector. As a
result, the demand for private renting is expected to remain high.
The Paragon Group of Companies PLC 9
There is uncertainty as to whether buy-to-let lending will become
regulated, although secured consumer lending is expected to be
FSA regulated in due course.
We continue to engage with government bodies regarding the
future course of regulatory processes and participated in the
consultation on possible revised prudential and conduct of
business obligations for non-bank lenders. We shall maintain an
active dialogue with the FSA and HM Treasury as the process of
consultation develops.
STRATEGIC DEVELOPMENTS
Last year we reported on the specific areas of strategic focus for
the generation of new sources of income to enhance shareholder
value, these being the acquisition of loan portfolios through Idem
Capital, the servicing of third party loan portfolios through
Moorgate Loan Servicing and Arden Credit Management and the
expansion of products and services for existing customers. Good
progress has been made in these areas.
Idem Capital
The portfolio of second mortgages purchased in September 2009
has performed well during the year and in September 2010 we
acquired a further portfolio, consisting of buy-to-let loans, from
Morgan Stanley Bank International Limited for £20.7 million. The
full transfer of the servicing of these loans to our systems has
been completed. The Group has a long and established track
record in acquiring loan portfolios and successfully transferring
the
the books
loan servicing
effectively thereafter.
in-house and managing
The Group has acquired some £3 billion of loan portfolios in the
past across a range of asset classes. We continue to believe that a
number of portfolios owned by banks and other financial
institutions will become available for sale as these institutions de-
leverage and restructure their balance sheets. We see this as an
important strategic opportunity, with the potential to deliver
excellent returns to shareholders and we will continue to pursue
opportunities in this area.
The owner-occupied book reduced to £151.7 million from
£179.3 million during the year ended 30 September 2010 and
performed in line with the Group’s expectations. Save for the
management of this book in run-off, there has been little activity
in recent years in this area as the Group has focused on other
lending markets.
Consumer Finance
Lending during the period has been limited to a small number of
further advances to existing customers. At 30 September 2010,
the total loans outstanding on the Consumer Finance books
were £435.6 million, compared with £550.0 million at
30 September 2009, the redemption rate being kept low by the
shortage of alternative offerings in the market, as a result of lack
of funding, and by the low level of housing activity.
The percentage of accounts with arrears of two months and over
on the secured loan book has increased from 7.94% at
30 September 2009 to 9.36% at 30 September 2010, reflecting
both
the effects of economic conditions on borrower
performance and the contraction in the size of the portfolio. The
arrears performance compares favourably with the industry data
recorded by the Finance & Leasing Association (“FLA”) of 24.4%
(2009: 19.8%).
REGULATION
There has been an increasing trend towards greater regulation in
the financial sector, which is likely to continue for the foreseeable
future. Paragon is not directly affected by many of these changes,
although the consequences of changing market conditions can
affect the competitive landscape. Basel III does not apply to the
Group although its wider implications for the banking sector
are uncertain.
Portfolio acquisitions
The Group has a long and
established track record in acquiring
loan portfolios and successfully
transferring the loan servicing
in-house and managing the books
effectively thereafter.
10
The Paragon Group of Companies PLC
Moorgate Loan Servicing
FUNDING
Good progress has been made with the development of third
party loan servicing through Moorgate Loan Servicing and its
division, Arden Credit Management, which utilises our core
administration and collection skills. Our experience in loan
management established over many years has enabled us to
extend this service to our third party clients, providing significant
added value to the performance of their loan portfolios. Arden
Credit Management assumed servicing of a further 15,000
accounts during the year with the result that 54.3% of accounts
under management by the Group at 30 September 2010 were
managed on behalf of third parties. We believe increasing
opportunities will arise over the coming years, particularly as
portfolio disposals take place as part of the wider banking
de-leveraging process.
The range of services we offer to the private rented sector under
our Redbrick brand, which include the provision of energy
performance certificates, survey and valuation services, specialist
insurance services for landlords and tenant credit checks and
assessments, continued to be developed during the year and we
have been encouraged by the growth in business levels in
these areas.
for
funding
the warehouse
As previously reported, the Group entered into a £200.0 million
in
revolving warehouse agreement with Macquarie Bank
September, providing
the
recommencement of buy-to-let lending. The facility, to be rated
by Fitch Ratings, is available for a four year term to Paragon Fourth
Funding Limited, a 100% owned subsidiary, and interest will be
charged on the amount drawn at one month LIBOR plus 2.875%.
The Group’s intention is to use the facility to warehouse loans
prior to arranging term funding in the mortgage backed
securitisation markets. Consequently, the facility is structured to
permit drawings and re-drawings in its first two years. The Group
continues to engage
in a dialogue with other potential
counterparties to expand the warehouse funding available.
During the year the Group has engaged with bond investors in
the UK and in Europe to update investors on the Group’s
progress and to determine market appetite for new Paragon debt
securities. Taking account of the positive feedback received from
investors and the improvement seen during the course of the past
year in both the primary and secondary securitisation markets, the
Group continues to focus on securitisation
issuance as
offering the most cost-effective access to long-term funding for
new lending.
The activities of Idem Capital and Moorgate Loan Servicing
contributed £4.9 million to operating profit (2009: £1.4 million)
during the financial year.
CONCLUSION
In addition, following the buyback of £37.7 million (nominal) of
Group debt during the year ended 30 September 2009 at a cost
of £18.9 million, we invested a further £8.3 million during the
period in the purchase of £14.0 million (nominal) of the Group’s
securitisation debt, creating an exceptional profit of £5.7 million.
The scope for further purchases is limited as increased bond
prices now make further transactions less attractive.
The Group has made excellent progress during the year,
materially increasing profits, witnessing further growth in its new
ventures and importantly securing funding to support the
relaunch back into new buy-to-let lending. We fully expect that
our new lending programme will expand over time and will be
complemented by increasing opportunities to acquire loan
portfolios and take on new servicing contracts, all of which should
provide the basis for continued growth in shareholder value. The
Group’s financial position is strong, leaving us well placed to
deal with the economy’s uncertainties and to exploit the
opportunities ahead.
NIGEL S TERRINGTON
Chief Executive
24 November 2010
The Paragon Group of Companies PLC 11
Board
of Directors
Robert G Dench
Chairman
Age 60
Bob Dench joined the Group as a non-executive director in September 2004 and was appointed Chairman
in February 2007. During an extended career with Barclays he held a number of senior positions in the UK
and overseas, leaving in 2004. He is also a non-executive director of AXA UK plc and AXA Ireland Limited.
Nigel S Terrington
Chief Executive
Age 50
Nigel Terrington joined the Group in 1987 and became Chief Executive in June 1995, having held the
positions of Treasurer and Finance Director. Prior to Paragon, he worked in investment banking. He has
previously held the positions of Chairman of the Intermediary Mortgage Lenders Association, Chairman of
the FLA Consumer Finance Division and a Board member of the FLA. He is a member of the Chairman’s
Committee and Executive Committee of the Council of Mortgage Lenders. He is also currently a member of
HM Treasury’s Home Finance Forum.
Nicholas Keen
Finance Director
Age 52
Nick Keen joined the Group in May 1991 and became Finance Director in June 1995 having previously held
the position of Treasurer. Prior to joining the Group he worked in Corporate Banking, Treasury and Capital
Markets. He is Chairman of the Paragon Credit Committee.
John A Heron
Director of Mortgages
Age 51
John Heron joined the Group in January 1986. He was appointed as Marketing Director in 1990 and in 1994
played a pivotal role in re-establishing the Group’s mortgage lending operations as Managing Director of
Paragon Mortgages. Mr Heron joined the board in 2003 and is responsible for the development of all the
Group's new business operations. He is a Fellow of the Chartered Institute of Bankers and holds a number
of industry positions including the chair of the CML buy-to-let panel.
12
The Paragon Group of Companies PLC
Christopher D Newell
Non-Executive Director
Age 50
Christopher Newell has been a director of Altium Capital Limited since 1990. He was a director of Artemis
Investment Management Limited from its formation until 2006. He is a Chartered Accountant and joined the
Board of Paragon as a non-executive director in November 2001. He is Chairman of the Paragon Audit and
Compliance Committee.
Terence C Eccles
Non-Executive Director
Age 64
Terry Eccles joined Paragon as a non-executive director on 1 February 2007. He is also a non-executive
director of Bluebay Asset Management PLC and of Horizon Acquisition Company PLC. He was previously
Vice Chairman of JPMorgan Cazenove. Since joining the JPMorgan Group in 1970 he held a wide range of
roles in London, New York and Hong Kong. Since 1986 he was involved with the development of the firm’s
financial institutions business, becoming its head and then chairman. He has advised on many of the more
significant transactions in the financial services industry. He is the Senior Independent Director.
Edward A Tilly
Non-Executive Director
Age 67
Ted Tilly was appointed as a non-executive director on 1 April 2008. Mr Tilly was the senior independent
director of Retail Decisions PLC from January 2000 until January 2007. He has held a number of directorships
including Chairman of Barclays Life Assurance Company Ltd from 1999 to 2003. Prior to this Mr Tilly was
Chairman and Chief Executive of GE Capital’s European insurance division. Mr Tilly was with the Legal &
General Group for nearly thirty years where he held a number of senior positions including Director Life and
Pensions and Director International.
Alan K Fletcher
Non-Executive Director
Age 60
Alan Fletcher was appointed as a non-executive director on 25 February 2009. Mr Fletcher has considerable
experience in financial services, including pension fund trusteeship and investment fund management. He
was Chairman of Neville James Holdings prior to its acquisition by Challenger International of Australia,
following which he was Sales and Marketing Director of Challenger Group Services and a director of
Challenger Life (UK) from 2002 to 2003. He has been non-executive Chairman of Hyperama plc since 2000
and was Chairman of the professional training company Fresh Professional Development from 2003 to 2010.
He was a member of the General Synod of the Church of England between 2007 and 2010. He has been a
member of the Church of England Pensions Board since 2009, and of both its investment and housing
committees, which appointment runs until 2013.
The Paragon Group of Companies PLC 13
Directors’
report
The directors submit their Report and the Accounts for the year
ended 30 September 2010 which were approved by the Board on
24 November 2010.
Principal activities
The Company (registered number 2336032) is a holding
company co-ordinating the activities of its subsidiary companies.
The principal activities of the Group continue to be the operation
of its first mortgage and consumer finance businesses.
Results and dividends
The results for the year are shown in the Consolidated Income
Statement on page 44. The directors recommend a final dividend
of 2.4p per share (2009: 2.2p) which, taken with the interim
dividend of 1.2p per share (2009: 1.1p per share) paid on
30 July 2010, would give a total dividend for the year of 3.6p per
share (2009: 3.3p per share). Before dividends, retained profits of
£53.9 million (2009: £41.1 million) have been transferred
to reserves.
Business review
The Companies Act 2006 requires the Company to set out in this
report a fair review of the business of the Group during the year
ended 30 September 2010, including an analysis of the position
of the Group at the year end and a description of the
principal risks and uncertainties facing the Group (known as a
‘Business Review’).
The information that fulfils the Business Review requirements can
be found in the following sections of the Annual Report. All of the
information presented in these sections is incorporated by
reference into this Directors’ Report and is deemed to form part
of this report.
• The sections of the Chairman’s Statement headed ‘Capital
Management’ and ‘Conclusion’ on pages 5 and 6;
• The Chief Executive’s Review on pages 7 to 11;
• The Corporate Social Responsibility Report on pages 18
to 21;
• The Corporate Governance Statement on pages 36 to 39; and
• The principal risks and uncertainties to which the Group is
exposed on pages 40 and 41.
Pages 14 to 17 inclusive, together with the sections of the Annual
Report incorporated by reference, comprise a directors’ report for
the Group which has been drawn up and presented in
accordance with, and in reliance upon, applicable English
company law and the liabilities of the directors in connection with
this report shall be subject to the limitations and restrictions
provided by such law.
Directors
The interests of the directors at the year end in the share capital
of the Company, all beneficially held, are shown below.
At 30 September 2010
Ordinary Shares
At 30 September 2009
Ordinary Shares
R G Dench
N S Terrington
N Keen
J A Heron
C D Newell*
T C Eccles*
E A Tilly*
A K Fletcher*
117,000
647,972
368,679
252,680
78,000
80,000
30,000
125,000
117,000
612,921
342,412
234,256
78,000
80,000
-
100,000
* Non-executive directors
In addition, certain directors had interests in the share capital of
the Company by virtue of options granted under the Company’s
executive share option schemes and awards under the Paragon
Performance Share Plan, the Deferred Bonus Scheme and the
Matching Share Plan, details of which are given in the Report of
the Board to the Shareholders on Directors’ Remuneration on
pages 22 to 32.
There have been no changes in the directors’ interests in the
share capital of the Company since 30 September 2010.
The directors have no interests in the shares or debentures of the
Company’s subsidiary companies.
There were no changes in the membership of the Board during
the year.
The appointment and replacement of the Company’s directors is
governed by its Articles of Association, the UK Corporate
Governance Code, the Companies Acts and related legislation
and the individual service contracts and terms of appointment of
the directors. The powers of the directors, and their service
contracts and terms of appointment, are described in the
Corporate Governance section on pages 36 to 39.
14
The Paragon Group of Companies PLC
In accordance with the Articles of Association Mr R G Dench,
Mr N Keen and Mr C D Newell will retire from the Board at the
end of the forthcoming Annual General Meeting, and, being
eligible, will offer themselves for re election.
In addition, the UK Corporate Governance Code, which replaced
the Combined Code with effect from the Group’s financial year
ending 30 September 2011 recommends that all directors should
be subject to re-appointment annually and therefore the
remaining directors, Mr N S Terrington, Mr J A Heron, Mr T C
Eccles, Mr E A Tilly and Mr A K Fletcher, have agreed to
voluntarily retire from the Board at the end of the forthcoming
Annual General Meeting, and, being eligible, will offer
themselves for re election.
None of the directors has a service contract with the Company
requiring more than 12 months’ notice of termination to be given.
From 1 October 2008, a director has had a statutory duty to avoid
a situation in which he has, or can have, an interest that conflicts
or possibly may conflict with the interests of the Company. A
director will not be in breach of that duty if the relevant matter has
been authorised in accordance with the Articles of Association by
the other directors. The Articles of Association include the
relevant authorisation for directors to approve such conflicts.
None of the directors had, either during or at the end of the year,
any material interest in any contract of significance with the
Company or its subsidiaries.
Capital structure
Details of the issued share capital of the Company, together with
details of movements in its issued share capital in the year, are
given in note 42 to the accounts. The Company has one class of
ordinary share which carries no right to fixed income. Each
ordinary share carries the right to one vote at general meetings of
the Company. The rights and obligations attaching to ordinary
shares are set out in the Articles of Association of the Company.
There are no specific restrictions on the size of a member’s
holding or on the transfer of shares. Both of these matters are
governed by the general provisions of the Company’s Articles of
Association and prevailing legislation. The Articles of Association
may be amended by special resolution of the shareholders. The
directors are not aware of any agreements between holders of the
Company’s shares in respect of voting rights or which might
result in restrictions on the transfer of securities.
Details of employee share schemes are set out in note 15 to the
accounts. Votes attaching to shares held by employee benefit
trusts are not exercised at general meetings of the Company.
The Company presently has the authority to issue ordinary shares
up to a value of £99,400,000 and to make market purchases of up
to 29,900,000 £1 ordinary shares, granted at the Annual General
Meeting on 11 February 2010. These authorities expire at the
conclusion of the forthcoming Annual General Meeting on
10 February 2011.
Purchase of own shares
At 30 September 2007 the Company had, as part of a
£40.0 million repurchase programme, repurchased 6,689,000
10p ordinary shares having an aggregate nominal value of
£668,900. The reasons for the repurchase programme were set
out in an announcement made by the Company through RNS on
25 May 2005. On 29 January 2008 these shares were
consolidated into 668,900 £1 ordinary shares. All of these shares
were held as at 30 September 2010 and 30 September 2009 as
treasury shares, representing 0.2% of the issued share capital
excluding treasury shares, and this holding represents the
maximum number of its own £1 ordinary shares held by the
Company at any time during the past year.
Substantial shareholdings
As at 31 October 2010, being a date not more than one month
before the date of the notice convening the forthcoming Annual
General Meeting, the Company had been notified of the
following interests of more than 3% in the nominal value of the
ordinary share capital of the Company:
Ordinary shares
% held
Standard Life Investments
28,524,201
9.55%
BlackRock Investment
Management (UK)
Legal & General Investment
Management
Schroder Investment
Management
25,679,636
8.59%
20,934,678
7.01%
19,463,171
M & G Investment Management
18,333,707
Old Mutual Investment
Management
VPV Bankers NV
Aviva Investors
14,708,387
12,958,825
11,351,309
6.51%
6.14%
4.92%
4.34%
3.80%
The Paragon Group of Companies PLC 15
Donations
Company law requires the disclosure of political donations and
expenditure by any Group company. During the year ended
30 September 2010 no such payments were made (2009: £nil).
The Board of Directors considers that all the resolutions to be put
to the meeting are in the best interests of the Company and its
shareholders as a whole and unanimously recommends that
shareholders vote in favour of them.
Contributions to charitable institutions in the United Kingdom
amounted to £60,963 (2009: £50,895).
Resolution 13
Close company status
So far as the directors are aware, the Company is not a close
company for taxation purposes.
Creditor payment policy
The Group agrees terms and conditions with each of its suppliers
and ensures that its suppliers are aware of these terms. Payment
is then made on the terms agreed, subject to the appropriate
terms and conditions being met by the supplier. It is not
the Group’s policy to follow any code or standard on
payment practice.
The trade creditor days figure has not been stated as the measure
is not appropriate to the business.
Auditors
The directors have taken all reasonable steps to make themselves
and the Company’s auditors aware of any information needed in
preparing the audit of the Annual Report and Financial
Statements for the year, and, as far as each of the directors is
aware, there is no relevant audit information of which the auditors
are unaware.
A resolution for the re-appointment of Deloitte LLP as the auditors
of the Company is to be proposed at the forthcoming Annual
General Meeting.
Details of resolutions to be proposed as special
business at the Annual General Meeting
Resolution 13 is proposed as an ordinary resolution. This means
that for this resolution to be passed, more than half of the votes
cast must be in favour of the resolution. Resolutions 14, 15 and 16
are proposed as special resolutions. This means that for each of
these resolutions to be passed, at least three quarters of the votes
cast must be in favour of the resolution.
16
The Paragon Group of Companies PLC
Section 549 of the Companies Act 2006 states that the directors
may not exercise a company’s power to allot shares or grant rights
to subscribe for or convert any security into shares unless given
authority to do so by resolution of the shareholders in general
meeting.
The present authority of the directors to allot the unissued
ordinary share capital of the Company was granted at an Annual
General Meeting on 11 February 2010 and will expire at the end
of the forthcoming Annual General Meeting. Resolution 13 seeks
to give the directors authority to allot shares or grant rights to
subscribe for or convert any security into shares up to an
representing
aggregate nominal value of £99,500,000
approximately one third of the Company’s
issued share
capital, excluding treasury shares, at 31 October 2010. At
31 October 2010 the Group held 668,900 treasury shares,
representing 0.2% of the Company’s issued capital, excluding
treasury shares, at that date. The directors have no present
intention of exercising this authority, which will expire at the
conclusion of the following Annual General Meeting or, if earlier,
on 9 May 2012.
Resolution 14
Under Section 561 of the Companies Act 2006, any shares
allotted (or, in the case of any shares held in treasury, sold) wholly
for cash must be offered to existing shareholders in proportion to
their holdings, but this requirement may be modified by
the authority of a special resolution of the shareholders in
general meeting.
The authority given at the Annual General Meeting held on
11 February 2010 will expire at the end of the forthcoming Annual
General Meeting and Resolution 14 seeks to renew it. The
resolution authorises the directors to allot or sell shares for cash,
other than to existing shareholders or holders of other equity
securities in proportion to their holdings, up to an aggregate
nominal value of £14,900,000, representing approximately 5% of
the Company’s issued share capital, excluding treasury shares, at
31 October 2010. In respect of this aggregate nominal amount,
the directors confirm their intention to follow the provisions of the
Pre-Emption Group’s Statement of Principles regarding
cumulative usage of authorities within a rolling three year period
where the Principles provide that usage in excess of 7.5% should
not take place without prior consultation with shareholders. This
authority will expire at the conclusion of the following Annual
General Meeting or, if earlier, on 9 May 2012.
Resolution 15
This resolution, which is being proposed as a Special Resolution,
will enable the Company to purchase, in the market, up to a
maximum of 29.8 million of the Company’s ordinary shares
(approximately 10% of the issued share capital, excluding
treasury shares, at 31 October 2010) for cancellation, or to be
held in treasury, at a minimum price of 10p per share and a
maximum price of not more than 105% of the average middle
market quotation for an ordinary share as derived from the
London Stock Exchange Daily Official List for the five business
days immediately prior to purchase.
The directors would not expect to purchase ordinary shares in the
market unless, in the light of market conditions prevailing at the
time, they considered that to do so would enhance earnings per
share and would be in the best interests of shareholders
generally. Any purchases made by the Company will be
announced no later than 7.30 a.m. on the business day following
the transaction.
Resolution 16
Shareholders may give approval to shorten the notice period
required for general meetings (other than Annual General
Meetings) from 21 clear days to 14 clear days. At an Annual
General Meeting on 11 February 2010 shareholders approved the
reduction of the notice period for general meetings (other than
Annual General Meetings) to 14 clear days notice. In order to
preserve this reduction, Resolution 16 seeks to renew this
approval. The approval will be effective until the Company’s next
Annual General Meeting, when it is intended that a similar
resolution will be proposed. The shorter notice period would not
be used as a matter of routine for such meetings, but only where
flexibility is merited by the business of the meeting and is thought
to be to the advantage of the shareholders as a whole.
Approved by the Board of Directors and signed on behalf of
the Board.
JOHN G GEMMELL
Company Secretary
24 November 2010
The Paragon Group of Companies PLC 17
Corporate social
responsibility
The Group believes that the long-term interests of shareholders,
employees and customers are best served by acting in a socially
responsible manner. As such, the Group ensures that a high
standard of corporate governance is maintained.
Commitment to our customers
The Group places the needs of customers at the heart of its
day-to-day operations. With a commitment from the Board,
fairness to customers is a key consideration and objective at all
stages of the lifetime of a loan.
Training and development
The Group has been accredited under the ‘Investors in People’
scheme since 1997. This demonstrates the Group’s commitment
to the training and development of employees. The staff appraisal
system is designed to assist employees in developing their
careers and to
identify and provide appropriate training
opportunities, with all employees receiving a review at
least annually.
The corporate training and development strategy focuses on
providing opportunities to develop all staff and is central to the
achievement of the Group’s business objectives. On average
employees received 8.5 days training in the year (2009: 8.1 days).
Equality and diversity
The Group is committed to providing a working environment in
which employees feel valued and respected and are able to
contribute to the success of the business, and to employing a
workforce that recognises the diversity of customers. Employees
are requested to co-operate with the Group’s efforts to ensure
the policy is fully implemented.
The Group’s aim is that its employees should be able to work in an
environment free from discrimination, harassment and bullying,
and that employees, job applicants, customers, retailers, business
introducers and suppliers should be treated fairly regardless of:
• race, colour, nationality (including citizenship), ethnic or
national origins
• gender, sexual orientation, marital or family status
• religious or political beliefs or affiliations
• disability, impairment or age
• real or suspected infection with HIV/AIDS
• membership of a trade union
18
The Paragon Group of Companies PLC
and that they should not be disadvantaged by unjust or unfair
conditions or requirements.
When responding to changes in its business, the Group seeks to
minimise the requirement for compulsory redundancy, retraining
and redeploying staff wherever possible.
Composition of the workforce is reviewed on an annual basis and
employee satisfaction with equality of opportunity is monitored as
part of the regular employee feedback surveys. Human
Resources policies are reviewed regularly to ensure that they are
non-discriminatory and promote equality of opportunity. In
particular, recruitment, selection, promotion, training and
development policies and practices are monitored to ensure that
all employees have the opportunity to train and develop
according to their abilities.
Information on the composition of the workforce at the year end
is summarised below:
Female employees
Female management
grade employees
2010
2009
59.0%
59.5%
41.5%
40.7%
Ethnic minority employees
10.3%
8.7%
Ethnic minority management
grade employees
2.5%
1.9%
Employees’ involvement
The directors recognise the benefit of keeping employees
informed of the progress of the business. The Group sponsors a
Staff Forum, attended by elected staff representatives from each
area of the business, which exists primarily to facilitate
communication and dissemination of information throughout the
Group and provides a means by which employees can be
consulted on matters affecting them.
Employees are provided with regular information on the
performance and plans of the Group, and the financial and
economic factors affecting it, through information circulars
and presentations.
The Company operates a Sharesave share option scheme and a
profit sharing scheme, both of which enable eligible employees to
benefit from the performance of the business.
The directors encourage employee involvement at all levels through the staff appraisal process and communication between directors,
managers, teams and individual employees.
Environmental policy
The Group is engaged in mortgage and consumer finance and arrears management and therefore its overall environmental impact is
considered to be low. The main environmental impacts for the Group are limited to universal environmental issues such as resource use,
procurement in offices and staff and business travel.
The Group complies with all applicable laws and regulations relating to the environment and operates a Green Charter, which:
• ensures all buildings occupied by the Group are managed efficiently by its Facilities Team and Building Surveyor
• encourages staff to conserve energy
• provides facilities to enable employees to re-cycle used products
• controls business travel and provides opportunities for employees to travel to work in various ways; i.e. providing cycle racks and
showers (where possible)
• displays a Paragon Green Charter at all sites to encourage employees to be environmentally friendly at all times
• ensures liaison with the local community
• ensures that redundant IT equipment is disposed of within current directives / regulations (WEEE - Waste Electrical and Electronic
Equipment), recycling 98% of such equipment
• ensures that all fluorescent light tubes are disposed of in a safe manner, compliant with appropriate regulations
• arranges for paper waste products to be recycled, securely, by third parties
The Green Charter is kept under continuous review by the Facilities team.
All of the Group’s paper based stationery is procured from FSC certified suppliers.
The Group has been involved in no prosecutions, accidents or similar non-compliances in respect of environmental matters.
The environmental key performance indicators for the Group, determined in accordance with the Reporting Guidelines published by the
Department for Environment Food and Rural Affairs (DEFRA) in 2006 are set out below.
Direct inputs (operational)
Greenhouse
gases
Definition
Gas
Emissions from utility boilers
Vehicle fuel
Petrol and diesel used by staff and company cars
Absolute tonnes
CO2
Normalised tonnes CO2
per £m income
2010
366
306
2009
373
342
2010
2.5
2.1
2009
2.5
2.3
Waste
Definition
Absolute tonnes
Normalised tonnes
per £m income
Landfill
Recycled
General office waste, which includes a mixture of
paper, card, wood, plastics and metal
General office waste recycled, primarily
paper and cardboard
2010
154
2009
150
2010
1.0
2009
1.0
164
96
1.1
0.6
The Paragon Group of Companies PLC 19
Indirect inputs (supply chain)
Greenhouse
gases
Definition
Energy use
Directly purchased electricity, which generates
greenhouse gas emissions
Absolute tonnes
CO2
2010
1,523
2009
1,417
Normalised tonnes CO2
per £m income
2010
10.3
2009
9.4
Water
Definition
Absolute cubic metres
Normalised cubic metres
per £m income
Supplied
water
Consumption of piped water. No water is
extracted directly by the Group
2010
6,697
2009
6,374
2010
45.2
2009
42.3
Gas, electricity and water usage is based on consumption recorded on purchase invoices. Vehicle fuel usage is based on expense claims
and recorded mileage and waste generation is based on volumes reported on disposal invoices. Waste generation figures for the year
ended 30 September 2009 have been restated following the receipt of corrected data from contractors.
CO2 values above are calculated based on the DEFRA guidelines published in October 2010. CO2 values for the year ended
30 September 2009 have been restated for the revised conversion factors published by DEFRA. Normalised data is based on total
operating income of £147.9m (2009: £150.8m).
Health and safety policy
It is the Group’s policy to comply with the terms of the Health and Safety at Work Act 1974, and subsequent legislation, and to provide
and maintain a healthy and safe working environment. The health and safety objective of the Group is to minimise the number of
instances of occupational accidents and illnesses and ultimately achieve an accident-free workplace.
The Group recognises and accepts its duty to protect the health and safety of all visitors to its premises, including contractors and
temporary workers, as well as any members of the public who might be affected by our operations.
While the management of the Group will do all within its power to ensure the health and safety of its employees, it is recognised that
health and safety at work is the responsibility of each and every individual associated with the Group. It is the duty of each employee to
take reasonable care of their own and other people’s welfare and to report any situation which may pose a threat to the well-being of
any other person.
Health and safety policies and procedures are managed by the Group Services Division who liaise with senior management and Human
Resources as necessary.
All employees are provided with such equipment, information, training and supervision as is necessary to implement the policy in order
to achieve the above stated objective. The Group makes available such finances and resources deemed reasonable to implement
this policy.
All injuries, however small, sustained by a person at work must be reported. Accident records are crucial to the effective monitoring and
revision of the policy and must therefore be accurate and comprehensive.
The Group recognises the civil and moral need to ensure that all employees adhere to this health and safety policy and is prepared to
invoke the disciplinary procedure in case of any deliberate disregard for the health and safety policy.
20
The Paragon Group of Companies PLC
The Group’s health and safety policy is continually monitored and updated, particularly when changes in the scale or nature of our
operations occur. The policy is updated at least every twelve months.
A six monthly health and safety report is produced by Head of Group Services for the Senior Management Group. Consultants are
employed to carry out an annual audit of all health and safety records, including policies, procedures, risk assessments and
training records.
Charitable contributions
The Group contributes to registered charities relating to financial services or serving the local communities in which it operates. Included
in the charitable contributions shown in the Directors’ Report are contributions of £46,453 (2009: £36,792) made by the Group to the
work of the Foundation for Credit Counselling which operates the Consumer Credit Counselling Service. The Group has also
contributed to charities throughout the year by way of single donations.
The Group’s main objective is to support children’s and local charities although no charity request is overlooked. During the last year the
Group has helped many and varied charities and causes such as: Youth Speaks, Pathway Project, Lupus UK, TSUK- Transplant Active,
Action for Sick Children, Special Needs Adventure Playground Kenilworth, Trinity Hospice, Second Chance, The Children’s Trust,
Down’s Syndrome International Swimming Organisation, Children’s Cancer Care, Happy Days, The Foundation for Conductive
Education, British Blind Sport, Children’s Heart Foundation, RMCH, Shelter, Meningitis Trust, Queen Elizabeth Hospital, Walk the Walk
Worldwide, The Royal Marsden Cancer Campaign, Motor Neurone Disease Association, CHICKS, Penn Hall School for the Physically
Disabled, Care, Child Haven Appeal (SPACE), Zoe’s Place Baby Hospice, Help for Heroes, County Air Ambulance.
The Group also supports Paragon’s Charity Committee, consisting of volunteer employees, which organises a variety of fundraising
activities throughout the year, raising in the region of £7,000 for the employees’ chosen charity. All employees are given the opportunity
to nominate a charity and a vote is carried out to select the beneficiary of the year’s fundraising.
The Paragon Group of Companies PLC 21
Report of the Board to the shareholders
on directors’ remuneration
Remuneration policy for the Chairman and executive
directors
The Company’s policy is to ensure that the Chairman and the
executive directors are fairly rewarded for their individual
performance, having regard to the importance of retention and
motivation. The performance measurement of the Chairman and
the executive directors and the determination of their annual
remuneration packages are undertaken by the Committee.
In forming and reviewing remuneration policy the Committee has
given full consideration to the Combined Code on Corporate
Governance and has complied with the Code’s provisions relating
to directors’ remuneration throughout the year. Moreover, the
Committee has given due regard to the
link between
remuneration and strategy, seeking to ensure that the
remuneration structures in place do not encourage excessive risk
or activities that are not in line with the agreed strategy.
The remuneration packages of the individual directors are
assessed after a review of their individual performances and an
assessment of comparable positions in the financial sector and
within a group of pan-sectoral comparators comprising a number
of companies with market capitalisations similar to the Group’s
discounted net present value, there now being few financial
service businesses in the UK of similar size to the Group.
The executive directors receive a combination of fixed and
performance-related elements of
remuneration. Fixed
remuneration consists of salary, benefits in kind and pension
scheme contributions (see under ‘Pension contributions’ below).
Performance-related remuneration consists of participation in the
annual bonus plan, the award of shares under the Performance
Share Plan and participation in the award of shares under the
Matching Share Plan from time to time. The performance-related
elements of remuneration are intended to provide a significant
proportion of executive directors’ potential total remuneration.
As a result of the difficulties in the financial markets in recent
years and the Board’s rejection of an offer for the Company in
2008, the Committee has kept the Company’s remuneration
policy under review. The Committee, having consulted major
shareholders, believes that the current policy is appropriate for
the present needs of the Company, acknowledging that its
application will take into account the specific context in which the
Company operates. The Committee will continue to keep the
position under review during the coming year.
This report has been prepared in accordance with the Directors’
Remuneration Report Regulations 2002 and also sets out how the
principles of the Combined Code on Corporate Governance
relating to executive directors’ remuneration are applied by the
Group. As required by the Regulations, a resolution to approve
the report will be proposed at the Annual General Meeting of
the Company.
Certain parts of this report are required to be audited. Where
disclosures are subject to audit, they have been marked as such.
UNAUDITED INFORMATION
Remuneration Committee
During the year, the Committee consisted of Edward Tilly (who
chaired the Committee), Terence Eccles, Christopher Newell and
Alan Fletcher, all of whom are independent non-executive
directors and the Chairman of the Company, Robert Dench.
None of the non-executive directors who sit on the Committee
has any personal financial interest (other than as a shareholder),
conflict of interest arising from cross-directorships or day-to-day
involvement in running the business. The Chairman of the
Company does not participate
in discussions on his
own remuneration.
The Committee determines the Company’s policy on executive
remuneration and specific compensation packages for each of the
executive directors and the Chairman. No director contributes to
any discussion about his own remuneration. The Committee also
reviews
remuneration of
senior management.
level and structure of
the
The terms of reference of the Committee are available on request
from the Company Secretary.
In determining the directors’ remuneration for the year, the
Committee consulted Mr N S Terrington (Chief Executive) about
its proposals. The Committee also retains Hewitt New Bridge
Street (‘HNBS’) as its advisor on remuneration matters. HNBS also
advised the Company on various sundry remuneration matters
during the year, which did not conflict with its advice to
the Committee.
22
The Paragon Group of Companies PLC
The Committee pays due regard to the levels of remuneration
within the Group when determining the remuneration of
executive directors and other senior employees. It also seeks to
ensure that the incentive structure for senior management does
not raise environmental, social or governance risks by
inadvertently motivating irresponsible behaviour.
Salary
levels,
The Chairman’s fees and executive directors’ salaries are
determined by the Committee at the beginning of each year. In
deciding appropriate
the Committee considers
remuneration levels within the Group as a whole, individual and
business performance during the year and in the past has relied
on objective research which gives up-to-date information on
comparable companies. Directors’ contracts of service will be
available for inspection at the Annual General Meeting. In view of
the progress made by the Group during the year, the Committee
has agreed that the Chairman’s fee and executive directors’
salaries will be increased by 3% from 1 October 2010, having
been frozen at 2008/09 levels for 2009/10 .
Pension contributions
During the year the executive directors were members of the
Group Retirement Benefits Plan, to which the Company
contributes at the same rate as for all members. Dependants of
executive directors who are members of the Group Retirement
Benefits Plan are eligible for a dependant’s pension and the
payment of a lump sum in the event of death in service. The
pension arrangements provide for a pension of 1/37.5 of basic
annual salary (to a maximum of 2/3) for every year of eligible
service. Where pension contributions are capped, additional
payments are made to enable further provision. Plan participants
contribute 5% of eligible salary to the Plan. Two of the executive
directors suspended their contributions to the Plan, and the
accrual of benefits, prior to the beginning of the year. This was
because each director affected by the 2006 ‘A-Day’ changes was
offered the opportunity to terminate permanently further
contributions in exchange for a cash supplement calculated to
equate to the cost of the Company’s contributions towards the
executive’s future service benefits had he stayed within the Plan
for his future service accrual.
The changes in pension entitlements arising in the financial year,
the disclosure of which is required by the Financial Services
Authority, are given on pages 27 and 28. There have been no
changes in the terms of directors’ pension entitlements during the
year. There are no unfunded promises or similar arrangements
for directors.
Performance bonuses
During the year, the executive directors participated in an annual
bonus scheme under which awards were determined by
consideration of (a) several business-specific financial measures,
including operating profit, cash generation and cost control; and
(b) measures relevant to current business plans and objectives,
such as the preparation of the business for a return to new
lending. These performance measures are designed to promote
the long-term success of the Company by linking to the strategy
and specific risk factors faced by the Company. Consideration
was also given to individual executive performance. Corporate
and individual performance are the key determinants of any
bonus paid – share price performance is not intended to have an
impact other than in exceptional circumstances.
During the year, the total target bonus for executive directors was
100% of salary, total stretch bonus was 150% of salary and the
bonus payable under the bonus scheme was capped at 200% of
salary (this could only be achieved for exceptional performance).
This structure will remain unchanged for the current year.
In determining bonus levels the Committee has considered the
performance of the executive directors and of the Company in
relation to the adverse economic and market conditions
prevailing during the year. The directors have exceeded their
target bonus objectives to deliver the Group’s strategy, including,
inter alia, revenue generation, the effective and efficient
management of the extant book, including optimising value by
maintaining low redemption and arrears rates, maximising cash
flow and preparing the business for a return to new lending,
which has now recommenced. In view of the results achieved the
Committee has determined that each executive director should
be paid the stretch bonus equal to 150% of his salary in respect of
the year ended 30 September 2010. Bonus amounts in excess of
£50,000 are subject to compulsory 25% deferral, whereby the
deferred amount less any clawback (in the event of misstatement
or misconduct), which can be applied by the Committee in certain
specific circumstances, is payable in shares after three years.
The Chairman and non-executive directors are not entitled to
receive a bonus and do not participate in the performance or
matching share plans.
For the current year, bonus objectives will continue to be focused
on protecting, maintaining and enhancing shareholder value.
Specific objectives will be set concerning the management of the
extant book of business, covering such aspects as managing
retention, arrears, cash flow and overall cost efficiency. Other
objectives will concern the development of the Group’s new
lending business and the development and delivery of new
strategies to enhance existing income streams. Performance
against these objectives will be reported in next year’s report.
The Paragon Group of Companies PLC 23
Share awards
Paragon Performance Share Plan (‘PSP’)
The PSP has an annual award limit to an individual of shares worth
200% of salary.
For PSP awards made after 30 September 2005 but prior to 29
September 2008 to Executive Directors, 50% of the awards are
subject to an EPS test and 50% to a TSR test. The growth in the
Company’s EPS (as adjusted for a common rate of corporation
tax) and its TSR are compared over a single three-year period to
the performance of the following companies: Alliance & Leicester
(until its delisting on 10 October 2008), Barclays, Bradford &
Bingley (until its nationalisation on 29 September 2008), Cattles,
Egg (until its delisting on 20 February 2006), HBOS (until its
delisting on 19 January 2009), Hitachi Capital (until its delisting on
9 August 2007), HSBC, Kensington Group (until its delisting on 8
August 2007), Lloyds Banking Group, London Scottish Bank (until
its delisting on 4 December 2008), Northern Rock (until its
nationalisation on 22 February 2008), Provident Financial and
Royal Bank of Scotland.
35% of each element of the PSP award vests for median
performance with full vesting for upper quartile performance;
between these points awards vest on a straight line basis. For
below median performance, none of the relevant element of the
award vests. In addition, the Remuneration Committee has regard
to the underlying financial performance of the Company as
compared with the level of TSR and EPS performance when
determining whether to scale back the level of awards that will
ultimately vest.
TSR and EPS were selected as the performance measures for
these awards since they provided a balance of internal and
external measures to incentivise and reward executives more
effectively, whilst also aligning the interests of executives with
those of shareholders. The Company’s TSR performance and the
TSR and EPS performance of the peer companies will be
independently calculated by HNBS before being reviewed and
confirmed by the Remuneration Committee.
PSP awards granted on 29 September 2008 are subject to an
absolute TSR performance condition, whereby the Company’s
share price (plus the benefit of any reinvested dividends) at the
end of the performance period must be at least equal to 125p plus
compound annual growth of 10%. (The share price at the time
awards were granted was 66.5p). 35% of the awards will vest at
this level, increasing on a straight line basis to full vesting for
compound annual growth of 15%. The performance period is the
three year period commencing on the date of grant.
In prior years, executive directors received grants of share
options under the Paragon 2000 Executive Share Option Scheme
(‘ESOS’). Executive directors no longer receive share option
grants under the ESOS and the scheme has now expired.
Directors remain eligible for awards under the Performance Share
Plan (‘PSP’) and are able to participate in the Matching Share Plan
(‘MSP’) by
in the
Company’s shares.
investing up to 25% of their salary
reviewed
the appropriateness of
The Committee
the
performance criteria it had applied to awards in the past and
concluded that the traditional measures of EPS growth and
relative Total Shareholder Return ("TSR") would not be
appropriate for the current situation. After consultation with
major shareholders, the Committee determined that the most
appropriate target is relative TSR, whereby the TSR of the
Company is compared to a comparator group of companies
comprising the constituents of the FTSE 250. This was the
condition applied to grants made under the PSP and MSP on and
after 21 May 2009. The FTSE 250 was chosen because it is a
broad-based index and because of the lack of comparable listed
financial services organisations at the current time. The
performance conditions will be reviewed prior to each future
grant to ensure that they remain the most suitable in the
Company’s prevailing circumstances.
The executive directors are entitled to receive options under the
Paragon UK Sharesave Plan 2009, on the same terms as
other employees.
24
The Paragon Group of Companies PLC
PSP awards granted on or after 21 May 2009 are subject to a
performance condition comparing the rank of the Company’s TSR
against a comparator group of companies comprising the
constituents of the FTSE-250 on the date of grant over the three
years commencing on the date of grant. 25% of awards vest for
median performance, increasing on a straight line basis to full
vesting for upper quartile performance.
Performance graph
The following graph shows the Company’s TSR performance
compared with the performance of the FTSE All Share General
Financial sector index. The General Financial sector has been
selected for this comparison because it is the sub-sector index
that contains the Company’s shares.
Prior to any awards vesting, the Remuneration Committee must
be satisfied that the requirements of a financial underpin test have
been met.
Five Year Return Index for the FTSE All Share
Financial Services sector as at 30 September 2010
During the year the rules of the scheme were amended such that
the expiry date for each outstanding award is the tenth
anniversary of the grant date. Performance continues to be
measured over a single three year period and all other conditions
remain unchanged.
Awards under the PSP are made from time to time at the
discretion of the Committee and during the year the executive
directors were granted awards over shares equal to 150%
of salary.
180
160
140
120
100
80
60
40
20
0
Paragon Matching Share Plan (‘MSP’)
Under the terms of the MSP, executive directors and senior
management may be invited to invest in shares in the Company
out of their after-tax cash bonus. Assuming that the executives
decide to invest, the shares acquired must remain held by the
executives for three years. At the end of the three-year period
and, subject to satisfaction of the same performance conditions as
set out for the PSP above, the executives will receive a match in
shares on a two-for-one basis related to the number of shares
which could have been purchased with the pre-tax equivalent of
the bonus invested.
Executive directors will be invited to invest the after-tax
equivalent of up to 25% of salary; at such a level, their award is
over ‘free’ performance-linked matching shares worth 50%
of salary.
The MSP provides the facility to increase the level of potential
investment up to the after-tax equivalent of 50% of salary should
the Remuneration Committee feel in future years that this would
be appropriate.
During the year the rules of the scheme were amended such that
the expiry date for each outstanding award is the tenth
anniversary of the grant date. Performance continues to be
measured over a single three year period and all other conditions
remain unchanged.
2005 2006 2007 2008 2009 2010
The Paragon Group of Companies PLC
FTSE All Share General Financial sector
This graph shows the value, by 30 September 2010, of £100
invested
in The Paragon Group of Companies PLC on
30 September 2005, compared with £100 invested in the FTSE
General Financial sector index. The other points plotted are the
values at the intervening financial year ends.
Directors’ contracts
in
The Chairman and executive directors hold one year rolling
contracts
line with current market practice and the
Remuneration Committee reviews the terms of these contracts
regularly. During the year the terms of the executive directors’
contracts were amended to require each director to give six
months notice of termination of employment.
The current contracts are dated as follows:
R G Dench
N S Terrington - 1 September 1990 (amended 16 February
- 8 February 2007
N Keen
1993, 30 October 2001 and 10 March 2010)
- 6 February 1996 (amended 30 October 2001
and 10 March 2010)
J A Heron
- 1 September 1990 (amended 14 January,
8 February 1993 and 10 March 2010)
The Paragon Group of Companies PLC 25
In the event of early termination, the directors’ contracts provide
for the payment of one year’s fees / salary, benefits, pension and
bonus in lieu of notice. No provision exists for additional
compensation in the event of termination due to a change of
control of the Company.
membership of each committee, £10,500 for Remuneration
Committee and Audit and Compliance Committee chairmanship
and £6,300 for acting as the Senior Independent Director. All fees
payable to non-executive directors have been increased by 3%
with effect from 1 October 2010.
Of the directors seeking re-election at the Annual General
Meeting, Mr R G Dench, Mr N S Terrington, Mr N Keen and
Mr J A Heron each has a service contract with the Company.
None of the executive directors currently earns remuneration
from external non-executive appointments.
Current terms of engagement apply for the following periods:
1 November 2010 to 1 November 2011
C D Newell
1 February 2010 to 1 February 2013
T C Eccles
1 April 2008 to 1 April 2011
E A Tilly
25 February 2009 to 25 February 2012
A K Fletcher
-
-
-
-
Non-executive directors
All non-executive directors have specific terms of engagement
and their remuneration is determined by the Board, subject to the
Articles of Association. During the year all non executive
directors were paid an annual base fee of £31,500 plus £2,100 for
Non-executive directors are not eligible to participate in any of
the Company’s incentive or pension schemes and are not entitled
to receive compensation for early termination of their terms
of engagement.
Edward Tilly, Chairman of the Remuneration Committee, will be
available to answer questions on remuneration policy at the
Annual General Meeting.
26
The Paragon Group of Companies PLC
AUDITED INFORMATION
Directors’ emoluments
The emoluments of directors holding office during the year were:
Salary
and fees
£000
Benefits
in kind
£000
Annual
bonus
£000
Loss of office
£000
193
406
307
220
-
46
46
44
38
-
1,300
1,306
5
2
5
2
-
-
-
-
-
-
14
51
-
456
344
249
-
-
-
-
-
-
1,049
712
-
-
-
-
-
-
-
-
-
-
-
417
2010
Total
£000
198
864
656
471
-
46
46
44
38
-
2,363
2,486
2009
Total
£000
209
716
545
400
436
45
43
44
23
25
2,486
Chairman
R G Dench
Executive
N S Terrington
N Keen
J A Heron
P Pandya
Non-executive
C D Newell
E A Tilly
T C Eccles
A K Fletcher
D M M Beever
2010
2009
Benefits in kind comprise private health cover, fuel benefit, life assurance and company car provision.
Directors’ pensions
The total amount charged to the profit and loss account of the Group in respect of pension provision for directors was £375,000
(2009: £381,000).
Mr N S Terrington, Mr N Keen and Mr J A Heron were members of the Group defined benefit pension scheme during the year.
The amounts shown below describe their entitlement in accordance with paragraph LR 9.8.8(12) of the Listing Rules.
N S Terrington
N Keen
J A Heron
Increase / (decrease)
in accrued pension
during the year
excluding any
increase for inflation
£000
Transfer value
of increase /
(decrease) less
directors’
contributions
£000
Accumulated
total accrued
pension at
30 September
2010
£000
Accumulated
total accrued
pension at
30 September
2009
£000
-
7
-
-
96
-
151
87
85
151
80
85
The Paragon Group of Companies PLC 27
The pension entitlement shown is that which would be paid annually on retirement based on service to 30 September 2010 for Mr Keen
and service to 6 April 2006 for Messrs Terrington and Heron who each elected to suspend future benefit accrual within the plan from
that date.
The increase in accrued pension during the year (and transfer value of the increase) excludes any increase for inflation.
The transfer value has been calculated in accordance with the Occupational Pensions Schemes (Transfer Values) Regulations 1996 and
the Occupational Pensions Schemes (Transfer Values) (Amendment) Regulations 2008, in force from 1 October 2008.
Members of the scheme have the option to pay Additional Voluntary Contributions; neither the contributions nor the resulting benefits
are included in the above table.
The Government has recently announced its intention to link pension increases to CPI rather than RPI. This may have an impact on the
plan. The transfer values calculated have been based on the assumption that increases (both revaluation in deferment and increases in
payment) continue to be linked to RPI as provided by the plan rules.
The following disclosures describe the pension benefits earned in the year in accordance with section 421 of the Companies Act 2006.
Directors’
contributions
in the year
Age
at
year
end
Increase in
accrued
pension
in the year
Accumulated
total accrued
pension at
year end
N S Terrington
N Keen
J A Heron
50
52
51
£000
£000
-
6
-
-
7
-
£000
151
87
85
Transfer value
of accrued
benefits at
30 September
2009
£000
Transfer value
of accrued
benefits at
30 September
2010
£000
2,428
1,340
1,415
2,599
1,534
1,515
Difference
in transfer
values less
contributions
£000
171
188
100
The pension entitlement shown is that which would be paid annually on retirement based on service to 30 September 2010 for Mr Keen
and service to 6 April 2006 for Messrs Terrington and Heron who both elected to suspend future benefit accrual within the plan from
that date.
The contributions shown are those paid or payable by the directors under the terms of the plan. Members of the scheme have the option
to pay Additional Voluntary Contributions; neither the contributions nor the resulting benefits are included in the above table.
The increases in transfer values (as shown in the final column) reflect the change in assumptions underlying the transfer value basis as
at 30 September 2010 and 30 September 2009, due to changes in financial conditions. The increases also allow for the fact that the
accrued pension is a year closer to the assumed date of payment.
The transfer value at 30 September 2010 has been calculated on the basis of the Occupational Pensions Schemes (Transfer Values)
(Amendment) Regulations 2008, in force from 1 October 2008. Under the amended regulations, the trustees are responsible for the
assumptions and calculation of transfer values, having taken advice from the scheme actuary.
The Government has recently announced its intention to link pension increases to CPI rather than RPI. This may have an impact on the
plan. The transfer values calculated have been based on the assumption that increases (both revaluation in deferment and increases in
payment) continue to be linked to RPI as provided by the plan rules.
The transfer values disclosed above do not represent a sum paid or payable to the individual director. Instead they represent a potential
liability of the pension scheme.
During the year the Group made contributions in respect of further pension provision of £130,000 (2009: £130,000) for
Mr N S Terrington, £127,000 (2009: £124,000) for Mr N Keen and £65,000 (2009: £65,000) for Mr J A Heron.
28
The Paragon Group of Companies PLC
Details of share-based awards
Aggregate gains before taxation made by directors on the exercise of share based awards during the year were £109,000
(2009: £12,000). At 30 September 2010 the share price of The Paragon Group of Companies PLC was 163.6p per share (2009: 150.8p
per share) and the range during the year then ended was 113.3p to 182.7p per share (2009: 31.0p to 159.0p per share).
Paragon Performance Share Plan
Awards under this plan comprise a right to acquire shares in the Company for nil or nominal payment and will vest on the third
anniversary of their granting to the extent that the applicable performance criteria have been satisfied.
Details of individual entitlements of the directors under the Paragon Performance Share Plan at 30 September 2009 and 30 September
2010 are:
Date from
which
exercisable
Expiry date
Market price
at award date
N S Terrington
N Keen
J A Heron
Number
Number
Number
Awards outstanding at 30 September 2009:
09/01/2010†
28/03/2010†
14/06/2010†
26/09/2010†
26/11/2010†
29/09/2011‡
21/05/2012§
09/07/2010
28/06/2010
14/06/2017
26/09/2017
26/11/2017
29/09/2018
21/05/2019
665.00p *
576.50p *
543.00p *
296.50p *
130.50p *
66.50p #
70.00p #
Awards made in the year:
Granted on 4 January 2010
11,611
13,073
16,964
36,038
50,050
844,051
844,286
8,699
9,795
12,712
27,009
37,504
632,475
632,143
5,545
6,244
7,238
12,673
26,693
450,160
450,000
1,816,073
1,360,337
958,553
04/01/2013§
04/01/2020
135.20p #
451,145
337,786
240,458
Awards exercised in the year:
09/01/2010†
28/03/2010†
09/07/2010
28/06/2010
Awards lapsing in the year:
09/01/2010†
28/03/2010†
14/06/2010†
26/09/2010†
09/07/2010
28/06/2010
14/06/2017
26/09/2017
665.00p *
576.50p *
665.00p *
576.50p *
543.00p *
296.50p *
(6,808)
(7,665)
(4,803)
(5,408)
(7,017)
(14,911)
(5,101)
(5,743)
(3,598)
(4,052)
(5,258)
(11,175)
(3,252)
(3,661)
(2,293)
(2,583)
(2,994)
(5,243)
At 30 September 2010
2,220,606
1,663,196
1,178,985
*
price per 10p ordinary share
# price per £1 ordinary share
The Paragon Group of Companies PLC 29
†
50% of these awards are subject to an EPS test and 50% to a TSR test. No part of an award vests for below median performance, 35%
of each element vests for median performance and full vesting will occur for upper quartile performance. Between median and
upper quartile performance, awards vest on a straight line basis.
‡ These awards are subject to an absolute TSR performance condition, whereby the increase in the net return index over the
performance period, based on a share price that is equivalent to 125 pence per share, must at least equal compound annual growth
of 10%. 35% of the awards will vest for 10% compound annual growth over the performance period, increasing on a straight line basis
to full vesting for compound annual growth of 15%. The performance period is the three year period commencing on the date
of grant.
§ These awards will be subject to a performance condition comparing the rank of the Company’s TSR against a comparator group of
companies comprising the constituents of the FTSE-250 on the date of grant over the three years commencing on the date of grant.
25% of the awards will vest for median performance, increasing on a straight line basis to full vesting for upper quartile performance.
The share price at the exercise date of 29 March 2010 was 138.0p.
The awards maturing during the year achieved 58.6% vesting after the application of the performance criteria.
Share option schemes
Details of individual options held by the directors at 30 September 2009 and 30 September 2010 are:
Expiry date
Option price
N S Terrington
N Keen
J A Heron
Date from
which
exercisable
Options held at 30 September 2009:
17/02/2003
27/11/2004
29/07/2005
14/03/2006
08/12/2006
01/12/2007
17/02/2010
27/11/2011
29/07/2012
14/03/2013
08/12/2013
01/12/2014
234.33p
395.34p
297.30p
297.30p
540.40p
555.34p
Number
Number
Number
62,730
188,190
37,638
119,848
61,527
68,874
-
-
37,638
87,161
46,261
51,656
-
-
50,184
41,269
25,906
27,730
538,807
222,716
145,089
Options granted in the year:
Options lapsing in the year:
-
17/02/2003
17/02/2010
234.33p
(62,730)
-
-
-
-
At 30 September 2010
476,077
222,716
145,089
30
The Paragon Group of Companies PLC
Deferred bonus shares
Details of individual entitlements of the directors to Deferred Bonus Shares at 30 September 2009 and 30 September 2010 are:
Award date
Transfer date
Market price
at award date
N S Terrington
Number
N Keen
Number
J A Heron
Number
Awards outstanding at 30 September 2009:
15/01/2007
01/10/2009
631.00p*
11,340
11,340
8,501
8,501
5,996
5,996
Awards made in the year:
11/01/2010
01/10/2012
Shares transferred in the year:
130.60p#
60,098
42,802
27,952
15/01/2007
01/10/2009
631.00p*
(11,340)
(8,501)
(5,996)
At 30 September 2010
60,098
42,802
27,952
*
price per 10p ordinary share
# price per £1 ordinary share
The Deferred Bonus Shares awarded will be transferred to the scheme participants as soon as is reasonably practicable after the
transfer date.
The share price at the exercise date of 1 December 2009 was 135.0p. Following the transfer of the shares the participants received
payment in respect of the dividends which would have accrued on the shares since the award date as follows: Mr N S Terrington -
£3,737, Mr N Keen - £2,801 and Mr J A Heron - £1,976.
Rights to the following shares are due to be granted in respect of the compulsory deferral of 25% of performance bonuses in excess of
£50,000 for the year ended 30 September 2010. The shares, less any clawback, which can be applied by the Remuneration Committee
in certain circumstances, will be transferable to the recipients on 1 October 2013, subject to the recipient being employed by the
Company at that time:
N S Terrington
N Keen
J A Heron
82,248
59,672
40,288
The Paragon Group of Companies PLC 31
Matching Share Plan
The individual interests of the directors in the Matching Share Plan at 30 September 2009 and 30 September 2010 are:
Award date
Market price
at award date
N S Terrington
Number
N Keen
Number
J A Heron
Number
Awards outstanding at 30 September 2009:
09/01/2007†
665.00p*
Awards made in the year:
15,755
15,755
11,805
11,805
9,406
9,406
05/01/2010§
133.40p#
43,249
32,422
22,868
Awards exercised in the year:
09/01/2007†
665.00p*
(9,238)
(6,922)
(5,515)
Awards lapsing in the year:
09/01/2007†
665.00p*
(6,517)
(4,883)
(3,891)
At 30 September 2010
43,249
32,422
22,868
*
price per 10p ordinary share
# price per £1 ordinary share
†
50% of these awards are subject to an EPS test and 50% to a TSR test. No part of an award vests for below median performance, 35%
of each element vests for median performance and full vesting will occur for upper quartile performance. Between median and
upper quartile performance, awards vest on a straight line basis.
§ These awards will be subject to a performance condition comparing the rank of the Company’s TSR against a comparator group of
companies comprising the constituents of the FTSE-250 on the date of grant over the three years commencing on the date of grant.
25% of the awards will vest for median performance, increasing on a straight line basis to full vesting for upper quartile performance.
Awards are exercisable from the date on which the Remuneration Committee determines the extent to which the performance
conditions have been satisfied to the tenth anniversary of the grant date. EPS performance is measured over the three year period
commencing on the first day of the financial year in which the award date falls and TSR over the three year period commencing on the
first day of the calendar quarter in which the award date falls.
The awards maturing during the year achieved 58.6% vesting after the application of the performance criteria.
The share price at the exercise date of 29 March 2010 was 138.0p.
Signed on behalf of the Board of Directors
JOHN G GEMMELL
Company Secretary
24 November 2010
32
The Paragon Group of Companies PLC
Statement of directors’ responsibilities
in relation to financial statements
The directors are responsible for preparing the Annual Report
and the financial statements. The directors are required to
prepare accounts for the Group in accordance with International
Financial Reporting Standards (‘IFRS’) and have also elected to
prepare company financial statements in accordance with IFRS. In
respect of the financial statements for the year ended
30 September 2010, company law requires the directors to
prepare such
in accordance with
International Financial Reporting Standards, the Companies Act
2006 and Article 4 of the IAS Regulation.
financial statements
International Accounting Standard 1 – ‘Presentation of Financial
Statements’ requires that financial statements present fairly for
each financial year the Company’s financial position, financial
performance and cash flows. This requires the faithful
representation of the effects of transactions, other events and
conditions in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set out in the
International Accounting Standards Board’s ‘Framework for the
Preparation and Presentation of Financial Statements’. In virtually
all circumstances, a fair presentation will be achieved by
compliance with all applicable International Financial Reporting
Standards. Directors are also required to:
The directors are responsible for the maintenance and integrity of
the Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements differs from legislation in other jurisdictions.
The directors confirm that, to the best of their knowledge:
• the financial statements, prepared in accordance with
International Financial Reporting Standards as adopted by the
European Union, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company
and of the Group taken as a whole; and
• the business review, which is incorporated into the Directors’
Report, includes a fair review of the development and
performance of the business and the position of the Group
taken as a whole, together with a description of the principal
risks and uncertainties it faces.
Approved by the Board of Directors and signed on behalf of
the Board.
• properly select and apply accounting policies;
• present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information; and
JOHN G GEMMELL
Company Secretary
24 November 2010
• provide additional disclosures when compliance with the
specific requirements in International Financial Reporting
Standards is insufficient to enable users to understand the
impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance.
The directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the company, for safeguarding the assets, for
taking reasonable steps for the prevention and detection of fraud
and other irregularities and for the preparation of a directors’
report and directors’ remuneration report which comply with the
applicable requirements of the Companies Act 2006.
The Paragon Group of Companies PLC 33
Independent auditors’ report
To the members of The Paragon Group of Companies PLC
We have audited the financial statements of The Paragon Group
of Companies PLC for the year ended 30 September 2010 which
comprise the consolidated income statement, the consolidated
statement of comprehensive income, the consolidated and
company balance sheets, the consolidated and company cash
flow statements, the consolidated and company statements of
movements in equity and the related notes 1 to 64. The financial
reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union and, as regards the
company financial statements, the Companies Act 2006.
This report is made solely to the Company’s members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state
to the Company’s members those matters we are required to
state to them in an auditors’ report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the
Company’s members as a body, for our audit work, for this report,
or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully
in the Statement of Directors’
Responsibilities, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a
true and fair view. Our responsibility is to audit the financial
statements in accordance with applicable law and International
Standards on Auditing (UK and Ireland). Those standards require
us to comply with the Auditing Practices Board’s (APB’s) Ethical
Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures
in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of: whether the accounting policies are
appropriate to the Group’s and the parent company’s
circumstances and have been consistently applied and
the reasonableness of significant
adequately disclosed;
accounting estimates made by the directors; and the overall
presentation of the financial statements.
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the state
of the Group’s and of the parent company’s affairs as at
30 September 2010 and of the Group’s profit for the year
then ended;
• the group financial statements have been properly prepared
in accordance with IFRSs as adopted by the European Union;
• the parent company financial statements have been properly
prepared in accordance with IFRSs as adopted by the
European Union and as applied in accordance with the
provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as
regards the group financial statements, Article 4 of the
IAS Regulation.
Separate opinion in relation to IFRSs as issued by
the IASB
As explained in note 3 to the financial statements, the Group in
addition to complying with its legal obligation to apply IFRSs as
adopted by the European Union, has also applied IFRSs as issued
by the International Accounting Standards Board (IASB).
In our opinion the group financial statements comply with IFRSs
as issued by the IASB.
Opinion on other matters prescribed by the
Companies Act 2006
In our opinion:
• the part of the Directors’ Remuneration Report to be audited
in accordance with the
has been properly prepared
Companies Act 2006; and
• the information given in the Directors’ Report for the financial
year for which the financial statements are prepared is
consistent with the financial statements.
.
34
The Paragon Group of Companies PLC
Matters on which we are required to report
by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
• adequate for our audit have not been received from branches
not visited by us; or
• the parent company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law
are not made; or
• we have not received all the information and explanations we
require for our audit.
Under the Listing Rules we are required to review:
• the directors’ statement, set out on page 39 in relation to
going concern; and
• the part of the Corporate Governance Statement relating to
the Company’s compliance with the nine provisions of the
June 2008 Combined Code specified for our review.
MATTHEW PERKINS
(Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditors
Birmingham, United Kingdom
24 November 2010
The Paragon Group of Companies PLC 35
Corporate
governance
The Board of Directors is committed to the principles of corporate
governance contained in the Combined Code on Corporate
Governance (“Code”) issued by the Financial Reporting Council
in June 2008, which is publicly available on their website at
www.frc.org. Throughout the year ended 30 September 2010 the
Company complied with the provisions of the Code.
Directors
Throughout the year the Board of Directors comprised the
Chairman, three executive and four non-executive directors.
All of the directors bring to the Company a broad and valuable
range of experience. In accordance with the Code, all directors
have submitted themselves for re-election at least once in every
three years. With effect from the Group’s financial year ending
30 September 2011, the UK Corporate Governance Code
replaces the Combined Code and recommends that all directors
should be subject to re-appointment annually. Accordingly all of
the directors have submitted themselves for re-election at the
forthcoming Annual General Meeting. The names of the directors
in office at the date of this report and their biographical details are
set out on pages 12 and 13.
The division of responsibilities between the Chairman and Chief
Executive is clearly established, set out in writing and agreed by
the Board. There is a strong non-executive representation on the
Board, including Terence Eccles, who has been nominated as the
Senior Independent Director. This provides effective balance and
challenge. The Board is responsible for overall Group strategy, for
approving major agreements, transactions and other financing
matters and for monitoring the progress of the Group against
budget. All directors receive sufficient relevant information on
financial, business and corporate issues prior to meetings and
there is a formal schedule of matters reserved for decision by the
Board, which includes material asset acquisitions and disposals,
granting and varying authority levels of the Chairman and the
executive directors, determination and approval of the Group’s
objectives, strategy and annual budget, investment decisions,
and
corporate
dividend policies.
governance
financial
policies
and
The Chairman’s other business commitments are set out in the
biographical details on page 12 and there have been no
significant changes during the period to those commitments.
There were ten regular Board meetings during the year. Robert
Dench, Nigel Terrington, Nicholas Keen, John Heron and Alan
Fletcher attended all ten of the Board meetings during the year
ended 30 September 2010, Christopher Newell and Edward Tilly
attended nine meetings and Terence Eccles attended
seven meetings.
36
The Paragon Group of Companies PLC
All of the non-executive directors are
independent of
management and all are appointed for fixed terms. They are kept
fully informed of all relevant operational and strategic issues and
bring a strongly independent and experienced judgement to bear
on these issues. Christopher Newell’s appointment has been
extended for a further twelve months to enable an orderly
handover of the Chairmanship of the Audit and Compliance
Committee after the expected appointment of an appropriately
qualified person in the coming year. The Board considers that Mr
Newell remains independent.
Prior to 1 October 2008 the Board approved a set of guiding
principles on managing conflicts and agreed a process to identify
and authorise any conflicts which might arise. At each meeting of
the Board actual or potential conflicts of interest in respect of any
director are reviewed.
All directors have access to the advice and services of the
Company Secretary, who is responsible to the Board for ensuring
that board procedures are complied with. Both the appointment
and removal of the Company Secretary are matters for the Board
as a whole.
All directors are able to take independent professional advice in
the furtherance of their duties whenever it is considered
appropriate to do so and have access to such continuing
professional development opportunities as are identified as
appropriate in the Board appraisal process.
The Board also operates through a number of committees
covering certain specific matters, these being:
• The Remuneration Committee, which during the year
consisted of Edward Tilly (who chaired the Committee),
Terence Eccles, Christopher Newell and Alan Fletcher, all of
whom are independent non-executive directors, and the
Chairman of the Company, Robert Dench.
During the year ended 30 September 2010 there were five
meetings of the Remuneration Committee. All meetings were
attended by Edward Tilly, Alan Fletcher and Robert Dench
and four meetings were attended by Terence Eccles and
Christopher Newell.
Further information about the Remuneration Committee is
given in the Report of the Board to the Shareholders on
Directors’ Remuneration on pages 22 to 32.
• The Audit and Compliance Committee, which during the year
consisted of Christopher Newell, who chaired
the
Committee, Terence Eccles, Edward Tilly and Alan Fletcher.
The Board is satisfied that all members of the Committee have
recent and relevant financial experience. The Committee
meets at least three times per year. It monitors the integrity of
the Group’s financial reporting, reviews the Group’s internal
control and risk management systems, monitors and reviews
the effectiveness of the Group’s internal audit function,
monitors the relationship between the Group and the
external auditors and provides a forum through which the
Group’s external and internal audit functions report to the
non executive directors. The Committee is also responsible
for ensuring that the system and controls for regulatory
compliance are effective.
The Audit and Compliance Committee reviews the scope and
the results of the annual external audit, its cost effectiveness
and the independence and objectivity of the external
auditors. In recommending the re-appointment of the
external auditors to the Board, the Committee have
considered their performance and the requirements of the
Group’s financial control process and have concluded that the
needs of the Group would not be best served by putting the
external audit out to tender at this time. The Committee has
not identified any factors which might restrict its choice of
external auditor.
Both the Audit and Compliance Committee and the external
auditors have in place safeguards to avoid compromises of
the independence and objectivity of the external auditors.
The Group has a formal policy for the engagement of its
external auditors to supply non-audit services. The policy is
designed to ensure that neither the nature of the service to be
provided nor the level of reliance placed on the services could
impact the objectivity of the external auditors’ opinion on the
Group’s financial statements. The policy incorporates a
comprehensive system for reporting to the Audit and
Compliance Committee all proposals considered and the
level of fees payable to the external auditors for the
provision of non-audit services. In pursuance of this
policy other accounting firms have been engaged for
particular assignments.
At each meeting the Audit and Compliance Committee
receives reports of reviews conducted throughout the
Group by the Internal Audit and, from time to time,
compliance functions.
The Chairman, the executive directors, Director of Financial
Accounting and Group Company Secretary, Director of
Business Analysis and Planning, Director of Legal Services,
Head of Internal Audit and a partner from the external
auditors normally attend meetings of the Committee.
During the year ended 30 September 2010 there were three
meetings of the Audit and Compliance Committee, all of
which were attended by Christopher Newell and Alan
Fletcher and two of which were attended by Terence Eccles
and Edward Tilly.
• The Nomination Committee, consisting of Robert Dench,
who chairs the Committee, Nigel Terrington and three non-
executive directors, Christopher Newell, Edward Tilly and
Alan Fletcher, ensuring that a majority of the Committee’s
members are independent non-executive directors. The
Committee is convened as required to nominate candidates
for membership of the Board, although ultimate responsibility
for appointment rests with the Board. There were no
meetings of the Committee during the year. The Committee
only engages in the process of identification of suitable
candidates for appointment to the Board when requested by
the Board to do so.
There is a formal process for the appointment of directors,
starting with a review of the Board structure, size and
composition, leading to the preparation of a written job
specification and the identification of suitable candidates. The
Nomination Committee ensures that prospective non-
executive directors can devote sufficient time to the
appointment. The Board recognises the benefits that can flow
from non-executive directors holding other appointments but
requires them to seek the agreement of the Chairman before
entering into any commitments that might affect the time they
can devote to the Company. The choice of appointee would
be based entirely on merit.
• The Asset and Liability Committee, consisting of appropriate
heads of functions and chaired by Nigel Terrington, the Chief
Executive. It meets regularly and monitors Group liquidity
risks,
interest rate risks, currency risks and treasury
counterparty exposures.
• The Credit Committee, consisting of appropriate heads of
functions and chaired by Nicholas Keen, the Finance Director.
It meets regularly and is responsible for establishing credit
policy and monitoring compliance therewith.
All Board committees operate within defined terms of reference
and sufficient resources are made available to them to undertake
their duties. The terms of reference of the Remuneration
Committee, Audit and Compliance Committee and Nomination
Committee are available on request from the Company Secretary.
The composition of the Board and its committees is kept under
review, with the aim of ensuring that there is an appropriate
balance of power and authority between executive and non-
executive directors and that the directors collectively possess the
skills and experience necessary to direct the Company and the
Group’s business activities.
There is an established process for external appointments
through the Nomination Committee. Ultimately, the appointment
of any new director is a matter for the Board. Executive director
appointments are based upon merit and business need. Non-
executive appointments are based upon the candidates’ profiles
matching those drawn up by the Nomination Committee. In all
cases
the appointment only after
careful consideration.
the Board approves
The Paragon Group of Companies PLC 37
The Board, individual directors and Board committees are
appraised annually. The performance of the Chief Executive is
appraised by the Chairman. The performance of the other
executive directors is appraised by the Chief Executive in
conjunction with the Chairman. The results of these appraisals are
presented to the Remuneration Committee for consideration and
determination of remuneration.
The Chairman, Chief Executive and Finance Director have a full
programme of meetings with institutional investors during the
course of the year and investors comments are communicated to
all members of the Board.
The Company’s web site at www.paragon-group.co.uk provides
access to information on the Company and its businesses.
During the year the Board conducted a formal and rigorous
performance review facilitated by an external company. All Board
directors participated and considered a list of questions on Board
and Committee performance. The evaluation process was
followed by a Board discussion.
At the Annual General Meeting the Chairman will confirm to
re-election of any
shareholders, when proposing
non-executive director, that, following formal performance
evaluation, the individual’s performance continues to be effective
and demonstrates commitment to the role.
the
The non-executive directors meet at least annually to review the
performance of the Chairman.
Directors’ remuneration
The Remuneration Committee reviews the performance of
executive directors and members of senior management prior
to determining its recommendations on annual remuneration,
performance bonuses
the
Board’s determination.
options
share
and
for
The Report of the Board to the Shareholders on Directors’
Remuneration is on pages 22 to 32.
Relations with shareholders
The Board encourages communication with the Company’s
institutional and private investors. All shareholders have at least
twenty working days’ notice of the Annual General Meeting at
which the directors and committee chairmen are available for
questions. The Annual General Meeting is held in London during
business hours and provides an opportunity for directors to
report to investors on the Group’s activities and to answer their
questions. Shareholders will have an opportunity to vote
separately on each resolution and all proxy votes lodged are
counted and the balance for and against each resolution
is announced.
38
The Paragon Group of Companies PLC
Accountability and audit
Detailed reviews of the performance of the Group’s main
business lines are included within the Chairman’s Statement and
Chief Executive’s Review. The Board uses these, together with
the Directors’ Report on pages 14 to 17 to present a balanced and
the Company’s position
understandable assessment of
and prospects.
The directors’ responsibility for the financial statements is
described on page 33.
An on-going process for identifying, evaluating and managing the
significant risks faced by the Group, which is regularly reviewed
by the Board, was in place for the year ended 30 September 2010
and to the date of these financial statements. The directors
confirm that they have reviewed the effectiveness of the Group’s
system of internal control for this period and that these
‘Internal Controls:
procedures accord with the guidance
Guidance for Directors on the Combined Code’.
The directors are responsible for the system of internal control
throughout the Group, including the system of internal control
over financial reporting, and for reviewing its effectiveness. Such
a system is designed to manage rather than eliminate the risk of
failure to achieve business objectives, and can provide
reasonable, but not absolute, assurance against the risk of
material misstatement or loss and that assets are safeguarded
against unauthorised use or disposition. In assessing what
constitutes reasonable assurance, the directors have regard to the
relationship between the cost and benefits from particular aspects
of the control system.
The system of internal control includes documented procedures
covering accounting, compliance, risk management, personnel
matters and operations, clear reporting lines, delegation of
authority through a formal structure of mandates, a formalised
budgeting, management reporting and review process, the use of
key performance indicators throughout the Group and regular
meetings of the Asset and Liability and Credit Committees and
senior management.
Internal control over financial reporting within the Group is
provided by a process designed, under the supervision of the
Finance Director and senior financial management of the Group,
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external reporting purposes, including the process of preparing
the Group’s consolidated financial statements.
Internal control over financial reporting includes polices and
procedures intended to ensure that records are maintained that
fairly, and
in reasonable detail, reflect transactions and
dispositions of assets, to provide reasonable assurance that
transactions are recorded as necessary to permit the preparation
of the financial statements, to ensure that receipts and
expenditures are only being made
in accordance with
management authorisation and to provide reasonable assurance
regarding prevention or timely detection of unauthorised
acquisition, use or disposition of assets that could have a material
effect on the financial statements.
Internal control systems, no matter how well designed, have
inherent limitations and may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that internal controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may reduce.
The Board receives regular reports setting out key performance
and risk indicators. In addition the Board operates a formal risk
management process, from which the key risks facing the
business are identified. The process results in reports to the
Board on how these risks are being managed. The Board has a
programme of regular presentations from senior management to
enable the Board to review the operation of internal controls in
relation to the risks associated with their specific areas.
The system of internal control is monitored by management and
by an internal audit function that concentrates on the areas of
greater risk and reports its conclusions regularly to management
and the Audit and Compliance Committee. The internal audit
work plan is approved annually by the Audit and Compliance
Committee, which reviews the effectiveness of the system of
internal control annually and reports its conclusions to the Board.
Going concern basis
The business activities of the Group, its current operations and
those factors likely to affect its future results and development,
together with a description of its financial position and funding
position, are described in the Chairman’s Statement on pages 5 to
6 and Chief Executive’s review on pages 7 to 11. The principal
risks and uncertainties affecting the Group, and the steps taken to
mitigate against these risks are described on pages 40 to 41.
Note 5 to the accounts includes an analysis of the Group’s
working capital position and policies, while note 6 includes a
detailed description of its funding structures, its use of financial
instruments, its financial risk management objectives and policies
and its exposure to credit, interest rate and liquidity risk. Critical
accounting estimates affecting the results and financial position
disclosed in this annual report are discussed in note 4.
As described under ‘Accountability and Audit’ above, the Group
has a formalised process of budgeting, reporting and review,
which provides information to the directors which is used to
ensure the adequacy of resources available for the Group to meet
its business objectives.
through securitisation structures and are
Substantially all of the Group’s remaining loan portfolios are
funded
thus
match-funded to maturity. None of the Group’s debt matures
before 2017, when the £110.0 million corporate bond is
repayable. As a consequence the directors believe that the Group
is well placed to manage its business risks successfully despite the
current uncertain economic outlook.
After making enquiries, the directors have a reasonable
expectation that the Group will have adequate resources to
continue in operational existence for the foreseeable future. For
this reason, they continue to adopt the going concern basis in
preparing the annual report and accounts.
The Paragon Group of Companies PLC 39
Principal risks
and uncertainties
There are a number of potential risks and uncertainties which
could have a material impact on the Group’s performance and
could cause actual results to differ materially from expected and
historical results. The Group’s system of risk management, which
includes risk review and an active internal audit function, is
monitored by the Audit and Compliance Committee as described
in the ‘Corporate Governance’ section of this Annual Report on
pages 36 to 39.
The principal risks to which the Group is exposed include
the following:
Economic environment
Further deterioration in the general economy may adversely
affect all aspects of the Group’s business. Adverse economic
conditions might increase the number of borrowers that default
on their loans, which may increase the Group’s costs and could
result in losses on some of the Group’s assets.
The general economic factors affecting the Group in the period
going forward, together with the steps taken by the Group’s
management to address these issues are described in more detail
in the Chairman’s statement on pages 5 to 6 and the Chief
Executive’s review on pages 7 to 11.
Changes in interest rates may adversely affect the Group’s net
income and profitability. The steps taken by the Group to mitigate
against the long term effects of interest rate movements, through
the structuring of its products and the use of hedging procedures
are described in note 6 to the accounts.
Credit risk
As a primary lender the Group faces credit risk as an inherent
component of its lending activities. Adverse changes in the credit
quality of the Group’s borrowers, a general deterioration in UK
economic conditions or adverse changes arising from systematic
risks in financial systems could reduce the recoverability and
value of the Group’s assets.
Operational risk
The activities of the Group subject it to operational risks relating
to its ability to implement and maintain effective systems to
process the high volume of transactions with customers.
A significant breakdown of the IT systems of the Group
might adversely impact the ability of the Group to operate its
business effectively.
To address these risks, the Group’s internal audit function carries
out targeted reviews of critical systems to ensure that they remain
adequate for their purpose. The Group has a business continuity
plan, which is kept under regular review and is designed to
ensure that any breakdown in systems would not cause
significant disruption to the business.
Competitor risk
The Group faces strong competition in all of the core markets in
which it operates. There is a danger that its profitability and /or
market share may be impaired.
To mitigate this risk the Group maintains relationships with its
customers, business introducers and other significant participants
in the markets in which it is active, as well as being active in
industry-wide organisations and initiatives. This enables market
trends to be identified and addressed within the relevant
business strategy.
Governmental, legislative and regulatory risk
The market sectors to which the Group supplies products, and
the capital markets from which it has historically obtained much of
its funding, have been subject to intervention by United Kingdom
Government, European Union and other regulatory bodies.
Current regulatory developments are discussed in the section of
the Chief Executive’s Review headed ‘Regulation’ on page 10. To
the extent that such actions disadvantage the Group, when
compared to other market participants, they present a risk to
the Group.
The Group’s approach to the management of credit risk and the
systems in place to mitigate that risk are described in the section
of note 6 to the accounts entitled ‘Credit Risk’.
In order to mitigate this risk the Group has been active in
explaining its position to the authorities in order that it is not
inadvertently disadvantaged.
40
The Paragon Group of Companies PLC
Management
The success of the Group is dependent on recruiting and
retaining skilled senior management and personnel.
The Group’s employment policies, which are designed to ensure
that an appropriately skilled workforce is, and remains, in place
are described within the Corporate Social Responsibility section
of this Annual Report on pages 18 and 19.
Working capital
The Group’s capital position and its policies in respect of capital
management are described in note 5 to the accounts. These
policies and their application are described more fully in the
section of
‘Capital
Management’ on page 5.
the Chairman’s Statement headed
Financial risk
The Group’s exposure to other financial risks, including liquidity
risk and foreign currency risk, and the procedures in place
to mitigate those risks are described in detail in note 6 to
the accounts.
The Paragon Group of Companies PLC 41
Registrars and transfer office
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol
BS99 6ZZ
Telephone: 0870 707 1244
Brokers
RBS Hoare Govett Limited
250 Bishopsgate
London
EC2M 4AA
UBS Limited
1 Finsbury Avenue
London
EC2M 2PP
Remuneration consultants
Hewitt New Bridge Street
6 More London Place
London
SE1 2DA
Consulting actuaries
Mercer Limited
Four Brindleyplace
Birmingham
B1 2JQ
Contacts
Registered and head office
St Catherine’s Court
Herbert Road
Solihull
West Midlands
B91 3QE
Telephone: 0121 712 2323
London office
Third Floor
30-34 Moorgate
London
EC2R 6PQ
Telephone: 020 7786 8474
Internet
www.paragon-group.co.uk
Auditors
Deloitte LLP
Chartered Accountants
Four Brindleyplace
Birmingham
B1 2HZ
Solicitors
Slaughter and May
One Bunhill Row
London
EC1Y 8YY
42
The Paragon Group of Companies PLC
The Accounts
CONSOLIDATED INCOME STATEMENT
For the year ended 30 September 2010
Interest receivable
Interest payable and similar charges
Net interest income
Share of results of associate
Other operating income
Total operating income
Operating expenses
Provisions for losses
Operating profit before gains and fair value items
Gains on debt repurchase
Impairment of goodwill
Fair value net (losses)
Operating profit being profit on
ordinary activities before taxation
Tax charge on profit on ordinary activities
Profit on ordinary activities after taxation for
the financial year
Earnings per share
- basic
- diluted
Notes
9
10
29
11
12
17
18
25
19
20
Notes
22
22
2010
£m
275.6
(142.2)
133.4
-
14.5
147.9
(42.6)
(39.2)
66.1
5.7
-
-
71.8
(17.9)
53.9
2010
18.3p
17.8p
2009
£m
508.2
(373.4)
134.8
-
16.0
150.8
(39.3)
(66.2)
45.3
18.4
(6.0)
(3.4)
54.3
(13.2)
41.1
2009
13.9p
13.7p
The results for the current and preceding years relate entirely to continuing operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2010
Profit for the year
Other comprehensive income
Actuarial (loss) on pension scheme
Cash flow hedge gains taken to equity
Tax on items taken directly to equity
Other comprehensive income for the year net of tax
Total comprehensive income for the year
Notes
2010
£m
54
46
23
(5.7)
0.3
1.3
£m
53.9
(4.1)
49.8
2009
£m
(7.7)
1.9
1.6
£m
41.1
(4.2)
36.9
44
The Paragon Group of Companies PLC
CONSOLIDATED BALANCE SHEET
30 September 2010
Assets employed
Non-current assets
Intangible assets
Property, plant and equipment
Interest in associate
Financial assets
Deferred tax asset
Current assets
Current tax assets
Other receivables
Cash and cash equivalents
Total assets
Financed by
Equity shareholders’ funds
Called-up share capital
Reserves
Share capital and reserves
Own shares
Total equity
Current liabilities
Financial liabilities
Current tax liabilities
Provisions
Other liabilities
Non-current liabilities
Financial liabilities
Retirement benefit obligations
Provisions
Other liabilities
Total liabilities
Notes
2010
£m
2009
£m
2008
£m
24
26
29
30
38
39
40
41
42
43
50
51
55
56
57
51
54
56
57
9.2
10.4
-
10,080.1
1.5
9.6
13.5
-
10,640.8
2.8
0.4
18.5
-
10,647.6
10.3
10,101.2
10,666.7
10,676.8
-
5.9
536.7
542.6
1.7
5.5
480.4
487.6
-
6.6
826.3
832.9
10,643.8
11,154.3
11,509.7
299.4
446.1
745.5
(53.2)
692.3
1.0
16.2
-
32.4
49.6
299.1
408.4
707.5
(56.7)
650.8
1.1
-
0.5
30.4
32.0
299.1
378.7
677.8
(56.3)
621.5
0.9
6.3
0.3
79.4
86.9
9,883.8
16.5
-
1.6
10,457.5
11.5
-
2.5
10,791.5
5.0
0.2
4.6
9,901.9
10,471.5
10,801.3
9,951.5
10,503.5
10,888.2
10,643.8
11,154.3
11,509.7
Approved by the Board of Directors on 24 November 2010.
Signed on behalf of the Board of Directors
N S Terrington
Chief Executive
N Keen
Finance Director
The Paragon Group of Companies PLC 45
COMPANY BALANCE SHEET
30 September 2010
Assets employed
Non-current assets
Property, plant and equipment
Investment in subsidiary undertakings
Interest in associate
Financial assets
Current assets
Other receivables
Cash and cash equivalents
Total assets
Financed by
Equity shareholders’ funds
Called-up share capital
Reserves
Share capital and reserves
Own shares
Total equity
Current liabilities
Financial liabilities
Current tax liabilities
Other liabilities
Non-current liabilities
Financial liabilities
Other liabilities
Total liabilities
Notes
26
27
29
30
40
41
42
43
50
51
55
57
51
57
2010
£m
7.0
764.4
-
8.0
779.4
125.8
143.6
269.4
1,048.8
299.4
269.7
569.1
(39.5)
529.6
0.9
1.5
389.2
391.6
126.7
0.9
127.6
519.2
1,048.8
2009
£m
7.9
769.9
-
8.7
786.5
88.5
78.8
167.3
953.8
299.1
235.1
534.2
(39.5)
494.7
0.8
1.0
317.6
319.4
138.6
1.1
139.7
459.1
953.8
2008
£m
8.7
782.0
-
15.5
806.2
102.0
64.8
166.8
973.0
299.1
208.5
507.6
(39.5)
468.1
0.8
1.0
369.4
371.2
132.5
1.2
133.7
504.9
973.0
Approved by the Board of Directors on 24 November 2010.
Signed on behalf of the Board of Directors
N S Terrington
Chief Executive
N Keen
Finance Director
46
The Paragon Group of Companies PLC
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2010
Net cash generated by operating activities
Net cash generated by investing activities
Net cash (utilised) by financing activities
Net increase / (decrease) in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
Represented by balances within:
Cash and cash equivalents
Financial liabilities
COMPANY CASH FLOW STATEMENT
For the year ended 30 September 2010
Net cash generated / (utilised) by operating activities
Net cash generated by investing activities
Net cash (utilised) by financing activities
Net increase in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
Represented by balances within:
Cash and cash equivalents
Financial liabilities
Notes
58
59
60
Notes
58
59
60
2010
£m
470.3
0.3
(414.1)
56.5
480.1
536.6
536.7
(0.1)
536.6
2010
£m
71.5
3.8
(10.5)
64.8
78.8
143.6
143.6
-
143.6
2009
£m
738.8
1.3
(1,086.2)
(346.1)
826.2
480.1
480.4
(0.3)
480.1
2009
£m
(0.6)
24.6
(10.0)
14.0
64.8
78.8
78.8
-
78.8
The Paragon Group of Companies PLC 47
STATEMENT OF MOVEMENTS IN EQUITY
For the year ended 30 September 2010
Notes
The Group
The Company
Total comprehensive income for the year
Dividends paid
Net movement in own shares
(Deficit) / surplus on transactions in own shares
Charge for share based remuneration
Tax on share based remuneration
48
49
13
23
Net movement in equity in the year
Equity at 30 September 2009
Equity at 30 September 2010
2010
£m
49.8
(10.0)
3.5
(3.5)
1.4
0.3
41.5
650.8
692.3
2009
£m
36.9
(9.2)
(0.4)
(0.6)
1.2
1.4
29.3
621.5
650.8
2010
£m
43.2
(10.0)
-
0.3
1.4
-
34.9
494.7
529.6
2009
£m
34.6
(9.2)
-
-
1.2
-
26.6
468.1
494.7
48
The Paragon Group of Companies PLC
NOTES TO THE ACCOUNTS
For the year ended 30 September 2010
1.
GENERAL INFORMATION
The Paragon Group of Companies PLC is a company domiciled in the United Kingdom and incorporated in England and Wales under
the Companies Act 2006 with company number 2336032. The address of the registered office is given on page 42. The nature of the
Group’s operations and its principal activities are set out in the Directors’ Report on pages 14 to 17.
These financial statements are presented in pounds sterling, which is the currency of the economic environment in which the
Group operates.
2.
ADOPTION OF NEW AND REVISED REPORTING STANDARDS
In the preparation of these financial statements reporting standards being applied for the first time are:
• International Financial Reporting Standard 8 – ‘Operating Segments’ (‘IFRS 8’);
• The revisions to International Accounting Standard 1 – ‘Presentation of Financial Statements’ (‘IAS 1 (revised)’);
• Amendment to IFRS 2 – ‘Share-based Payment’ in respect of cancellations and vesting conditions; and
• Amendment to IFRS 7 – ‘Financial Instruments – Disclosure’ in respect of extended disclosures.
As a result of the adoption of IFRS 8, the disclosures on operating segments given in note 7 are presented on a different basis from in
previous years and certain disclosures have been changed. The segments reported and their results, however, remain as previously
disclosed under IAS 14 – ‘Segment Reporting’.
As a result of the adoption of IAS 1 (revised), the format of certain disclosures made in the financial statements and notes differs from
previous years. Comparative figures have been reanalysed on a consistent basis.
The adoption of the amendment to IFRS 2 has had no material impact on the accounting of the Group.
The amendment to IFRS 7 has mandated certain new disclosures in respect of the Group’s financial instruments which are included in
the financial statements for the first time.
None of these accounting changes has any effect on the results of the Group for the current or preceding period, its balance sheets or
its cash flows.
At the date of authorisation of these financial statements the following International Financial Reporting Standards and Interpretations,
which have not been applied in these financial statements, were in issue but not yet effective:
• IFRS 9 – ‘Financial Instruments’;
• Amendment to IFRIC 14 – ‘Prepayments of a Minimum Funding Requirement’; and
• IAS 24 (Revised) – ‘Related Party Disclosures’.
The directors anticipate that the adoption of these Standards and Interpretations in future periods, other than IFRS 9, will have no
material impact on the financial statements of the Group.
The adoption of IFRS 9, as currently in issue, would not be anticipated to have a material impact on the accounting of the Group although
the International Accounting Standard Board (‘IASB’) has announced its intention to expand this Standard in such a way that would
require changes to the valuation and income recognition methods relating to the Group’s Loans to Customers, Borrowings and
derivative assets and liabilities. This Standard is intended to come into force for the financial year ending 30 September 2014, if the
Standard is endorsed by the European Union. The European Union has, however, declined to consider the endorsement of IFRS 9 until
a complete version is issued by the IASB. The Group has yet to conduct a full assessment of its potential impact, pending further
information on endorsement from the European Union.
Other Standards and interpretations in issue but not effective do not address matters relevant to the Group’s accounting and reporting.
The Paragon Group of Companies PLC 49
3.
ACCOUNTING POLICIES
The financial statements have been prepared in accordance with International Financial Reporting Standards as endorsed by the
European Union.
The particular policies adopted are described below.
(a)
Accounting convention
The financial statements have prepared under the historical cost convention, except as required in the valuation of certain
financial instruments which are carried at fair value.
(b)
Basis of consolidation
The consolidated financial statements deal with the accounts of the Company and its subsidiaries made up to 30 September
2010. Subsidiaries comprise all those entities over which the Group has control. The results of businesses acquired are dealt with
in the consolidated accounts from the date of acquisition.
In accordance with SIC 12 – ‘Consolidation: Special Purpose Entities’ companies owned by charitable trusts into which loans
originated by Mortgage Trust Limited were sold as part of its securitisation programme, where the Group enjoys the benefits of
ownership, are treated as subsidiaries.
Similarly, trusts set up to hold shares in conjunction with the Group’s employee share ownership arrangements are also treated
as subsidiaries.
(c)
Goodwill
Goodwill arising from the purchase of subsidiary undertakings, representing the excess of the fair value of the purchase
consideration over the fair values of acquired assets, including intangible assets, is held on the balance sheet and reviewed
annually to determine whether 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 – ‘Business Combinations’ to combinations taking place before
its transition date to IFRS (1 October 2004). Therefore any goodwill which was written off to reserves under UK GAAP will not
be charged or credited to the profit and loss account on any future disposal of the business to which it relates.
(d)
Intangible assets
Intangible assets comprise purchased computer software and other intangible assets acquired in business combinations.
Purchased computer software is capitalised where it has a sufficiently enduring nature and is stated at cost less accumulated
amortisation. Amortisation is provided in equal instalments at a rate of 25% per annum.
Other intangible assets acquired in business combinations include brands and business networks and are capitalised in
accordance with the requirements of IFRS 3 – ‘Business Combinations’. Such assets are stated at attributed cost less
accumulated amortisation. Amortisation is provided in equal instalments at a rate of 6.67% per annum.
(e)
Leases
Leases are accounted for as operating or finance leases in accordance with IAS 17 – ‘Leases’. A finance lease is deemed to be
one which transfers substantially all of the risks and rewards of the ownership of the asset concerned. Any other lease is an
operating lease.
Rental income and costs under operating leases are credited or charged to the profit and loss account on a straight line basis over
the period of the leases.
50
The Paragon Group of Companies PLC
(f)
Contract hire
Motor vehicles acquired in connection with contract hire arrangements are sold to finance houses, who lease them to customers
for a pre-determined period. The Group 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 derecognised on the sale to the finance house and remain as
the Group’s assets and the consideration 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 the sale value.
Depreciation is provided on cost in equal annual instalments over the lives of the assets. Land is not depreciated. The rates of
depreciation are as follows:
Freehold premises
Short leasehold premises
Computer hardware
Furniture, fixtures and office equipment
Company motor vehicles
2% per annum
over the term of the lease
25% per annum
15% per annum
25% per annum
Motor vehicles subject to contract hire arrangements
over the term of the lease
(h)
Associates
The Group’s interest in associated undertakings is valued at the Group’s share of the net assets of the associate, as required by
IAS 28 – ‘Investments in Associates’. The interest of the Group in the profit after tax of the associate is recognised in the
income statement.
The Company’s interest in the shares of associated undertakings is valued at cost less provision for impairment. Dividends
received from the associate by the Company are included in income when they become receivable.
(i)
Investments
The Company’s investments in subsidiary undertakings are valued at cost less provision for impairment.
(j)
Loans to customers
Loans to customers are considered to be ‘loans and receivables’ as defined by IAS 39 – ‘Financial Instruments: Recognition and
Measurement’. They are therefore accounted for on the amortised cost basis.
Loans advanced are valued at inception at the initial advance amount, which is the fair value at that time, inclusive of procuration
fees paid to brokers or other business providers and less initial fees paid by the customer. Loans acquired from third parties are
initially valued at the purchase consideration paid or payable. Thereafter all loans to customers are valued at this initial amount
less the cumulative amortisation calculated using the Effective Interest Rate (‘EIR’) method. The loan balances are then reduced
where necessary by a provision for balances which are considered to be impaired.
The EIR method spreads the expected net income arising from a loan over its expected life. The EIR is that rate of interest which,
at inception, exactly discounts the future cash payments and receipts arising from the loan to the initial carrying amount.
The Group’s policy is to hedge against any exposure to fixed rate loan assets.
(k)
Finance lease receivables
Finance lease receivables are included within ‘Loans to Customers’ at the total amount receivable less interest not yet accrued,
unamortised commissions and provision for doubtful debts.
Income from finance lease contracts is accounted for on the actuarial basis.
The Paragon Group of Companies PLC 51
3.
(l)
ACCOUNTING POLICIES (continued)
Impairment of loans and receivables
Loans and receivables are reviewed for indications of possible impairment throughout the year and at each balance sheet date,
in accordance with IAS 39. Where loans exhibit objective evidence of impairment, the carrying value of the loans is reduced to
the net present value of their expected future cash flows, including the value of the potential realisation of any security,
discounted at the original EIR. Loans are assessed collectively, grouped by risk characteristics and account is taken of any
impairment arising due to events which are believed to have taken place but have not been specifically identified at the balance
sheet date.
For financial accounting purposes provisions for impairments of loans to customers are held in an allowance account. These
balances are offset against the gross value of the loan when it is written off on the administration system. After this point a
salvage balance may be held in respect of any further recoveries expected on the loan.
(m)
Amounts owed by or to group companies
In the accounts of the Company balances owed by or to other group companies are carried at the current amount outstanding
less any provision. Where balances owing between group companies fall within the definition of either financial assets or
financial liabilities given in IAS 32 – ‘Financial Instruments: Presentation’ they are classified as ‘Loans and Receivables’ or ‘Other
financial liabilities’, respectively.
(n)
Cash and cash equivalents
Balances shown as cash and cash equivalents in the balance sheet comprise demand deposits and short-term deposits with
banks with initial maturities of not more than 90 days.
(o)
Own shares
Shares in The Paragon Group of Companies PLC held in treasury or by the trustees of the Group’s employee share ownership
plans are shown on the balance sheet as a deduction in arriving at total equity. Own shares are stated at cost.
(p)
Taxation
The charge for taxation is based on the profit for the period and takes into account taxation deferred because of temporary
differences. Temporary differences arise from the inclusion of items of income and expenditure in taxation computations in
periods different from those in which they are included in financial statements.
Tax relating to items taken directly to equity is also taken directly to equity.
(q)
Borrowings
Borrowings are carried in the balance sheet on the amortised cost basis. The initial value recognised includes the principal
amount received less any discount on issue or costs of issuance.
Interest and all other costs of the funding are expensed to the income statement as interest payable over the term of the
borrowing on an Effective Interest Rate basis.
Gains on the purchase of the Group’s Floating Rate Notes or corporate bonds are recognised as income at the time of
the transaction.
(r)
Finance lease payables
Balances due on the lease arising from the sale and leaseback of a Group property are recognised in creditors at the total amount
payable less interest not yet accrued. Interest is accrued on the actuarial basis.
The profit which arose on the sale and leaseback transaction is held within deferred income and is being credited to profit over
the lease term on a straight line basis.
52
The Paragon Group of Companies PLC
(s)
Derivative financial instruments
Derivative instruments utilised by the Group comprise currency swap, interest rate swap and interest rate option agreements.
All such instruments are used for hedging purposes to alter the risk profile of the existing underlying exposure of the Group in
line with the Group’s risk management policies.
The Group does not enter into speculative derivative contracts.
All derivatives are carried in the balance sheet at fair value, as assets where the value is positive or as liabilities where the value
is negative. Fair value is based on market prices, where a market exists. If there is no active market, fair value is calculated using
present value models which incorporate assumptions based on market conditions and are consistent with accepted economic
methodologies for pricing financial instruments. Changes in the fair value of derivatives are recognised in the income statement,
except where such amounts are permitted to be taken to equity as part of the accounting for a cash flow hedge.
(t)
Hedging
For all hedges, the Group documents, at inception, the relationship between the hedging instruments and the hedged items, as
well as its risk management strategy and objectives for undertaking the transaction. The Group also documents its assessment,
both at hedge inception and on an ongoing basis, of whether the hedging arrangements put in place are considered to be ‘highly
effective’ as defined by IAS 39.
For a fair value hedge, as long as the hedging relationship is deemed ‘highly effective’ and meets the hedging requirements of
IAS 39, any gain or loss on the hedging instrument recognised in income can be offset against the fair value loss 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
value adjustment is disclosed in the balance sheet alongside the hedged item, for other hedges the adjustment is made to the
carrying value of the hedged asset or liability. Only the net ineffectiveness of the hedge is charged or credited to income. Where
a fair value hedge relationship is terminated, or deemed ineffective, the fair value adjustment is amortised over the remaining
term of the underlying item.
Where a derivative is used to hedge the variability of cash flows of an asset or liability, it may be designated as a cash flow hedge
so long as this relationship meets the hedging requirements of IAS 39. For such an instrument the effective portion of the change
in the fair value of the derivative is taken initially to equity, with the ineffective part taken to profit or loss. The amount taken to
equity is released to the income statement at the same time as the hedged item affects the income statement. Where a cash flow
hedge relationship is terminated, or deemed ineffective, the amount taken to equity will remain there until the hedged
transaction is recognised, or is no longer highly probable.
(u)
Deferred taxation
Deferred taxation is provided in full on temporary differences that result in an obligation at the balance sheet date to pay more
tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law.
Deferred tax assets are recognised to the extent that it 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 take account of the expected timing of realisation.
(v)
Retirement benefit obligations
The expected cost of providing pensions within the funded defined benefit scheme, determined on the basis of annual
valuations by professionally qualified actuaries using the projected unit method, is charged to the income statement. Actuarial
gains and losses are recognised in full in the period in which they occur and do not form part of the result for the period, being
recognised in the Statement of Comprehensive Income.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation,
as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets at the balance sheet date.
Both the return on investment expected in the period and the expected financing cost of the liability, as estimated at the
beginning of the period are recognised in the result for the period. Any variances against these estimates in the year form part
of the actuarial gain or loss.
The assets of the scheme are held separately from those of the Group in an independently administered fund.
The charge to the income statement for providing pensions under defined contribution pension schemes is equal to the
contributions payable to such schemes for the year.
The Paragon Group of Companies PLC 53
3.
ACCOUNTING POLICIES (continued)
(w)
Provisions
Provisions are recognised where there is a present obligation as a result of a past event, it is probable that this obligation will
result in an outflow of resources and this outflow can be reliably quantified. Provisions are discounted where this effect
is material.
(x)
Revenue
The revenue of the Group comprises interest receivable and similar charges and other income. The accounting policy for the
recognition of each element of revenue is described separately within these accounting policies.
(y)
Fee and commission income
Other income includes administration fees charged to borrowers, which are credited when the related service is performed, fees
charged to third parties for account administration services, which are credited as those services are performed, and
commissions receivable on the sale of insurances, which are taken to profit at the point at which the Group becomes
unconditionally entitled to the income.
(z)
Share based payments
In accordance with IFRS 2 – ‘Share based payments’, the fair value at the date of grant of awards to be made in respect of options
and shares granted under the terms of the Group’s various share based employee incentive arrangements is charged to the profit
and loss account over the period between the date of grant and the vesting date.
As permitted by IFRS 1, only those options and awards granted after 7 November 2002 and not vested at 1 January 2005 have
been restated on transition to IFRS.
National Insurance on share based payments is accrued over the vesting period, based on the share price at the balance
sheet date.
Where the allowable cost of share based awards for tax purposes is greater than the cost determined in accordance with
IFRS 2, the tax effect of the excess is taken to reserves.
(aa)
Dividends
In accordance with IAS 10 – ‘Events after the balance sheet date’, dividends payable on ordinary shares are recognised in equity
once they are appropriately authorised and are no longer at the discretion of the Company. Dividends declared after the balance
sheet date, but before the authorisation of the financial statements remain within shareholders’ funds.
(bb)
Foreign currency
Foreign currency transactions, assets and liabilities are accounted for in accordance with IAS 21 – ‘The Effects of Changes in
Foreign Exchange Rates’. The functional currency of the Group is the pound sterling. Transactions which are not denominated
in sterling are translated into sterling at the spot rate of exchange on the date of transaction. Monetary assets and liabilities which
are not denominated in sterling are translated at the closing rate on the balance sheet date.
Gains and losses on retranslation are included in interest payable or interest receivable depending on whether the underlying
instrument is an asset or a liability, except where deferred in equity in accordance with the cash flow hedging provisions
of IAS 39.
(cc)
Segmental reporting
The accounting policies of the operating segments are the same as those described above for the Group as a whole. Costs
attributed to each segment represent the direct costs incurred by the segment operations and an allocation of the costs of areas
of the business which serve all segments. Such allocations are weighted by the value of loan assets in each segment, adjusted
for the relative effort involved in the administration of each asset class.
54
The Paragon Group of Companies PLC
4.
CRITICAL ACCOUNTING ESTIMATES
Certain of the balances reported in the financial statements are based wholly or in part on estimates or assumptions made by the
directors. There is, therefore, a potential risk that they may be subject to change in future periods. The most significant of
these are:
(a)
Impairment losses on loans to customers
Impairment losses on loans are calculated based on statistical models. The key assumptions revolve around estimates of future
cash flows from customer’s accounts, their timing and, for secured accounts, the expected proceeds from the realisation of the
property. These key assumptions are based on observed data from historical patterns and are updated regularly based on new
data as it becomes available.
In addition the directors consider how appropriate past trends and patterns might be in the current economic situation and make
any adjustments they believe are necessary to reflect the current conditions.
The accuracy of the impairment calculations would therefore be affected by unexpected changes to the economic situation,
variances between the models used and the actual results, or assumptions which differ from the actual outcomes. In particular,
if the impact of economic factors such as employment levels on customers is worse than is implicit in the model then the number
of accounts requiring provision might be greater than suggested by the model, while falls in house prices, over and above any
assumed by the model might increase the provision required in respect of accounts currently provided.
(b)
Effective interest rates
In order to determine the effective interest rate applicable to loans an estimate must be made of the expected life of each loan
and hence the cash flows relating thereto. These estimates are based on historical data and reviewed regularly. The accuracy of
the effective interest rate applied would therefore be compromised by any differences between actual borrower behaviour and
that predicted.
(c)
Fair values
Where financial assets and liabilities are carried at fair value, in the majority of cases this can be derived by reference to quoted
market prices. Where such a quoted price is not available the valuation is based on cash flow models based, where possible, on
independently sourced parameters. The accuracy of the calculation would therefore be affected by unexpected market
movements or other variances in the operation of the models or the assumptions used.
(d)
Retirement benefits
The present value of the retirement benefit obligation is derived from an actuarial calculation which rests on a number of
assumptions. These are listed in note 54. Where actual conditions differ from those assumed the ultimate value of the obligation
would be different.
(e)
Goodwill and intangible assets arising on acquisition
The value of goodwill and intangible assets recognised on the Group’s acquisition of TBMC was derived from the projected cash
flows for that business at the time of acquisition, based on management forecasts. The accuracy of this valuation would therefore
be compromised by any differences between these forecasts and the levels of business activity that the entity might actually
have been able to generate in the absence of the acquisition. This valuation will also be affected by the accuracy of the discount
factor used.
The carrying value of the goodwill and intangible assets is dependent on the accuracy of the inputs into the impairment test
described in note 25.
The Paragon Group of Companies PLC 55
5.
CAPITAL MANAGEMENT
The Group’s objectives in managing capital are:
• To safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns to shareholders and
benefits for other stakeholders; and
• To provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.
The Group sets the amount of capital in proportion to risk, availability and cost. The Group manages the capital structure and makes
adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets, having particular
regard to the relative costs and availability of debt and equity finance at any given time. In order to maintain or adjust the capital structure
the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, issue or redeem
other capital instruments, such as corporate bonds, or sell assets to reduce debt. The Group is not subject to any externally imposed
capital requirements.
The Board of Directors regularly review the proportion of working capital represented by debt and equity. Net debt is calculated as total
debt, other than securitised and warehouse debt, valued at principal value, less free cash up to a maximum of the total debt. Adjusted
equity comprises all components of equity (i.e. share capital, share premium, minority interest, retained earnings, and revaluation
surplus) other than amounts recognised in equity relating to cash flow hedges.
The debt and equity amounts at 30 September 2010 and at 30 September 2009 were as follows:
Debt
Corporate bond
Bank overdraft
Less: Applicable free cash
Net debt
Equity
Total equity
Less: cash flow hedging reserve
Adjusted equity
Total working capital
Debt
Equity
Total working capital
2010
£m
110.0
0.1
(110.1)
-
692.3
(1.4)
690.9
690.9
-
100.0%
100.0%
2009
£m
110.0
0.3
(84.0)
26.3
650.8
(1.2)
649.6
675.9
3.9%
96.1%
100.0%
In addition the Group held £37.7m of free cash in excess of that shown above.
The increased proportion of working capital represented by equity during 2010 resulted primarily from the operation of the policy
described above.
56
The Paragon Group of Companies PLC
6.
FINANCIAL RISK MANAGEMENT
The principal financial risks arising from the Group’s normal business activities are credit risk, liquidity risk, interest rate risk and currency
risk. The Board operates through the Credit Committee and the Asset and Liability Committee to review and agree policies for managing
each of these risks, as described in the Corporate Governance Statement on pages 36 to 39, and they are summarised below. These
policies have remained unchanged throughout the year and since the year end. The position disclosed below is materially similar to that
existing throughout the year.
Use of derivative financial instruments
The Group uses derivative financial instruments for risk management purposes. Such instruments are used only to limit the exposure of
the Group to movements in market interest or exchange rates.
It is, and has been throughout the year under review, the Group’s policy that no trading in financial instruments shall be undertaken, and
hence all of the Group’s derivative financial instruments are for commercial hedging purposes only. These are used to protect the Group
from exposures principally arising from fixed rate lending or borrowing and borrowings denominated in foreign currencies. Hedge
accounting is applied where appropriate, though it should be noted that some derivatives, while forming part of an economic hedge
relationship, do not qualify for this accounting treatment under the IAS 39 rules, while in other cases hedge accounting has not been
adopted either because natural accounting offsets are expected or because complying with the IAS 39 hedge accounting rules would
be especially onerous.
The Group has designated a number of derivatives as fair value hedges for accounting purposes. In particular this treatment is used for:
(a)
(b)
hedging the interest rate risk of groups of fixed rate prepayable loan assets with interest rate derivatives on a portfolio basis. The
Group believes this solution is the most appropriate as it is consistent with the economic hedging approach taken by the Group
to these assets.
hedging the interest rate risk of fixed rate corporate bond borrowings with a designated fixed to floating interest rate swap,
which was taken out for this specific purpose.
The Group has also designated cash flow hedging relationships, principally arising from currency borrowings, where a specified foreign
exchange basis swap, set up as part of the terms of the borrowing is used.
The only derivative financial instrument held by the Company is the swap related to the fixed rate corporate bond borrowing
described above.
Credit risk
The Group’s business objectives rely on maintaining a high-quality customer base and place strong emphasis on good credit
management, both at the time of acquiring or underwriting a new loan, where strict lending criteria are applied, and in the
collections process.
Primary responsibility for credit risk management across the Group lies with the Credit Committee. The Credit Committee is made up of
four senior members of staff, headed by the Finance Director. Its key responsibilities include setting and reviewing credit policy,
controlling applicant quality, tracking account performance against targets, agreeing product criteria and lending guidelines and
monitoring performance and trends.
The assets of the Group and the Company which are subject to credit risk are set out below:
The Group
The Company
Loans to customers (note 33)
Derivative financial assets (note 37)
Amounts owed by Group companies (note 40)
Accrued interest (note 40)
Cash (note 41)
2010
£m
8,911.2
1,160.3
-
0.5
536.7
2009
£m
9,314.3
1,287.5
-
0.5
480.4
Maximum exposure to credit risk
10,608.7
11,082.7
The Group’s credit risk is primarily attributable to its loans to customers.
2010
£m
-
8.0
125.8
0.6
143.6
278.0
2009
£m
-
8.7
88.5
-
78.8
176.0
The Paragon Group of Companies PLC 57
6.
FINANCIAL RISK MANAGEMENT (continued)
Credit risk (continued)
While this maximum exposure represents the potential loss which might have to be accounted for by the Group, the terms on which the
Group’s loan assets are funded, described under Liquidity Risk below, limit the amount of principal repayments on the Group’s
securitised and warehouse borrowings in cases of capital losses on assets, significantly reducing the effective shareholder value at risk.
The Group’s loan assets at 30 September 2010 are analysed as follows:
Buy-to-let mortgages
Owner occupied mortgages
Total first mortgages
Secured loans
Loans secured on property
Car loans
Retail finance loans
Other loans
Total loans to customers
2010
£m
8,323.9
151.7
8,475.6
391.9
8,867.5
21.0
4.8
17.9
8,911.2
2010
%
93.4%
1.7%
95.1%
4.4%
99.5%
0.2%
0.1%
0.2%
2009
£m
8,585.0
179.3
8,764.3
467.4
9,231.7
48.3
9.0
25.3
2009
%
92.2%
1.9%
94.1%
5.0%
99.1%
0.5%
0.1%
0.3%
100.0%
9,314.3
100.0%
There are no significant concentrations of credit risk due to the large number of customers included in the portfolios.
The Group’s underwriting philosophy is based on a combination of sophisticated individual credit assessment and the automated
efficiencies of a scored decision making process. Information on each applicant is combined with data taken from a credit reference
bureau to provide a complete credit picture of the applicant and the borrowing requested. Key information is validated through a
combination of documentation and statistical data which collectively provides evidence of the applicant’s ability and willingness to pay
the amount contracted under the loan agreement.
First mortgages and secured loans are secured by charges over residential properties in England and Wales, or similar Scottish or
Northern Irish securities. Car loans are effectively secured by the financed vehicle.
Despite this security, in assessing credit risk, an applicant’s ability and propensity to repay the loan remain the principal factors in the
decision to lend.
In considering whether to acquire loan assets, the Group reviews documentary and statistical evidence to achieve a level of confidence
that the Group’s investment will be recovered similar to that provided by the underwriting process.
In order to control credit risk relating to counterparties to the Group’s derivative financial instruments and cash deposits, the Asset and
Liability Committee determines which counterparties the Group will deal with, establishes limits for each counterparty and monitors
compliance with those limits. Such counterparties are typically highly rated banks and, for all cash deposits and derivative positions held
within the Group’s securitisation structures, must comply with criteria set out in the financing arrangements. Where a derivative
counterparty fails to meet the required criteria they are obliged under the terms of the instruments to set aside a cash collateral deposit.
The amounts of these cash collateral deposits, which do not form part of the Group’s cash position, are given in note 37.
The Group’s cash balances are held in sterling at London banks in current accounts and as short fixed term deposits. Credit risk on these
balances, and the interest accrued thereon, is considered to be immaterial.
58
The Paragon Group of Companies PLC
An analysis of the indexed loan to value ratio for those loan accounts secured on property by value at 30 September 2010 is set
out below.
Loan to value ratio
Less than 70%
70% to 80%
80% to 90%
90% to 100%
Over 100%
2010
First
Mortgages
%
2010
Secured
Loans
%
2009
First
Mortgages
%
23.6
23.0
30.1
19.2
4.1
28.3
14.8
15.2
14.7
27.0
17.7
16.5
30.2
30.0
5.6
2009
Secured
Loans
%
26.0
13.2
16.5
14.2
30.1
100.0
100.0
100.0
100.0
Average loan to value ratio
79.4
86.5
82.6
88.4
The number of accounts in arrears by asset class, based on the most commonly quoted definition of arrears for the type of asset, at
30 September 2010 and 30 September 2009, compared to the most recent available industry averages published by the Council of
Mortgage Lenders (‘CML’) and the Finance and Leasing Association (‘FLA’), was:
First mortgages
Accounts more than three months in arrears
Buy-to-Let accounts including receiver of rent cases
Buy-to-Let accounts excluding receiver of rent cases
Owner Occupied accounts
CML data for mortgage accounts more than three months in arrears at 30 September 2010
Buy-to-Let accounts including receiver of rent cases
Buy-to-Let accounts excluding receiver of rent cases
Owner Occupied accounts
All mortgages
Secured loans
Accounts more than 2 months in arrears
FLA data for secured loans at 30 September 2010
Car loans
Accounts more than 2 months in arrears
FLA data for all personal loans at 30 September 2010
Other loans
Accounts more than 2 months in arrears
2010
%
0.83
0.10
4.00
2.45
1.71
2.20
2.15
9.36
24.40
5.85
4.80
2009
%
1.54
0.29
4.11
3.23
2.19
2.45
2.42
7.94
19.80
4.44
5.00
59.75
47.94
No published industry data for asset classes comparable to the Group’s retail finance and other books has been identified.
During the year ended 30 September 2010 the CML has enhanced the analysis of its published data, enabling the Group to provide
clearer comparisons of the performance of its loan book. Accordingly additional data has been given for both 2010 and 2009.
The portfolio of buy-to-let mortgage assets acquired on 30 September 2010 has not been included above. This portfolio was acquired
for £20.7m at a discount to the total of its current balances and had not been brought within the Group’s collection processes at the year
end, so its performance is not directly comparable to other Group buy-to-let assets. 28.0% of these assets were more than three months
in arrears at the year end.
The number of accounts in arrears will be higher for closed books such as the owner occupied mortgage book and the car finance, retail
finance and unsecured loan books than for comparable active ones, as performing accounts pay off their balances.
The Paragon Group of Companies PLC 59
6.
FINANCIAL RISK MANAGEMENT (continued)
Credit risk (continued)
The payment status of the current balances of the Group’s loan assets, at 30 September 2010 and at 30 September 2009 split between
those accounts considered as performing and those included in the population for impairment testing, is shown below.
FIRST MORTGAGES
Not past due
Arrears less than 3 months
Performing accounts
Arrears 3 to 6 months
Arrears 6 to 12 months
Arrears over 12 months
Possessions and similar cases
Impairment population
2010
£m
7,852.2
337.4
8,189.6
24.6
28.9
53.4
48.6
2009
(restated)
£m
7,928.9
431.8
8,360.7
48.0
53.7
61.9
80.0
155.5
243.6
8,345.1
8,604.3
During the year the Group has changed the analysis of arrears accounts used internally and now classifies Receiver of Rent cases which
are unlet or in the process of being sold with possession cases, regardless of their arrears status, as this gives more useful information.
The arrears analysis at 30 September 2009 has been restated on a comparable basis.
60
The Paragon Group of Companies PLC
CONSUMER FINANCE
30 September 2010
Not past due
Arrears less than 2 months
Performing accounts
Arrears 2 to 6 months
Arrears 6 to 9 months
Arrears 9 to 12 months
Arrears over 12 months
Impairment population
30 September 2009
Not past due
Arrears less than 2 months
Performing accounts
Arrears 2 to 6 months
Arrears 6 to 9 months
Arrears 9 to 12 months
Arrears over 12 months
Impairment population
OTHER LOANS
Not past due
Arrears less than 1 month
Performing accounts
Arrears 1 to 3 months
Arrears 3 to 6 months
Arrears 6 to 12 months
Arrears over 12 months
Impairment population
Secured
loans
£m
296.8
50.0
346.8
27.2
8.3
5.4
9.0
49.9
Car
loans
£m
16.7
1.3
18.0
0.7
0.2
0.1
0.9
1.9
396.7
19.9
370.3
48.1
418.4
32.0
9.5
3.6
5.1
50.2
39.3
2.5
41.8
1.7
0.4
0.2
0.8
3.1
468.6
44.9
Retail
finance
loans
£m
1.9
0.1
2.0
0.1
0.2
0.2
2.7
3.2
5.2
4.7
0.2
4.9
0.3
0.2
0.2
2.8
3.5
8.4
2010
£m
5.1
0.3
5.4
0.2
0.4
1.1
45.4
47.1
52.5
Total
£m
315.4
51.4
366.8
28.0
8.7
5.7
12.6
55.0
421.8
414.3
50.8
465.1
34.0
10.1
4.0
8.7
56.8
521.9
2009
£m
8.4
0.3
8.7
0.4
0.6
1.8
65.7
68.5
77.2
The Paragon Group of Companies PLC 61
6.
FINANCIAL RISK MANAGEMENT (continued)
Liquidity risk
The Group uses securitisation to mitigate its exposure to liquidity risk, ensuring, as far as possible, that the maturities of assets and
liabilities are matched.
The Group’s loan assets are principally financed by asset backed loan notes (‘Notes’) issued through the securitisation process. In a
securitisation deal a Group company, referred to as a Special Purpose Vehicle (‘SPV’) will issue Notes secured on a pool of mortgage or
other loan assets owned by the SPV. The Notes have a maturity date later than the final repayment date for any asset in the pool, typically
over thirty years from the issue date. The noteholders are entitled to receive repayment of the Note principal out of principal funds
generated by the loan assets from time to time, but their right to the repayment of principal is limited to the cash available in the SPV.
Similarly, payment of accrued interest to the noteholders is limited to cash generated within the SPV. There is no requirement for any
Group company other than the issuing SPV to make principal or interest payments in respect of the Notes. This has the effect of
matching the maturities of the assets and the related funding, substantially reducing the Group’s exposure to liquidity risk. Details of
Notes in issue are given in note 52 and the assets backing the Notes are shown in notes 31 and 32.
In the Group’s consumer finance SPVs, principal cash was not required to be repaid to noteholders during an initial period, but instead
could be used to acquire new loans from the Group, subject to underwriting conditions being met. Following the completion of this initial
period, principal cash is repaid in the same way as for other SPVs.
The Group provides additional funding to the SPV at inception, subordinated to the external funding, which means that credit risk on
the pool assets is retained within the Group. The Group also receives the residual income generated by the assets. These factors mean
that the risks and rewards of ownership of the assets remain with the Group, and hence the loans remain on the Group’s balance sheet.
Cash received in each SPV is held until the next interest payment date, after which the remaining balances become available to the
Group. Cash balances are also held within each SPV to provide credit enhancement for the particular securitisation, allowing principal
payments to be made even if loans default. In order to provide further credit enhancement in certain of the SPVs there exist specific
economic trigger events which cause additional cash to be retained in the SPV, rather than being transferred to the Group. While the
Group can, if it chooses, contribute additional cash to cover these requirements, it is under no obligation to do so. No such trigger event
has occurred to date in any of the Group’s SPVs and whether one arises in the future will depend on the performance of the general
economy and its impact on mortgage and loan arrears. However if such trigger events occurred in all of the SPVs, a total of £65.7m of
additional cash would be retained in those companies (2009: £65.3m). The cash balances of the SPV companies are included within the
restricted cash balances disclosed in note 41.
New loan originations are held within a revolving ‘warehouse’ facility from the point of their origination until their inclusion in a
securitisation deal. A warehouse functions in a similar way to an SPV, except that funds are drawn down as advances are made and
repaid when loans are securitised.
Before 29 February 2008 a warehouse facility was provided to Paragon Second Funding Limited. On this date the warehouse ceased to
be available for new drawings, although assets held within it at that time continued to be funded. Repayment of the principal on these
assets is not required unless amounts are realised from them. The final repayment date of the facility is later than the final due date of
the assets it is used to fund.
On 27 September 2010 a new warehouse facility agreement was signed with Macquarie Bank. This warehouse is available for drawing
and redrawing until 21 December 2012 for the purpose of funding new first charge mortgage loans. After that the loan has a further two
year period for the assets funded to be sold or refinanced. Repayment of the principal drawn in respect of assets is not required unless
amounts are realised from them, even after the two year period. There is no further recourse to the assets of the Group in respect of
either interest or principal on the borrowing.
As with the SPVs, the Group provides funding to the warehouse companies and restricted cash balances are held within them. Further
details of the warehouse facilities are given in note 52 and details of the loan assets within the warehouses are given in note 31.
Between 29 February 2008 and 30 September 2010 the only advances made by the Group were consumer loans and further advances
on existing mortgage accounts, which are funded using the existing drawings in the SPV companies. The provision of new consumer
loans ceased on 9 April 2009, except for further advances on existing accounts, when the period over which new loans could be sold to
the consumer finance SPVs ended.
The securitisation process and the terms of the warehouse facilities effectively limit liquidity risk from the funding of the Group’s loan
assets. It remains to ensure that sufficient funding is available to fund the Group’s participation in the SPVs, provide capital support for
new loans and working capital for the Group. This responsibility rests with the Asset and Liability Committee which sets the Group’s
liquidity policy and uses detailed cash flow projections to ensure that an adequate level of liquidity is available at all times.
62
The Paragon Group of Companies PLC
The final repayment date for all of the securitisation borrowings and the old warehouse borrowing is more than five years from the
balance sheet date, the earliest falling due in 2033 and the latest in 2050. The equivalent sterling principal amount outstanding at
30 September 2010 under these arrangements, allowing for the effect of the cross currency basis swaps, described under currency risk
below, which are net settled with the loan payments, was £8,598.3m (2009: £9,007.3m). The total sterling amount payable under these
arrangements, were these principal amounts to remain outstanding until the final repayment date would be £19,550.9m
(2009: £21,413.7m). As the principal will, as discussed above, reduce as customers repay or redeem their accounts, the cash flow will
in practice be far less than this amount.
The total undiscounted amounts, inclusive of estimated interest, which would be payable in respect of the Group’s other borrowings,
should those balances remain outstanding until the contracted repayment date, together with amounts payable in respect of the ‘other
accruals’ shown in note 57 are shown below.
30 September 2010
Payable in less than one year
Payable in one to two years
Payable in two to five years
Payable in over five years
30 September 2009
Payable in less than one year
Payable in one to two years
Payable in two to five years
Payable in over five years
Corporate
bond
£m
Other
accruals
£m
7.7
7.7
23.2
125.4
164.0
7.7
7.7
23.2
133.1
171.7
10.1
0.1
-
-
10.2
10.9
0.5
0.1
-
11.5
Total
£m
17.8
7.8
23.2
125.4
174.2
18.6
8.2
23.3
133.1
183.2
The cash flows described above will include those for interest on borrowings accrued at 30 September 2010 disclosed in note 57.
The cash flows which are expected to arise from derivative contracts in place at the year end, estimating future floating rate payments
and receipts on the basis of the yield curve at the balance sheet date are as follows:
On derivative liabilities
Payable in less than one year
Payable in one to two years
Payable in two to five years
Payable in over five years
On derivative assets
Payable in less than one year
Payable in one to two years
Payable in two to five years
Payable in over five years
2010
Total cash
outflow /
(inflow)
£m
2009
Total cash
outflow /
(inflow)
£m
7.5
4.0
5.0
14.6
31.1
(6.1)
(5.8)
(12.3)
(17.8)
(42.0)
(10.9)
38.8
8.1
5.6
30.8
83.3
(7.9)
(6.6)
(7.4)
(32.7)
(54.6)
28.7
The Paragon Group of Companies PLC 63
6.
FINANCIAL RISK MANAGEMENT (continued)
Interest rate risk
The Group manages interest rate risk, the risk that margins will be adversely affected by movements in market interest rates, by
maintaining floating rate liabilities and matching these with floating rate assets, hedging fixed rate assets and liabilities by the use of
interest rate swap or cap agreements.
The rates of interest payable on the loan facilities and on asset backed loan notes issued in the securitisation process are reset quarterly
on the basis of LIBOR. Where asset backed loan notes are issued in foreign currencies, cross-currency basis swaps are put in place
converting the reference interest rate to a sterling LIBOR basis.
The Group’s assets predominantly bear LIBOR linked interest rates or are hedged fixed rate assets. The interest rates charged on the
Group’s variable rate loan assets are determined by reference to, inter alia, the Group’s funding costs and the rates being charged on
similar products in the market. Generally this ensures the matching of changes in interest rates on the Group’s loan assets and
borrowings and any exposure arising on the interest rate resets is relatively short term. Forward rate agreements may be used to hedge
against any perceived risk of temporary increases in LIBOR rates at month ends.
The fixed rate corporate bond is hedged by use of a long-term interest rate swap agreement, of notional principal equal to the principal
amount of the bond. This swap is in place until the optional repayment date in 2012 and converts the interest payable to a LIBOR-linked
floating rate basis.
The Group has entered into various interest rate basis swap arrangements to alter the effective basis of interest payments on certain
borrowings to match the underlying assets, though due to their nature and the low notional value of these swaps, they do not have a
significant impact on the Group’s results.
The Asset and Liability Committee monitors the interest rate risk exposure on the Group’s loan assets and asset backed loan notes and
ensures compliance with the requirements of the trustees in respect of the Group’s securitisations.
To assess the Group’s exposure to interest rate movements the notional impact of a 1% change in UK interest rates on the equity of the
Group at 30 September 2010, and the notional annualised impact of such a change on the operating profit of the Group, based on the
year end balance sheet have been calculated.
On this basis a 1% increase in UK interest rates would reduce the Group’s equity at 30 September 2010 by £4.3m (2009: £4.5m) and
increase profit before tax by £5.1m (2009: increase profit before tax by £3.8m).
This calculation allows only for the direct effects of any change in UK interest rates. In practice such a change might have wider economic
consequences which would themselves potentially effect the Group’s business and results.
Although certain of the Group’s borrowings have interest rates dependant on US Dollar and Euro LIBOR rates, the effect of
the cross currency basis swaps is such that the Group’s results have no material exposure to movements in these rates. The
effects of independent 1% increases in US or Euro interest rates would be to increase the Group’s equity by £1.4m (2009: £1.4m) and
£2.4m (2009: £2.7m) respectively.
The only interest rate risk in the Company arises from the corporate bond described above which is a fixed rate instrument, until its
maturity in 2017, which is fully hedged. Loans to associates and inter company assets and liabilities bear interest at floating rates based
on LIBOR which reset within three months of the balance sheet date. The finance lease bears notional interest only; all other balances
are non-interest bearing.
64
The Paragon Group of Companies PLC
Currency risk
All of the Group’s assets and liabilities are denominated in sterling with the exception of the asset backed loan notes denominated in US
dollars and euros, which are described in note 52. Although IAS 39 requires that they be accounted for as currency liabilities and valued
at their spot rates, it was a condition of the issue of these notes that interest rate and currency swaps were put in place for the duration
of the borrowing, having the effect of converting the liability to a LIBOR linked floating rate sterling borrowing. As a result the Group has
no material exposure to foreign currency risk, and no sensitivity analysis is presented for currency risk.
The equivalent sterling principal amounts of notes in issue under these arrangements, and their carrying values at 30 September 2010
and 30 September 2009 are:
US dollar notes
Euro notes
2010
Equivalent
sterling
principal
£m
3,054.8
2,108.2
2010
Carrying
value
£m
3,652.3
2,663.9
5,163.0
6,316.2
2009
Equivalent
sterling
principal
£m
3,177.3
2,191.8
5,369.1
2009
Carrying
value
£m
3,717.8
2,930.1
6,647.9
Fair values of financial assets and financial liabilities
Fair values have been determined for all derivatives, listed securities and any other financial assets and liabilities for which an active and
liquid market exists.
Derivative financial instruments are stated at their fair values in the accounts. The Group uses a number of techniques to determine the
fair values of its derivative assets and liabilities, for which observable prices in active markets are not available. These are principally
present value calculations based on estimated future cash flows arising from the instruments, discounted using a risk adjusted interest
rate. The principal inputs to these valuation models are LIBOR benchmark interest rates for the currencies in which the instruments are
denominated, sterling, euros and dollars. The cross currency basis swaps have a notional principal related to the outstanding currency
borrowings and therefore the estimated rate of repayment of these notes also affects the valuation of the swaps. In order to determine
the fair values the management applies valuation adjustments to observed data where that data would not fully reflect the attributes of
the instrument being valued. The management reviews the models used on an ongoing basis to ensure that the valuations produced are
reasonable and reflect all relevant factors.
For assets and liabilities carried at fair value IFRS 7 requires that the measurements should be classified using a fair value hierarchy
reflecting the inputs used, and defines three levels. Level 1 measurements are unadjusted market prices, level 2 measurements are
derived from observable data, such as market prices or rates, while level 3 measurements rely on significant inputs which are not derived
from observable data. As described above the valuations of the Group’s derivatives are based on market information and they are
therefore classified as level 2 measurements. Details of these assets are given in note 37. The Group had no financial assets or liabilities
in the year ended 30 September 2010 or the year ended 30 September 2009 valued using level 1 or level 3 measurements.
The fair values of cash and cash equivalents, bank loans and overdrafts and asset backed loan notes, which are carried at amortised cost,
are not materially different from their book values because all the assets mature within three months of the year end and the interest
rates charged on financial liabilities reset on a quarterly basis. While the Group’s asset backed loan notes are listed, the quoted prices
for an individual note may not be indicative of the fair value of the issue as a whole, due to the specialised nature of the market in such
instruments and the limited number of investors participating in it.
In the absence of a liquid market in loan assets the directors have considered the estimated cash flows expected to arise from the
Group’s investments in its loans to customers and have concluded that the carrying value of these assets, determined on the amortised
cost basis, is not significantly different from the fair value of the assets derived on a discounted cash flow basis.
The Paragon Group of Companies PLC 65
7.
SEGMENTAL INFORMATION
For internal reporting purposes the Group is organised into two major operating divisions, First Mortgages and Consumer Finance. These
divisions are the basis on which the Group reports segmental information.
The revenue generated by the First Mortgages segment includes interest and fees generated by the buy-to-let and owner-occupied
mortgage assets and other income derived from first charge mortgages. Consumer Finance revenue includes interest and fees generated
by second charge loans and the residual car and retail finance and unsecured loan assets, and other sources of income derived from the
consumer loans.
All of the Group’s operations are conducted in the United Kingdom, all revenues arise from external customers and there are no
inter-segment revenues. No customer contributes more than 10% of the revenue of the Group.
Financial information about these business segments is shown below.
Year ended 30 September 2010
First
Mortgages
£m
Consumer
Finance
£m
228.4
(133.6)
94.8
-
6.5
101.3
(32.1)
(18.6)
50.6
5.7
-
(0.2)
56.1
47.2
(8.6)
38.6
-
8.0
46.6
(10.5)
(20.6)
15.5
-
-
0.2
15.7
Total
£m
275.6
(142.2)
133.4
-
14.5
147.9
(42.6)
(39.2)
66.1
5.7
-
-
71.8
(17.9)
53.9
Interest receivable
Interest payable
Net interest income
Share of associate result
Other operating income
Total operating income
Operating expenses
Provisions for losses
Gains on debt repurchases
Impairment of goodwill
Fair value net (losses) / gains
Operating profit
Tax charge
Profit after tax
66
The Paragon Group of Companies PLC
Year ended 30 September 2009
Interest receivable
Interest payable
Net interest income
Share of associate result
Other operating income
Total operating income
Operating expenses
Provisions for losses
Gains on debt repurchases
Impairment of goodwill
Fair value net (losses) / gains
Operating profit
Tax charge
Profit after tax
First
Mortgages
£m
Consumer
Finance
£m
443.8
(347.8)
96.0
-
11.4
107.4
(31.2)
(31.5)
44.7
15.9
(6.0)
(3.6)
51.0
64.4
(25.6)
38.8
-
4.6
43.4
(8.1)
(34.7)
0.6
2.5
-
0.2
3.3
Total
£m
508.2
(373.4)
134.8
-
16.0
150.8
(39.3)
(66.2)
45.3
18.4
(6.0)
(3.4)
54.3
(13.2)
41.1
The assets and liabilities attributable to each of the segments at 30 September 2010, 30 September 2009 and 30 September 2008 were:
30 September 2010
Segment assets
Segment liabilities
30 September 2009
Segment assets
Segment liabilities
30 September 2008
Segment assets
Segment liabilities
All of the assets shown above were located in the United Kingdom.
First
Mortgages
£m
Consumer
Finance
£m
10,081.3
(9,529.6)
551.7
10,443.4
(9,929.5)
513.9
10,580.8
(10,095.4)
485.4
562.5
(421.9)
140.6
710.9
(574.0)
136.9
928.9
(792.8)
136.1
Total
£m
10,643.8
(9,951.5)
692.3
11,154.3
(10,503.5)
650.8
11,509.7
(10,888.2)
621.5
The Paragon Group of Companies PLC 67
7.
SEGMENTAL INFORMATION (continued)
The total additions to non-current assets, excluding financial instruments and deferred tax assets, attributable to each segment during
the years ended 30 September 2010 and 30 September 2009 was:
2010
2009
Being:
2010
2009
8.
REVENUE
Interest receivable
Other income
Total revenue
Arising from:
First Mortgages
Consumer Finance
Total revenue
9.
INTEREST RECEIVABLE
Interest on loans to customers
Interest on loans to associate
Other interest receivable
Total interest on financial assets
Return on pension scheme assets
First
Mortgages
£m
Consumer
Finance
£m
1.2
0.2
0.1
0.1
Intangible
Assets
(Note 24)
£m
0.3
0.1
Property,
Plant and
Equipment
(Note 26)
£m
1.0
0.2
2010
£m
275.6
14.5
290.1
234.9
55.2
290.1
2010
£m
269.1
-
2.9
272.0
3.6
275.6
Total
£m
1.3
0.3
Total
£m
1.3
0.3
2009
£m
508.2
16.0
524.2
455.2
69.0
524.2
2009
£m
489.1
0.5
15.1
504.7
3.5
508.2
Interest on loans to customers includes £11.7m (2009: £15.8m) charged on accounts where an impairment provision has been made.
68
The Paragon Group of Companies PLC
10.
INTEREST PAYABLE AND SIMILAR CHARGES
On asset backed loan notes
On corporate bond
On bank loans and overdrafts
Total interest on financial liabilities
On pension scheme liability
On finance leases
Other finance costs
11.
OTHER OPERATING INCOME
Loan account fee income
Insurance income
Third party servicing
Other income
12.
OPERATING EXPENSES
Employment costs
Auditor remuneration
Amortisation of intangible assets
Depreciation
Operating lease rentals
Other administrative costs
2010
£m
110.3
3.4
22.6
136.3
3.6
1.1
1.2
142.2
2010
£m
6.5
0.7
5.6
1.7
14.5
2010
£m
26.2
0.7
0.7
2.3
3.2
9.5
42.6
2009
£m
298.9
7.7
60.9
367.5
3.2
1.2
1.5
373.4
2009
£m
10.4
2.5
1.0
2.1
16.0
2009
£m
23.7
0.8
0.7
3.2
4.1
6.8
39.3
Notes
13
16
24
26
62
The Paragon Group of Companies PLC 69
13.
EMPLOYEES
The average number of persons (including directors) employed by the Group during the year was 611 (2009: 553). The number of
employees at the end of the year was 636 (2009: 596).
Staff costs incurred during the year in respect of these employees were:
Share based remuneration
Other wages and salaries
Total wages and salaries
National Insurance on share based remuneration
Other social security costs
Total social security costs
Defined benefit pension cost
Other pension costs
Total pension costs
Total staff costs
2010
£m
1.4
20.4
0.9
1.7
1.6
0.2
2009
£m
1.2
19.2
-
1.8
1.4
0.1
2010
£m
21.8
2.6
1.8
26.2
2009
£m
20.4
1.8
1.5
23.7
Details of the pension schemes operated by the Group are given in note 54.
The Company has no employees. Details of the directors’ remuneration are given in note 14.
14.
KEY MANAGEMENT REMUNERATION
The remuneration of the directors, who are the key management personnel of the Group and the Company, is set out below in aggregate
in accordance with IAS 24 – ‘Related Party Transactions’. Further information about the remuneration of individual directors is provided
in the Report of the Board to the Shareholders on Directors’ Remuneration on pages 27 to 32.
Short-term employee benefits
Post-employment benefits
Termination benefits
Share based payment
2010
£m
2.7
0.4
-
1.0
4.1
2009
£m
2.3
0.4
0.4
0.4
3.5
70
The Paragon Group of Companies PLC
15.
SHARE BASED REMUNERATION
During the year the Group had various share based payment arrangements with employees. They are accounted for by the Group and
the Company as shown below.
The effect of the share based payment arrangements on the Group’s profit is shown in note 13.
Further details of share based payment arrangements are given in the Report of the Board to the Shareholders on Directors’
Remuneration on pages 27 to 32.
(a)
Share option schemes
Options under the Executive Share Option (‘Executive’) schemes have been granted to directors and senior employees from time to
time, on the basis of performance and at the discretion of the Remuneration Committee. These options vest so long as the grantee is still
employed by the Group at the end of the vesting period and, where applicable, performance criteria have been satisfied. The Executive
schemes are no longer available for the grant of further awards.
The Group also operates an All Employee Share Option (‘Sharesave’) scheme. Grants under this scheme vest after the completion of the
appropriate service period and subject to a savings requirement.
A reconciliation of movements in the number and weighted average exercise price of options over £1 ordinary shares during the year
ended 30 September 2010 and the year ended 30 September 2009 is shown below.
2009
Number
2010
Number
2010
Weighted
average
exercise
price
p
4,214,600
712,869
(6,845)
(169,230)
190.70
100.32
525.52
194.66
4,840,258
-
-
(625,658)
4,751,394
177.17
4,214,600
2009
Weighted
average
exercise
price
p
195.33
-
-
226.55
190.70
Options outstanding
At 1 October 2009
Granted in the year
Exercised in the year
Lapsed during the year
At 30 September 2010
Options exercisable
1,500,460
405.32
1,593,440
396.17
The weighted average remaining contractual life of options outstanding at 30 September 2010 was 17.1 months (2009: 20.2 months).
The Paragon Group of Companies PLC 71
15.
SHARE BASED REMUNERATION (continued)
Options are outstanding under the Executive and Sharesave schemes to purchase ordinary shares as follows:
Period
exercisable
Exercise
price
Number
2010
Grant date
Executive Schemes
17/02/2000
27/11/2001
29/07/2002
14/03/2003
18/12/2003
01/06/2004
01/12/2004
Sharesave Schemes
23/06/2005
28/07/2006
28/07/2006
20/06/2007
20/06/2007
18/07/2008
18/07/2008
20/07/2010
20/07/2010
17/02/2003 to 17/02/2010
27/11/2004 to 27/11/2011
29/07/2005 to 29/07/2012
14/03/2006 to 14/03/2013
18/12/2006 to 18/12/2013
01/06/2007 to 01/06/2014
01/12/2007 to 01/12/2014
01/08/2010 to 01/02/2011
01/09/2009 to 01/03/2010
01/09/2011 to 01/03/2012
01/08/2010 to 01/02/2011
01/08/2012 to 01/02/2013
01/09/2011 to 01/03/2012
01/09/2013 to 01/03/2014
01/09/2013 to 01/03/2014
01/09/2015 to 01/03/2016
234.33p
395.34p
297.30p
297.30p
540.40p
514.10p
555.34p
520.89p
837.73p
837.73p
685.84p
685.84p
63.00p
63.00p
100.32p
100.32p
Number
2009
94,095
319,923
244,647
413,110
225,199
25,092
264,672
-
319,923
244,647
413,110
225,199
25,092
264,672
1,492,643
1,586,738
4,880
-
191
2,937
4,006
1,512,873
1,031,760
505,908
196,196
4,880
6,702
191
2,937
4,960
1,576,432
1,031,760
-
-
3,258,751
2,627,862
4,751,394
4,214,600
The number of share options outstanding and the exercise price under each of the arrangements shown above was adjusted in
accordance with the respective scheme rules, following the share consolidation on 29 January 2008 and the rights issue on
21 February 2008.
A number of the above options were granted to former employees whose rights terminate at the later of twelve months following
redundancy or forty-two months after the issue of the options.
The fair value of options granted is determined using a Binomial model. Details of the awards over £1 ordinary shares made in the year
ended 30 September 2010, which were all made under the Sharesave scheme, are shown below. No grants were made in the year ended
30 September 2009.
Grant date
Number of awards granted
Market price at date of grant
Contractual life (years)
Fair value per share at date of grant
Inputs to valuation model
Expected volatility
Expected life at grant date (years)
Risk-free interest rate
Expected dividend yield
Expected annual departures
20/07/10
20/07/10
516,673
196,196
120.00p
3.00
57.88p
86.87%
3.41
1.71%
2.82%
5.00%
120.00p
5.00
57.16p
86.87%
5.43
1.71%
2.82%
5.00%
The expected volatility of the share price used in determining the fair value is based on the annualised standard deviation of daily
changes in price over the six years preceding the grant date.
72
The Paragon Group of Companies PLC
(b)
Paragon Performance Share Plan
Awards under this plan comprise a right to acquire ordinary shares in the Company for nil or nominal payment and will vest on the third
anniversary of their granting, to the extent that the applicable performance criteria have been satisfied, if the holder is still employed by
the Group. The awards will lapse to the extent that the performance condition has not been satisfied on the third anniversary.
The conditional entitlements outstanding under this scheme at 30 September 2010 and 30 September 2009 were:
Grant date
09/01/2007
28/03/2007
14/06/2007
26/09/2007
26/11/2007
18/03/2008
29/09/2008
21/05/2009
04/01/2010
02/09/2010
Period
exercisable
09/01/2010 to 09/01/2017 †
28/03/2010 to 28/03/2017 †
14/06/2010 to 14/06/2017 †
26/09/2010 to 26/09/2017 †
26/11/2010 to 26/11/2017 †
18/03/2011 to 18/03/2018 §
29/09/2011 to 29/09/2018 ‡
21/05/2012 to 21/05/2019 *
04/01/2013 to 04/01/2020 *
02/09/2013 to 02/09/2020 *
Number
2010
3,294
3,514
36,550
64,545
312,421
725,000
1,926,686
3,221,335
1,797,822
141,844
Number
2009
71,680
55,467
91,920
127,318
358,426
860,000
2,081,344
3,419,549
-
-
8,233,011
7,065,704
† The receipt of these shares is 50% subject to an EPS test and 50% to a TSR test. The growth in the Company’s EPS (as adjusted for
a common rate of corporation tax) and its TSR will be compared over the vesting period to the performance of a group of designated
comparator companies. 35% of each element of the award will vest for median performance with full vesting for upper quartile
performance; between these points awards will vest on a straight line basis. For below median performance, none of the relevant
element of the award will vest. In addition, the Remuneration Committee will have regard to the underlying financial performance
of the Company as compared with the level of TSR and EPS performance.
§ The receipt of these shares is subject to the Company’s TSR exceeding the TSR of a comparator group drawn from the FTSE All
Share Banks and General Financial sectors. No part of an award will vest for below median performance, 35% will vest for median
performance and 100% will vest for upper quartile performance. Between median and upper quartile performance, awards will vest
on a straight line basis.
‡ The receipt of these shares is subject to an absolute TSR performance condition, whereby the increase in the net return index over
the performance period, based on a share price that is equivalent on the grant date to 125 pence per share, must at least equal
compound annual growth of 10%. 35% of the awards will vest for 10% compound annual growth over the performance period,
increasing on a straight line basis to full vesting for compound annual growth of 15%. The performance period is the three year
period commencing on the date of grant.
*
The receipt of these shares is subject to a performance condition comparing the rank of the Company’s TSR against a comparator
group of companies comprising the constituents of the FTSE-250 on the date of grant over the three years commencing on the date
of grant. 25% of the awards will vest for median performance, increasing on a straight line basis to full vesting for upper quartile
performance.
The number of awards outstanding under each of the arrangements shown above was adjusted in accordance with the scheme rules,
following the share consolidation on 29 January 2008 and the rights issue on 21 February 2008.
During the year the outstanding awards were modified so that awards vesting would be exercisable for a period of seven years after the
vesting date rather than six months. This change had no incremental effect on the fair value of the awards, as it implied no changes in
any of the assumptions used in the valuations.
The Paragon Group of Companies PLC 73
15.
SHARE BASED REMUNERATION (continued)
The fair value of awards granted under the Performance Share Plan is determined using a Monte Carlo simulation model, to take account
of the effect of the market based condition. Details of the awards over £1 ordinary shares made in the year ended 30 September 2010
and the year ended 30 September 2009 are shown below:
Grant date
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
Inputs to valuation model
Expected volatility
Risk-free interest rate
Expected dividend yield
02/09/10
04/01/10
21/05/09
141,844
1,903,737
3,419,550
140.00p
103.35p
135.20p
99.36p
85.51%
1.51%
2.43%
84.76%
2.04%
2.44%
70.75p
11.67p
82.78%
2.13%
4.43%
For all of the above grants the contractual life and expected life at grant date is three years and no departures are expected.
For awards granted before 18 July 2008 the expected volatility of the share price used in determining the fair value was based on the
annualised standard deviation of daily changes in price over the previous year from the grant date. The expected volatility for awards
granted between this date and 30 September 2008 is calculated using the same method but using daily changes in price over the six
years preceding the grant date. The expected volatility for awards granted after this date is calculated using the same method but using
daily changes in price over the three years preceding the grant date.
(c)
Deferred Bonus awards
Awards under this scheme comprise a right to acquire ordinary shares in the Company for nil or nominal payment and will vest on the
third anniversary of their granting.
The conditional entitlements outstanding under this scheme at 30 September 2010 and 30 September 2009 were:
Grant date
15/01/2007
28/12/2007
05/01/2010
Transfer
date
01/10/2009
01/10/2010
01/10/2012
Number
2010
-
21,120
169,287
190,407
Number
2009
37,595
29,121
-
66,716
The shares awarded will be transferred to the scheme participants as soon as is reasonably practicable after the transfer date.
The number of awards outstanding under each of the arrangements shown above was adjusted in accordance with the scheme rules,
following the share consolidation on 29 January 2008 and the rights issue on 21 February 2008.
The fair value of Deferred Bonus awards issued in the year was determined using a Black-Scholes Merton model. Details of the awards
over £1 ordinary shares made in the year ended 30 September 2010 are shown below. No awards were made in the year ended
30 September 2009.
Grant date
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
Inputs to valuation model
Risk-free interest rate
Expected dividend yield
74
The Paragon Group of Companies PLC
05/01/10
169,287
133.40p
124.64p
2.04%
2.47%
(d) Matching Share Plan
Awards under this plan comprise a right to acquire ordinary shares in the Company for nil or nominal payment and will vest on the third
anniversary of their granting to the extent that the applicable performance criteria have been satisfied, if the holder is still employed by
the Group. The awards will lapse to the extent that the performance condition has not been satisfied on the third anniversary.
The conditional entitlements outstanding under this scheme at 30 September 2010 and at 30 September 2009 were:
Grant date
09/01/2007
02/01/2008
05/01/2010
Transfer
date
09/01/2010 †
02/01/2011 †
05/01/2013 *
Number
2010
5,625
56,680
142,347
Number
2009
84,081
56,680
-
204,652
140,761
† The receipt of these shares is 50% subject to an EPS test and 50% to a TSR test. The growth in the Company’s EPS (as adjusted for
a common rate of corporation tax) and its TSR will be compared over the vesting period to the performance of a group of designated
comparator companies. 35% of each element of the award will vest for median performance with full vesting for upper quartile
performance; between these points awards will vest on a straight line basis. For below median performance, none of the relevant
element of the award will vest. In addition, the Remuneration Committee will have regard to the underlying financial performance
of the Company as compared with the level of TSR and EPS performance.
*
The receipt of these shares is subject to a performance condition comparing the rank of the Company’s TSR against a comparator
group of companies comprising the constituents of the FTSE-250 on the date of grant over the three years commencing on the date
of grant. 25% of the awards will vest for median performance, increasing on a straight line basis to full vesting for upper quartile
performance.
The number of awards outstanding under each of the arrangements shown above was adjusted in accordance with the scheme rules,
following the share consolidation on 29 January 2008 and the rights issue on 21 February 2008.
During the year the outstanding awards were modified so that awards vesting would be exercisable for a period of seven years after the
vesting date rather than six months. This change had no incremental effect on the fair value of the awards, as it implied no changes in
any of the assumptions used in the valuations.
The fair value of awards granted under the Matching Share Plan is determined using a Monte Carlo simulation model, to take account
of the effect of the market based condition. Details of the awards over £1 ordinary shares made in the year ended 30 September 2010
are shown below. No awards were made in the year ended 30 September 2009.
Grant date
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
Inputs to valuation model
Expected volatility
Risk-free interest rate
Expected dividend yield
15/01/10
142,347
133.40p
97.96p
84.76%
2.04%
2.47%
For all of the above grants the contractual life and expected life at grant date is three years and no departures are expected.
For awards granted before 18 July 2008 the expected volatility of the share price used in determining the fair value was based on the
annualised standard deviation of daily changes in price over the previous year from the grant date. The expected volatility for awards
granted between this date and 30 September 2008 is calculated using the same method but using daily changes in price over the six
years preceding the grant date. The expected volatility for awards granted after this date is calculated using the same method but using
daily changes in price over the three years preceding the grant date.
The Paragon Group of Companies PLC 75
16. AUDITOR REMUNERATION
The analysis of fees payable to the Group’s auditors, excluding irrecoverable VAT, required by the Companies (Disclosure of Auditor
Remuneration) Regulations 2005 is set out below. This analysis includes amounts charged to the profit and loss account or included
within the issue costs of debt and equity in respect of fees paid to the Group auditors and their associates.
Group audit fee
Other services
Audit of associated undertakings pursuant to legislation
Subsidiary audit fees
Total audit fees
Other services pursuant to legislation
Interim review
Other services related to taxation
Compliance services
Advisory services
Total fees
Irrecoverable VAT
Total cost to the Group
Of which:
Included in operating expenses (note 12)
Included in gains on debt repurchase
2009
22%
34%
56%
5%
17%
22%
39%
100%
2010
£000
184
203
387
40
116
96
212
639
110
749
749
-
749
2010
29%
32%
61%
6%
18%
15%
33%
100%
2009
£000
162
259
421
40
130
165
295
756
113
869
799
70
869
In addition to the amounts above, the auditors received fees of £7,000 (2009: £7,000), excluding VAT, in respect of the audit of the
Group pension scheme.
17.
PROVISIONS FOR LOSSES
Impairment of financial assets (note 34)
First mortgage loans
Other secured loans
Finance lease receivables
Retail finance loans
Other loans
On loans to customers
Other provisions (note 56)
76
The Paragon Group of Companies PLC
2010
£m
18.6
7.6
3.5
0.5
9.0
39.2
-
39.2
2009
£m
31.2
18.9
5.0
0.8
10.0
65.9
0.3
66.2
18. GAINS ON DEBT REPURCHASE
On asset backed loan notes
On corporate bond
2010
£m
5.7
-
5.7
2009
£m
13.9
4.5
18.4
These gains have arisen on the repurchase by the Group, on the open market, of its debt securities at less than their carrying value.
The cash consideration paid on these purchases, including transaction costs of £nil (2009: £0.3m) was:
On asset backed loan notes
On corporate bond
2010
£m
8.3
-
8.3
2009
£m
13.9
5.4
19.3
Despite the gains made on the repurchase of these debt instruments, the directors consider that the carrying values of the remaining
borrowings are not materially different from their fair values. The directors currently expect that these borrowings will be repaid in full
and the present values of such cash flows will not be materially different to the carrying value. The gains described above have been
made on purchases in a market with a very low level of activity, where the prices which can be achieved in one-off transactions will not
necessarily be representative of the fair value of the liabilities concerned.
19.
FAIR VALUE NET GAINS / (LOSSES)
Net gain / (loss) on derivatives designated as fair value hedges
Fair value adjustments from hedge accounting
Ineffectiveness of fair value hedges
Ineffectiveness of cash flow hedges
Net gains / (losses) on other derivatives
2010
£m
30.3
(30.4)
(0.1)
-
0.1
-
2009
£m
(51.7)
51.0
(0.7)
-
(2.7)
(3.4)
The fair value net gain / (loss) represents the accounting volatility on derivative instruments which are matching risk exposure on an
economic basis generated by the requirements of IAS 39. Some accounting volatility arises on these items due to accounting
ineffectiveness on designated hedges, or because hedge accounting has not been adopted or is not achievable on certain items. The
losses and gains are primarily due to timing differences in income recognition between the derivative instruments and the economically
hedged assets and liabilities. Such differences will reverse over time and have no impact on the cash flows of the Group.
The Paragon Group of Companies PLC 77
20.
TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES
(a)
Analysis of charge in the year
Current tax
UK Corporation Tax on profits of the period
Adjustment in respect of prior periods
Total current tax
Deferred tax
Tax charge on profit on ordinary activities
(b) Deferred tax charge for the year
The deferred tax charge in the income statement comprises the following temporary differences:
Accelerated tax depreciation
Retirement benefit obligations
Impairment and other provisions
Utilisation of tax losses
Other timing differences
Deferred tax charge for the year
Recognition of asset not previously recognised
Change in tax rate
Deferred tax charge (note 38)
2010
£m
16.1
(1.1)
15.0
2.9
17.9
2010
£m
0.2
0.2
0.2
3.2
0.9
4.7
(1.6)
(0.2)
2.9
2009
£m
5.0
(3.1)
1.9
11.3
13.2
2009
£m
0.3
1.4
(8.6)
12.6
5.2
10.9
0.4
-
11.3
The United Kingdom Government enacted provisions reducing the standard rate of corporation tax from 28% to 27% with effect from
1 April 2011. Therefore the standard rate of corporation tax applicable to the Group will be 27.5% in the year ending 30 September 2011
and 27% thereafter. The expected impact of this change on the values at which deferred tax amounts are expected to crystallise has been
accounted for in the year ended 30 September 2010.
The Government has announced its intention to make further reductions in the rate of corporation tax in future years. The effect of any
such changes on deferred tax balances will be accounted for in the period in which any such changes are enacted.
78
The Paragon Group of Companies PLC
(c)
Factors affecting tax charge for the year
The tax assessed for the year is lower than the standard rate of corporation tax in the United Kingdom of 28% (2009: 28%). The
differences are explained below:
Profit on ordinary activities before taxation
Profit on ordinary activities multiplied by standard rate of corporation tax in the
UK of 28% (2009: 28%)
Effects of:
Permanent differences
Share based payments
Recognition of deferred tax asset not previously recognised
Change in rate of taxation on deferred tax assets and liabilities
Other movements in unprovided deferred taxation
Prior year (credit)
Tax charge for the year
2010
£m
71.8
2009
£m
54.3
20.1
15.2
0.7
-
(0.3)
(0.2)
0.5
(2.9)
17.9
0.6
-
0.4
-
0.1
(3.1)
13.2
21.
PROFIT ATTRIBUTABLE TO MEMBERS OF THE PARAGON GROUP OF COMPANIES PLC
The Company’s profit after tax for the financial year amounted to £43.2m (2009: £34.6m). A separate income statement has not been
prepared for the Company under the provisions of Section 408 of the Companies Act 2006.
The Company has no other items of comprehensive income for the years ended 30 September 2010 or 30 September 2009.
22.
EARNINGS PER SHARE
Earnings per ordinary share is calculated as follows:
Profit for the year (£m)
Basic weighted average number of ordinary shares ranking for
dividend during the year (million)
Dilutive effect of the weighted average number of share options
and incentive plans in issue during the year (million)
Diluted weighted average number of ordinary shares ranking for
dividend during the year (million)
Earnings per ordinary share
- basic
- diluted
2010
53.9
2009
41.1
295.3
295.7
8.3
5.2
303.6
300.9
18.3p
17.8p
13.9p
13.7p
The Paragon Group of Companies PLC 79
23.
TAX CHARGED TO EQUITY
On actuarial (loss) on pension scheme (note 54)
On gains on cash flow hedges (note 46)
Tax on items taken to equity
On share based payment
Total tax credited to equity
Of which
Current tax
Deferred tax (note 38)
The Group
The Company
2010
£m
1.4
(0.1)
1.3
0.3
1.6
-
1.6
1.6
2009
£m
2.2
(0.6)
1.6
1.4
3.0
-
3.0
3.0
2010
£m
2009
£m
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Included in tax charged to equity in the year ended 30 September 2010 is £0.2m in respect of the effect of the changes in corporation
tax rates described in note 20 on deferred tax assets.
24.
INTANGIBLE ASSETS
Cost
At 1 October 2008
Acquisition
Additions
Disposals
At 30 September 2009
Additions
Disposals
At 30 September 2010
Accumulated amortisation
At 1 October 2008
Amortisation charge for the year
Impairment of goodwill
On disposals
At 30 September 2009
Amortisation charge for the year
On disposals
At 30 September 2010
Net book value
At 30 September 2010
At 30 September 2009
At 30 September 2008
Goodwill
(note 25)
Computer
Software
£m
-
7.6
-
-
7.6
-
-
7.6
-
-
6.0
-
6.0
-
-
6.0
1.6
1.6
-
£m
2.1
0.1
0.1
-
2.3
0.3
-
2.6
1.7
0.3
-
-
2.0
0.2
-
2.2
0.4
0.3
0.4
Other
intangible
assets
£m
-
8.1
-
-
8.1
-
-
8.1
-
0.4
-
-
0.4
0.5
-
0.9
7.2
7.7
-
Total
£m
2.1
15.8
0.1
-
18.0
0.3
-
18.3
1.7
0.7
6.0
-
8.4
0.7
-
9.1
9.2
9.6
0.4
Other intangible assets comprise brands and the benefit of business networks recognised on the acquisition of subsidiary companies.
80
The Paragon Group of Companies PLC
25. GOODWILL
The goodwill carried in the accounts was recognised on the acquisition of The Business Mortgage Company and its subsidiaries
(‘TBMC’) in December 2008. The cash generating unit to which this goodwill was attributed for impairment testing purposes was TBMC,
which is the lowest level within the Group at which this goodwill is currently monitored, though the operations of the acquired entity
will, in time, be integrated with those of the First Mortgage division.
An impairment review undertaken at 30 September 2009 indicated a write down of £6.0m which was charged to the profit and loss
account. A further review was undertaken at 30 September 2010, which indicated no further impairment.
The recoverable amount of TBMC used in this impairment testing is determined on a value in use basis using cash flow projections based
on financial budgets approved by the Board covering a 4 year period. The discount rate applied to the cash flow projection is 7.25% and
cash flows beyond the 4 year budget are extrapolated using a 2.40% growth rate, being the average long term growth rate in the United
Kingdom economy over a twenty year period.
The key assumptions underlying the value in use calculation for the TBMC business are:
• Level of business activity, based on management expectations. Management have concluded that the levels of activity assumed for
the purpose of this forecast are reasonable, based on past experience and the current economic environment.
• Discount rate, which is based on the Group’s cost of capital.
The directors believe that no reasonably possible change in any of the key assumptions above would cause the carrying value of the unit
to exceed its recoverable amount.
26.
PROPERTY, PLANT AND EQUIPMENT
(a)
The Group
Cost
At 1 October 2008
Acquisition
Additions
Disposals
At 30 September 2009
Additions
Disposals
At 30 September 2010
Accumulated depreciation
At 1 October 2008
Charge for the year
On disposals
At 30 September 2009
Charge for the year
On disposals
At 30 September 2010
Net book value
At 30 September 2010
At 30 September 2009
At 30 September 2008
Land and
Buildings
£m
Plant and
Machinery
£m
19.4
-
-
-
19.4
0.7
-
20.1
9.7
1.0
-
10.7
1.0
-
11.7
8.4
8.7
9.7
18.7
0.1
0.2
(5.2)
13.8
0.3
(4.3)
9.8
9.9
2.2
(3.1)
9.0
1.3
(2.5)
7.8
2.0
4.8
8.8
Total
£m
38.1
0.1
0.2
(5.2)
33.2
1.0
(4.3)
29.9
19.6
3.2
(3.1)
19.7
2.3
(2.5)
19.5
10.4
13.5
18.5
The net book value of land and buildings includes £7.0m in respect of buildings held under finance leases (2009: £7.9m).
The Paragon Group of Companies PLC 81
26.
PROPERTY, PLANT AND EQUIPMENT (continued)
(b)
The Company
Cost
At 1 October 2008, 30 September 2009 and 30 September 2010
Accumulated depreciation
At 1 October 2008
Charge for the year
At 30 September 2009
Charge for the year
At 30 September 2010
Net book value
At 30 September 2010
At 30 September 2009
At 30 September 2008
The net book value of land and buildings represents buildings held under finance leases.
27.
INVESTMENT IN SUBSIDIARY UNDERTAKINGS
At 1 October 2008
Acquisition
Loans advanced
Loans repaid
Provision movements
At 30 September 2009
Loans advanced
Loans repaid
Provision movements
At 30 September 2010
Shares in
Group
companies
£m
Loans to
Group
companies
£m
Loans to
ESOP
Trusts
£m
252.1
-
-
-
0.1
252.2
-
-
0.3
526.5
15.4
14.7
(39.5)
(3.6)
513.5
15.0
(19.0)
(1.8)
252.5
507.7
3.4
-
0.2
-
0.6
4.2
0.2
-
(0.2)
4.2
Land and
Buildings
£m
16.6
7.9
0.8
8.7
0.9
9.6
7.0
7.9
8.7
Total
£m
782.0
15.4
14.9
(39.5)
(2.9)
769.9
15.2
(19.0)
(1.7)
764.4
During the year ended 30 September 2010 the Company received £27.7m in dividend income from its subsidiaries (2009: £23.2m) and
£30.3m of interest on loans to Group companies (2009: £41.0m).
The principal operating subsidiaries, and the nature of the Group’s interest in them, are shown in note 28.
82
The Paragon Group of Companies PLC
28.
PRINCIPAL OPERATING SUBSIDIARIES
The financial year end of all of the Group’s subsidiary companies is 30 September, with the exception of The Business Mortgage
Company Limited, the year end of which is 31 December. They are all registered in England and Wales, except Idem Jersey (No. 1)
Limited, which is registered in the Bailiwick of Jersey, and they all operate in the United Kingdom.
Principal operating subsidiaries where the share capital is held within the Group comprise:
Holding
Principal activity
Direct subsidiaries of The Paragon Group of Companies PLC
Paragon Finance PLC
Mortgage Trust Limited
Paragon Mortgages Limited
Paragon Mortgages (2010) Limited
Paragon Vehicle Contracts Limited
Paragon Car Finance Limited
Paragon Personal Finance Limited
Moorgate Servicing Limited
Redbrick Real Estate Services Limited
Idem Capital Limited
Idem Jersey (No. 1) Limited
The Business Mortgage Company Limited
Paragon Mortgages (No. 7) PLC
Paragon Mortgages (No. 8) PLC
Paragon Mortgages (No. 9) PLC
Paragon Mortgages (No. 10) PLC
Paragon Mortgages (No. 11) PLC
Paragon Mortgages (No. 12) PLC
Paragon Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) PLC
Paragon Personal and Auto Finance (No. 3) PLC
Paragon Secured Finance (No. 1) PLC
First Flexible (No. 7) PLC
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100% *
100% *
100% *
100% *
100% *
100% *
100% *
100%
100%
100% *
Residential mortgages and asset administration
Residential mortgages
Residential mortgages
Residential mortgages
Vehicle fleet management
Vehicle finance
Unsecured lending
Intermediate holding company
Property services
Asset investment
Asset investment
Mortgage broker
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Loan and vehicle finance
Loan finance
Residential mortgages
Subsidiary of Paragon Mortgages Limited
Paragon Second Funding Limited
Subsidiaries of Mortgage Trust Limited
Mortgage Trust Services plc
First Flexible No. 6 PLC
Subsidiaries of Moorgate Servicing Limited
Redbrick Survey and Valuation Limited
Moorgate Loan Servicing Limited
Subsidiary of Idem Capital Limited
Idem (No. 1) Limited
100%
Residential mortgages and loan and vehicle finance
100%
74%
100%
100%
Residential mortgages and asset administration
Residential mortgages
Surveyors and property consulting
Asset administration
100%
Asset investment
The holdings shown above are those held by the Group. The shareholdings of the Company are the same as those held by the parent
company identified above, except that for the shareholdings marked * the parent company holds only 74% of the share capital, the
remainder being held by other group companies.
The issued share capital of all subsidiaries consists of ordinary share capital, except that First Flexible No. 6 PLC has additional preference
share capital held by the Group. The minority interest in this company is not material.
The Paragon Group of Companies PLC 83
28.
PRINCIPAL OPERATING SUBSIDIARIES (continued)
In addition, prior to its acquisition by the Group, certain loans originated by Mortgage Trust Limited had been sold to special purpose
entity companies, ultimately beneficially owned by charitable trusts, which had raised non-recourse finance to fund these purchases.
The Group is considered to control these entities, as defined by SIC-12 ‘Special Purpose Entities’ and hence they are considered to be
subsidiaries of the Group.
The principal companies party to these arrangements are First Flexible No. 4 plc and First Flexible No. 5 plc. The principal activity of both
of these companies is residential mortgages.
29.
INTEREST IN ASSOCIATE
On 25 January 2007 the Group acquired a 33% interest in the equity of The Business Mortgage Company Limited, a mortgage broker.
This company operates in the United Kingdom and is registered in England and Wales. On 17 December 2008 this company became a
subsidiary of the Group. The net assets position of the associate at 30 September 2008 is shown below.
Total assets
Total liabilities
Total equity
2008
£m
16.0
(16.6)
(0.6)
During the period from 1 October 2008 to its acquisition by the Group the associate was charged £0.7m by the Group and the Company
in interest and received £0.0m in commission income from Group companies. The Group provided the associate with certain
management services in this period.
(a) The Group
Equity interest in the associate carried in the consolidated balance sheet using the equity method.
2010
£m
2009
£m
-
-
-
-
-
-
-
-
-
-
2010
£m
2009
£m
-
-
-
-
-
-
-
-
At 1 October 2009
Additions
Share of result of associates
Dividends received
At 30 September 2010
(b) The Company
Equity interest in the associate carried in the balance sheet of the Company at cost.
At 1 October 2009
Provision
Transfer to investments in subsidiaries
At 30 September 2010
84
The Paragon Group of Companies PLC
30.
FINANCIAL ASSETS
(a)
The Group
Loans and receivables
Finance lease receivables
Loans to customers
Fair value adjustments from portfolio hedging
Loans to associate
Derivative financial assets
(b)
The Company
Loans to associate
Derivative financial assets
Notes
31
32
33
35
36
37
Notes
36
37
2010
£m
8,890.2
21.0
8,911.2
8.6
-
1,160.3
2009
£m
9,266.0
48.3
9,314.3
39.0
-
1,287.5
2008
£m
9,966.4
86.8
10,053.2
(12.0)
15.5
590.9
10,080.1
10,640.8
10,647.6
2010
£m
-
8.0
8.0
2009
£m
-
8.7
8.7
2008
£m
15.5
-
15.5
31.
LOANS AND RECEIVABLES
Loans and receivables at 30 September 2010, 30 September 2009 and 30 September 2008, which are all denominated and payable in
sterling, were:
First mortgage loans
Secured loans
Retail finance loans
Other unsecured loans
2010
£m
8,475.6
391.9
4.8
17.9
8,890.2
2009
£m
8,764.3
467.4
9.0
25.3
9,266.0
2008
£m
9,418.7
487.4
25.6
34.7
9,966.4
First mortgages are secured on residential property within the United Kingdom; Secured loans enjoy second charges on residential
property. Retail finance loans are unsecured. The estimated value of the security held against those loans above which are considered
to be impaired or past due, representing the lesser of the outstanding balance and the estimated valuation of the property for each such
account was:
First mortgage loans
Secured loans
2010
£m
105.7
32.3
138.0
2009
£m
196.6
28.8
225.4
The amount shown above for first mortgages in 2009 has been revised to correspond to the revised definition of the impairment
population discussed in note 6.
The Paragon Group of Companies PLC 85
31.
LOANS AND RECEIVABLES (continued)
Mortgage loans have a contractual term of up to thirty years, secured loans up to twenty five years, retail finance loans up to ten years
and other unsecured loans up to ten years. In all cases the borrower is entitled to settle the loan at any point and in most cases early
settlement does take place. All borrowers are required to make monthly payments, except where an initial deferred period is included
in the contractual terms.
Under the terms of certain first mortgage products, the customer has the right to draw down further funds. At 30 September 2010 the
Group’s commitment in respect of such facilities was £43.3m (2009: £48.6m).
The loans shown above pledged as collateral for the liabilities described in note 52 at 30 September 2010 and 30 September 2009 were:
30 September 2010
In respect of:
Asset backed loan notes
Warehouse facilities
Total pledged as collateral
Not pledged as collateral
30 September 2009
In respect of:
Asset backed loan notes
Warehouse facilities
Total pledged as collateral
Not pledged as collateral
First
Mortgages
£m
Consumer
Finance
£m
6,915.5
1,514.0
8,429.5
46.1
8,475.6
7,166.0
1,566.4
8,732.4
31.9
8,764.3
397.6
-
397.6
17.0
414.6
479.1
-
479.1
22.6
501.7
Total
£m
7,313.1
1,514.0
8,827.1
63.1
8,890.2
7,645.1
1,566.4
9,211.5
54.5
9,266.0
32.
FINANCE LEASE RECEIVABLES
The Group’s finance lease receivables are car finance loans. The average contractual life of such loans is 56 months (2009: 56 months),
but it is likely that a significant proportion of customers will choose to settle their obligations early.
The minimum lease payments due under these loan agreements are:
2010
£m
12.4
9.5
0.7
22.6
(1.4)
21.2
2009
£m
21.8
28.8
1.7
52.3
(4.6)
47.7
2008
£m
31.7
62.2
3.0
96.9
(11.4)
85.5
Amounts receivable
Within one year
Within two to five years
After five years
Less: future finance income
Present value
86
The Paragon Group of Companies PLC
The present values of those payments, net of provisions for impairment, carried in the accounts are:
Amounts receivable
Within one year
Within two to five years
After five years
Allowance for uncollectible amounts
Provision for recoveries
2010
£m
11.6
8.9
0.7
21.2
(1.8)
1.6
21.0
2009
£m
19.9
26.3
1.5
47.7
(2.4)
3.0
48.3
2008
£m
28.0
54.9
2.6
85.5
(2.3)
3.6
86.8
The Group considers that the fair value of its finance lease receivables is not significantly different to their carrying values. Whilst the
Group has the benefit of the underlying vehicle as security on these loans, no account of this is taken in the allowance for uncollectible
amounts shown above. The Group has insufficient information on the current condition of finance leased vehicles to derive a reliable
estimate of the value which could be realised from vehicles to offset against arrears accounts. Accordingly, no such disclosure
is provided.
The loans shown above pledged as collateral for liabilities at 30 September 2010 and 30 September 2009 were:
In respect of:
Asset backed loan notes
Warehouse facilities
Total pledged as collateral
Not pledged as collateral
2010
£m
19.3
-
19.3
1.7
21.0
2009
£m
45.2
-
45.2
3.1
48.3
33.
LOANS TO CUSTOMERS
The movements in the Group’s investment in loans to customers in the year ended 30 September 2010 and the year ended
30 September 2009 were:
Cost
At 1 October 2009
Additions
Effective Interest Rate (‘EIR’) adjustments
Other debits
Provision charge (note 34)
Repayments and redemptions
At 30 September 2010
2010
£m
2009
£m
9,314.3
52.5
(22.5)
296.7
(39.2)
(690.6)
10,053.2
96.6
23.0
488.8
(65.9)
(1,281.4)
8,911.2
9,314.3
‘Other debits’ includes primarily interest and fees charged to customers on loans outstanding.
The fair value of loans to customers is considered to be not materially different to the amortised cost value at which they are disclosed.
The Paragon Group of Companies PLC 87
34.
IMPAIRMENT PROVISIONS ON LOANS TO CUSTOMERS
The following amounts in respect of impairment provisions, net of allowances for recoveries of written off assets, have been deducted
from the appropriate assets in the balance sheet.
At 1 October 2008
Charge for the year (note 17)
Amounts written off
Amounts recovered
At 30 September 2009
Charge for the year (note 17)
Amounts written off
Amounts recovered
At 30 September 2010
First
Mortgages
£m
16.9
31.2
(1.9)
(0.1)
46.1
18.6
-
0.2
64.9
Other
loans and
receivables
£m
53.1
29.7
(17.8)
(2.0)
63.0
17.1
(37.9)
(1.0)
41.2
Finance
leases
£m
(1.3)
5.0
(3.7)
(0.6)
(0.6)
3.5
(2.3)
(0.4)
0.2
Total
£m
68.7
65.9
(23.4)
(2.7)
108.5
39.2
(40.2)
(1.2)
106.3
35.
FAIR VALUE ADJUSTMENTS FROM PORTFOLIO HEDGING
The Group applies fair value hedge accounting in respect of portfolios of loan assets where the appropriate criteria are met. In these
circumstances the change in the fair value of the hedged items attributable to the hedged risk is shown under this heading.
36.
LOANS TO ASSOCIATE
The Group’s associated undertaking became a subsidiary on 17 December 2008. After that date the loan balances were eliminated on
consolidation. Loans to the associated undertaking at 30 September 2008 were all denominated and payable in sterling. Interest is
charged on these loans at a fixed margin above six-month LIBOR. Details of these loans are shown below.
Carrying value (£m)
Outstanding principal (£m)
Maximum contractual life (months)
Average contractual life (months)
Maximum remaining life (months)
Average remaining life (months)
Average margin charged above LIBOR
2008
£m
15.5
16.2
108
76
88
56
5.06%
The fair values of these loans were not considered to be significantly different to their carrying values and the effective interest rates
were not materially different to the rates charged.
88
The Paragon Group of Companies PLC
37. DERIVATIVE FINANCIAL ASSETS AND LIABILITIES
All of the Group’s financial derivatives are held for economic hedging purposes, although not all may be designated for hedge
accounting in accordance with the provisions of IAS 39. The analysis below therefore splits derivatives between those accounted for as
hedges and those which, while representing an economic hedge, do not qualify for this treatment.
All of the financial derivatives shown are valued using methodologies where the principal inputs are directly or indirectly derived from
market data and are therefore classified within level two of the fair value hierarchy laid down by IFRS 7.
The Group’s securitisation borrowings are denominated in sterling, euros and US dollars. All currency borrowings are swapped at
inception so that they have the effect of sterling borrowings. These swaps provide an effective hedge against exchange rate movements,
but the requirement to carry them at fair value leads, when exchange rates have moved significantly since the issue of the notes, to large
balances for the swaps being carried in the balance sheet. This is currently the case with both euro and US dollar swaps, although the
debit balance is compensated for by retranslating the borrowings at the current exchange rate.
Derivative financial assets and liabilities are included within Financial Assets (note 30) and Financial Liabilities (note 51) respectively.
(a)
The Group
Derivatives in accounting
hedge relationships
Fair value hedges
Interest rate swaps
Cash flow hedges
Foreign exchange
basis swaps
Interest rate swaps
Other derivatives
Interest rate swaps
Interest rate caps
Interest rate floors
2010
Notional
Amount
£m
2010
Assets
2010
Liabilities
£m
£m
2009
Notional
Amount
£m
2009
Assets
£m
2009
Liabilities
£m
410.0
410.0
8.0
8.0
5,163.0
4.9
1,148.7
-
5,167.9
1,148.7
5,577.9
1,156.7
283.5
48.7
10.5
342.7
3.5
0.1
-
3.6
(9.8)
(9.8)
-
(0.1)
(0.1)
(9.9)
(7.4)
-
-
(7.4)
1,362.6
1,362.6
5,369.1
13.1
5,382.2
6,744.8
557.8
62.6
10.5
630.9
8.7
8.7
1,273.5
-
1,273.5
1,282.2
4.9
0.4
-
5.3
(45.6)
(45.6)
-
(0.5)
(0.5)
(46.1)
(10.5)
-
-
(10.5)
Total recognised derivative
assets / (liabilities)
5,920.6
1,160.3
(17.3)
7,375.7
1,287.5
(56.6)
At 30 September 2010 cash deposits of £145.9m had been pledged as collateral in respect of swaps shown above by the respective
swap counterparties (2009: £174.4m) as described in note 6.
The Paragon Group of Companies PLC 89
37. DERIVATIVE FINANCIAL ASSETS AND LIABILITIES (continued)
(b)
The Company
2010
Notional
Amount
£m
2010
Assets
2010
Liabilities
£m
£m
2009
Notional
Amount
£m
2009
Assets
£m
2009
Liabilities
£m
Derivatives in accounting
hedge relationships
Fair value hedges
Interest rate swaps
Total recognised derivative
assets / (liabilities)
110.0
110.0
110.0
8.0
8.0
8.0
-
-
-
110.0
110.0
110.0
8.7
8.7
8.7
-
-
-
Of the interest rate swap agreements used for fair value hedging, swaps of a notional value of £110.0m (2009: £110.0m), recognised as
assets of £8.0m (2009: assets of £8.7m) in both the Group and the Company relate to the hedging of the Corporate Bond borrowings.
All other fair value hedging items relate to the hedging of the Group’s loan assets on a portfolio basis.
38. DEFERRED TAX
(a)
The Group
The movements in the net deferred tax asset are as follows:
Net asset at 1 October 2009
Acquisition
Income statement (charge)
Credit to equity
Net asset at 30 September 2010
Notes
20
23
The net deferred tax asset for which provision has been made is analysed as follows:
Accelerated tax depreciation
Retirement benefit obligations
Impairment and other provisions
Tax losses
Other timing differences
Net deferred tax asset
2010
£m
2.8
-
(2.9)
1.6
1.5
2010
£m
1.4
4.5
(16.5)
13.2
(1.1)
1.5
2009
£m
10.3
0.8
(11.3)
3.0
2.8
2009
£m
1.7
3.2
(17.0)
16.8
(1.9)
2.8
2008
£m
16.1
-
(6.8)
1.0
10.3
2008
£m
1.9
2.4
(25.2)
28.6
2.6
10.3
Temporary differences arising in connection with interests in the associated undertaking at 30 September 2008 were not significant.
(b) The Company
No provision for deferred tax was required in the Company at 30 September 2010, 30 September 2009 or 30 September 2008.
90
The Paragon Group of Companies PLC
39.
CURRENT TAX ASSETS
UK Corporation Tax
40. OTHER RECEIVABLES
(a)
The Group
Current assets
Amounts owed by associated undertakings
Accrued interest income
Prepayments
Other debtors
2010
£m
-
-
2010
£m
-
0.5
1.0
4.4
5.9
Accrued interest income and other debtors fall within the definition of financial assets given in IAS 32.
The fair values of the above items are not considered to be materially different to their carrying values.
(b)
The Company
Current assets
Amounts owed by Group companies
Amounts owed by associated undertakings
Accrued interest income
2010
£m
125.2
-
0.6
125.8
Accrued interest income and other debtors fall within the definition of financial assets given in IAS 32.
The fair values of the above items are not considered to be materially different to their carrying values.
The Group
2009
£m
1.7
1.7
2009
£m
-
0.5
1.4
3.6
5.5
2009
£m
88.5
-
-
88.5
2008
£m
-
-
2008
£m
0.5
2.8
1.2
2.1
6.6
2008
£m
101.4
0.5
0.1
102.0
The Paragon Group of Companies PLC 91
41.
CASH AND CASH EQUIVALENTS
Only ‘Free Cash’ is unrestrictedly available for the Group’s general purposes. Cash received in respect of loan assets is not immediately
available, due to the terms of the warehouse facilities and the securitisations. ‘Cash and Cash Equivalents’ also includes balances held
by the Trustees of the Paragon Employee Share Ownership Plans which may only be used to invest in the shares of the Company,
pursuant to the aims of those plans.
The total consolidated ‘Cash and Cash Equivalents’ balance may be analysed as shown below:
Free cash
Securitisation cash
ESOP cash
2010
£m
147.8
387.2
1.7
536.7
2009
£m
84.0
394.7
1.7
480.4
2008
£m
73.2
750.6
2.5
826.3
All ‘Cash and Cash Equivalents’ shown in the Company balance sheet are included in free cash.
Cash and Cash Equivalents includes current bank balances and fixed rate sterling term deposits with London banks.
42.
CALLED-UP SHARE CAPITAL
The share capital of the company consists of a single class of £1 ordinary shares.
Movements in the issued share capital in the year were:
Ordinary shares of £1 each
At 1 October 2009
Shares issued
At 30 September 2010
2010
Number
2009
Number
299,159,605
294,473
299,159,605
-
299,454,078
299,159,605
During the year the Company issued 294,473 shares at par to the trustees of its ESOP Trusts in order that they could fulfil their
obligations under the Group’s share based award arrangements.
92
The Paragon Group of Companies PLC
43.
RESERVES
(a)
The Group
Share premium account
Merger reserve
Cash flow hedging reserve
Profit and loss account
(b)
The Company
Share premium account
Merger reserve
Profit and loss account
44.
SHARE PREMIUM ACCOUNT
Balance at 1 October 2009
Balance at 30 September 2010
45. MERGER RESERVE
Balance at 1 October 2009
Balance at 30 September 2010
Notes
44
45
46
47
Notes
44
45
47
2010
£m
64.1
64.1
2010
£m
64.1
(70.2)
1.4
450.8
446.1
2010
£m
64.1
(23.7)
229.3
269.7
2009
£m
64.1
(70.2)
1.2
413.3
408.4
2009
£m
64.1
(23.7)
194.7
235.1
2008
£m
64.1
(70.2)
(0.1)
384.9
378.7
2008
£m
64.1
(23.7)
168.1
208.5
The Group
The Company
2009
£m
64.1
64.1
2010
£m
64.1
64.1
2009
£m
64.1
64.1
The Group
The Company
2010
£m
(70.2)
(70.2)
2009
£m
(70.2)
(70.2)
2010
£m
(23.7)
(23.7)
2009
£m
(23.7)
(23.7)
The merger reserve arose, due to the provisions of UK company law at the time, on a group restructuring on 12 May 1989 when the
Company became the parent entity of the Group.
The Paragon Group of Companies PLC 93
46.
CASH FLOW HEDGING RESERVE
Balance at 1 October 2009
Movement in fair value of hedging derivatives
Deferred tax thereon (note 23)
Balance at 30 September 2010
The Group
The Company
2010
£m
1.2
0.3
(0.1)
1.4
2009
£m
(0.1)
1.9
(0.6)
1.2
2010
£m
2009
£m
-
-
-
-
-
-
-
-
The cash flows to which these amounts relate are expected to take place, and to affect profit, over the next 34 years (2009: 35 years).
The majority of the balance relates to the cross currency basis swaps described in note 6. Cash flows in respect of these swaps will
continue for as long as the related notes remain outstanding.
Foreign exchange gains of £124.8m on asset backed loan notes denominated in US dollars and euros (2009: losses of £719.1m) have
been taken to the cash flow hedging reserve together with equal and opposite movements on the cross currency basis swaps used to
hedge these liabilities.
47.
PROFIT AND LOSS ACCOUNT
Balance at 1 October 2009
Dividends paid (note 48)
Share options exercised (note 49)
Charge for share based remuneration (note 13)
Tax on share based remuneration (note 23)
Actuarial (loss) on retirement benefit obligation (note 54)
Profit for the year
The Group
The Company
2010
£m
413.3
(10.0)
(3.8)
1.4
0.3
(4.3)
53.9
2009
£m
384.9
(9.2)
(0.6)
1.2
1.4
(5.5)
41.1
2010
£m
194.7
(10.0)
-
1.4
-
-
43.2
2009
£m
168.1
(9.2)
-
1.2
-
-
34.6
Balance at 30 September 2010
450.8
413.3
229.3
194.7
94
The Paragon Group of Companies PLC
48.
EQUITY DIVIDEND
Amounts recognised as distributions to equity shareholders in the period:
Equity dividends on ordinary shares
Final dividend for the year ended 30 September 2009
Interim dividend for the year ended 30 September 2010
Amounts paid and proposed in respect of the year:
Interim dividend for the year ended 30 September 2010
Proposed final dividend for the year ended 30 September 2010
2010
Per share
2009
Per share
2.2p
1.2p
3.4p
2.0p
1.1p
3.1p
2010
Per share
2009
Per share
1.2p
2.4p
3.6p
1.1p
2.2p
3.3p
2010
£m
6.5
3.5
10.0
2010
£m
3.5
7.1
10.6
2009
£m
5.9
3.3
9.2
2009
£m
3.3
6.5
9.8
Dividends of £0.0m (2009: £0.0m) were paid by the Company in respect of shares held by ESOP trusts on which dividends had not
been waived.
The proposed final dividend for the year ended 30 September 2010 will be paid on 14 February 2011, subject to approval at the Annual
General Meeting, with a record date of 14 January 2011. The dividend will be recognised in the accounts when it is paid.
49.
TRANSACTIONS IN SHARES
The Group
The Company
Awards from ESOP schemes
Proceeds
Cost of shares transferred (note 50)
(Deficit) on exercise (note 47)
Shares issued
Nominal value (note 42)
Premium on issue (note 44)
Proceeds of issue
2010
£m
-
(3.8)
(3.8)
0.3
-
0.3
2009
£m
-
(0.6)
(0.6)
-
-
-
(Deficit) / surplus on transactions in own shares
(3.5)
(0.6)
2010
£m
2009
£m
-
-
-
0.3
-
0.3
0.3
-
-
-
-
-
-
-
The Paragon Group of Companies PLC 95
50. OWN SHARES
Treasury shares
At 1 October 2009
Shares purchased
At 30 September 2010
ESOP shares
At 1 October 2009
Shares purchased
Shares subscribed for (note 42)
Options exercised (note 49)
At 30 September 2010
Balance at 30 September 2010
Balance at 1 October 2009
The Group
The Company
2010
£m
39.5
-
39.5
17.2
-
0.3
(3.8)
13.7
53.2
56.7
2009
£m
39.5
-
39.5
16.8
1.0
-
(0.6)
17.2
56.7
56.3
2010
£m
39.5
-
39.5
-
-
-
-
-
39.5
39.5
2009
£m
39.5
-
39.5
-
-
-
-
-
39.5
39.5
At 30 September 2010 the number of the Company’s own shares held in treasury was 668,900 (2009: 668,900). These shares had a
nominal value of £668,900 (2009: £668,900). The dividends on these shares have been waived.
The ESOP shares are held in trust for the benefit of employees exercising their options under the Company’s share option schemes and
awards under the Paragon Performance Share Plan, Matching Share Plan and Deferred Bonus Scheme. The trustees’ costs are included
in the operating expenses of the Group.
At 30 September 2010, the trusts held 3,366,361 ordinary shares (2009: 3,405,452) with a nominal value of £3,366,361
(2009: £3,405,452) and a market value of £5,507,366 (2009: £5,135,422). Options, or other share-based awards, were outstanding
against 3,366,361 of these shares at 30 September 2010 (2009: 3,405,452). The dividends on 2,821,549 of these shares have been
waived (2009: 2,860,640).
51.
FINANCIAL LIABILITIES
(a)
The Group
Current liabilities
Finance lease liability
Bank loans and overdrafts
Non-current liabilities
Asset backed loan notes
Corporate bond
Finance lease liability
Bank loans and overdrafts
Derivative financial instruments
Notes
53
53
37
2010
£m
0.9
0.1
1.0
8,336.2
115.8
10.9
1,403.6
17.3
2009
£m
0.8
0.3
1.1
8,819.2
116.8
11.8
1,453.1
56.6
2008
£m
0.8
0.1
0.9
9,028.7
117.9
12.6
1,606.6
25.7
9,883.8
10,457.5
10,791.5
A maturity analysis of the above borrowings and further details of asset backed loan notes and bank loans are given in note 52.
96
The Paragon Group of Companies PLC
(b) The Company
Current liabilities
Finance lease liability
Non-current liabilities
Corporate bond
Finance lease liability
Derivative financial instruments
Notes
53
53
37
2010
£m
0.9
115.8
10.9
-
126.7
2009
£m
0.8
126.8
11.8
-
138.6
2008
£m
0.8
117.9
12.6
2.0
132.5
A maturity analysis of the above borrowings is given in note 52.
52.
BORROWINGS
All borrowings shown as falling due after more than one year fall due after more than five years.
The fair values of borrowings are not considered to be significantly different to their carrying values and the effective interest rates are
not materially different to the rates charged.
(a)
Asset backed loan notes
The asset backed loan notes are secured on portfolios comprising variable and fixed rate mortgages or personal, retail and car loans, and
are redeemable in part from time to time, but such redemptions are limited to the net capital received from borrowers in respect of the
underlying assets. There is no requirement for the Group to make good any shortfall out of general funds. The maturity date of the notes
matches the maturity date of the underlying assets. It is likely that a substantial proportion of these notes will be repaid within five years.
In each issue there exists an option for the Group to repay all of the notes at an earlier date (the ‘call date’), at the outstanding
principal amount.
Interest is payable at a fixed margin above;
• the London Interbank Offered Rate (‘LIBOR’) on notes denominated in sterling;
• the Euro Interbank Offered Rate (‘EURIBOR’) on notes denominated in euros; and
• the London Interbank Offered Rate (‘US Dollar LIBOR’) on notes denominated in US dollars.
All payments in respect of the notes are required to be made in the currency in which they are denominated.
The notes outstanding at 30 September 2010 comprised £7,877.8m (2009: £8,225.9m, 2008: £8,241.6m) in respect of mortgage backed
notes and £458.4m (2009: £593.3m, 2008: £787.1m) in respect of notes backed by other loan assets. The details of the assets backing
these securities are given in notes 31 and 32.
A more detailed description of the securitisation structure under which these notes are issued is given in note 6.
The Paragon Group of Companies PLC 97
52.
BORROWINGS (continued)
Notes in issue at 30 September 2010 and 30 September 2009 were:
Issuer
Maturity
date
Call date
Principal
Outstanding
Sterling notes
15/05/43
Paragon Mortgages (No. 7) PLC
15/04/44
Paragon Mortgages (No. 8) PLC
Paragon Mortgages (No. 9) PLC
15/05/41
Paragon Mortgages (No. 10) PLC 15/06/41
Paragon Mortgages (No. 11) PLC 15/10/41
Paragon Mortgages (No. 12) PLC 15/11/38
Paragon Mortgages (No. 13) PLC 15/01/39
Paragon Mortgages (No. 14) PLC 15/09/39
Paragon Mortgages (No. 15) PLC 15/12/39
01/07/36
First Flexible No. 4 PLC
01/06/34
First Flexible No. 5 PLC
01/12/35
First Flexible No. 6 PLC
First Flexible No. 7 PLC
15/09/33
Paragon Personal and Auto
Finance (No. 3) PLC
Paragon Secured
Finance (No. 1) PLC
15/04/36
15/11/35
US dollar notes
15/05/43
Paragon Mortgages (No. 7) PLC
Paragon Mortgages (No. 9) PLC
15/05/41
Paragon Mortgages (No. 10) PLC 15/06/41
Paragon Mortgages (No. 11) PLC 15/10/41
Paragon Mortgages (No. 12) PLC 15/11/38
Paragon Mortgages (No. 13) PLC 15/01/39
Paragon Mortgages (No. 14) PLC 15/09/39
Paragon Mortgages (No. 15) PLC 15/12/39
01/12/35
First Flexible No. 6 PLC
Euro notes
15/05/43
Paragon Mortgages (No. 7) PLC
15/04/44
Paragon Mortgages (No. 8) PLC
Paragon Mortgages (No. 9) PLC
15/05/41
Paragon Mortgages (No. 10) PLC 15/06/41
Paragon Mortgages (No. 11) PLC 15/10/41
Paragon Mortgages (No. 12) PLC 15/11/38
Paragon Mortgages (No. 13) PLC 15/01/39
Paragon Mortgages (No. 14) PLC 15/09/39
Paragon Mortgages (No. 15) PLC 15/12/39
First Flexible No. 6 PLC
01/12/35
Paragon Personal and Auto
Finance (No. 3) PLC
15/04/36
2010
£m
88.5
251.4
149.9
187.5
96.0
134.7
150.9
164.4
190.4
86.3
98.2
82.5
110.7
119.0
162.1
$m
255.7
24.3
204.2
527.3
1,157.5
1,211.6
1,406.7
951.8
12.5
€m
260.0
328.7
235.6
269.0
287.5
388.6
371.3
406.4
287.0
46.1
15/05/08
15/10/08
15/05/09
15/12/09
15/04/10
15/08/10
15/10/10
15/03/11
15/06/11
01/07/08
01/07/09
01/03/08
15/03/11
15/04/09
15/11/08
15/05/08
15/05/09
15/12/09
15/04/10
15/08/10
15/10/10
15/03/11
15/06/11
01/03/08
15/05/08
15/10/08
15/05/09
15/12/09
15/04/10
15/08/10
15/10/10
15/03/11
15/06/11
01/03/08
15/04/09
206.0
2009
£m
91.0
258.9
154.8
187.5
99.2
137.8
153.7
167.6
195.9
94.8
105.5
86.9
131.4
156.0
191.5
$m
265.4
25.1
240.4
548.3
1,196.8
1,253.3
1,455.0
981.8
13.4
€m
269.4
338.0
244.0
269.0
292.2
393.9
378.4
412.7
289.9
48.9
271.9
Average Interest
Margin
2010
%
2009
%
0.42
0.30
0.38
0.28
0.14
0.19
0.17
0.16
0.14
1.09
0.99
1.28
0.13
0.89
0.95
%
0.74
0.36
0.09
0.10
0.12
0.11
0.10
0.09
0.56
%
0.66
0.24
0.57
0.21
0.25
0.25
0.19
0.21
0.33
1.05
0.79
0.21
0.31
0.19
0.28
0.14
0.18
0.18
0.16
0.14
1.08
0.97
1.27
0.13
0.39
0.43
%
0.37
0.18
0.09
0.10
0.12
0.11
0.10
0.09
0.56
%
0.33
0.24
0.29
0.20
0.25
0.25
0.19
0.21
0.33
1.03
0.35
During the year, Group companies issued £nil (2009: £nil) of mortgage backed floating rate notes at par and £nil (2009: £nil) of asset
backed floating rate notes at par.
98
The Paragon Group of Companies PLC
(b) Bank borrowings
Prior to the recent difficulties in the capital markets, assets were typically securitised within twelve months of origination. New loans were
funded by a bank facility (the ‘old warehouse facility’). This was drawn down to fund completions and repaid when assets were
securitised. More information on this process is given in note 6.
The old warehouse facility was available for further drawings until 29 February 2008 at which point it converted automatically to a term
loan and no further drawings were allowed. The old warehouse facility is provided by a committed sterling facility provided to Paragon
Second Funding Limited by a consortium of banks. This facility is secured on all the assets of Paragon Second Funding Limited, Paragon
Car Finance (No. 1) Limited and Paragon Personal Finance (No. 1) Limited and although its final repayment date is 28 February 2050 it
is likely that substantial repayments will be made within the next five years. Interest on this loan is payable monthly in sterling at 0.675%
above LIBOR (2009: 0.675% above LIBOR).
The principal amount outstanding on the facility at 30 September 2010, which was also the maximum available amount, was £1,403.6m
(2009: £1,453.1m). The carrying value of the borrowing in the balance sheet was £1,403.6m (2009: £1,453.1m).
Details of assets held within the old warehouse are given in note 32. As with the asset backed loan notes, repayments of this facility
before the final repayment date are restricted to the amount of principal cash realised from the funded assets.
In order to provide funding for new lending, on 27 September 2010 the Group entered into a £200.0m committed sterling facility
provided to Paragon Fourth Funding Limited by Macquarie Bank plc (‘the new warehouse’). This facility is secured on all the assets of
Paragon Fourth Funding Limited and is available for drawing for a period of two years and has a term of four years. It is the Group’s
intention to refinance loans originated in the new warehouse in the mortgage backed securitisation market when appropriate. Interest
on this loan is payable monthly in sterling at 2.875% above LIBOR. The facility has a renewal process that allows the Group to agree a
new two year commitment period prior to the expiry of the existing commitment period.
No amounts had been drawn on this facility at 30 September 2010 and hence the maximum available drawing at that date was £200.0m
(2009: £nil). As with the old warehouse, repayments on the new warehouse are limited to principal cash received from the
funded assets.
The Group additionally has entered into £64.8m (2009: £79.8m) of sterling revolving credit facilities to fund, where necessary, the
purchase of mortgage redraws in certain subsidiary companies. At 30 September 2010 £nil (2009: £nil) had been drawn down under
these facilities.
The weighted average margin above LIBOR on bank borrowings at 30 September 2010 was 0.675% (2009: 0.675%).
(c) Corporate bond
On 20 April 2005 the Company issued £120.0m of 7% Callable Subordinated Notes at an issue price of 99.347% to provide long term
capital for the Group. These bonds bear interest at a fixed rate of 7% per annum and are repayable on 20 April 2017, but may be repaid
on 20 April 2012 at the Company’s option. They are unsecured and subordinated to any other creditors of the Company. At 30
September 2010 £115.8m (2009: £126.8m) was included within the financial liabilities of the Company in respect of these bonds.
At 30 September 2009 bonds to the principal value of £10.0m were held by other group companies and hence the value included within
the financial liabilities of the Group in respect of these bonds was £116.8m. During the year ended 30 September 2010 these notes were
cancelled, realising a profit of £10.0m in the Company, and at 30 September 2010 none of the bonds were held by other entities within
the Group and therefore the value included within the financial liabilities of the Group in respect of the bonds at 30 September 2010 was
the same as that for the Company.
The Paragon Group of Companies PLC 99
53. OBLIGATIONS UNDER FINANCE LEASES
The finance lease obligations recorded in the accounts arise from a sale and leaseback transaction of the Group’s former head office
building in 1997 which falls to be treated as a finance lease under IAS 17 - ‘Leases’. The lease expires in 2019 and is subject to five yearly
rent reviews, with guaranteed minimum rent increases.
The minimum lease payments payable under this lease are:
Amounts payable
Within one year
Within two to five years
After five years
Less: future finance charges
Present value of lease obligations
The present value of these payments recognised in the financial statements is:
Amounts payable
Within one year
Within two to five years
After five years
2010
£m
1.9
8.2
7.0
17.1
(5.3)
11.8
2010
£m
0.9
5.0
5.9
11.8
2009
£m
1.9
8.0
9.1
19.0
(6.4)
12.6
2009
£m
0.8
4.3
7.5
12.6
2008
£m
2.0
7.8
11.2
21.0
(7.6)
13.4
2008
£m
0.8
3.8
8.8
13.4
The fair value of the lease obligation is not considered to be materially different to the present value of the future obligations shown
above. The interest rate implicit in the lease is 9.13% (2009: 9.13%)
At 30 September 2010 the minimum amount of payments expected to be received in respect of non-cancellable sub-leases in respect
of this building was £1,100,000 (2009: £2,100,000).
100
The Paragon Group of Companies PLC
54.
RETIREMENT BENEFIT OBLIGATIONS
The Group operates a funded defined benefit pension scheme in the UK (the ‘Plan’). A full actuarial valuation was carried out at
31 March 2007 and updated to 30 September 2010 by a qualified independent actuary. A full actuarial valuation as at 31 March 2010 is
currently being carried out. The results of this valuation will be used in compiling the financial statements for the year ending
30 September 2011.
The liabilities of the Plan are measured by discounting the best estimate of future cash flows to be paid out by the scheme using the
Projected Unit method. This amount is reflected in the liability in the balance sheet. The Projected Unit method is an accrued benefits
valuation method in which the technical provisions are calculated based on service up until the valuation date allowing for future salary
growth until the date of retirement, withdrawal or death, as appropriate. The future service rate is then calculated as the contribution
rate required to fund the service accruing over the control period again allowing for future salary growth. As a result of the Plan being
closed to new entrants, the service cost as a percentage of pensionable salaries is expected to increase as the members of the Plan
approach retirement. However the membership is expected to reduce so that the service charge in monetary terms will gradually
reduce. The major weighted average assumptions used by the actuary were (in nominal terms):
30 September
2010
30 September
2009
30 September
2008
In determining net pension cost for the year
Discount rate
Expected long term rate of return on scheme assets
Rate of compensation increase
Rate of increase of pensions
in payment (accrued before 6 April 2006)
in payment (accrued after 5 April 2006)
in deferment
In determining benefit obligations
Discount rate
Rate of compensation increase
Rate of increase of pensions
in payment (accrued before 6 April 2006)
in payment (accrued after 5 April 2006)
in deferment
Further life expectancy at age 60
Pensioner (male)
Pensioner (female)
Non-retired member (male)
Non-retired member (female)
5.70%
6.60%
4.20%
3.20%
2.50%
3.20%
5.20%
4.00%
3.00%
2.50%
3.00%
30
33
31
35
6.50%
7.70%
4.35%
3.35%
2.50%
3.35%
5.70%
4.20%
3.20%
2.50%
3.20%
30
33
31
35
6.10%
7.20%
4.10%
3.10%
2.50%
3.10%
6.50%
4.35%
3.35%
2.50%
3.35%
30
33
31
35
The Paragon Group of Companies PLC 101
54.
RETIREMENT BENEFIT OBLIGATIONS (continued)
The assets in the Plan at 30 September 2010, 30 September 2009 and 30 September 2008 and the expected rates of return were:
At 30 September 2010
At 30 September 2009
At 30 September 2008
Long term
rate of return
expected
7.25%
4.40%
5.80%
Value
£m
35.2
16.8
5.2
Long term
rate of return
expected
7.60%
4.80%
4.80%
6.28%
57.2
6.90%
(73.7)
(16.5)
Equities
Bonds
Other
Total market value
of assets
Present value of
scheme liabilities
(Deficit) in the scheme
Long term
rate of return
expected
8.20%
6.25%
6.25%
7.70%
Value
£m
33.0
13.7
5.3
52.0
(63.5)
(11.5)
Value
£m
31.5
12.1
0.3
43.9
(48.9)
(5.0)
The Plan assets are held in a separate trustee-administered fund to meet long-term pension liabilities to past and present employees. The
trustees of the Plan are required to act in the best interests of the Plan’s beneficiaries. The appointment of trustees to the Plan is
determined by the scheme’s trust documentation. The Group has a policy that one third of all trustees should be nominated by active
and pensioner members of the Plan.
At 30 September 2010 the Plan assets were invested in a diversified portfolio that consisted primarily of equity and gilt investments. The
majority of the equities held by the Plan are in developed markets. The target asset allocations for the year ending 30 September 2011
are 55% equities, 25% bonds and 20% other assets.
In conjunction with the trustees, the Group has continued to conduct asset-liability reviews of the Plan. These studies are used to assist
the trustees and the Group to determine the optimal long-term asset allocation with regard to the structure of liabilities within the Plan.
The results of the studies are used to assist the trustees in managing the volatility in the underlying investment performance and risk of
a significant increase in the scheme deficit by providing information used to determine the investment strategy of the Plan.
Following the 2007 actuarial valuation, the trustees put in place a recovery plan. The trustees’ recovery plan aims to meet the statutory
funding objective within ten years and nine months from the date of valuation, i.e. by 1 January 2018.
The rate of return expected on scheme assets is based on the current level of expected returns on risk free investments (primarily
government bonds), the historical level of the risk premium associated with other asset classes in which the portfolio is invested and the
expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the asset
allocation to develop the expected long-term rate of return on assets assumption for the portfolio.
The movement in the market value of the scheme assets during the year was as follows:
At 1 October 2009
Movement in year
Contributions by the Group
Contributions by scheme members
Benefits paid
Expected return on scheme assets
Actuarial gain
At 30 September 2010
The actual rate of return on scheme assets in the year ended 30 September 2010 was 7.8% (2009: 14.5%).
2010
£m
52.0
2.3
0.3
(1.4)
3.6
0.4
57.2
2009
£m
43.9
2.3
0.3
(0.8)
3.5
2.8
52.0
102
The Paragon Group of Companies PLC
The movement in the present value of the scheme liabilities during the year was as follows:
At 1 October 2009
Movement in year
Current service cost
Past service costs
Contributions by scheme members
Benefits paid
Finance cost
Actuarial loss
At 30 September 2010
2010
£m
63.5
1.6
-
0.3
(1.4)
3.6
6.1
73.7
2009
£m
48.9
1.4
-
0.3
(0.8)
3.2
10.5
63.5
The most recent valuation of the scheme liabilities on a buy out basis obtained by the trustees in accordance with section 224 of the
Pensions Act 2004 was calculated at 31 March 2007, when the valuation on that basis was £76.1m. An actuarial valuation as at
31 March 2010 is in progress, but the results have not been finalised.
The sensitivity of the valuation of the scheme liabilities to the principal assumptions disclosed above at 30 September 2010 is as follows:
Assumption
Discount rate
Rate of inflation *
Rate of salary growth
Rates of mortality
Increase in assumption
Impact on scheme liabilities
0.1% p.a.
0.1% p.a.
0.1% p.a.
1 year of life expectancy
Decrease by 2.6%
Increase by 2.4%
Increase by 0.8%
Increase by 1.9%
* maintaining a 1% real increase in salary growth
The duration of the scheme’s liabilities are shown in the table below:
Category of member
Active members
Deferred pensioners
Current pensioners
All members
2010
Years
28
27
14
27
2009
Years
28
27
14
27
The agreed rate of employer contributions was 27.4% of gross salaries for participating employees. Since 1 July 2008 an additional
contribution of £500,000 per annum has been paid by monthly instalments. Contributions to the plan will be reviewed and agreed with
the trustees as part of the 31 March 2010 valuation.
The amounts charged in the income statement in respect of the pension scheme are:
Current service cost
Past service cost
Included within operating expenses
Expected return on scheme assets
Funding cost of scheme liability
Total expense recognised in profit
Notes
13
9
10
2010
£m
1.6
-
1.6
(3.6)
3.6
1.6
2009
£m
1.4
-
1.4
(3.5)
3.2
1.1
The Paragon Group of Companies PLC 103
54.
RETIREMENT BENEFIT OBLIGATIONS (continued)
The actuarial losses and gains in the statement of comprehensive income in respect of the pension scheme are:
Gain on scheme assets
(Loss) on scheme liabilities
Total actuarial (loss)
Tax thereon
Net actuarial (loss)
Notes
23
47
2010
£m
0.4
(6.1)
(5.7)
1.4
(4.3)
2009
£m
2.8
(10.5)
(7.7)
2.2
(5.5)
The cumulative value of actuarial losses charged through reserves to the profit and loss account since 1 October 2001, the first date on
which a valuation of the scheme assets and liabilities on a basis consistent with IAS 19 was carried out is £33.4m (2009: £27.7m):
The five year history of experience adjustments on the scheme is as shown below:
Fair value of scheme assets
Present value of scheme obligations
(Deficit) / surplus in the scheme
Experience adjustments on
scheme assets:
Amount (£m)
Percentage of scheme assets
Experience adjustments on
scheme liabilities:
Amount (£m)
Percentage of scheme liabilities
2010
£m
57.2
(73.7)
(16.5)
0.4
0.6%
-
0.0%
2009
£m
52.0
(63.5)
(11.5)
2.8
5.3%
-
0.0%
2008
£m
43.9
(48.9)
(5.0)
(10.4)
(23.8)%
0.2
0.4%
2007
£m
49.2
(45.0)
4.2
0.9
1.8%
2.5
5.6%
2006
£m
43.9
(43.6)
0.3
0.4
1.0%
-
0.0%
In addition to the Group Pension Scheme, the Group operates a defined contribution (Stakeholder) pension scheme. Contributions
made by the Group to this scheme in the year ended 30 September 2010 were £0.2m (2009: £0.1m).
55.
CURRENT TAX LIABILITIES
(a)
The Group
UK Corporation Tax
(b)
The Company
UK Corporation Tax
104
The Paragon Group of Companies PLC
2010
£m
16.2
16.2
2010
£m
1.5
1.5
2009
£m
-
-
2009
£m
1.0
1.0
2008
£m
6.3
6.3
2008
£m
1.0
1.0
56.
PROVISIONS
Provision at 1 October 2009
Current year charge (note 17)
Utilised in the year
Released in the year
Provision at 30 September 2010
Included in current liabilities
Included in non-current liabilities
Provisions included committed future lease costs for properties no longer occupied by the Group.
57. OTHER LIABILITIES
(a) The Group
Current liabilities
Accrued interest
Deferred income
Other accruals
Other taxation and social security
Non-current liabilities
Deferred income
Other accruals
2010
£m
21.1
0.4
10.1
0.8
32.4
1.5
0.1
1.6
2010
£m
0.5
-
(0.5)
-
-
-
-
-
2009
£m
17.8
0.9
10.9
0.8
30.4
1.9
0.6
2.5
Accrued interest and other accruals fall within the definition of ‘other financial liabilities’ set out in IAS 32 and IAS 39.
(b) The Company
Current liabilities
Amounts owed to Group companies
Accrued interest
Deferred income
Non-current liabilities
Deferred income
2010
£m
385.6
3.5
0.1
389.2
0.9
0.9
2009
£m
313.7
3.8
0.1
317.6
1.1
1.1
Accrued interest and other accruals fall within the definition of ‘other financial liabilities’ set out in IAS 32 and IAS 39.
2009
£m
0.5
0.3
(0.3)
-
0.5
0.5
-
0.5
2008
£m
68.2
1.7
9.0
0.5
79.4
2.1
2.5
4.6
2008
£m
365.5
3.8
0.1
369.4
1.2
1.2
The Paragon Group of Companies PLC 105
58. NET CASH FLOW FROM OPERATING ACTIVITIES
(a)
The Group
Profit before tax
Non-cash items included in profit and other adjustments:
Depreciation of property, plant and equipment
Amortisation of intangible assets
Impairment of goodwill
Share of result of associated undertakings
Profit on repurchase of debt
Foreign exchange movement on borrowings
Other non-cash movements on borrowings
Impairment losses on loans to customers
Charge for share based remuneration
Loss on disposal of property, plant and equipment
Net decrease / (increase) in operating assets:
Loans to customers
Loans to associates
Derivative financial instruments
Fair value of portfolio hedges
Other receivables
Net (decrease) / increase in operating liabilities:
Derivative financial instruments
Other liabilities
Cash generated by operations
Income taxes received / (paid)
2010
£m
71.8
2.3
0.7
-
-
(5.7)
(124.8)
0.6
39.2
1.4
0.2
363.9
-
127.2
30.4
(0.4)
(39.3)
(0.1)
467.4
2.9
470.3
2009
£m
54.3
3.2
0.7
6.0
-
(18.4)
719.1
12.3
66.2
1.2
0.5
673.0
0.1
(696.6)
(51.0)
(0.1)
30.9
(52.7)
748.7
(9.9)
738.8
106
The Paragon Group of Companies PLC
(b)
The Company
Profit before tax
Non-cash items included in profit and other adjustments:
Depreciation of property, plant and equipment
Non-cash movements on borrowings
Impairment losses on investments in subsidiaries
Cancellation of debt (note 52)
Charge for share based remuneration
Net (increase) / decrease in operating assets:
Loans to associates
Other receivables
Derivative financial instruments
Net increase / (decrease) in operating liabilities:
Derivative financial instruments
Other liabilities
Cash generated by operations
Income taxes paid
2010
£m
45.8
0.9
(1.0)
1.7
(10.0)
1.4
-
(37.3)
0.7
-
71.4
73.6
(2.1)
71.5
2009
£m
36.3
0.8
8.9
2.9
-
1.2
0.1
13.5
(8.7)
(2.0)
(51.9)
1.1
(1.7)
(0.6)
59. NET CASH FLOW FROM INVESTING ACTIVITIES
Proceeds on disposal of property, plant and equipment
Purchases of property, plant and equipment
Purchases of intangible assets
Investment in subsidiary undertakings
Net cash generated by investing activities
The Group
The Company
2010
£m
1.6
(1.0)
(0.3)
-
0.3
2009
£m
1.6
(0.2)
(0.1)
-
1.3
2010
£m
-
-
-
3.8
3.8
2009
£m
-
-
-
24.6
24.6
60. NET CASH FLOW FROM FINANCING ACTIVITIES
The Group
The Company
Shares issued
Dividends paid (note 48)
Repayment of asset backed floating rate notes
Repurchase of debt (note 18)
Capital element of finance lease payments
Movement on bank facilities
Purchase of shares (note 50)
2010
£m
-
(10.0)
(345.5)
(8.3)
(0.8)
(49.5)
-
2009
£m
-
(9.2)
(902.4)
(19.3)
(0.8)
(153.5)
(1.0)
Net cash (utilised) by financing activities
(414.1)
(1,086.2)
2010
£m
0.3
(10.0)
-
-
(0.8)
-
-
(10.5)
2009
£m
-
(9.2)
-
-
(0.8)
-
-
(10.0)
The Paragon Group of Companies PLC 107
61.
PURCHASE OF SUBSIDIARY UNDERTAKINGS
On 25 January 2007 the Group acquired a 33% interest in the equity of The Business Mortgage Company Limited and its subsidiary
companies (‘TBMC’), a mortgage broker, as part of a transaction in which the Company supported the purchase of TBMC by its
management, providing facilities of £15.75 million. With the significant downturn in market activity during 2008 the business of TBMC
suffered and, in order to secure the future of this strategically important business channel, the Group agreed to a reorganisation of
TBMC whereby it accepted the remaining 67% of the equity on 17 December 2008, bringing the company within the Group, and
suspended interest payments on its loan to TBMC. No payment was made in respect of the shares accepted. This transaction was
accounted for by the purchase method of accounting. The fair values of the assets acquired and the liabilities assumed as a result of the
acquisition were as follows:
Intangible assets
Tangible fixed assets
Deferred tax assets
Other receivables
Other liabilities
Liabilities owed to Group
Goodwill
Total cash consideration
Less: cash acquired
Cash flow on acquisition less cash acquired
62. OPERATING LEASE ARRANGEMENTS
(a)
As lessee
Minimum lease payments under operating leases
recognised in income for the year
The Group
2009
£m
8.2
0.1
0.8
0.2
(0.1)
9.2
(16.8)
(7.6)
7.6
-
-
-
-
The Group
The Company
2010
£m
3.2
2009
£m
4.1
2010
£m
2009
£m
0.3
0.3
At 30 September 2010 the Group had outstanding commitments for future minimum lease payments under non-cancellable operating
leases, which fall due as follows:
Amounts falling due:
Within one year
Between two and five years
After more than five years
The Group
The Company
2010
£m
2.5
8.1
4.0
14.6
2009
£m
3.3
10.0
5.9
19.2
2010
£m
0.3
1.0
0.9
2.2
2009
£m
0.3
1.0
1.2
2.5
Operating lease payments represent rents payable by the Group in respect of certain of its office premises and amounts attributed to
land rent under the finance lease described in note 53. The average term of the current leases is 13 years (2009: 15 years) with rents
subject to review every five years.
108
The Paragon Group of Companies PLC
(b)
As lessor
Certain of the Group’s office premises which are not currently required by the Group have been sub-let. Rental income from these
premises during the year ended 30 September 2010 was:
Rental income
The Group
The Company
2010
£m
1.7
2009
£m
2.1
2010
£m
1.3
2009
£m
1.8
At 30 September 2010 the Group had received outstanding commitments from tenants for future minimum lease payments under
non-cancellable operating leases, which fall due as follows:
Amounts receivable:
Within one year
Between two and five years
After more than five years
The Group
The Company
2010
£m
0.7
0.4
-
1.1
2009
£m
1.5
2.3
0.2
4.0
2010
£m
0.7
0.4
-
1.1
2009
£m
1.0
1.1
-
2.1
63.
CAPITAL COMMITMENTS
There were no capital commitments (2009: £nil) contracted but not provided for.
64.
RELATED PARTY TRANSACTIONS
(a)
The Group
On 27 May 2010, Mr A K Fletcher, an independent non-executive director of the Company, was appointed as a trustee of the Group
Pension Plan. In respect of this appointment he was paid £3,000 in the year ended 30 September 2010 by Paragon Finance plc, the
sponsoring company of the Plan.
The Group had no other transactions with related parties other than the key management compensation disclosed in note 14 and the
transactions with its associated undertaking, up to the time it joined the Group, disclosed in notes 29, 36 and 40.
(b)
The Company
During the year the parent company entered into transactions with its subsidiaries, which are related parties. Management services were
provided to the Company by one of its subsidiaries and the Company granted awards under the share based payment arrangements
described in note 15 to employees of subsidiary undertakings. The Company also issued shares to the trustees of its ESOP trusts, as
described in note 42.
Details of the Company’s investments in subsidiaries and the income derived from them are shown in notes 27 and 28.
Outstanding current account balances with subsidiaries are shown in notes 40 and 57.
During the year the Company incurred interest costs of £16.6m in respect of borrowings from its subsidiaries (2009: £18.7m).
The Company had made investments in an associated undertaking, which became a subsidiary of the Group during the year ended
30 September 2009, and had made loans to this associate. Details of equity investments in the associate are given in note 29, details of
loans to the associate are given in note 36 and the accrued interest payable by the associate, up to the point at which it joined the Group,
is shown in note 40.
The Paragon Group of Companies PLC 109
Appendices to
the Annual Report
For the year ended 30 September 2010
A.
COST:INCOME RATIO
Cost:income ratio is derived as follows:
Cost – operating expenses
Total operating income
Cost / Income
B.
UNDERLYING PROFIT
2010
£m
42.6
147.9
2009
£m
39.3
150.8
28.8%
26.1%
Underlying profit is determined by excluding from the operating result certain costs of a one off nature, which do not reflect the
underlying business performance of the Group, gains on the repurchase of debt which result from the illiquidity of the credit markets
rather than the fair value of the security and fair value accounting adjustments arising from the Group’s hedging arrangements.
2010
£m
56.1
(5.7)
-
0.2
50.6
15.7
-
-
(0.2)
15.5
71.8
(5.7)
-
-
66.1
2009
£m
51.0
(15.9)
6.0
3.6
44.7
3.3
(2.5)
-
(0.2)
0.6
54.3
(18.4)
6.0
3.4
45.3
First Mortgages
Profit before tax for the period (note 7)
Less: Gain on debt repurchase
Impairment of goodwill
Fair value losses / (gains)
Consumer Finance
Profit before tax for the period (note 7)
Less: Gain on debt repurchase
Impairment of goodwill
Fair value losses / (gains)
Total
Profit before tax for the period (note 7)
Less: Gain on debt repurchase
Impairment of goodwill
Fair value losses / (gains)
110
The Paragon Group of Companies PLC
C.
NET ASSET VALUE PER SHARE
Net asset value per share is derived as follows:
Total equity (£m)
Outstanding issued shares (m)
Treasury shares (m)
Shares held by ESOP schemes (m)
Net asset value per £1 ordinary share
Notes
42
50
50
2010
£m
692.3
299.5
(0.7)
(3.4)
295.4
234p
2009
£m
650.8
299.2
(0.7)
(3.4)
295.1
221p
The Paragon Group of Companies PLC 111
112
The Paragon Group of Companies PLC
Notice of
Annual General Meeting
Notice of
Annual General Meeting
THIS NOTICE IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.
If you are in any doubt as to any aspect of the proposals referred to in this notice or as to the action you should take, you should seek
your own advice from a stockbroker, solicitor, accountant, or other professional adviser.
To all shareholders
NOTICE IS HEREBY GIVEN that the twenty-second Annual General Meeting of The Paragon Group of Companies PLC will be held at
the offices of RBS Hoare Govett Limited at 250 Bishopsgate, London, EC2M 4AA on 10 February 2011 at 10.00 a.m. for the following
purposes:
As ordinary business
1
2
3
4
5
6
7
8
9
10
11
12
To receive and consider the Company’s Accounts for the year ended 30 September 2010 and the Reports of the Directors and
the Auditors.
To consider and adopt the Report of the Board to the Shareholders on Directors’ Remuneration.
To declare a dividend.
To re-appoint as a director Mr R G Dench (who retires under Article 77(b)).
To re-appoint as a director Mr N Keen (who retires under Article 77(b)).
To re-appoint as a director Mr C D Newell (who retires under Article 77(b)).
To re-appoint as a director Mr N S Terrington.
To re-appoint as a director Mr J A Heron.
To re-appoint as a director Mr T C Eccles.
To re-appoint as a director Mr E A Tilly.
To re-appoint as a director Mr A K Fletcher.
To re-appoint Deloitte LLP as Auditors and to authorise the directors to fix their remuneration.
As special business
To consider and, if thought fit, to pass resolution 13 as an ordinary resolution and resolutions 14, 15 and 16 as special resolutions:
Ordinary Resolution
13
‘THAT the Board be and it is hereby generally and unconditionally authorised (in substitution for all subsisting authorities to the
extent unused) to exercise all powers of the Company to allot shares in the Company and to grant rights to subscribe for or
convert any security into shares in the Company up to an aggregate nominal amount of £99,500,000 PROVIDED THAT this
authority shall expire at the earlier of the conclusion of the next Annual General Meeting of the Company after the passing of
this resolution and the close of business on 9 May 2012 (unless previously revoked or varied by the Company in general
meeting) save that the Company may before such expiry make an offer or agreement which would or might require shares to be
allotted after such expiry and the Board may allot shares or grant rights to subscribe for or convert securities into shares in
pursuance of such an offer or agreement as if the authority conferred hereby had not expired.’
114
The Paragon Group of Companies PLC
Special Resolutions
14
‘THAT, subject to the passing of resolution 13, the Board be and it is hereby empowered pursuant to Section 571 of the
Companies Act 2006 to allot equity securities (within the meaning of Section 560 of the said Act) for cash pursuant to the
authority conferred by resolution 13 and/or where allotment is treated as an allotment of equity securities under section 560(3)
as if sub-section (1) of Section 561 of the said Act did not apply to any such allotment, PROVIDED THAT this power shall be
limited to:
(a)
the allotment of equity securities in connection with a rights issue, open offer or any other pre-emptive offer in favour of
ordinary shareholders and in favour of all holders of any other class of equity security in accordance with the rights
attached to such class where the equity securities respectively attributable to the interests of all such persons on a fixed
record date are proportionate (as nearly as may be) to the respective numbers of equity securities held by them or are
otherwise allotted in accordance with the rights attaching to such equity securities (subject in either case to such
exclusions or other arrangements as the Board may deem necessary or expedient to deal with treasury shares, fractional
entitlements, record dates or legal or practical problems arising in any overseas territory, the requirements of any
regulatory body or any stock exchange in any territory or any other matter whatsoever); and
(b)
the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an aggregate nominal value
of £14,900,000
and shall expire upon the renewal of this power or, if earlier, at the conclusion of the next Annual General Meeting of the
Company after the passing of this resolution (or, if earlier, the close of business on 9 May 2012), save that the Company may
before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry
and the Board may allot equity securities in pursuance of such an offer or agreement as if the power conferred hereby had not
expired.’
15
‘THAT the Company be and is hereby generally and unconditionally authorised for the purposes of Section 701 of the
Companies Act 2006 (‘the Act’) to make one or more market purchases (within the meaning of Section 693(4) of the Act) on the
London Stock Exchange PLC of ordinary shares of £1 each in the share capital of the Company (‘Ordinary Shares’) provided
that:-
(a)
(b)
(c)
(d)
(e)
the maximum aggregate number of Ordinary Shares hereby authorised to be purchased is 29,800,000 (representing
approximately 10 per cent of the Company’s issued ordinary share capital excluding treasury shares);
the minimum price which may be paid for an Ordinary Share is 10p;
the maximum price which may be paid for an Ordinary Share is an amount equal to 105 per cent of the average of the
middle market price shown in the quotations for an Ordinary Share as derived from the London Stock Exchange Daily
Official List for the five business days immediately preceding the day on which the Ordinary Share is contracted to be
purchased;
unless previously renewed, varied or revoked, the authority hereby conferred shall expire on the earlier of the
conclusion of the next Annual General Meeting of the Company and the close of business on 9 August 2012; and
the Company may make a contract or contracts to purchase Ordinary Shares under the authority hereby conferred prior
to the expiry of such authority which will or may be executed wholly or partly after the expiry of such authority, and may
make a purchase of Ordinary Shares in pursuance of any such contract or contracts.’
16
‘THAT a general meeting other than an annual general meeting may be called on not less than 14 clear days’ notice.’
By order of the Board
JOHN G GEMMELL
Company Secretary
Registered and Head Office:
St Catherine’s Court
Herbert Road
Solihull
West Midlands
B91 3QE
24 November 2010
Registered in England No. 2336032
The Paragon Group of Companies PLC 115
NOTICE OF ANNUAL GENERAL MEETING (continued)
A member entitled to attend and vote at this meeting may appoint another person as their proxy to exercise all or any of their rights to
attend and to speak and vote at a meeting of the Company. A member may appoint more than one proxy in relation to the Annual
General Meeting provided that the member specifies the number of shares in relation to which each proxy is appointed and each proxy
is appointed to exercise the rights attached to a different share or shares held by that member. A proxy need not also be a member of
the Company. A proxy form is enclosed for use in connection with the meeting. Proxy forms and any power of attorney or other written
authority under which they are executed (or an office or notarially certified copy thereof) should be lodged with the Registrar of the
Company at the address shown on the reverse of the proxy form by 10.00 a.m. on Tuesday 8 February 2011. The appointment of a proxy
or any CREST Proxy Instruction (as described below) will not preclude a shareholder from attending and voting at the meeting.
The proxy appointment rights described above do not apply to any person nominated to enjoy information rights under section 146 of
the Companies Act 2006 by a member who holds shares on behalf of that person.
Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers
as a member provided that they do not do so in relation to the same shares.
To be entitled to attend and vote at the Annual General Meeting (and for the purpose of the determination by the Company of the votes
they may cast), Shareholders must be registered in the register of members of the Company at 10.00 a.m. on Tuesday 8 February 2011
(or, in the event of any adjournment, on the date which is two days before the time of the adjourned meeting). Changes to the register
of members after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the meeting.
As at 23 November 2010 (being the last business day prior to the publication of this notice) the Company’s issued share capital consists
of 299,454,078 ordinary shares, carrying one vote each, of which 668,900 were held in treasury. Therefore, the total voting rights in the
Company as at 23 November 2010 are 298,785,178.
CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using
the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST
members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able
to take the appropriate action on their behalf.
In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST
Proxy Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications, and must contain
the information required for such instruction, as described in the CREST Manual (available via www.euroclear.com/CREST). The
message, regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously
appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID number 3RA50) by 10.00 a.m.
on Tuesday 8 February 2011. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied
to the message by the CREST Application Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the
manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated
to the appointee through other means.
CREST members and, where applicable, their CREST sponsors, or voting service providers should note that Euroclear UK & Ireland
Limited does not make available special procedures in CREST for any particular message. Normal system timings and limitations will,
therefore, apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or,
if the CREST member is a CREST personal member, or sponsored member, or has appointed a voting service provider, to procure that
his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by
means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or
voting system providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST
system and timings.
The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated
Securities Regulations 2001.
116
The Paragon Group of Companies PLC
Under section 527 of the Companies Act 2006 members meeting the threshold requirements set out in that section have the right to
require the Company to publish on a website a statement setting out any matter relating to: (i) the audit of the Company’s accounts
(including the auditor’s report and the conduct of the audit) that are to be laid before the Annual General Meeting; or (ii) any
circumstance connected with an auditor of the Company ceasing to hold office since the previous meeting at which annual accounts and
reports were laid in accordance with section 437 of the Companies Act 2006. The Company may not require the shareholders requesting
any such website publication to pay its expenses in complying with sections 527 or 528 of the Companies Act 2006. Where the Company
is required to place a statement on a website under section 527 of the Companies Act 2006, it must forward the statement to the
Company’s auditor not later than the time when it makes the statement available on the website. The business which may be dealt with
at the Annual General Meeting includes any statement that the Company has been required under section 527 of the Companies Act
2006 to publish on a website.
A copy of this notice, and other information required by section 311A of the Companies Act 2006, can be found
at www.paragon-group.co.uk.
Under section 338 and section 338A of the Companies Act 2006, members meeting the threshold requirements in those sections have
the right to require the Company (i) to give, to members of the Company entitled to receive notice of the meeting, notice of a resolution
which may properly be moved and is intended to be moved at the meeting and/or (ii) to include in the business to be dealt with at the
meeting any matter (other than a proposed resolution) which may be properly included in the business. A resolution may properly be
moved or a matter may properly be included in the business unless (a) (in the case of a resolution only) it would, if passed, be ineffective
(whether by reason of inconsistency with any enactment or the Company’s constitution or otherwise), (b) it is defamatory of any person,
or (c) it is frivolous or vexatious. Such a request may be in hard copy form or in electronic form, must identify the resolution of which
notice is to be given or the matter to be included in the business, must be authorised by the person or persons making it, must be
received by the Company not later than Wednesday 29 December 2010, being the date six clear weeks before the meeting, and (in the
case of a matter to be included in the business only) must be accompanied by a statement setting out the grounds for the request.
The register of directors’ interests, copies of directors’ service contracts and letters of appointment of non executive directors will be
available for inspection during normal business hours on any weekday (Saturdays and public holidays excepted) at the Registered Office
of the Company from the date of this notice until the date of the meeting and at the place of the meeting from 9.30 a.m. on the date of
such meeting until the conclusion thereof. The Report and Accounts have been sent to the Company’s shareholders.
Biographical details of current directors are provided on pages 12 and 13.
The Paragon Group of Companies PLC 117
The Paragon Group of Companies PLC
St Catherine's Court Herbert Road Solihull West Midlands B91 3QE
Telephone: 0121 712 2323 www.paragon-group.co.uk Registered No. 2336032
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