Paragon Banking Group PLC
2019 Annual Report and Accounts
CAUTIONARY STATEMENT
Sections of this Annual Report, including but not limited to the Directors’ Report, the Strategic Report and the Directors’ Remuneration
Report may contain forward-looking statements with respect to certain of the plans and current goals and expectations relating to
the future financial condition, business performance and results of the Group. These have been made by the directors in good faith
using information available up to the date on which they approved this report and the Group undertakes no obligation to update these
forward-looking statements. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future
events and circumstances that are beyond the control of the Group and depend upon circumstances that may or may not occur in the
future. There are a number of factors that could cause actual future financial conditions, business performance, results or developments
to differ materially from the plans, goals and expectations expressed or implied by these forward-looking statements and forecasts.
Nothing in this document should be construed as a profit forecast.
CONTENTS
Financial highlights
Results in brief
Financial highlights
A Strategic Report
The business and its performance in the year
A1 Chair of the Board's introduction
A2 Business model and strategy
A3 Chief Executive’s review
A4
Future prospects
A5 Corporate responsibility
A6 Approval of Strategic Report
B Corporate Governance
How the business is controlled and how risk is managed
B1 Chair’s statement on corporate governance
B2 Board of Directors
B3 Corporate governance
B4 Nomination Committee
B5 Audit Committee
B6 Remuneration report
B7 Risk management
B8 Directors’ report
B9 Statement of directors’ responsibilities
C
Independent Auditor’s Report
On the financial statements
Page 6
Page 10
Page 12
Page 23
Page 50
Page 53
Page 65
Page 68
Page 70
Page 75
Page 82
Page 84
Page 93
Page 125
Page 140
Page 144
C1
Independent Auditor’s Report
Page 148
D The Accounts
The financial statements of the Group
D1 Primary financial statements
D2 Notes to the accounts
Page 160
Page 167
E Appendices to the Annual Report
Additional financial information
E1 Appendices to the Annual Report
Page 278
F
Useful information
Additional information for shareholders and other users
F1 Glossary
F2 Shareholder information
F3 Other public reporting
F4 Contacts
Page 284
Page 286
Page 288
Page 290
FINANCIAL
HIGHLIGHTS
Results in brief
Financial highlights
UNDERLYING PROFIT BEFORE TAX
£164.4 million
5.0% higher (2018: £156.5 million)
PROFIT BEFORE TAX
£159.0 million
12.4% lower (2018: £181.5 million)
134.7
143.8
145.2
156.5
164.4
200
150
n
o
i
l
l
i
m
£
100
50
0
134.2
143.2
144.8
181.5
159.0
200
150
n
o
i
l
l
i
m
£
100
50
0
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
UNDERLYING BASIC EARNINGS PER SHARE
51.1 pence
6.0% higher (2018: 48.2 pence)
BASIC EARNINGS PER SHARE
49.4 pence
11.6% lower (2018: 55.9 pence)
60
60
48.2
51.1
55.9
49.4
40
36.6
40.7
43.3
40
35.5
40.5
43.1
e
c
n
e
p
20
0
e
c
n
e
p
20
0
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
DIVIDEND PER SHARE
21.2 pence
9.3% higher (2018: 19.4 pence)
CAPITAL - CET 1 ratio
13.7%
Remains strong (2018: 13.8%)
19.4
21.2
15.7
13.5
11.0
e
c
n
e
p
25
20
15
10
5
0
t
n
e
c
r
e
p
25
20
15
10
5
0
19.1
15.9
15.9
13.8
13.7
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
PAGE 6 • Financial highlights
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
TOTAL LOANS TO CUSTOMERS
£12.2 billion
0.5% higher (2018: £12.1 billion)
RETAIL DEPOSITS
£6.4 billion
20.7% higher (2018: £5.3 billion)
10.1
10.7
11.1
12.1
12.2
n
o
i
l
l
i
b
£
15
10
5
0
6.4
5.3
3.6
n
o
i
l
l
i
b
£
7
6
5
4
3
2
1
0
1.9
0.7
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
UNDERLYING RETURN ON TANGIBLE EQUITY
14.6%
(2018: 14.0%)
RETURN ON TANGIBLE EQUITY
14.1%
(2018: 16.1%)
11.8
12.9
13.5
14.0
14.6
t
n
e
c
r
e
p
16
12
8
4
0
12.9
13.4
11.4
16.1
14.1
t
n
e
c
r
e
p
20
15
10
5
0
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Five year performance summary
Underlying profit before taxation
Profit before taxation
Profit after taxation
Total loans to customers
Shareholders’ funds
Return on tangible equity
Earnings per share
- basic
- diluted
Dividend per ordinary share
2015
£m
134.7
132.2
107.1
2016
£m
143.8
143.2
116.0
10,062.4
969.5
10,737.5
969.5
2015
11.4%
35.5p
34.8p
11.0p
2016
12.9%
40.5p
39.7p
13.5p
2017
£m
145.2
144.8
117.2
11,124.1
1,009.4
2017
13.4%
43.1p
41.9p
15.7p
2018
£m
156.5
181.5
145.8
12,127.8
1,095.9
2018
16.1%
55.9p
54.2p
19.4p
2019
£m
164.4
159.0
127.4
12,186.1
1,108.4
2019
14.1%
49.4p
48.2p
21.2p
The exclusions from underlying results relate principally to acquisitions in prior periods and significant asset sales in the period and the
preceding period, which do not form part of the day-to-day activities of the Group and which have impacted on the reported results for the
year. The calculation of return on tangible equity is shown in note 55. The derivation of underlying profit before taxation and other underlying
measures is described in Appendix A.
PAGE 7 • Financial highlights
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
A.
STRATEGIC
REPORT
The Group’s business, risk profile, performance and prospects
A1
Chair of the Board’s introduction
The year in summary
A2
Business model and strategy
An overview of what the Group does and the significant risks to which it is exposed
A3
A4
A5
Chief Executive’s review
The financial and operational performance of the Group in the year
Future prospects
How the Group is placed looking forward
Corporate responsibility
The Group’s impact on its employees, the environment and the community,
including non-financial reporting
A6
Approval of Strategic Report
Approval of the Strategic Report by the Company Secretary
Page 10
Page 12
Page 23
Page 50
Page 53
Page 65
A1
Chair of the Board's introduction
The business
The business is managed through three lending divisions, Mortgages,
including buy-to-let, Commercial Lending and Idem Capital, with each
division offering a range of specialist lending propositions.
The mortgages division continues its focus on specialist landlords in
the private rented sector, which remains a fundamental part of the
nation’s housing provision.
The commercial lending division provides asset backed and other
funding to SMEs and small corporates, while the development
finance business provides funding particularly to small and medium
scale residential developers in the UK, both underserved sectors of
their respective markets.
Our Idem Capital division specialises in the acquisition of loan
portfolios. The division’s success builds on its extensive analytical
skills and a servicing approach focussed on developing sustainable
arrangements and fair outcomes for the personal lending customers
it acquires.
Significant expenditure has been made in the development of the
Group’s business lines throughout the year and further investment in
people and systems is anticipated in the year to come.
The Group’s business is described more fully in Section A2
Results
The growth in the Group’s new lending, up 8.5% to £2,532.4 million,
together with improved margins, contributed to an increase in
underlying profit by 5.0% to £164.4 million excluding items such
as the £9.7 million gain on sale of PM12, which do not arise from
the underlying operations of the business. Profit before tax on
the statutory basis fell by 12.4% to £159.0 million, reflecting the
£28.0 million gain on the disposal of Idem Capital assets reported
in 2018.
This led to underlying earnings per share (‘EPS’) increasing by 6.0%
to 51.1 pence (2018: 48.2 pence) and statutory EPS decreasing
to 49.4 pence (2018: 55.9 pence). Underlying return on tangible
equity reached 14.6% (2018: 14.0%), 14.1% on the statutory basis
(2018: 16.1%).
Funding was enhanced with the growth of the Group’s savings deposit
base to £6.4 billion from £5.3 billion a year earlier, further utilisation
of Bank of England facilities and a £364.3 million securitisation
transaction. This increasing diversification led to retail deposits
making up almost half of all Group funding.
The Group’s capital position remains strong, with a regulatory Core
Equity Tier 1 (‘CET1’) ratio of 13.7% (2018 (IAS 39): 13.8%).
The financial results and operational performance are reviewed in
Section A3
Fiona Clutterbuck, Chair of the Board
Despite the present economic and
political uncertainties facing the UK,
I am confident that the Group is well
placed to respond to the challenges in
its markets...
Dear Shareholder
I have the pleasure of introducing my second Annual Report and
Accounts as Chair of the Board of Paragon Banking Group PLC,
following a year which has seen continued progress in the Group’s
strategic development, after the major acquisitions of recent years,
against a backdrop of an uncertain UK economy.
The year has seen two significant milestones in the development
of the business. More than half of our lending portfolio now
comprises balances advanced since 2014, the year Paragon Bank
was authorised, whilst at the same time more than half our asset
funding is derived from retail deposits, a significant change in the
profile of the business over that period.
The development of the Group’s Commercial Lending division,
particularly the growth of newer and acquired businesses has
also been particularly pleasing in the year. We continue to target
investment and capital to support the Group’s medium-term
objective of improving net interest margin and cost efficiency, with
increasing business volumes. At the same time, we aim to provide
an additional, specialist choice to our customers, together with a
continuing focus on customer service.
In preparing the annual report for this year we have made changes
in our reporting of governance arrangements, in preparation for the
introduction of a new corporate governance code in the coming
year and to reflect the introduction of IFRS 9, bringing in substantial
new disclosures around customer loans and derivatives. I hope
you find this report useful in understanding our business and our
progress in the year.
PAGE 10 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Stakeholders
The Group takes its responsibility as a corporate citizen very
seriously. It values its culture and views the current regulatory
agenda of promoting the interests of stakeholders other than
shareholders as being well aligned with its own priorities.
During the year steps were taken to embed the ‘employee voice’
provisions of the new Code in the Group, and I was gratified that
the Group retained its Gold Investors in People status and that the
number of female senior managers reached 35% of the total, our
below-board Hampton-Alexander target.
The Group has always believed in the social benefits that can result
from using its power as a buy-to-let lender to drive up standards in
the private rented sector and from providing funds for housebuilding
and has always acted to manage its environmental impact. I noted
with interest the increased regulatory focus on sustainability during
the year, particularly from the PRA, and am taking a close interest
in the Group’s progress in developing enhanced procedures in
this area.
We recognise the importance of the contribution of the people who
work within our businesses to the Group’s results in the year and I
would like to thank all of them for their hard work and dedication
throughout the period.
The Group is committed to good corporate governance and we are
confident that we are well placed to comply with the new code from
the year ending 30 September 2020.
Corporate governance is discussed in Section B3
Risk
The Group continues to put considerable emphasis on the
resource
management of
risk, with additional specialist
recruited
in the year and the embedding of enhanced risk
management technology.
Particular focus has been given in the past year to cyber security
and operational resilience capabilities, with additional investment
in both systems and people. Systems for regulatory stress testing
have also been enhanced. These areas will continue to be key
priorities in future years. Significant focus also continues to be given
to the Group’s preparations for the regulatory approval process for
its IRB approach for credit risk.
The Risk Management report is set out in Section B7
Social responsibility issues are discussed in Section A5
Shareholder returns
Governance
Over the year my colleagues on the Board and I have spent
considerable time and effort in enhancing the Group’s governance
process. We have updated processes to accord with the new Code,
together with other new regulations and considered the results of
our board evaluation. We have also finalised a new remuneration
policy for shareholders’ consideration at the forthcoming AGM.
As part of these developments we were able to meet with many
shareholders and other stakeholder groups, and I thank them for
their valuable time with us. During this exercise, I met 18 of the
Group’s major shareholders, representing over two-thirds of the
total share capital, and the insight gained into their views of the
business was extremely useful.
During the year, my board colleague John Heron, Director – Mortgages,
decided to step down after being with the Group since 1986,
establishing its buy-to-let business and becoming one of the leading
figures in the buy-to-let sector in the UK. Peter Hartill, the Chair of the
Group’s Audit Committee, will also step down from the Board after
nine years’ service. I would like to thank both of them for their very
meaningful contribution to the Group’s development and the support
they have given me as Chair.
In addition to our usual workload, the entire Board has been much
involved with the further development of the Group’s strategy,
particularly the evaluation and monitoring of acquisitions and their
integration into the Group. I thank my colleagues for their diligence
in these matters.
PAGE 11 • Strategic Report
The positive result for the year has enabled the Board to enhance
the dividends paid to shareholders, in accordance with the policy
previously announced. We have declared a final dividend for the
year of 14.2 pence per share, bringing the dividend for the year to
21.2 pence per share, up 9.3% from the 19.4 pence declared for 2018,
subject to shareholder approval. £26.5 million (excluding costs) has
also been spent on the share buy-back programme announced in
July. Each of these actions enhances returns for shareholders.
Conclusion
The Group has continued to make progress towards its strategic
goals. The market for a specialist, retail funded banking group, able
to serve the needs of currently underserved SME, small corporate
and personal borrowing and savings customers, clearly exists and
the Group’s strengths, experience and culture mean that it is well
placed to do this.
Despite the present economic and political uncertainties facing
the UK, I am confident that the Group is well placed to respond to
the challenges in its markets. The Group’s wealth of data and the
well tested, through the cycle experience of its senior management
team continues to provide the basis to deliver excellent service to
its customers, strong and sustainable returns to its shareholders
while enhancing its relationships with all of its stakeholders.
Fiona Clutterbuck
Chair of the Board
26 November 2019
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A2
Business model and strategy
A2.1 Paragon at a glance
Paragon is a specialist banking group. We offer a range of savings and specialist lending products to individuals and SMEs in the UK. Listed
on the London Stock Exchange, we are a FTSE 250 company, headquartered in Solihull, employing 1,360 people.
Established in 1985, we originally focused primarily on buy-to-let mortgages but since gaining our banking licence in 2014, not only have we
expanded our operations in buy-to-let, we have also extended into a wide range of commercial lending markets and service a range of consumer
loan portfolios through our subsidiary, Idem Capital. New lending is funded principally through an online personal savings operation and our
vision is to be the UK's leading specialist banking group, meeting the needs of UK consumers and businesses.
Operating model
Paragon’s operations are organised into three divisions, each with responsibility for achieving asset and profit growth, with new lending funded
largely by retail deposits. These are supported by the Group through the provision of capital to underpin growth and, where appropriate, with
central services including loan servicing, marketing, information technology and legal support. This operating model comprises local specialism
with strong centralised resources enabling economies of scale to be achieved and centres of excellence to be developed.
Mortgages
Commercial Lending
Idem Capital
Buy-to-let mortgage finance for
landlords operating in the UK’s
private rented sector. We also
offer a range of second charge
mortgage products.
A range of asset-backed loan
products for consumers and
SMEs operating across a number
of markets.
Acquisition and servicing of
UK loan portfolios.
• £10.3 billion loan assets
•
•
Over 62,000 buy-to-let
loan accounts
3.7% of all new buy-to-let
mortgages in the UK
•
•
£1.5 billion loan assets
•
Over 79,000 customer accounts
£43.8 million profit segment
Read more about Mortgages
on page 16
Read more about Commercial
Lending on page 18
Read more about Idem Capital
on page 20
Funding
New lending funded principally from retail savings balances,
complimented by a core expertise in wholesale funding.
Read more about Funding on page 21
PAGE 12 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Building a specialist bank
In 2014 we launched a strategic transformation from a monoline lender to a diversified, specialist bank.
Paragon Bank established and first savings accounts opened
2014
Launch of three lending product lines
New lending in buy-to-let mortgages increased by 82%
Paragon re-enters motor finance market
2015
Paragon enters the SME finance market with the acquisition of Five Arrows Leasing Group
Savings deposit base grows to more than £700 million
Purchase of Premier Asset Finance, one of the UK’s leading asset finance brokers
2016
Launch of property development finance proposition
Paragon Bank launches ISAs
Paragon Bank PLC moves into profit
2017
2018
Transition into fully integrated banking group complete and Paragon Group of Companies PLC becomes
Paragon Banking Group PLC
Reorganisation of the Group into three operating units
Began offering finance to the legal profession with the acquisition of Iceberg
Launch of Group’s first structured lending facilities
Acquisition of Titlestone accelerated progress of the Group’s development finance offering
Savings deposits exceed £6 billion
2019
Specialist landlords account for almost 90% of all new buy-to-let lending
Commercial Lending portfolio increased by 28.1%
PAGE 13 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Our business model and strategy
We help individuals and small businesses across the UK prosper and grow by focusing on customers in markets typically underserved by
larger high street banks. We see specialisation as what makes us different, as our competitive advantage, and we seek to know more than
our competitors about our customers and the markets in which we operate, the products and services we offer, and the risks we incur.
Our strategy is to build a specialist bank for our customers, which delivers sustainable growth and shareholder returns through a low risk and
robust model.
Our strategic priorities
Specialisation
Diversification
Growth
Focussing on
building strong
positions in our
chosen markets
Developing our
range of savings and
lending products in
existing and
new markets
Seeking
opportunities for
growth, both
organically and
through acquisition
Capital
management
Recycling capital
to reinvest in the
business and provide
shareholder returns
Sustainability
Ensuring our operations
have a positive effect
on our stakeholders and
communities with which
we interact
Our key differentiators
1
2
3
4
Customer expertise
We have a deep understanding of our customers and
their markets, designing products to meet their needs
and continually striving to exceed their expectations.
500 million items of customer data
analysed each month
Risk management
We lend conservatively, based on detailed credit
assessments of the customer and underlying loan
collateral, to minimise the risk of non-payment and
portfolio losses.
Cost of risk 0.07%
Cost control
Distributing loan products principally via third party
brokers, collecting savings deposits online and
operating mainly from a centralised location means we
run a cost efficient business.
Underlying cost:income ratio 42.1%
Our people
We are committed to helping all our employees reach
their potential and recognise the importance of
diversity, thereby maintaining a skilled and engaged
workforce.
Gold Investors in People accreditation
PAGE 14 • Strategic Report
5
6
7
8
Technology
We are utilising technology to improve productivity
and access new markets, and are well placed to take
advantage of digital changes to enter new markets.
Intermediary portal for online applications
launched in 2019
Management expertise
An experienced management team with a
through-the-cycle track record.
16 years average length of service for
executive management team
Culture
Eight core values underpin the way we do business
and how we interact with our customers and other
stakeholders, with a focus on treating customers fairly.
91% of employees feel Paragon has clear
values1
Strong financial foundations
Efficiently utilising capital and debt positions to
maintain balance sheet strength.
Underlying RoTE 14.6%
1Investors in People report, 2019
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Creating value
This approach enables us to create value for all
our stakeholders
A broad funding base…
The Group funds its assets using a variety of
sources, including retail deposits, securitisation
and bond issuance. It takes care to secure
competitive funding over an appropriate term
to underpin its assets, cover working capital
requirements and maintain a strong financial
position.
See page 21
…lending on diversified loan assets…
The Group focusses on building its asset base by
originated new loans, developing new products,
diversifying into new markets and acquiring loan
portfolios.
See pages 16 to 20
…generating growing income…
The Group generates income from interest and
fees earned on its mortgage, consumer and SME
loan assets. It also earns fees from third parties
for administering similar loans on their behalf.
…underpinned by a customer focused culture,
based on eight core values, and an engaged,
skilled and diverse workforce.
Our values
Fairness
Commitment
Professionalism
Creativity
Integrity
Teamwork
Humour
Respect
Shareholders
See page 38
Creating long-term shareholder value through growing
profits and dividends
21.2p dividend per share
Customers
See pages 16 and 18
Providing tailored lending products, expertise and working
with intermediaries to help our customers achieve their
lifestyle ambitions
+65 Net promoter score for savings account opening1
Employees
See page 56
Helping all our people develop their career and reach
their potential
Average training per employee in 2019: 6.9 days
(CIPD average 2.8 - 3.3 days)
Society
See page 62
Helping the UK economy grow and supporting the
communities in which we operate
Charitable contributions of £24,200 in 2019
Environment
See page 58
Continually reducing our environmental impact and
designing products that support positive environmental
change
100% of electricity used by sites we are responsible
for was from renewable energy sources in 2019
1Net Promoter Score of +65 for savings account opening process based on online survey of 3,900 savings customers between 1 October 2018 and 30 September 2019
PAGE 15 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Mortgages
We offer residential mortgages, with buy-to-let finance for landlords operating in the UK’s Private Rented Sector (PRS) being our largest
market. We were one of the first lenders to pioneer buy-to-let lending and, since 1996, we have originated £22.9 billion of buy-to-let
accounts. In the year to 30 September 2019, we provided 3.7% of all new buy-to-let mortgages in the UK.
Our customer-focussed approach, combined with our expertise in property valuation and risk assessment, helps us support a wide range
of customers, especially landlords with large-scale property portfolios, those investing in complex properties and those operating in
corporate structures.
The UK’s PRS provides a vital social function, delivering accommodation for people who want the flexibility that renting provides, as well as those
who cannot afford to buy and need the security of a stable home. Paragon supports socially responsible investment in the PRS by promoting
high standards in accommodation, ensuring minimum energy efficiency levels, supporting professionalism in the landlord community, and
working with industry and government to improve the sector.
Raising service standards
We survey mortgage intermediaries and customers on a systematic basis to
identify areas for improvement. This year, acting on intermediary feedback,
we refined our mortgage application process by making a number of simple
but significant improvements. As a result, intermediaries are now four times
more likely to recommend Paragon to a colleague or a friend.
+60
Net promoter score1
September 2019
The underwriter was very good. Everyone I spoke to was
helpful. I felt common sense was applied and it was a very
good experience...
Intermediary feedback, July 2019
1Net Promoter Score for buy-to-let mortgages at offer stage, based on telephone survey of 1,220 intermediaries between 1 October 2018 and 30 September 2019
PAGE 16 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Market drivers
The UK’s PRS has more than doubled in size since 2000. Today, it
comprises 4.5 million households, almost 20% of the total1. After
owner-occupation, renting in the PRS is the second most common
housing tenure in the UK. Economic, social and demographic changes,
together with the flexibility that renting provides, have combined to make
renting in the PRS an increasingly popular choice.
Housing tenure
The PRS makes up 20% of the English housing market
Owner-occupiers
Private renters
Social renters
17%
Factors driving demand for PRS accommodation include:
•
Low investment in social housing
• Mortgage affordability constraints
• Population growth
• Rising participation in higher education
• A tendency to settle down later in life
• Changing housing needs
Source: English Housing
Survey 2018
20%
63%
In the lettings market,
the latest set of results…
are indicative of demand
from prospective tenants
rising firmly for an eighth
month in a row...
Source: RICS UK Residential Market Survey, September 2019
Market trends
•
•
•
UK buy-to-let mortgage lending totalled £41 billion2 in 2018,
providing funding for approximately 35% of PRS homes
lending growth following the
After strong year-on-year
financial crisis, tax changes for landlords announced in 2015
have resulted in more moderate growth
Buy-to-let underwriting changes introduced in 2017 which
larger-scale,
encourage more detailed underwriting for
portfolio landlords have also re-shaped the market, with
specialist lenders like Paragon better equipped to service
this segment
Market outlook
•
•
•
Despite strong historic growth in the PRS, commentators forecast a further 1.2 million rental homes will be needed by 20233 to keep pace
with tenant demand
Landlords are continuing to invest in rental homes in the PRS but, given the tax changes, investment is more selective
Evidence suggests larger-scale landlords are three times more likely to buy property than their smaller-scale counterparts4 and Paragon is
well-placed to grow its market share in this segment. At the year end, 91.4% of the buy-to-let pipeline was with specialist landlord customers
1MHCLG, English Housing Survey 2017-2018 2UK Finance 3Knight Frank, Multi-housing 2019 - PRS Research 4Paragon, PRS Trends Survey, Q2 2019
PAGE 17 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Commercial Lending
Our Commercial Lending division helps small UK businesses develop, in turn supporting the UK economy. We also help fund the UK’s much
needed expansion in housing and encourage investment in cleaner technologies to reduce the country’s environmental footprint.
We provide finance to SMEs and small corporate customers operating in a wide range of commercial lending markets, as well as motor finance
to UK based consumers. We focus on specialist assets and underserved markets in four main areas:
SME lending
A range of finance solutions for SMEs covering a wide array
of sectors, including agriculture, aviation, construction,
commercial vehicles and business equipment
Development finance
Competitive and flexible financing solutions targeted at
experienced property developers
Structured finance
Finance for non-bank specialist lenders, either through
wholesale funding or block discounting
Motor finance
Finance through approved intermediaries and dealers for
cars, light commercial vehicles, motorhomes and caravans
Broker perceptions
During 2019 we undertook research with
our brokers to understand how Paragon is
perceived in the SME lending market and
to identify potential further opportunities
for improvement.
The results highlighted strengths including
clear pricing and structure, flexibility, strong
relationships and consistency of decision
making, but identified opportunities
to improve speed of processes and
communication, and address variability
of experiences.
Documents are now available online
which should speed things up.
They’ve been very easy to deal with…
professional, responsive – especially
over the last couple of months.
Clearer on pricing, documentation and
underwriting appetite.
Broker feedback, May 2019
PAGE 18 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Market drivers
The commercial lending markets are broad and Paragon is focussed
on specific asset classes. The general economic conditions within the
UK influence activity in these markets and other key drivers include:
•
•
•
•
•
The UK property market and rate of housebuilding driving the
opportunities for development finance
The rate of new work
construction
in commercial
industries such as
Uncertainty around the UK’s economic future impacts buyer
confidence and therefore our direct B2B and B2C lines, such as
aviation and vehicle finance
Advances in technology and SME growth continue to open up
funding opportunities for our asset finance business
Environmental concerns and the drive towards fuel efficiency
prompting increased demand for lower emissions, and hybrid and
electric vehicles
Market trends
•
•
•
•
•
•
The asset finance market grew by 7% in the year ended
30 September 20191
The latest annual asset finance new business total (twelve
months to September 2019) reached a record level of
£33.2 billion1
Housebuilding in England continues to fall well below the
Government’s target of 300,000 new homes per year
In the year ended 30 September 2019, new business in
the Commercial Vehicle finance market was 14% higher
than the same period in 20181
Finance for new construction and agricultural equipment
is relatively stable1 but recent reports show a sharp drop
in new construction work3
In the year ended 30 September 2019, motor finance new
business grew by 3% in value1
Market outlook
•
•
•
•
The British Chambers of Commerce forecast 1.2% growth in GDP in 2019, 0.8% for 2020, and 1.2% for 2021
A marginal 0.7% rise in new car finance is forecast for 2019, with growth forecast to revive to 2.7% in 2020 as uncertainty around Brexit
recedes2
One million new electric vehicles ('EVs') are forecast to be sold in the UK by 2025 and 11 million by 2040 with consumers increasingly likely
to purchase EVs over conventional vehicles
The outlook for construction work remains among the weakest since 2012 as clients respond to economic and political uncertainty3
1FLA, November 2019 2Oxford Economics, October 2019 3IHS Markit/CIPS UK Construction Total Activity Index
PAGE 19 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts£ billion201520142013201220112010200920162017201820195101520403530250UK asset finance originationsSource: FLAEquipmentCarsOtherPlant & MachineryCommercial VehiclesNumber of dwellings2003-042004-052005-062006-072007-082008-092010-112009-102011-122012-132013-142014-152015-162016-172017-182018-1950,000100,000150,000350,000300,000250,000200,0000New homes completedSource: MHCLG - House building: permanent dwellings completedEnglandGovernment target Idem Capital
Idem Capital is a leading UK loan purchaser, acquiring and servicing
portfolios which include products such as leases, motor finance
agreements, mortgages and unsecured loans. In addition, we offer
servicing of loan portfolios for clients including banks, private equity
houses and specialist lenders.
We acquire loan portfolios from financial institutions that are either
restructuring or refocussing their activities and focus on the acquisition
and servicing of paying (either fully or semi-performing) accounts. Idem
Capital does not actively compete to acquire non-paying portfolios.
Shift towards performing loans
Performing loans
Discounted purchases
n
o
i
l
l
i
m
£
700
600
500
400
300
200
100
0
2015
2016
2017
2018
2019
79,000
customers
We target those portfolios where the most benefit can be
derived from our core credit profiling and administration
skills, focussing on disciplined analysis and evaluation of
portfolio cash flows on potential acquisitions. We seek to
make purchases which will augment the Group’s organic loan
originations.
Idem Capital has managed more than one million customer
accounts and we are proud of the reputation we have
established for customer service. We assist our customers in
managing their accounts and strive to create fair, affordable
and sustainable repayment solutions.
PAGE 20 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and AccountsLoans secured on propertyIdem Capital loan portfolio by valueMotor financeUnsecured loans56%34%10%
Funding
The Group’s principal source of funding for new lending is its range of savings products offered to UK households where the Group seeks to
offer simple understandable products at competitive rates. Other funding for lending is derived from the efficient use of Bank of England
funding schemes, while securitisation continues to fund much of the back book and is used tactically, including a major transaction in the
year. Central funding is provided through corporate and retail bonds.
Savings
Retail deposit balances form the mainstay of the Group’s funding,
with the capacity to support significant balance sheet growth.
The UK household savings market is £1.2 trillion, so provides a
deep and liquid source for the Group’s funding. Costs for this
funding remain low.
Paragon Bank offers a range of safe, simple and transparent Easy
Access, ISA, Notice and Fixed Term savings accounts. Our regular
survey of new savings customers demonstrates a high level of
satisfaction with our products and our online application process.
The online distribution process has been augmented during the
year by the addition of digital banking and wealth management
platform relationships.
Central bank funding
The Group uses facilities provided by the Bank of England under
the TFS, ILTR and FLS schemes to support lending growth. These
schemes provide cost effective funding so long as appropriate
targets are met.
Wholesale funding
The Group has a core expertise in securitisation and other debt.
Securitisation and other wholesale debt markets are accessed on
a tactical basis, when appropriate.
launched
The Group
its first SONIA referenced mortgage
securitisation in the period consolidating its position as one of the
main issuers in the market.
£29,000
average deposit
180,000
customers
+65
Net promoter score for
savings account opening1
£364.3
million raised
in the year
1Net Promoter Score of +65 for savings account opening process based on online survey of 3,900 savings customers between 1 October 2018 and 30 September 2019.
PAGE 21 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A2.2 Principal risks
There are a number of potential risks and uncertainties to which the Group is exposed and which could impact significantly on its ability to
conduct its business successfully. These are summarised below.
Category
Business
Risk
Economic
Concentration
Transition
Credit
Customer
Description
The Group could be materially affected by a severe downturn in the UK economy,
as its income is wholly derived from activities within the country. The likelihood of
this occurring has become more difficult to forecast given the continuing material
uncertainties regarding the UK’s withdrawal from the European Union (‘EU’), and the
unstable UK political climate.
A material downturn in economic performance could reduce demand for the
Group’s loan products, increase the number of customers that default on their
loans and cause security asset values to fall.
The Group’s business plans could be particularly affected by any material change
in the operation of the UK private rented sector and / or further regulatory
intervention to control buy-to-let lending.
Failure to manage major internal reorganisations or integrate acquired businesses
safely and effectively could adversely affect the Group’s business plans and
damage its reputation.
Failure to target and underwrite credit decisions effectively could result in
customers becoming less able to service debt, exposing the Group to unexpected
material losses.
Counterparty
Failure of an institution holding the Group’s cash deposits or providing hedging
facilities for risk mitigation could expose the Group to loss or liquidity issues.
Conduct
Fair outcomes
Operational
People
Systems
Regulation
Liquidity and Capital
Funding
Failure to deliver fair outcomes for its customers could impact on the Group’s
reputation, its ability to meet its regulatory obligations and its financial
performance.
Failure to attract or retain appropriately skilled key employees at all levels
could impact upon the Group’s ability to deliver its business plans and strategic
objectives.
The inability of the Group’s systems to support its business operations effectively
and / or guard against cyber security risks could result in reputational damage and
financial loss.
Given the highly regulated sectors in which the Group operates, compliance
failures or failures to respond effectively to new and emerging regulatory and legal
developments could result in reputational damage and financial loss.
If access to funding became restricted, either through market movements or
regulatory intervention, this could result in the scaling back or cessation of some
business lines.
Capital
Proposals by the PRA, EBA, and EU to implement changes in the Basel Capital
Regime, including changes affecting lending secured on residential property could
have adverse financial implications for the Group.
Market
Interest rates
Reduction in margins between market lending and borrowing rates or mismatches
in the Group balance sheet could impact profits.
Pension Obligation
Pensions
The obligation to support the Group’s defined benefit pension plan might deplete
resources.
The Group has considered and responded to all of these risks, mitigating the exposure as far as is practicable to ensure that its risk profile
remains within the Board’s stated risk appetite. These risks are discussed in more detail in Section B7.5.
PAGE 22 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A3
Chief Executive’s review
Nigel Terrington, Chief Executive
Strong lending growth was
achieved across the Group’s
businesses, with total new lending
of £2,532.4 million, an increase of
8.5% on the previous year...
A3.1 Strategy review
During the year ended 30 September 2019 the Group has maintained
its specialist lending strategy, growing its loan books and improving
margins whilst integrating new operations acquired or developed in
the previous year.
The Group supports the needs of its consumer and SME customers
and seeks to develop its presence in these markets through
a combination of specialist product design, distribution and
underwriting supported by an efficient operating platform and
resilient technology. The Group has an outstanding through-the-cycle
record in challenging markets with excellent risk metrics, reflective
of the cautious and prudent approach it takes to its risk appetite
alongside its highly effective operating model.
Our focus on risk and disciplined underwriting will not change
going forward, while our position in the markets we serve will allow
us to continue to deliver strong growth. A focus on the delivery
of our organic strategy being augmented by the expansion of our
proposition, where such developments provide an attractive risk and
return profile.
Lending
Strong lending growth was achieved across the Group’s businesses,
with total new lending of £2,532.4 million, an increase of 8.5%
on the previous year (2018: £2,333.2 million). Combined with the
disposal of the Group’s residual interest in the PM12 securitisation,
these
loan book 0.5% higher at £12,186.1 million at
30 September 2019 (2018: £12,127.8 million). More than half of this
balance is now represented by loans originated since Paragon Bank
was formed in 2014.
left the
Volumes within the Mortgages segment remained broadly stable,
with £1,564.4 million of advances and a portfolio acquisition of
£4.2 million (2018: £1,623.2 million), with the majority of the decrease
attributable to first charge owner-occupied business as the Group
refocussed its efforts in that area in the light of adverse market
conditions. Overall the mortgage segment loan book reduced by 1.2%
year-on-year to £10,344.0 million (2018: £10,473.5 million), including
the £24.0 million impact of IFRS 9 transition and the disposal of
£695.8 million of PM12 assets. The post-2010 buy-to-let portfolio
grew by 21.1% to £5,427.7 million (2018: £4,481.8 million).
Within the buy-to-let business the strategic focus remains on
specialist landlords who are becoming the core investors in the
UK private rented sector. The proportion of completions where
the customers were specialist
(operating through
corporate structures and / or running large portfolios) increased
from 79.3% to 88.8% of the total with a corresponding fall in
simple completions. This effect is also seen in the pipeline at
30 September 2019, with 91.4% of the £911.7 million total relating to
specialist cases (2018: £778.9 million with 87.8% specialist).
landlords
PAGE 23 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Commercial Lending advances increased by 36.3%, to £968.0 million, compared to the previous year (2018: £710.0 million). Within this:
•
The Group’s development finance operation, incorporating the Titlestone business acquired in July 2018, advanced £362.9 million
(2018: £136.8 million, £320.8 million on a proforma basis)
• Structured lending, launched in the second half of 2018 saw £49.7 million of new loans (2018: £40.6 million)
•
SME lending, including the Iceberg professions finance operation acquired in December 2017, advanced £406.5 million, 14.6% up on the
£354.7 million for 2018, at improved margins
• Motor finance lending reduced from £177.9 million to £148.9 million following a strategic focus on margin improvement
Overall, the Commercial Lending portfolio increased by 28.1% year-on-year to £1,452.1 million (2018: £1,133.2 million).
During 2018 the Group sold a material Idem Capital portfolio, recycling the capital generated to support the Titlestone acquisition which
generates attractive, sustainable growth and returns. This process has continued during 2019, where strong cash flow has continued to
amortise the Idem Capital balances. In the absence of new Idem Capital deals that generate an acceptable risk / reward combination, capital
has again been refocused to support growth in the Commercial Lending division.
Funding
The Group continues to pursue its flexible integrated funding strategy with the increase in lending balances funded principally through an
increase in the Group’s retail deposit balances to £6,391.9 million, 20.7% higher than the £5,296.6 million balance at the end of 2018. This
included increased diversification in the savings operation’s route to market, with presences developed on external wealth management
and digital banking platforms. Average pricing in the portfolio at 30 September 2019 was 1.81%, slightly higher than the 1.76% reported at
30 September 2018 but in line with the level at 31 March 2019. Retail deposits therefore represent a highly cost-effective and stable
funding source.
In wholesale funding, the Group:
•
•
launched its first SONIA referenced securitisation, raising £364.3 million through the Paragon Mortgages (No. 26) transaction
disposed of its residual interest in the Paragon Mortgages (No. 12) PLC (‘PM12’) securitisation, releasing £49.8 million of cash resources and
generating a profit of £9.7 million
•
closed out several other legacy transactions, releasing cash to the Group
Retail deposits represent the Group’s primary source of funding for new lending, whilst securitisation or other wholesale channels are used as
and when conditions in those markets are attractive, and terms are appropriate.
Results
Underlying profits (before the effect of fair value movements on hedging items and the gain on PM12) increased by 5.0% to £164.4 million, from
£156.5 million in 2018. Net interest income was 8.5% higher on an underlying basis at £278.4 million, 9.3% higher on a statutory basis, driven
upwards by both a higher net interest margin (‘NIM’) and year-on-year increases in loan balances.
The Group’s new mortgage lending delivers higher margins than its legacy, pre-2010 portfolio. Therefore, the run-off of the legacy assets and
their replacement with new loans enhances margins overall. Together with wider margins earned through the businesses within the Commercial
Lending segment, the Group’s new lending activities create a structurally improving margin. NIM in the period was 2.29%, compared to 2.21%
in 2018.
The Group has continued to hold strong levels of liquidity, both actual and contingent, during the period in response to the economic and
political uncertainties inherent in the UK’s Brexit process. Brexit has had a negative impact on sentiment across the Group’s markets during the
period and appears set to continue as the economic and political situation develops.
The Group’s cost:income ratio in the year on a statutory basis was 40.7%, compared to 37.8% in 2018. On an underlying basis (excluding
fair value movements and gains) the cost:income ratio was 42.1%, increased from 40.6% in the previous year. The cost base increased by
£13.3 million year-on-year, including a full year of costs from 2018 acquisitions, the increased outsourced costs of the larger savings book and
significant project-related costs (including expenses associated with the Group’s IRB application). The Group continued to make significant
investments in technology, developing systems to provide improved service offerings to its customers and enhance operational resilience, the
costs of which contributed to the increase in operational expenses in the period.
Careful cost management remains a key objective of the Group. Investments in new businesses, technologies and our IRB framework mitigate
against a near term reduction in the cost:income ratio, as does the amortisation of the Idem Capital portfolio. The Board still expects to achieve
significant operational leverage within the business, but now over the longer term.
The Group’s loan impairment costs are now reported under IFRS 9. The overall effect of the transition to the new standard was to increase the
opening provisions on the Group’s loan assets by £27.2 million and reduce equity by £22.2 million, net of tax, although these changes did not
impact the Group’s results for the period.
PAGE 24 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts IFRS 9, through its focus on expected loss levels rather than the incurred loss approach of IAS 39, accelerates provision for losses, increasing
profit and loss charges on growing books, such as many of the Group’s portfolios. The forward-looking calculation basis requires estimates to
be made of likely future economic conditions. During the year the Group adopted a more pessimistic weighting of the economic scenarios it
considers in its calculations, in response to the increased levels of economic uncertainty, which, under IFRS 9, will increase provision charges.
Despite these factors, the bad debt charge increased to £8.0 million in the period, compared to £7.4 million, on an IAS 39 basis, in 2018. The bad
debt charge was lower in the Mortgage division, but rose in Commercial Lending, reflecting its relative growth rate, and the consequent level of
provision on performing new loans required by IFRS 9.
Buy-to-let credit performance remained strong with arrears at 30 September 2019 at 0.18%, significantly less than the market average
(2018: 0.11%). Commercial Lending bad debt rates also increased slightly, although still represent a very small number of cases. Overall, our
behavioural scoring models, which act as a lead indicator of financial stress in the loan books, were stronger in all significant portfolios across
the period.
Throughout the year the UK interest rate outlook and capital markets were affected by Brexit-led macro-economic uncertainties, impacting on
fair value exercises carried out for accounting purposes at the year end. This created a charge of £15.1 million in respect of the revaluation of
derivatives held for hedging (2018: gain of £1.2 million) in the income statement and an increase in the pension scheme liability in the balance
sheet of £15.0 million since 30 September 2018, with, as a consequence, a reduction of capital.
This fair value adjustment, combined with the inclusion of a £28.0 million gain on the disposal of an Idem Capital portfolio in the 2018 result,
led to statutory profit before tax decreasing to £159.0 million from £181.5 million in 2018, with profit after tax reducing from £145.8 million to
£127.4 million, after provision for tax at a rate of 19.9% (2018: 19.7%).
This result translates to basic earnings per share (‘EPS’) on an underlying basis of 51.1 pence per share, a year-on-year increase of 6.0%
(2018: 48.2 pence per share) (Appendix A). On the statutory basis basic EPS reduced by 11.6% to 49.4 pence per share as a result of the fair
value losses in the current period and one-off gains in the prior year (2018: 55.9 pence per share). Underlying return on tangible equity (‘RoTE’)
at 14.6% (2018: 14.0%) continued to make progress towards the Group’s long-term target of over 15% (Appendix A).
Capital and distributions
The Group maintains a strong capital position, even after the reductions in equity from IFRS 9 and the revaluation of the pension
liability. On an IFRS 9 transitional basis, the Group’s CET1 capital ratio was 13.7% and its total capital ratio 15.9% (2018: 13.8% and 16.2%)
with the pension deficit reducing the ratio at 30 September 2019 by 20 basis points. The fully loaded CET1 and total capital ratios at
30 September 2019, excluding the IFRS 9 transitional capital relief were 13.4% and 15.7% respectively. The UK leverage ratio remained strong
at 6.7% on the transitional basis, 6.6% fully loaded (2018: 6.4%).
The Company’s dividend policy is underpinned by the principle of enhancing shareholder returns on a sustainable basis. The Board proposes a
dividend for the year of 21.2 pence for 2019, an increase of 9.3% from the 19.4 pence in 2018. This results in a dividend cover ratio of 2.33 times,
which is below the normal target of around 2.5 times but which reflects the scale of non-cash, fair value items in the 2019 results.
Following the PM12 residual sale the Company announced a share buy-back programme in July 2019, with £26.5 million (exclusive of costs)
having been invested by the year end. The Company will seek the normal shareholder approval at its February 2020 Annual General Meeting
(‘AGM’) to allow such programmes to take place in future if surplus capital becomes available.
The business has successfully pursued the strategy set out to investors, focussing on its specialist markets and maintaining a strong capital
and funding base. It is well placed to deliver further progress and provide sustainable returns to shareholders. Its operating model and wide
experience mean that the Group is positioned to respond quickly to the challenges, and to take advantage of the opportunities that will arise,
given changes in the broader operating environment.
A more detailed discussion of the Group’s performance is given below covering:
Lending review
A3.2
Funding review
A3.3
Capital review
A3.4
Financial review
A3.5
Operational review
A3.6
Lending, performance
and markets
Retail deposits and
wholesale funding
Capital management,
liquidity and
distributions
Results for the period,
assets and liabilities
Governance, people, risk
and regulation
PAGE 25 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
A3.2 Lending review
The Group’s operations are organised into three divisions, based on product type, origination and servicing capabilities. This organisational and
management structure has been in place throughout the year.
New business advances and investments in the year, together with the year end loan balances, by division, are summarised below:
Mortgages
Commercial Lending
Idem Capital
Advances and investments
in the year
Net loan balances
at the year end
2019
£m
1,568.6
968.0
-
2,536.6
2018
£m
1,623.2
710.0
83.4
2,416.6
2019
£m
10,344.1
1,452.1
389.9
12,186.1
2018
£m
10,473.5
1,133.2
521.1
12,127.8
The Group’s loan book increased by 0.5% in the year, with new lending 8.5% higher than in the previous financial year and total advances and
investments 5.0% higher.
A3.2.1 Mortgages
The Group’s Mortgages division offers buy-to-let first charge and owner-occupied first and second charge mortgages on residential property
in the UK. In all its offerings, it targets niche markets where its focus on detailed case-by-case underwriting, proven rating methodology, and
robust and informed approach to property risk differentiate it from mass market and other specialist lenders.
Housing and mortgage market
The performance of the UK mortgage and housing markets has remained subdued in the face of economic concerns arising from Brexit and
the wider economy. New mortgage approvals, reported by the Bank of England, in the year ended 30 September 2019, at £262.9 billion had
increased by only 2.6% from the previous year (2018: £256.3 billion), with remortgaging decreasing by 0.6% and house purchase mortgages
increasing by 4.9%. This level of transactions remains some 30.0% below the peak in the market when £375.8 billion of mortgages were
advanced in the year ended 30 September 2007. At the same time margins on mainstream mortgage lending have been squeezed as large
lenders seek to preserve volumes.
The Nationwide House Price Index reported negligible annual growth of only 0.2%, sharply reduced from the 2.0% seen in 2018, with London and
the South Eastern regions of England seeing a decline in prices, although house prices there remain close to their 2017 peak. Across England,
Nationwide report house prices only 17%, on average, higher than their level in 2007 with prices outside the South East, having appreciated less.
Growth has been at current levels for the past two years, with expectations of future increases remaining modest.
The latest survey data, as at 30 September 2019, from the Royal Institution of Chartered Surveyors (‘RICS’) UK Residential Market Survey,
confirms this subdued position with market confidence drifting downwards, and negative short-term expectations on demand and prices, with
some of this attributed to Brexit-related concerns amongst potential buyers. However, RICS expect some improvement in the longer term.
Buy-to-let and the private rented sector
The Group’s deep understanding and long-term experience of the buy-to-let mortgage market mean that it is well placed to serve the particular
needs of specialist landlord customers. The impact of regulatory and tax changes on landlords in recent years has led to lenders’ strategies
for buy-to-let polarising, with many large lenders not offering professional buy-to-let loans. This has left the Group amongst a small number of
specialist lenders addressing the professional buy-to-let mortgage market. UK Finance (‘UKF’) has observed that landlords with portfolios of
four or more properties comprise over a quarter of the buy-to-let lending market.
The private rented sector (‘PRS’) lettings market remains robust with RICS reporting both demand and rental levels increasing due to restricted
supply, partially as a result of amateur landlords seeking to exit the market in response to fiscal and regulatory changes over recent years.
However, the English Housing Survey for 2018, published in January 2019, continues to show the PRS representing around 19-20% of
households, as it has for the past five years.
These factors have led to an expectation of increasing rents, with RICS members predicting a 2% increase over the next twelve months,
accelerating to 3% per annum up to 2024. This follows average rent increases of 1.3% in the year ended September 2019, reported by the
Office of National Statistics (2018: 0.9%), with September data from ARLA Propertymark (‘ARLA’), the landlord’s trade body, showing 58% of
tenants witnessing rent increases in the year (2018: 27%). ARLA data also shows more tenants renting for longer periods. These factors should
benefit the Group’s customers and the affordability of their loans. However, reduced supply and increased rents may present difficulties for
tenants and those seeking rented accommodation.
PAGE 26 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Buy-to-let lending in the year remained stable with UKF reporting new advances of £39.9 billion, the same value as in the previous year. Much
of this activity represents refinancing by landlords, with 71.4% of new advances by value representing remortgages (2018: 70.4%). The trend
in favour of longer-term fixed interest rates has also continued, both across the industry and in the Group’s own lending, with over half of new
lending at rates fixed for five years. This trend is expected to reduce remortgage activity in the short-term as product maturity terms increase.
The numbers of new buy-to-let mortgages reported by UKF over the past four years are set out below.
Number of new buy-to-let mortgages
UKF
These overall movements do, however, conceal a more mixed picture, with smaller landlords less active while activity amongst specialist
landlords remains more positive.
The Group considers that its support for the PRS, through the buy-to-let mortgage market, contributes to housing provision for a significant
number of families and it seeks to use its position as a lender to drive up standards of housing provision through its interaction with its
landlord customers.
Lending activity
The Group’s new lending activity in the segment during the year is set out below.
Originated assets
First charge buy-to-let
First charge owner-occupied
Second charge
Acquired assets
2019
£m
2018
£m
1,480.5
1,495.5
11.9
72.0
1,564.4
4.2
1,568.6
56.5
71.2
1,623.2
-
1,623.2
Total mortgage originations in the Group reduced by 3.6% in the year. The majority of this decrease arose from owner-occupied lending,
where the offering was scaled back in the year. This reflects the Group’s focussed approach to balancing acceptable levels of risk and return in
lending decisions.
In addition to the loans originated a further portfolio of seasoned, largely performing, buy-to-let loans was purchased from a third party in
June 2019 for £4.2 million. This purchase was facilitated by the Idem Capital team but is reported within the Mortgages division as the assets
are similar to the segment’s other assets and administered by the mortgage servicing team.
PAGE 27 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and AccountsnumberQ4 2015Q1 2016Q2 2016Q3 2016Q4 2016Q1 2017Q2 2017Q3 2017Q4 2017Q1 2018Q2 2018Q3 2018Q4 2018Q1 2019Q2 2019Q3 2019PurchaseRemortgage50,00040,00030,00020,00010,0000 Buy-to-let
The Group’s buy-to-let
levels
(2018: £1,495.5 million). The pipeline of buy-to-let loans in process at the year end was £911.7 million, an increase of 17.0% on the position a
year earlier (2018: £778.9 million).
largely stable year-on-year, reducing by 1.0% from 2018
lending, at £1,480.5 million, remained
In the professional buy-to-let market the Group’s strategy of focussing on specialist customers (those operating through corporate structures
and those with larger portfolios) has delivered positive results. These are the customers best suited to the Group’s service model and this
targeting, coupled with a disciplined approach to underwriting and valuation, has enabled margins and retention rates to be increased while
providing the customers with a high standard of support for their business needs. The analysis of the Group’s new buy-to-let business by
customer type is set out below.
Buy-to-let advances
Corporate customers
Other specialist customers
Total specialist
Non-specialist
30 September
30 September
30 September
30 September
2019
£m
812.4
502.7
1,315.1
165.4
1,480.5
2019
%
54.9%
33.9%
88.8%
11.2%
100.0%
2018
£m
656.7
528.8
1,185.5
310.0
1,495.5
2018
%
43.9%
35.4%
79.3%
20.7%
100.0%
These advances show the impact of the concentration of buy-to-let activity among more professional investors, many operating through
corporate structures. This trend is set to continue into the next financial year, with 91.4% of pipeline cases relating to specialist landlord
customers (2018: 87.8%). Within this, the trend for portfolio landlords to incorporate their businesses, partly as a response to recent changes
in the tax regime for buy-to-let, also continued.
This trend can be seen in the analysis of the Group’s buy-to-let pipeline numbers over the last three years.
Percentage of specialist pipeline cases
Number outstanding at date
The Group seeks to mitigate exposure to climate change related issues which might impact on security values, through its lending criteria. This
includes ensuring that any property proposed as security generally has an Energy Performance Certificate (‘EPC’) rating of E or better (on a
scale of A to G), and considering any property’s exposure to flooding risk before it is accepted as security. A detailed review of the buy-to-let
loan book in the year indicated that less than 2.5% of security properties for which data was available were situated in postcodes with medium
or high flood risk.
The Group sources the majority of its new buy-to-let lending through specialist intermediaries and significant investment has been made to
ensure they receive excellent service. It was therefore gratifying that in feedback from intermediaries in the period, 84% were satisfied with
the process of arranging a loan offer, delivering a net promoter score at offer stage of +60. Continued improvement is expected in the coming
financial year as intermediaries and customers benefit from the Group’s investment in its service proposition and the enhanced technology to
support it.
PAGE 28 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accountspercent31 March 201730 September 201731 March 201830 September 201831 March 201930 September 2019CorporateOther specialist1009080706050403020100 Other mortgage lending
The division’s other first and second charge mortgage lending has been carefully managed to ensure that only lending with appropriate risks
and returns is undertaken.
The Group’s second charge mortgage lending has increased marginally by 1.1% during the year, but remains at modest levels. The second
charge market is currently not large, with total lending in the financial year reported by the Finance and Leasing Association (‘FLA’) of
£1,207 million (2018: £1,031 million). However, much of the increase has come from sub-prime activity, which falls outside the Group’s risk
appetite. The Group seeks to target only that population of customers with the strongest credit quality in this area, avoiding any form of
sub-prime business, which necessarily limits the addressable market for second charge lending.
In residential mortgage lending, margins have been generally compressed and the Group has maintained credit discipline at acceptable
yields, meaning that the amount of new business has fallen. The opportunities for the Group in this area principally relate to highly specialised
propositions, where the Group’s operational approach can be beneficial, including lending to the existing specialist landlord customer base. In
the short-term only small volumes of lending are expected in this area.
Performance
The outstanding loan balances in the segment are set out below, analysed by business line.
Post-2010 assets
First charge buy-to-let
First charge owner-occupied
Second charge
Legacy assets
First charge buy-to-let
First charge owner-occupied
30 September
30 September
2019
£m
5,427.7
68.3
171.6
5,667.6
4,674.2
2.3
10,344.1
2018
£m
4,481.8
59.4
141.3
4,682.5
5,779.8
11.2
10,473.5
At 30 September 2019, the balance on the Group’s mortgage portfolio was 1.2% less than a year earlier, with £695.8 million of the reduction
being due to the PM12 disposal. Excluding movements in the PM12 portfolio in the year, the mortgage book grew by 6.2%. Within those amounts
the post-2010 buy-to-let book grew by 21.1%.
The annualised redemption rate on post-2010 buy-to-let mortgage assets at 10.7% (2018: 16.7%), has reduced from the high level seen in
2018. This higher level of customer retention is a result of the extending profile of product maturities and the changing focus towards specialist
landlord customers. The annualised redemption rate on pre-crisis lending, at 6.7%, is similar to that seen in the year ended 30 September 2018
(2018: 6.0%), reflecting the pricing of those loans relative to current market offerings.
Arrears on the buy-to-let book as a whole have marginally increased in the year to 0.18% (2018: 0.11%), with arrears on post-2010 lending
standing at 0.03% (2018: 0.01%). These arrears remain very low compared to the national buy-to-let market, with UKF reporting arrears of
0.42% across the buy-to-let sector at 30 September 2019 (2018: 0.42%). This strong performance reflects the Group’s focus in underwriting
on the credit quality and financial capability of its customers, underpinned by a detailed and thorough assessment of the value and suitability
of the property as security.
Second charge arrears increased to 0.38% from 0.21% in the year, as the book continues to season, with performance remaining strong, while
the new residential lending has yet to see any arrears, although the loans are still comparatively unseasoned.
The Group’s receiver of rent process for buy-to-let assets helps to reduce the level of losses by giving direct access to the rental flows from
the underlying properties, while allowing tenants to stay in their homes. At the year end, 683 properties were managed by a receiver on the
customer’s behalf, a reduction of 11.3% since 2018 (2018: 770 properties) as cases on the old book resolve and post-2010 cases perform well.
Outlook
The Group has established a significant market position in specialist buy-to-let which offers good prospects for future earnings and profitability,
though significant expansion of volumes is not anticipated in the year ending 30 September 2020.
Although the general UK economic outlook remains uncertain, the underlying metrics within the PRS are more positive for the Group’s landlord
customers, with market commentators largely positive. The Group is also confident that its robust approach to valuation and the loan to value
coverage in its buy-to-let book, at 67.3% (2018: 65.7%) provide significant security in the event of a downturn.
PAGE 29 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Looking forward, the Group intends to broaden its offerings to its core professional landlord customers and the intermediaries supporting them
to provide both an enhanced service and additional products tailored to their needs. Despite the political uncertainties, professional landlords
continue to develop their businesses and expand their portfolios. With the PRS representing a fifth of households, professional landlords are
vital to the UK’s housing provision and the Group sees significant business opportunities in providing them with the financial support that
they require.
A3.2.2 Commercial Lending
The Group’s Commercial Lending division’s focus is to support UK SMEs and small corporates through the provision of various financing
solutions. The division has seen significant levels of investment since 2015 through both acquisition and organic business growth.
The proposition is delivered through four key business lines: SME lending, providing finance leasing for business assets and unsecured cash
flow lending to professional services firms amongst other products; development finance, including the operation acquired in 2018; structured
lending; and motor finance.
The asset leasing market in the UK is substantial, covering some £79.3 billion of outstanding balances at 30 September 2019
(2018: £75.8 billion) and £33.2 billion of advances in the year then ended (2018: £30.1 billion) according to FLA data. However, a large proportion
of this business is commodity lending in the hands of a small number of very large finance houses. It is the Group’s strategy to target niches within
this market where its particular skill sets can be best applied, and its capital effectively deployed to optimise the relationship between growth, risk
and return.
The Group’s commercial lending offerings target markets where there has historically been a shortage of credit, such as its development
finance business which primarily supports smaller housebuilders, whose difficulties in funding new-builds have been widely reported, and
the structured lending business which funds small non-bank lending operations. In each of these markets the Group’s competitors are other
smaller banks and similar sized lenders. They are markets in which the largest lenders have little presence, creating a credit availability issue for
customers and significant opportunities for the Group.
The division’s businesses comprise specialist teams, developed internally or sourced externally to provide bespoke focus to their respective
markets. This was highlighted in the year when the Group’s SME lending business was named as ‘Best Commercial Lender’ at the 2019 Lending
Awards and ‘Best Specialist Finance Solutions Provider’ in the SME News Magazine’s 2019 UK Legal Awards, while being shortlisted in several
other categories. Also at the Lending Awards, the structured lending business was named ‘Best Specialist Commercial Lender’ for 2019.
The common themes of these business lines are a deep understanding of their markets and their customer needs together with expertise in
security valuation, collections and asset recovery. In common with the rest of the Group, the division’s focus is on the maintenance of strong
credit standards and it does not pursue business volumes at the expense of margins.
Lending activity
A deceleration in global economic growth and continued political uncertainty in the UK during the year have had an adverse impact on UK
business investment, however this has not led to a reduction in the Group’s volumes.
The Group’s focus across all the Commercial Lending business lines in the year has been on growing the scope of its operations to address a
wider range of funding propositions for SME customers, while enhancing service, maintaining credit discipline and improving yields.
The SME leasing operation has strengthened its position in core hard-assets and expanded into soft-asset financing. The Group’s development
finance and structured lending businesses have also increased their scope.
The UK government retains its target of delivering 300,000 new homes by the mid-2020s, which will require a significant uplift in current
construction levels (in 2017/18 222,000 new homes were built), providing opportunities for the Group’s customers in the construction and
property development fields.
The Group’s Commercial Lending exposure has increased overall by 28.1% in the year to £1,452.1 million (2018: £1,133.2 million). The new
lending activity in the segment during the year is set out below.
2019
£m
362.9
406.5
49.7
148.9
968.0
2018
£m
136.8
354.7
40.6
177.9
710.0
Development finance
SME lending
Structured lending
Motor finance
PAGE 30 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Development finance
The Group’s development finance business was significantly expanded by the acquisition of Titlestone in July 2018. The period since then has
been positive with the Group’s organically developed activities being integrated with the acquisition to deliver operational efficiencies, and the
focus of the combined business refined.
The Group’s target customer in this market is a small to medium sized developer of UK residential property. The projects funded have an average
size of approximately £5 million and are generally focussed on the more liquid parts of the residential market, avoiding developments with high
unit values. While the business has been concentrated in the South-East of England to date, with 51.7% of balances at 30 September 2019
located in London and the South-East, the Group’s strategic objective is to lend more widely across the UK. Central London property hot-spots
have been largely avoided.
Activity in the Group’s target market has held up well in the year, with enquiry levels consistent with previous periods. However, economic
uncertainty has led to some developers taking longer to commence projects and there has been additional caution amongst larger scale
developers, evidenced in lengthening periods between facility agreement and the first drawdown.
The successful combination of the Group’s original Paragon Development Finance business with Titlestone has seen lending volumes increase
from £136.8 million in 2018 to £362.9 million in 2019. However, the 2018 figure only includes post-acquisition advances. On a proforma,
like-for-like basis, the 2018 volumes were £320.8 million. The underlying £42.1 million (13.1%) increase represents the distribution benefits from
the combination and the maintenance of the Group’s strong credit standards in this market.
Prospects for the new financial year remain encouraging, with undrawn amounts on live facilities at 30 September 2019 of £294.8 million
(2018: £215.2m) and a post-offer pipeline of £160.9 million (2018: £151.5m), a large proportion of which would be expected to flow in to future
completions. Market fundamentals remain strong, albeit tempered by short-term economic anxieties, and the Group’s extensive property
experience can be used to leverage future growth.
SME lending
The SME lending operation has strengthened its position in its core hard-asset leasing market during the period and sought to expand its
soft-asset offering. It has maintained its focus on margins and sought to support its business levels through strong customer relationships and
service standards.
Business generation has benefitted from an enhanced proposition and operational efficiencies arising from increasing centralisation
of operations at the Group’s SME lending hub in Southampton. New loan volumes in the leasing business have grown by 11.4% compared
to 2018, reaching £288.7 million (2018: £259.2 million). A further £11.6 million of operating lease assets were also acquired in the year
(2018: £19.3 million).
The short-term professions finance business, which includes the Iceberg operation acquired in December 2017, grew broadly in line with
expectations during the period.
As part of the centralisation process significant investments have been made in technology, while the sales teams have also been strengthened
across the various specialist areas of the business. These developments form the first phase of a programme of business enhancements which
will sustain growth into the future.
Structured lending
The Group’s structured lending business, which made its first loans in the second half of 2018 has made further progress in the year. The
structured lending unit provides senior debt to the UK non-bank lending market and deploys loans to help support ‘best-in-class’ businesses
working across consumer and commercial lending. Transactions are structured using established and robust methodologies and secured on
underlying assets, with a substantial amount of over-collateralisation. The business addresses certain segments where the Group may be
under-weight or has no exposure at all and where working with a recognised industry expert is preferable to organic expansion.
The team, which has built a solid reputation in the market, expanded in the year, allowing more prospects to be addressed. The structured
lending business generally has a longer pipeline than other operations, with detailed negotiations required before a new loan can be agreed.
There are now eight transactions in place, compared to three at the previous year end, with more prospects at various stages of development.
The deals currently in progress are expected to provide further lending into the new financial year, while the business as a whole has good
prospects for further expansion.
Motor finance
The Group continues to target its motor finance offerings on those specialist propositions which are not addressed by the mass-market lenders
who control the majority of the market. This limits the potential to grow market share and the level of advances in 2019 has been below that
achieved in 2018, in part due to a continued level of new business pricing discipline. The Group has reviewed its business model for motor
finance following the publication of the FCA’s review of the sector. It has identified the changes required by the FCA’s proposed new rules and
considers that is well placed to comply, compared to other market participants.
Across all business lines growth has been carefully controlled with credit quality and margins prioritised over expanding lending volumes and
care has been taken to focus effort on those sectors or subsectors of the market most suited to the Group’s business model and most likely to
provide it with a good return on capital.
PAGE 31 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Performance
The outstanding loan balances in the segment are set out below, analysed by business line.
Asset leasing
Professions finance
Invoice finance
Unsecured business lending
Total SME lending
Development finance
Structured lending
Motor finance
30 September
30 September
2019
£m
492.2
46.2
18.5
19.3
576.2
506.5
88.1
281.3
2018
£m
403.4
42.6
21.8
17.3
485.1
352.8
38.7
256.6
1,452.1
1,133.2
Margins in the segment have remained strong and have reflected both the changing business mix and strategic initiatives to improve yields
across the main product lines.
Credit quality in the development finance book has been good, and the overall performance of the projects has been in line with expectations.
These accounts are monitored on a case-by-case basis by the Credit Risk function. At 30 September 2019 very few cases had been classified
by the monitoring process as being likely to result in a loss, beyond a small number of Titlestone accounts identified on acquisition and allowed
for in the purchase price and where refinements in fair values at the acquisition date have been reflected in the goodwill valuation during
the year.
The average loan to gross development value for the portfolio at the year end, a measure of security cover, was 64.8% (2018: 63.2%).
Credit performance on the division’s finance leasing portfolios remains stable, with arrears in asset leasing at 0.43% and motor finance at
1.27% (2018: 0.78% and 0.93% respectively). These compare favourably to those in the wider sector, with the FLA reporting average arrears
for business leasing at 1.10% and car finance at 2.70% at 30 September 2019 (2018: 0.70% and 2.50%).
Performance in the structured lending operation has been in line with expectations, with satisfactory pricing and no serious concerns with the
operation of any of the deals.
Outlook
The Commercial Lending segment has seen the greatest level of investment by the Group in the recent past, most notably through its acquisition
activity in the SME lending and development finance markets. The Group has demonstrated its ability to support the needs of underserved
customers in these important parts of the UK economy.
Whilst further bolt-on acquisitions to enhance existing operations remain a possibility, the Group’s focus, having integrated and embedded
the acquired elements into its core risk, operational and systems processes, is now to invest in technological, distribution and servicing
enhancements for its commercial lending activities, optimising its proposition to customers.
The division seeks to be responsive and flexible in addressing the SME market, but its UK focus means that it is exposed to a downturn in
business investment nationally. Overall, the Group has a good platform for continuing growth and increasing scale and diversity will enable a
better return to be generated from its resources, control framework and investments in systems.
A3.2.3
Idem Capital
The Group’s Idem Capital division includes its acquired loan portfolios, together with its pre-2010 legacy consumer accounts. Its strategic focus
is on the acquisition of more specialist loan portfolios where it can enhance value through leveraging the Group’s origination and collections
expertise and access to funding, and which will augment the organic origination activities of the Group. It uses its analytical skills base, which it
sees as a core differentiator, to identify and evaluate portfolios brought to market.
The division’s profitability relies on providing a high quality service to customers when collecting on acquired assets. Many of these borrowers
may have historically experienced financial difficulties, and its focus in collections activity is to generate fair outcomes for these customers,
while being mindful of potential vulnerabilities.
As part of the banking group it is able to deploy expertise in a wide variety of asset classes and access the systems development resource and
support functions of the wider business, enabling more complex portfolios to be addressed. It also has significant experience in working in
partnership, either as an investor or administrator, giving it access to transactions which may be unattractive on a standalone basis.
PAGE 32 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts As part of a wider Group, Idem Capital evaluates investments on the potential return which can be achieved on Group capital compared to
alternative opportunities in other divisions, imposing a bidding discipline on potential purchases, but is also not constrained to pursue volumes
in order to retain critical mass, as a monoline asset purchaser might be.
Overall, Idem Capital’s success rests on understanding assets, strong analytics, advanced servicing capabilities and the efficient use of funding.
New Business
The UK loan portfolio purchase market has remained active throughout the year despite the current levels of economic uncertainty, and the
Group has accessed all the significant tender processes in the period. However, conditions in the market are difficult, with levels of demand and
pricing remaining high, and several very large investors being prepared to accept returns on capital below those required by the Group.
In the face of these conditions the Group has maintained its disciplined approach to pricing and quality. It continues to target only those deals
where its wider capabilities in administration and funding can provide a real benefit to the project and where the projected return is attractive in
comparison to the other opportunities for the deployment of its capital.
During the period no new deals were completed which were subsequently included on the division’s balance sheet (2018: one deal) although the
Idem Capital team was active in facilitating the £4.2 million asset purchase undertaken by the Mortgages division in the year, as noted above. In
addition, the division undertook a limited number of reviews of opportunities that were ultimately not progressed.
Aside from these, the main focus of the business was on monitoring the performance of the extant portfolio and the integration of the
£83.4 million motor finance portfolio purchased towards the end of the previous financial year.
The Group believes that its ability to accurately evaluate a potential acquisition is a core strength and it is not willing to compromise on credit
quality or target return levels in pursuit of volumes. Idem Capital remains on the panels of all principal UK vendors.
Performance
The value of the loan balances in the segment are set out below, analysed by business line.
Second charge mortgage loans
Unsecured consumer loans
Motor finance
30 September
30 September
2019
£m
217.7
134.7
37.6
389.9
2018
£m
274.6
173.7
72.8
521.1
The reduction in balances is a result of the scale of collections from the brought forward loan portfolios, particularly the unsecured and motor
finance balances, together with some minor asset disposals. 120 month Estimated Remaining Collections (‘ERC’) on acquired consumer assets
reduced from £489.6 million at 30 September 2018 to £366.4 million at the year end, for the same reasons.
Overall collections from customers have held up well in the year, despite the generally negative economic forecasts for the UK. Whilst
the division’s second charge assets are over 10 years seasoned, offering resilience to any potential downturn, the unsecured assets are
less seasoned, and their performance will continue to be carefully monitored over the coming year.
Arrears on the segment’s secured lending business have risen slightly to 17.2% (2018: 15.8%), the increase arising from redemptions amongst
the better performing accounts in the year. These arrears levels remain higher than the average for the sector, but this reflects the seasoning
of the balances, and the inclusion of accounts which are currently making full monthly payments but had missed payments at some point in the
past. Average arrears for secured lending of 8.7% at 30 September 2019 were reported by the FLA (2018: 9.4%).
None of the division’s remaining portfolios at the year end were regarded as materially underperforming, with strong overall cash generation.
The Group monitors actual cash receipts from acquired portfolios against those forecast in the evaluation which informed the purchase price.
Up to 30 September 2019 such collections were 109.8% of those forecast to that point (2018: 109.7%).
The motor finance book acquired at the end of the previous financial year has been bedded in successfully, with collections currently ahead of
plan, resulting in a reduction of 48.4% in the carrying balance, year-on-year, and only 12.1% of remaining cases in arrears at the year end. The
success of this acquisition reflects the Group’s strategy of targeting more specialist portfolios.
Operational improvements have continued to be made in systems, processes and employment patterns which are expected to generate
operational efficiencies and improve both customer service and customer experience in future periods.
Outlook
The loan purchase market continues to offer opportunities for Idem Capital to invest in portfolios, either by itself or with partners, where its
ability to leverage the skill base of the wider group can generate good returns. These deals are likely to be larger, more idiosyncratic and less
frequently available than the average, which leads to an irregular flow of new accounts to the division.
PAGE 33 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The Group regards such investments as essentially opportunistic, and its firm belief is that the maintenance of strict discipline in this area is the
best route to delivering an appropriate return on its investments. The division is well placed to continue the effective management of its asset
base and to address appropriate business opportunities as they arise, however, in the absence of an acceptable return on investment, the Group
expects to focus its capital allocation on its other operating divisions in the near term.
A3.3 Funding review
The Group’s strategic funding objective is to maintain a diversified and sustainable funding base. It accesses differing mixes of funding options
from time to time to ensure that pricing and availability issues in any particular funding market can be mitigated, while maintaining the flexibility
to fund new business opportunities when required.
During the year the Group has continued to emphasise the central role of retail deposits within its funding mix. This has resulted in savings
deposits accounting for almost half the Group’s funding by the year end.
In the wholesale markets the Group issued its first SONIA referenced securitisation transaction, Paragon Mortgages (No. 26) PLC during the
year. It also disposed of its residual interests in the Paragon Mortgages (No. 12) PLC securitisation and repaid several other securitisation deals,
financing them on balance sheet.
In the uncertain economic climate, which has continued throughout the year, the Group maintained its policy of holding strong levels of
contingent liquidity and of holding larger cash balances than might otherwise be the case, with £872.1 million of cash available for liquidity and
other purposes at 30 September 2019 (2018: £962.9 million). Further contingent liquidity was provided by undrawn warehouse facilities of
£200.0 million (2018: nil) and assets pre-positioned to access Bank of England facilities. The contingent liquidity policy will be kept under review
in the light of the emerging economic and political environment.
The Group has also explored new routes to the savings market in the period in order to broaden its distribution, increase the market addressed
and create the capacity for more flexibility in its funding.
The Group’s funding at 30 September 2019 is summarised as follows:
Retail deposit balances
Securitised and warehouse funding
Central bank facilities
Tier 2 and retail bonds
Total on balance sheet funding
Off balance sheet central bank facilities
2019
£m
6,391.9
5,206.9
994.4
446.1
13,039.3
109.0
13,148.3
2018
£m
5,296.6
6,490.3
1,024.4
445.4
13,256.7
108.7
13,365.4
2017
£m
3,615.4
7,781.8
700.0
444.8
12,542.0
109.0
12,651.0
The Group’s funding has become increasingly diversified in the years following the authorisation of Paragon Bank in 2014. This is illustrated by
the chart below which shows, for each of the year ends since 2013, the outstanding funding balance by type.
Funding by type (£m)
30 September 2013 – 2019
PAGE 34 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts£ million2013201420152016201720182019SecuritisationTier 2 bondRetail bondCentral BankRetail deposits15,00010,0005,0000 The Group continues to hold both assets and liabilities where the interest rate is set by reference to LIBOR, which will be withdrawn in 2021. A
working group is in place to oversee a transition plan managing impacts on both sides of the balance sheet.
It is likely that a market consensus solution for LIBOR-linked instruments will emerge, which will then need to be implemented on a case-by-
case basis. The position with regard to LIBOR linked assets, where the Group has a substantial position relating to legacy mortgage lending
is likely to be more complex, with regulatory expectations playing a significant role. No new LIBOR-linked lending is undertaken without
specific contractual terms addressing replacement benchmarks. The Group continues to carefully monitor emerging regulatory and market
developments so that it minimises, as far as possible, any disruption on LIBOR withdrawal.
A3.3.1 Retail funding
Paragon Bank’s savings business provides customers with a range of deposit options, offering value for money and competitive rates, combined
with the protection provided by the Financial Services Compensation Scheme (‘FSCS’). While the business currently sources the majority of
deposits through its own website, it also has an increasing presence on wealth management platforms and is expanding to offer postal accounts.
Retail deposits continue to represent a reliable, cost-effective and scalable source of finance for the Group. The volume of retail deposits
has continued to grow significantly during the period, in line with the Group’s funding strategy, with balances at 30 September 2019, at
£6,391.9 million, having increased by 20.7% over the year (2018: £5,296.6 million).
The Group’s share of the overall UK savings market remains small, with opportunities identified to expand the franchise. Household savings
balances reported by the Bank of England increased by 3.7% in the year ended 30 September 2019 to £1,220.9 billion (2018: £1,177.3 billion),
although these deposits remain overwhelmingly with clearing banks and building societies. While this market position enhances the Group’s
funding flexibility, it does mean that rates may be influenced by the funding needs of other, larger, participants in the market, which are beyond
the Group’s control.
New entrants in the banking market have sought to access similar segments of the savings market as the Group, and therefore competition
for internet-sourced deposits has increased. However, the Group’s competitive position on pricing, products and service, has meant that it has
been able to achieve its required funding levels at attractive prices.
Savings balances at the year end are analysed below.
Fixed rate deposits
Variable rate deposits
All balances
Average interest rate
Average initial balance
Proportion of deposits
2019
%
2.02%
1.43%
1.81%
2018
%
1.94%
1.36%
1.76%
2019
£000
16
16
16
2018
£000
19
16
18
2019
%
65.0%
35.0%
2018
%
68.8%
31.2%
100.0%
100.0%
The average initial term of fixed rate deposits was 28 months (2018: 27 months).
Market rates for new easy access accounts and one year deposits reported by the Bank of England have increased year-on-year, with rates on
longer dated products falling, which is consistent with the picture shown above.
At 30 September 2019 the proportion of easy access deposits, which are repayable on demand, at 27.8% was a little higher than its level at the
beginning of the year (30 September 2018: 25.5%), and represented £1,778.0 million of the balance (2018: £1,349.2 million). This percentage
can be expected to rise going forward as the Group generates richer behavioural data to support its liquidity requirement assumptions for easy
access business.
PAGE 35 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The growth of the retail funding balance since the authorisation of Paragon Bank as a deposit taker in 2014 is shown below.
Retail deposits (£m)
At 30 September 2015-2019
The core route to market for the deposit proposition is through its online presence, with traffic driven by strong repeat business flows, organic
searches, a presence on price comparison websites and recommendations from industry savings experts. This has been enhanced in the period
by the launch of alternative deposit sources, such as investment platforms outside the main business flow.
The first of these alternative sources, the Hargreaves Lansdown Active Savings platform came on stream in November 2018, with further
relationships with Flagstone, a wealth management solution and Monzo, the digital bank, launched later in the year. These arrangements allow
the Group to access an additional customer base, as the platforms target different demographics to its online direct savings channel. The Group
will seek to develop such relationships further in future periods.
The Group’s products, process and approach have been recognised in the industry and by customers winning the ‘Best Monthly Interest
Provider’ award in the 2019 Moneynet awards, its second consecutive victory in this category. It was also named as ‘Best Online Cash ISA
Provider’ in the 2019 YourMoney.com Awards and ‘Best Savings Provider for Existing Customers’ in the 2019 Savings Champion awards.
In customer feedback 89% of those opening a savings account with the Group in the year who provided data, stated that they would ‘probably’
or ‘definitely’ take a second product (2018: 90%). The net promoter score in the same survey was +65, up from +61 for the 2018 financial year.
When customers with maturing savings balances in the year were surveyed 91% stated that they would ‘probably’ or ‘definitely’ consider taking
out a replacement product with the Group (2018: 90%) with a net promoter score at maturity of +53, up from +50 for the 2018 financial year.
This performance is particularly valuable to the Group, given the benefits of customer and deposit retention.
The Group’s outsourced administration platform continues to meet its needs and provides a cost-effective, stable and scalable solution in the
medium to long-term. The Group has a close relationship with the service provider through which it seeks to enhance both its offerings and its
customer service levels.
The size and diversity of the Group’s deposit base is expected to continue to expand, forming the principal funding source for new lending
activities. This will be driven through expanding distribution and developing the product range to serve additional customer groups. The
guarantee provided by the FSCS scheme is likely to reduce the potential for an economic downturn to impact liquidity and the profile of the
Group’s target customers suggests that they are likely to be more resilient than average in such circumstances.
Overall, the savings proposition provides the Group with a stable funding platform, with a focus on term funding to manage interest rate risk and
the ability to limit product availability to short periods of time, giving the funding channel flexibility and manageability. The additional routes to
market enhance this flexibility.
A3.3.2 Wholesale funding
The Group’s wholesale funding comprises securitisation funding, warehouse debt and retail and corporate bonds. It has been one of the principal
issuers of residential mortgage backed securities (‘RMBS’) in the UK over many years. Its Long-Term Issuer Default Rating was affirmed at BBB
by Fitch in the period, albeit with a negative outlook which was applied to all the major UK banks as a result of the uncertainty surrounding the
Brexit process. Fitch have stated that, all other things being equal, this would be removed in the event of a resolution.
The capital markets were largely quiet in the first six months of the period with rates less appealing than in previous periods. This was attributable
to two factors, the general economic environment in the UK and the impending withdrawal of the LIBOR reference rate, which has formed the
basis for interest charging on the majority of asset backed securities since the inception of that market. LIBOR is due to be withdrawn in 2021,
within the lifetime of a newly issued four-year security, and UK regulators have mandated the Bank of England Sterling Overnight Index Average
(‘SONIA’) to replace it.
No significant SONIA-linked bonds were issued before April 2019, with much of the market waiting for a standard approach to emerge. However,
the first issuers came to market after that point and the levels of pricing and liquidity returned to a more normal level for the rest of the year,
despite the general economic pressures.
PAGE 36 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts£ million201520162017201820197,0006,0005,0004,0003,0002,0001,0000 The Group issued its first SONIA linked transaction, Paragon Mortgages (No. 26) PLC (‘PM26’) in June 2019. PM26, backed by seasoned
buy-to-let mortgage assets, raised £364.3 million of external funding in sterling Mortgage Backed Floating Rate Notes. The senior notes, the
only notes issued externally, were rated AAA by Fitch and Aaa by Moodys and bear interest at compounded SONIA plus a margin of 1.05%. It
should be noted that margins above SONIA are typically larger than those above LIBOR, reflecting the risk-free nature of the SONIA rate. The
deal also generated internally held rated notes which may either be sold later or used as collateral for Bank of England or other repo facilities,
giving the Group enhanced funding and liquidity options.
On 27 June 2019 the Group sold its remaining investments and residual interest in the Paragon Mortgages (No. 12) PLC securitisation. While the
transaction remains in place and the Group continues to manage the assets, it has no further interest in their performance and both the assets
and the associated funding have been derecognised from the Group’s balance sheet, realising a net profit of £9.7 million as well as crystallising
its loan participation in cash. This removed £695.8 million of low yielding securitised assets from the Group’s balance sheet and, consequently,
reduced its encumbrance ratio, while improving yields.
During the year the Group paid down five further securitisation transactions. These included two funding legacy mortgages and the Group’s
remaining consumer finance transaction. These transactions between them had £95.8 million of notes outstanding at 30 September 2018 and
had some of the highest funding costs among the legacy arrangements. Additionally, two transactions funding post-2010 mortgages were paid
down, having reached their optional call dates. After the year end, notice was given on a further post-2010 mortgage transaction. Further such
refinancing transactions should be expected over the coming years.
A further funding option is provided by wholesale warehouse funding, which provides standby capability, particularly in the event of market
disruption elsewhere, where funds need to be deployed rapidly or as an alternative to retail deposit funding for liquidity purposes or in the
process of building a portfolio of loan assets for securitisation. During the period a new £200.0 million facility was agreed with Bank of America
Merrill Lynch, carrying an interest rate of LIBOR plus 0.95%.
A3.3.3 Central bank facilities
The Group has continued to make use of facilities offered by the Bank of England to support its lending to households and businesses. Its
drawings under the Term Funding Scheme (‘TFS’) remain in place and provide £944.4 million of the Group’s funding (2018: £944.4 million),
with all drawings remaining in place until at least 2021. The Group also utilised the Indexed Long-Term Repo scheme (‘ILTR’) for six-month
borrowings, with £50.0 million outstanding at the period end (2018: £80.0 million).
The Group’s liquidity drawdown under the Funding for Lending Scheme (‘FLS’), which provides liquidity of £109.0 million (2018: £108.7 million)
remained in place throughout the period. The terms of this facility are such that neither the drawing nor the liquidity provided appear on the
Group’s balance sheet.
The Group has also pre-positioned further mortgage loans and certain other assets with the Bank of England to act as collateral for further
drawings on central bank funding lines, if and when required, providing access to liquidity of up to £1,095.0 million. It can also use the retained
notes in recent securitisation transactions, which are externally rated, for this purpose.
The Group will continue to utilise central bank facilities in future, subject to availability, as part of its integrated funding framework.
A3.3.4 Summary
The Group’s diversified funding position, with strong wholesale and retail franchises gives it a strong position in the face of economic
uncertainties. This reduces its exposure to issues affecting any particular funding source and allows it the flexibility to raise funds in accordance
with its own market assessments, rather than being forced into sub-optimal transactions for short term reasons. This base delivers a robust and
adaptable position going forward, supporting the Group’s overall business strategy and aspirations.
Further information on all the above borrowings is given in notes 32 to 36.
PAGE 37 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A3.4 Capital review
The Group’s capital policy aims to provide appropriate returns to shareholders, whilst maintaining prudent levels of capital to support its
strategic objectives going forward. The maintenance of strong regulatory capital and liquidity positions to safeguard its depositors is also a
principal strategic objective.
For regulatory purposes the Group’s capital comprises shareholders’ equity and tier 2 bonds. It has no outstanding AT1 issuance, but has the
capacity to issue such securities, if considered appropriate, under an authority granted by shareholders at the 2019 AGM, which will be proposed
for renewal at the forthcoming meeting.
A3.4.1 Dividends and distribution policy
The Company’s previously announced dividend policy of paying out approximately 40% of consolidated earnings to shareholders remains in
place, achieving a dividend cover ratio of around 2.5 times, in ordinary circumstances. During July 2019 an interim dividend of 7.0 pence per
share was paid, determined, in accordance with the Group’s stated policy, as 50% of the previous year’s final dividend.
Following the completion of the PM12 residual sale on 27 June 2019 the Board considered the profit generated and the capital released by that
transaction and determined that it was appropriate to return a portion of this capital to shareholders by way of a share buy-back programme.
During the year the Group bought back 6.0 million of its ordinary shares at a cost of £26.7 million, including stamp duty and transaction expenses
(note 44); £26.5 million excluding costs, these shares being held in treasury. Treasury shares may subsequently be cancelled.
In determining the level of dividend for the year, the Board has considered the dividend policy, and has also taken into account the impact of
the buy-back programme, together with the Group’s strategy, capital requirements, principal risks, the level of available retained earnings in the
Company, its cash resources and the objective of enhancing shareholder value. The dividend policy is underpinned by the principle of enhancing
shareholder returns on a sustainable basis and the Board is proposing, subject to approval at the Annual General Meeting on 13 February 2020,
a dividend for the year of 21.2 pence for 2019, an increase of 9.3% from the 19.4 pence in 2018. This results in a dividend cover ratio of 2.33
times, which is below the normal target of around 2.5 times but which reflects the scale of non-cash, fair value items in the 2019 results.
The progress of the dividend for the year is shown in the chart below.
Dividend for the year (pence)
In respect of the years 2013 - 2019
The directors have considered the distributable reserves of the Company and concluded that such a dividend is appropriate.
A3.4.2 Regulatory capital
The Group is subject to supervision by the PRA on a consolidated basis, as a group containing an authorised bank. As part of this supervision,
the regulator will issue an individual capital requirement setting an amount of regulatory capital, defined under the international Basel III rules,
implemented through the Capital Requirements Regulation and Directive (‘CRD IV’), which the Group is required to hold relative to its total risk
exposure in order to safeguard depositors in the event of severe losses being incurred by the Group.
The Group maintains strong capital and leverage ratios, with a total capital ratio of 15.9% at 30 September 2019 (2018: 16.2%) and a UK leverage
ratio at 6.7% (2018: 6.4%) (note 55(c)). The CET1 ratio, 13.7% at 30 September 2019, marginally reduced during the period (2018: 13.8%),
reflecting primarily the growth in the balance sheet, offset by the impact of distributions to shareholders through buy-backs and dividends.
PAGE 38 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accountspence20132014201520162017201820192520151050 The Group’s principal capital measures are set out below. It has been granted transitional relief on the adoption of IFRS 9, with the impact on
capital being phased in over a five-year period, with only 5% of the effect being recognised in the first year. However, firms are also required to
disclose capital measures as if the relief had not been given (referred to as the ‘fully loaded’ basis).
CET1 capital
Basic
Fully loaded
Total Regulatory Capital (‘TRC’)
Basic
Fully loaded
2019
IFRS 9
£m
922.0
900.8
1,072.0
1,050.8
2018
IFRS 9
£m
888.7
867.5
1,038.7
1,017.5
2018
IAS 39
£m
889.9
889.9
1,044.8
1,044.8
The Group’s CET1 capital comprises its equity shareholders’ funds, adjusted as required by the CRD IV rules. TRC, in addition, includes tier 2
capital representing the Tier 2 Bonds. Additional tier 2 capital arising from credit loss allowances is no longer included in regulatory capital
following the introduction of IFRS 9.
The Group’s capital requirements include the Pillar 1 + 2a amount which is specific to the Group and is set by the regulator. This may include
both variable and fixed components. At 30 September 2019 this requirement was £742.9 million on the transitional basis and £741.8 million on
the fully loaded basis (2018 (IAS 39): £727.7 million), with the increased requirement principally driven by the growth in the Group’s asset base.
The Group’s capital must also cover the CRD IV buffers, the Counter-Cyclical (‘CCyB’) and Capital Conservation (‘CCoB’) buffers. These apply to
all firms and are based on a percentage of total risk exposure. These buffers were both increased in the period, with the CCoB increasing from
1.875% to 2.500%, its long-term rate, from January 2019 and the CCyB increasing from 0.5% to 1.0%, from November 2018. These increases
in standard CRD IV buffers have added over £75.0 million to the Group’s capital requirement. Further buffers may be set by the PRA on a
firm-by-firm basis but may not be disclosed.
The Group continues to maintain a healthy capital surplus, although this has been eroded by the 1.125 percentage point increase in the CRD IV
buffers in the period, the introduction of IFRS 9 and the increase in the deficit on the Group’s defined benefit pension plan.
The Group’s capital ratios are set out below.
CET1 capital
Total capital ratio
UK leverage ratio
Basic
Fully loaded
Basic
Fully loaded
Basic
Fully loaded
2019
IFRS 9
£m
13.7%
13.4%
15.9%
15.7%
6.7%
6.6%
2018
IFRS 9
£m
13.8%
13.5%
16.2%
15.8%
6.4%
6.3%
2018
IAS 39
£m
13.8%
13.8%
16.2%
16.2%
6.4%
6.4%
Capital ratios remain largely in line with previous performance, with IFRS 9 transition not having a major impact.
During the year the Group has undertaken a thorough review of the risk weightings applied to its assets for capital purposes, partly in response
to market concerns across the sector. This exercise confirmed the weightings being applied under the Standardised Approach for credit risk
(‘SA’) and the appropriateness of the Group’s risk weighted asset values and hence its capital measures.
The regulatory authorities in the UK and EU have also continued their work to put in place the December 2017 amendments to the Basel III
capital adequacy regime, published in the BCBS document ‘Basel III: Finalising post-crisis reforms’. This addresses both the SA for credit risk,
presently used by the Group, and the Internal Ratings Based (‘IRB’) approach, which is based on firms’ own internal calculations and subject to
supervisory approval.
These proposals are expected to increase capital requirements under the SA for a number of asset classes, including buy-to-let lending, and
introduce stricter parameters within which IRB approaches must operate. The Group has monitored developments during the year and revised
its capital strategy where necessary.
The Group’s project to develop an IRB approach to credit risk for capital adequacy purposes has continued throughout the year. A considerable
amount of work has been completed, using both internal and external resources, generating system enhancements as well as progressing the
application process. However, in September 2019, the PRA published a consultation paper (CP 21/19) which would enact significant new EBA
regulations governing IRB techniques in the UK. At the same time the CP highlighted a need for firms applying for IRB accreditation to comply
with certain future regulatory requirements where the authorisation process is expected to extend beyond 2020.
The Group’s models already reflect the most material requirements arising from the CP, however, whilst only a consultation at this stage,
the Board has decided to ensure its IRB models are fully compliant with the requirements of the CP before delivering the first part of its the
application to the PRA.
PAGE 39 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A3.4.3 Liquidity
The Group’s operational capital and funding requirements are also influenced by the Group’s policy to hold sufficient liquidity in the business
to meet its cash requirements in the short and long-term, as well as to provide a buffer under stress. There is also a regulatory requirement to
hold liquidity in Paragon Bank. The Board regularly reviews liquidity risk appetite and closely monitors a number of key internal and external
measures. The most significant of these, which are calculated for the Paragon Bank regulatory group on a basis which is standardised across
the banking industry are set out below.
LCR – Liquidity coverage ratio
NSFR – Net stable funding requirement
*Not yet a binding requirement
2019
138%
115%
2018
144%
113%
Regulatory
minimum
100%
100%*
This shows the available liquidity at the year end to be well in excess of regulatory minimums.
A3.4.4 Capital outlook
The Board keeps the appropriate level and form of capital required by the Group under review to ensure that, in the light of the Group’s strategic
objectives and the economic environment in which it operates, and more specifically where there are changes in the business or in regulatory
expectations, the capital position remains prudent and sustainable, for the benefit of all stakeholders.
A3.5 Financial review
The underlying economic uncertainty in the UK over the past year has been reflected in significant shifts in the interest rate yield curve which
have affected the Group’s results, generating fair value volatility in the profit and loss account and increasing the deficit in the Group’s pension
plan. However, the underlying position remained positive as the Group’s long term strategy continued to bear fruit.
The Group’s underlying profit in the financial year ended 30 September 2019 (appendix A) increased by 5.0% to £164.4 million
(30 September 2018: £156.5 million) while on the statutory basis, including the effect of fair value losses, profit before tax decreased by 12.4%
to £159.0 million (30 September 2018: £181.5 million). The underlying result also excludes a gain of £9.7 million resulting from the disposal of
the Group’s residual interest in the PM12 securitisation in June 2019 (the ‘PM12 disposal’) (2018: £28.0 million gains on asset disposals).
Earnings per share on the statutory basis reduced to 49.4 pence (30 September 2018: 55.9 pence) while increasing by 6.0% to 51.1 pence on
an underlying basis (30 September 2018: 48.2 pence).
PAGE 40 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A3.5.1 Results for the year
CONSOLIDATED RESULTS
For the year ended 30 September 2019
Interest receivable
Interest payable and similar charges
Net interest income
Net leasing income
Gain on derecognition of financial assets
Other income
Total operating income
Operating expenses
Provisions for losses
Fair value net (losses) / gains
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
Income
2019
IFRS 9
£m
505.7
(227.3)
278.4
3.8
9.7
15.4
307.3
(125.2)
(8.0)
174.1
(15.1)
159.0
(31.6)
127.4
2019
21.2p
49.4p
48.2p
2018
IAS 39
£m
451.9
(197.3)
254.6
3.8
28.0
15.5
301.9
(114.2)
(7.4)
180.3
1.2
181.5
(35.7)
145.8
2018
19.4p
55.9p
54.2p
Underlying net interest income increased by 8.5% to £278.4 million from the £256.5 million for the year ended 30 September 2018
(2018 statutory basis: £254.6 million). The growth reflects improved yields in the loan book, together with the size of the average loan book,
which rose by 4.5% to £12,143.4 million over the year (2018: £11,626.0 million) (appendix B).
Underlying net interest margin (‘NIM’) in the year ended 30 September 2019 increased to 2.29% compared to the 2.21% in the previous year
(appendix B). This increase reflects the changes in product mix in the Group’s balance sheet, with new buy-to-let margins exceeding those
achieved on the legacy book and the growing Commercial Lending division operating on still wider margins (appendix B).
During the year the Group disposed of its residual interest in the legacy PM12 securitisation (note 7), generating a cash inflow of £49.8 million.
As a result, the assets and liabilities of PM12 were derecognised from the Group’s balance sheet, resulting in a net gain of £9.7 million.
Excluding the gain on disposal, other operating income was little changed at £19.2 million for the year, compared with £19.3 million in 2018.
Total underlying operating income increased by 7.9% to £297.6 million (2018: £275.8 million). Total operating income on the statutory basis, at
£307.3 million (2018: £301.9 million) also included the gain on the PM12 disposal, whereas the 2018 result included a £28.0 million one-off gain
on Idem Capital asset disposals arising during that year.
Costs
Underlying operating expenses increased by 11.9% to £125.2 million from £111.9 million reported in the previous year. These costs include a full
year’s costs relating to both the Titlestone business, acquired in the second half of the last financial year and the Iceberg business, acquired in
December 2017. During the year the Group’s average number of employees increased 1.2% to 1,365 (2018: 1,349) and with the Group’s strategic
initiatives seeing a significant level of higher-paid individuals joining the payroll in the year, employment costs increased by 8.2% year-on-year
(note 10). The increase in the Group’s savings balance in the period (20.7% year-on-year) also impacts operating costs, with the outsourced
servicing fee set by reference to the balance outstanding, rather than simply rising in line with inflation.
The delivery of the Group’s strategy depends heavily on its IT infrastructure, and during the year it made substantial investments in developments
both to improve efficiency and to provide an enhanced experience to its customers, particularly in the SME market. These initiatives were
ongoing at the year end and will be rolled out in the future. Further systems effort was deployed to enhance cyber-security and operational
resilience. The period’s costs also include expenditure of around £2.4 million on the development of the Group’s IRB approach, both in internal
resources and external advice, which should generate future benefits to the Group’s capital position. Overall the Group estimates that these
project costs comprise over £3.5 million of the cost base for the period.
PAGE 41 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts This investment for the future increased the Group’s underlying cost:income ratio in the period to 42.1% (appendix C) from the 40.6% recorded
in 2018, although without the additional project costs and the impact of the acquisitions, this would have reduced. The control of operating
costs remains a principal strategic priority of the Group and it applies a rigorous budgeting and monitoring process.
Strategic disposals, such as the PM12 disposal and the Idem Capital sale in 2018, will have improved earnings per share and RoTE, however
their impact has increased the cost:income ratio as a consequence. Over the medium term, the Group targets improvements in the cost:income
ratio, from scale and efficiency gains, but increases in regulatory requirements, IT investments and the impact of new operations means that
progress to a lower ratio is unlikely to be linear.
Total operating expenses, which in 2018 included the costs of the Iceberg and Titlestone acquisition transactions, increased by 9.6% to
£125.2 million (2018: £114.2 million), giving a cost:income ratio on a statutory basis of 40.7% (2018: 37.8%) (appendix C), with the 2018 figure
deflated due to the size of the gains on derecognition in that period.
Impairment provisions
The Group has applied IFRS 9 in calculating its provisions for impairment for the first time in the year. As prior year charges are not required to
be restated, the 2019 charge is not strictly comparable to that for 2018. However, the charge of £8.0 million for loan impairment has remained
broadly similar to that for the previous year under IAS 39 (2018: £7.4 million). The cost of risk (the impairment charge as a percentage of average
loans to customers) (appendix B) remains stable at 0.07% compared to 0.06% in 2018.
Under IFRS 9, interest is only recognised on the net value of a credit impaired (Stage 3) loan, reducing both interest receivable and impairment
charges. The value of this adjustment in the year was approximately £1.0 million, reducing NIM and cost of risk by approximately 1 basis point.
Careful management of all the Group’s loan books continues to be a strategic priority, for both retention and credit purposes. The credit
performance of the books continues to be pleasing, with that of the buy-to-let book particularly strong, compared to market averages, with
improvements in performance on acquired consumer portfolios year-on-year and credit metrics on the Group’s newer portfolios also strong
and in line with expectations.
Fair value movements
Yield curve movements during the period resulted in hedging instrument fair value net losses of £15.1 million (2018: £1.2 million net gains), which
do not affect cash flow. The size of the movement in the period is mostly a result of market turbulence throughout the year, with the yield curve
showing large fluctuations, primarily downwards, especially at month ends. Commentators have ascribed some of this to heightened political
uncertainties in the UK over Brexit during the period, with these uncertainties carrying on into the new financial year.
This impacted particularly on the carrying values of swaps held for the purpose of hedging pipeline loan commitments, which cannot be included
in a hedge for accounting purposes.
The fair value movements of hedged assets or liabilities are expected to be profit neutral over time, as these instruments will be held to maturity.
As such, this item represents a timing difference. The Group remains economically and appropriately hedged.
Tax
Corporation tax has been charged at the rate of 19.9%, increased from 19.6% for the previous year. Materially all of the Group’s operations fall
within the scope of UK taxation and the standard rate of corporation tax applying to the Group in both years was 19.0%. The Group pays tax at
a higher rate on profits arising within its banking subsidiary.
Profits after taxation of £127.4 million (2018: £145.8 million) have been transferred to consolidated equity, which totalled £1,108.4 million at the
year end (2018: £1,095.9 million), representing a tangible net asset value of £3.71 per share (2018: £3.59 per share) and an unadjusted net asset
value of £4.39 per share (2018: £4.25 per share) (appendix D).
A3.5.2 Segmental results
The Group analyses its results between three segments, which are the principal divisions for which performance is monitored:
• Mortgages, including the Group’s buy-to-let, and owner-occupied first and second charge lending and related activities
•
Commercial Lending, including the Group’s asset leasing and motor finance activities, together with development finance, structured
lending and other offerings targeted towards SME customers
•
Idem Capital, including loan assets acquired from third parties and legacy assets which share certain credit characteristics with them
The Group’s central administration and funding costs, principally the costs of service areas, establishment costs, and bond interest have not
been allocated. Items excluded from underlying profit have also been included in unallocated costs, as these are not included in divisional
results internally.
PAGE 42 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The underlying operating profits of these business segments are detailed fully in note 2 to the accounts and are summarised below.
Segmental profit
Mortgages
Commercial Lending
Idem Capital
Gains on disposals
Unallocated central costs and other one-off items
2019
£m
167.9
43.8
48.0
259.7
9.7
(95.3)
174.1
2018
£m
144.8
19.9
78.2
242.9
28.0
(90.6)
180.3
Mortgages
The Mortgages division continues to maintain a strong market position in its core specialist buy-to-let loan market. Strategically targeted
operational initiatives have improved retention and enhanced NIM, while provisions remain low. As a result, the segmental profit increased
16.0% to £167.9 million (2018: £144.8 million). Net interest income increased by 12.8% to £177.8 million (2018: £157.6 million), although growth
in the average loan book was only 1.8%, a result of the PM12 disposal in the year. The Group’s legacy mortgage assets are lower yielding than
newer business therefore asset turnover will be beneficial to margins. These effects combined to deliver a 17 basis point improvement in
segmental NIM in the period.
The PM12 disposal also provided an additional one-off gain of £9.7 million, included in unallocated items above.
The costs of the division increased as a result of higher activity levels while other income reduced marginally during the period. The overall
result was also affected by a reduction of the impairment charge to £1.0 million (2018 (IAS 39): £5.5 million), following the transition to IFRS 9,
where an additional write down of £24.0 million was posted against reserves.
Commercial Lending
In the Commercial Lending segment, the level of new advances generated a substantial increase in loan assets, with the segment’s loans to
customers at 30 September 2019, at £1,452.1 million, increasing 28.4% from the position twelve months earlier (2018 (IFRS 9): £1,131.3 million).
Growth was seen across all the major product lines with the development finance portfolio increasing 43.2% year-on-year, asset leasing 21.3%
and structured lending 127.6%.
NIM in the division rose by 124 basis points compared with the year ended 30 September 2018, driven by the additional high-yielding
development finance assets and a focus on enhancing yields elsewhere.
Segmental profit in Commercial Lending increased 120.1% in the year to £43.8 million (2018: £19.9 million). This is attributable to the contribution
of operations acquired in the previous year and maturing new business lines, together with growth and enhanced focus in the ongoing sectors.
Idem Capital
The Idem Capital division’s portfolios continued to generate strong operational cash flows in the year ended 30 September 2019. No new
deals were completed and hence the average outstanding loan balance reduced through run-off in the period, falling by 25.0% in the last
twelve months to £389.9 million (2018 (IFRS 9): £519.8 million). NIM reduced in the segment, a result of the recent strategic focus on acquiring
performing books, which may have lower yields; the impact of the portfolio sale of higher yielding assets in September 2018; and strong natural
portfolio amortisation. This impacted on segmental profit, which fell by 38.6% to £48.0 million (2018: £78.2 million).
PAGE 43 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A3.5.3 Assets and liabilities
The Group’s assets and liabilities at the year end are summarised in the balance sheet below.
SUMMARY BALANCE SHEET
30 September 2019
Intangible assets
Investment in customer loans
Derivative financial assets
Free cash
Other cash
Other assets
Total assets
Equity
Retail deposits
Borrowings
Pension deficit
Other liabilities
2019
IFRS 9
£m
171.1
2018
IFRS 9
£m
169.3
12,186.1
12,100.6
592.4
225.7
999.7
220.5
855.7
238.0
1,072.6
51.7
14,395.5
14,487.9
1,108.4
6,391.9
6,648.4
34.5
212.3
1,073.5
5,296.6
7,961.2
19.5
137.1
2018
IAS 39
£m
169.3
12,127.8
855.7
238.0
1,072.6
51.7
14,515.1
1,095.9
5,296.6
7,961.2
19.5
141.9
Total equity and liabilities
14,395.5
14,487.9
14,515.1
The size of the Group’s balance sheet has remained broadly similar through the year although the underlying balances evidence the continuing
reshaping of its operations, with increased diversity of assets and growth in the retail deposit franchise.
The Group’s loan assets include:
• Buy-to-let and owner-occupied first mortgage assets in the Mortgages segment
• Second charge mortgages, with new originations in Mortgages and purchased and similar legacy assets in Idem Capital
• Other unsecured consumer lending in Idem Capital
• Asset leasing and motor finance loans in the Commercial Lending segment, with similar purchased accounts in the Idem Capital segment
• Professions finance, invoice finance and other finance for SME businesses in the Commercial Lending segment
• Development finance loans in the Commercial Lending segment
• Structured lending loans in the Commercial Lending segment
The allocation of these loan assets between segments is set out below.
Mortgages
Commercial Lending
Idem Capital
2019
IFRS 9
£m
10,344.1
1,452.1
389.9
12,186.1
2018
IFRS 9
£m
10,449.5
1,131.3
519.8
12,100.6
2018
IAS 39
£m
10,473.5
1,133.2
521.1
12,127.8
During the year the mix of the Group’s assets has been altered by the PM12 disposal, increased volumes in development finance and structured
lending and the continuing run-off of Idem Capital assets. Movements in the Group’s loan asset balances are discussed in the lending review
section (Section A3.2) while an analysis of the Group’s financial assets by type is shown in note 20.
PAGE 44 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Derivatives
Movements in derivative financial assets arise principally as a result of the effect of changes in exchange rates on instruments forming cash
flow hedges for the Group’s floating rate notes. These movements do not impact on the Group’s results, while the exchange movements have a
broadly equal and opposite impact on borrowings.
The interest rate movements mentioned above have also driven significant changes in the valuation of derivatives held for hedging fixed rate
loan assets or deposit liabilities, with the net carrying value switching from a £21.3 million asset at 30 September 2018 to a £70.8 million liability
at the period end. For those derivatives forming part of a hedge for accounting purposes this movement is offset by the movement in the fair
value adjustments against loans to customer and retail deposits.
Funding
Movements in the Group’s funding, including retail deposit balances and wholesale borrowings, are discussed in the funding review section
(Section A3.3), with retail deposits now forming almost half of the Group’s total funding. The Group has pursued a conservative liquidity policy in
the period, resulting in a focus on contingent liquidity arrangements and strong levels of liquid assets being held throughout the period.
Pension obligations
The accounting value of the deficit in the Group’s defined benefit pension plan (the ‘Plan’) has increased over the year ended 30 September
2019. Gilt yields fell sharply over the year, resulting in a discount rate of 1.85%, 110 basis points less than at 30 September 2018. This effect was
mitigated, to some extent, by the adoption of more recent market mortality assumptions and a strong performance by the Plan’s investments.
Together these resulted in the deficit under International Accounting Standard (‘IAS’) 19 increasing to £34.5 million (2018: £19.5 million). These
movements also generated an actuarial loss of £16.5 million before tax which was recognised in other comprehensive income (2018: gain of
£8.9 million).
While the valuation under IAS 19 is that which is required to be disclosed in the accounts, pension trustees generally use the technical provisions
basis as provided in the Pensions Act 2004 to measure scheme liabilities. On this basis, the deficit at the triennial valuation date (31 March 2016)
was £18.0 million and this had increased to £29.2 million at 30 September 2019 (30 September 2018: £15.2 million), representing an 80%
funding level (30 September 2018: 87%).
Other assets and liabilities
Sundry assets have increased as a result of the Group’s deferred tax balance becoming an asset (a result of IFRS 9 transition adjustments and
the movement in the pension plan liability), together with the inclusion of £72.2 million of collateral which was required to be placed with banks
as security for the Group’s swap liabilities (30 September 2018: £3.8 million).
Within sundry liabilities the largest movement has been the increase in derivative liabilities to £80.5 million from £4.7 million at
30 September 2018, principally as a result of interest rate movements.
A3.5.4 Accounting changes
On 1 October 2018 the Group adopted IFRS 9 in place of IAS 39. The new standard changes the basis of provision from incurred loss to expected
loss, which means that although a broadly similar bad debt charge will be posted over the life of a credit impaired account, it will be recognised
earlier. The consequence of this is that a growing portfolio, such as most of the Group’s loan books, will attract a higher provision charge than
it would have done under the previous methodology. This has required the development of models and methodologies over a period of years,
utilising the Group’s historic data and its experience in modelling and analytics.
The Group published a report on its transition to IFRS 9 on 20 March 2019 which is available from the investor section of the Group’s website
at www.paragonbankinggroup.co.uk.
The change impacted on loan asset values on the Group’s balance sheet on transition but has not had a significant impact on the profit and loss
charge in the year. This was anticipated, as the accounting change is principally an acceleration of the impairment charge and is therefore a
timing difference, rather than an additional loss. Within the charge, however, amounts which would have been provided in the year under IAS 39
were included in provision brought forward under the new standard, while additional provisions, particularly for new originations, were required
where no provision under IAS 39 would have been booked.
The other new requirements of IFRS 9 have not had a significant impact on the Group’s accounting but have required the presentation
of significant additional or expanded disclosures. At the same time the Group adopted IFRS 15 – ‘Revenue’, but this did not have a
significant impact.
The total effect of these changes was an increase in the Group’s impairment provisions at 1 October 2018 of £27.2 million and a reduction in
equity of £22.4 million after tax (note 62).
For regulatory capital purposes the CRR allows the impact of the transition to be phased in over a five year period, so that the initial impact on
capital ratios was negligible. On a fully loaded basis the transition to IFRS 9 resulted in the Group’s CET1 ratio at 1 October 2018 reducing from
13.8% to 13.5%.
The Group will continue to develop, test and validate its IFRS 9 approach as more data becomes available and market practice continues
to develop.
PAGE 45 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The Group has adopted IFRS 16 – ‘Leases’ with effect from 1 October 2019. However, this change will have minimal impact on the Group’s
results and balance sheet, increasing both assets and liabilities by around £9.0 million and not impacting on reserves or capital (note 61).
A3.6 Operational review
A3.6.1 Management and people
The Group’s people are its most significant cost, whilst also key to its future growth and development and the medium through which its culture
is manifested. Over 1,300 people worked for the Group throughout the period, at its Solihull headquarters and other locations across the UK.
Training and development, together with a rigorous recruitment and selection process are a key part of the Group’s organic growth strategy,
underpinning the strong progress made to date, and the Group’s Investors in People Champion status.
Governance and management
During the period the Company continued to comply with the principles of the UK Corporate Governance Code (the ‘Code’). On
31 December 2018, Alan Fletcher and Patrick Newberry stepped down from the Board. Alan served as a director from 2009, including a lengthy
term as Chair of the Remuneration Committee. Pat served first as an independent director of Paragon Bank PLC from its earliest months of
operation in 2014, serving as chair of its audit committee, and joined the Board of Paragon Banking Group in 2017. Both left with the thanks of
the Group and the Board for their support and dedication.
Peter Hartill, a non-executive director since 2011, and Chair of the Audit Committee and Senior Independent Director, will be retiring at the
2020 Annual General Meeting having served on the Board for nine years. The Group has progressed its search for a new Audit Committee Chair
and, at the date of signing this report, hopes to be in a position to announce a new appointment, after the AGM in February 2020, subject to
regulatory and Board approval.
John Heron, Director of Mortgages, has also signalled his intention to retire and will be leaving in early 2020. John joined the Group in 1986 and,
as well as being the Group’s longest-serving employee, he has been instrumental in establishing and building our buy-to-let mortgage offering.
A robust and extensive recruitment process has completed, and the Group looks forward to welcoming Richard Rowntree to run the Mortgages
division during the first quarter of 2020, subject to regulatory approval.
During the period the Group has continued its review of the requirements of the new edition of the Code, which came into force for the Company
from 1 October 2019. At the same time the Group has considered the forthcoming changes in UK rules for the disclosure of Chief Executive
remuneration and the director’s consideration of wider stakeholder interests (‘section 172’) and new requirements for corporate governance
and other new disclosures in subsidiary entities. No significant implementation issues were identified and appropriate measures to comply with
the new rules have been put in place.
The Board has also considered the governance and committee structures in preparation for the Group’s IRB application, as well as providing
oversight to that development more generally.
The Group’s third annual statement under the Modern Slavery Act 2015 was published on its website in March 2019. Relevant policies have
been reviewed and updated as appropriate. All employees have completed an annual e-learning module on this subject to raise awareness and
understanding.
People, diversity and development
The Group continues to focus on maintaining an efficient and effective workforce, increasing employee numbers by 1.3% over the year. The
Group maintains its accreditation from the UK Living Wage Foundation and minimum pay continues to meet the levels set by the Foundation.
The Group prides itself on its high levels of employee retention and long service. Its annual employee attrition rate of 11.5% is below the national
average and 27.3% of its people have over ten years’ service, with 11.5% having achieved over 20 years with the Group. We believe this is due to
providing quality development opportunities and creating a place where people want to work, which has meant that knowledge and experience
have been retained in each of our specialist areas. We believe our people are well positioned to support the Group’s future growth strategy.
PAGE 46 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Employee numbers
At 30 September and average for the year
The Group has been a signatory of the Women in Finance Charter, sponsored by HM Treasury, since 2016. The Charter’s objectives reflect the
Group’s own aspirations for gender diversity and the Group published its first set of internal targets under the Charter in January 2017.
The Group submitted its latest progress report at 30 September 2019 confirming that the Group is making excellent progress towards its
targets. In particular:
• 42.7% of employees receiving management career development/leadership training are female (target 50%)
• 35.8% of the workforce are on flexible working contracts (target 10%)
• 65.9% of the flexible working available is on a part-time basis (target 50%)
Activities under the Women in Finance initiative in the year have included participating in cross-company mentoring programmes to
nurture female talent and diversity training for all employees. Initiatives are also in hand to reduce the scope for unconscious bias in
recruitment processes.
The Hampton-Alexander (‘HA’) Review published its latest report on gender diversity in the leadership of FTSE 350 entities in November 2019.
The Group believes that its Women in Finance primary objective is consistent with the review’s recommendation and notes that its proportion
of female senior managers at the year end, as defined by HA, was 35.9% (2018: 29.1%). The Group is delighted to achieve its target of 35% well
ahead of the original target date of 31 January 2022.
The Group has calculated its gender pay gap at April 2019. This calculation shows that median female pay in the Group was 31.0% less than the
median male pay (2018: 30.7%). This is broadly in line with the results reported by other financial services companies and narrower than the
39.1% gap for the sector reported by the Office of National Statistics in their Annual Survey of Hours and Earnings published in October 2019.
Analysis of the gender pay gap data indicates that the Group’s gap arose principally as a result of the distribution of roles between the genders,
highlighting the importance of the Women in Finance initiative in addressing these issues.
The Nomination Committee, as the board committee with responsibility for diversity under the new Code, has identified action on the diversity
agenda as an important objective and during the year has taken a detailed interest in progress in these areas.
The Group’s succession planning strategy has also been an important area of focus during the year, with all Board and executive management
roles, together with their direct reports, assessed from a leadership and specialist perspective. Immediate successors are in place for these
roles for the short term to provide business continuity and longer-term succession plans are being developed for those with career aspirations
and strong potential.
In addition, the Group has introduced a specific senior leadership development programme focussed on those identified with high potential for
future roles, to strengthen the succession plan and increase the overall talent pool required to deliver the Group’s medium to long term strategy.
This area will remain a priority for the Board, with the assistance of the Nomination Committee, during the forthcoming year.
The Group was proud to be reaccredited with the Investors in People Gold Standard in February 2019 for a further three years. It was particularly
pleasing to note the improvement noted by the external assessors in the areas of building capability, empowering and involving people and
recognising and rewarding performance, as well as maintaining overall strengths in living the organisation’s values and behaviours, delivering
continuous improvement and creating sustainable success. It retains its status as an Investors in People Champion, providing advice and
support to other organisations.
During the year, the Group’s long-standing People Forum has had its membership and terms of reference refreshed to reflect the current
organisational structure. This will also provide a renewed focus on the Forum’s objectives of giving all employees a voice, nurturing good
employment relations, driving employee engagement and improving overall employee communications. In addition, the Forum’s role is being
enhanced in the light of the new Code requirements on workforce engagement and will have direct access to the Board. Regular meetings with
non-executive directors will commence from November 2019, with specific outcomes from the engagement activities being reported from
next year.
PAGE 47 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts1,6001,4001,2001,0008006004002000Year endAverage20132012201420152016201720182019number A3.6.2 Risk
The effective management of risk is crucial to the achievement of the Group’s strategic objectives. It operates a risk governance framework
designed around a formal three lines of defence model (business areas, risk and compliance function and internal audit) supervised at
Board level.
During the year, the Group has continued to enhance its ability to manage all categories of risk. In particular it has focussed on:
• The development of advanced models to enhance credit risk management and support the Group’s IRB application process
• Enhancement of stress testing procedures to ensure the robustness of capital and liquidity positions
• The continuing evolution and embedding of its risk appetite framework
•
The enhancement of its operational risk capabilities, including the assessment of critical business services and tolerances and the
embedding of its operational risk management system in business areas for use on a day-to-day basis
• The maintenance and further development of effective cyber-security controls
• The integration of the businesses acquired in the previous year to ensure they are fully captured by the risk management framework
• Continuing the embedding of robust data protection processes and controls to ensure compliance with the Data Protection Act 2018
During the year the Group has continued to review its exposure to emerging developments in the Brexit process, and the political uncertainties
surrounding it, both in terms of impacts on its own activities and on the potential effect on its businesses from wider economic consequences.
While the Group does not have operations outside the UK, this analysis addressed, in detail, the capital, liquidity and operational implications
of the stresses which might be caused by the process. The Board assessed the output of this analysis throughout the year as the position and
potential outcomes developed. The Group considers itself well placed to address the challenges arising, but the position remains uncertain and
will continue to be subject to detailed monitoring going forward.
The principal challenges in the risk environment faced by the Group during the year and moving forward into 2020 include:
• The level of change in products, funding and operations which will be required in preparation for the withdrawal of LIBOR in 2021
•
Heightened cyber-security risks as a result of the increasing sophistication and frequency of cyber-attacks affecting the financial
services sector
• Major regulatory developments including increased focus on the impact of climate change on managing financial risks
Further details regarding the governance model, together with the principal risks and uncertainties faced by the Group, the ways in which they
are managed and mitigated and the extent to which these have changed in the year are detailed within Section B7 of this annual report.
A3.6.3 Regulation
The Bank is authorised by the PRA and regulated by the PRA and the FCA. The Group is subject to consolidated supervision by the PRA and a
number of its subsidiaries are authorised and regulated by the FCA. As a result, current and projected regulatory changes continue to pose a
significant risk for the Group.
Whilst the Group is impacted by a broad range of prudential and conduct regulations, given the nature of its operations, the following
developments currently in progress are of particular note:
•
•
•
•
•
The Senior Managers and Certification Regime (‘SMCR’) will be extended to cover a wider section of persons employed in the financial
services sector in December 2019, with the establishment from March 2020 of a Directory of Certified Regime (CR) staff. This will increase
the number of the Group’s employees within the SMCR and the oversight activities required to ensure compliance with the extended rules.
These systems have been developed in the period and training modules for all impacted people have been delivered across the Group
SONIA (the Sterling Overnight Index Average) administered by the Bank of England is to be established as the primary sterling interest rate
benchmark by the end of 2021, in place of LIBOR. The Bank of England and the FCA are leading efforts to develop proposals to establish
and transition to the new regime. Appropriate steps are being considered and will be taken to manage the transition from LIBOR where it
impacts the Group’s business, particularly regarding LIBOR linked lending products and borrowings
The Bank of England, PRA and FCA published a discussion paper in July 2018 emphasising the importance of a firm understanding and
ensuring its operational resilience across critical business services and processes. The Group has implemented a formal programme to
both address the specificities of the paper and to align existing workstreams and activities to support wider resilience activities already
being undertaken. The appointment of a dedicated Operational Resilience manager has enabled a coordinated approach to improving
resilience capability
Vulnerable customers continue to be a strong focus for the FCA, and the Group takes its responsibilities in this regard seriously. The Group
welcomes the recently issued improved FCA guidance and is reviewing its current arrangements against that guidance
In March 2019 the FCA published the results of its review of the motor finance industry, identifying concerns about some commission
models used and lenders’ assessments of affordability. This was followed in October 2019 by the publishing of new regulations addressing
these issues. The Group has reviewed the FCA’s findings and identified the required changes in its motor finance lending models. The Group
believes it is well placed to accommodate these changes
PAGE 48 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts •
•
•
The FCA has proposed changes to its responsible lending and affordability rules to enable ‘mortgage prisoners’ to more easily switch
mortgages, and to require inactive lenders, and administrators acting for unregulated entities, to write to certain customers highlighting the
rule change, directing them to relevant sources of information. The Group has a number of accounts likely to fall into these categories and,
when the FCA final rules are available, will take the appropriate action
The PRA published policy and supervisory statements in April 2019, addressing climate change and its associated impact on the
management of financial risks within firms. These will require firms to proactively identify such risks and establish appropriate systems to
ensure these exposures are managed and governed. The Group is currently in the process of establishing its strategy in respect of climate
change, using the PRA’s suggested approach, to ensure it is well-positioned to address the challenges as they become better understood
In December 2017 the BCBS published its ‘Basel III: Finalising post-crisis reforms’ document. This has clarified the proposed increase to
the capital risk weights for buy-to-let lending under the revised standardised approach and the introduction of a capital output floor for IRB
based on the revised standardised approach. During the period the EU, PRA and EBA have continued the process to embed the Basel III
revisions into the UK regulatory framework and determine how their respective discretions should be applied. The proposed changes had
been anticipated within the Group’s IRB project
Certain regulations applying in the financial services sector only affect entities over a certain size, which the Group might meet within its current
planning horizon. The Group considers whether and when these regulations might apply to it in the light of the growth implicit in its business
plans and puts appropriate arrangements in place to ensure it would be able to comply at that point.
The Group, along with the rest of the UK corporate sector, continues to lack clear visibility on potential regulatory changes that may be
introduced following the UK’s exit from the EU, if and when that occurs. However, given the nature and scope of its operations, it does not have
any EU passporting issues that need to be considered.
The governance and risk management framework within the Group continues to be developed to ensure that the impacts of all new regulatory
requirements are clearly understood and mitigated as far as possible. Regular reports on key regulatory developments are received at both
executive and board risk committees.
Overall, the Group considers that it is well placed to address all the regulatory changes to which it is presently exposed.
A3.7 Conclusion
We are delighted to report another excellent financial and operational performance, underpinned by our effective diversification strategy and
focus on specialist lending. Volumes, profits and dividends are up strongly, and we are moving closer to our medium-term target of over 15%
return on tangible equity.
The Group’s transformation to a broadly based specialist banking group has continued over the last year. Our customers have increasingly
complex needs which are supported by ongoing technology investments and the deep experience of our employees. This approach, alongside
a disciplined and prudent risk appetite, has enabled us to achieve strong lending growth at improving margins, whilst maintaining an exemplary
credit performance.
Whilst there is uncertainty in the environment we have prepared well and look forward with optimism to the opportunities ahead.
Nigel Terrington
Chief Executive
26 November 2019
PAGE 49 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A4
Future prospects
The Code requires the directors to consider and report on the future prospects of the Group. In particular it requires that they:
•
•
Explain how they have assessed the prospects of the Group and whether, on this basis, they have a reasonable expectation that the Group
will be able to continue in operation (the ‘viability statement’)
State whether they consider it is appropriate for the Group to adopt the going concern basis of accounting in the preparation of the financial
statements presented in Section D (the ‘going concern statement’)
In addition, Listing Rule LR9.8.6 R(3) requires the directors to make these statements and to prepare the viability statement in accordance
with the ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’ published by the Financial Reporting
Council (‘FRC’) in September 2014.
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 in Section A1 and Chief Executive’s review in
Section A3. The principal risks and uncertainties affecting the Group, and the steps taken to mitigate these risks are described in Section B7.5.
Section B7 of this annual report describes the Group’s risk management system and the three lines of defence model which it is based upon.
Note 55 to the accounts includes an analysis of the Group’s working and regulatory capital position and policies, while notes 56 to 59 include
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 65.
Financial forecasts
The Group has a formalised process of budgeting, reporting and review. The Group’s planning procedures forecast its profitability, capital
position, funding requirement and cash flows. Detailed annual plans are produced for two-year periods with longer term forecasts covering a
five-year period, which include detailed income forecasts. These plans provide information to the directors which is used to ensure the adequacy
of resources available for the Group to meet its business objectives, both on a short-term and strategic basis.
The plans for the period commencing on 1 October 2019 have been approved by the Board and have been compiled taking into consideration
the Group’s cash flow, dividend cover, encumbrance, liquidity and capital requirements as well as other key financial ratios throughout
the period.
Current economic and market conditions are reflected at the start of the plan with consideration given to how these will evolve over the
plan period and affect the business model. The plan is compiled by consolidating separate income forecasts for each business segment and
securitisation vehicle to form the top-level projection for the Group. This allows full visibility of the basis of compilation and enables detailed
variance analysis to identify anomalies or unrealistic movements. Cost forecasts and new business volumes are agreed with the heads of the
various business areas to ensure that targets are realistic and operationally viable.
During this process, sensitivity analysis is also carried out on a number of key assumptions that underpin the forecast to evaluate the impacts of
the Group’s principal risks on profit, capital, liquidity, cash flow and other key metrics. This is further stress tested as part of the Group’s Internal
Capital Adequacy Assessment Process (‘ICAAP’), using a number of severe downside scenarios.
Risk assessment
During the year, the directors, as members or attendees of the Risk and Compliance Committee undertook reviews on a quarterly basis
which included:
• Reviews of the principal risks facing the Group
• Consideration of new or emerging risks and regulatory developments
• Consideration and challenge of management’s rating of the various risk categories to which the Group is exposed
• Consideration of the Group’s compliance with the risk appetites set by the Board and the continuing appropriateness of these risk appetites
•
Consideration of the root causes and impact of material risk events and the adequacy of actions undertaken by management to
address them
PAGE 50 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts During the year, directors held focussed in-depth sessions to review risk and risk management as part of the annual strategy day. The results of
this exercise were fed back into the Group’s risk management process.
Throughout the year, the directors received and discussed analyses of the potential impacts of the Brexit process on the Group. This included
consideration of regulatory impacts, impacts on the Group’s markets and customers, and impacts on the Group from general economic effects.
The results of these considerations fed into the Group’s forecasting and risk assessment.
In addition, the directors specifically considered the impact on risk and viability through review and approval of key risk assessments for the
Group, including the ICAAP, Internal Liquidity Adequacy Assessment Process (‘ILAAP’) and its Recovery Plan (‘RP’).
At the year end the directors reviewed their on-going risk management activities and the most recent risk information available to confirm the
position of the Group at the balance sheet date.
The directors concluded that those activities, taken together, constituted a robust assessment of all of the principal risks facing the Group,
including those that would threaten its business model, future performance, solvency or liquidity. These principal risks are set out in Section
B7.5 of the Risk Management Report.
Availability of funding and liquidity
The Group’s retail deposits of £6,391.9 million (note 31), accepted through Paragon Bank, are repayable within five years, with 67.8% of this
balance (£4,333.0 million) payable within twelve months of the balance sheet date. The liquidity exposure represented by these deposits is
closely monitored; a process supervised by the Asset and Liability Committee. The Group is required to hold liquid assets in Paragon Bank to
mitigate this liquidity risk. At 30 September 2019 Paragon Bank held £646.4 million of balance sheet assets for liquidity purposes, in the form
of central bank deposits (note 19). A further £109.0 million of liquidity was provided by the Bank of England FLS, bringing the total to £755.4
million.
Paragon Bank manages its liquidity in line with the Board’s risk appetite and the requirements of the PRA, which are formally documented in
the Board’s approved ILAAP. The Bank maintains a liquidity framework that includes a short to medium term cash flow requirement analysis, a
longer-term funding plan and access to the Bank of England’s liquidity insurance facilities, where pre-positioned assets would support drawings
of £1,095.0 million. Holdings of the Group’s own mortgage backed loan notes can also be used to access the Bank of England’s liquidity facilities.
The Group’s securitisation funding structures, described in note 58, ensure that a substantial proportion of its originated loan portfolio is
match-funded. This proportion was reduced by the PM12 disposal in June 2019, and increased by the issue of the PM26 securitisation in
July 2019. Repayment of the securitisation borrowings is restricted to funds generated by the underlying assets and there is limited recourse
to the Group’s general funds. Recent and current loan originations are financed through retail deposits and may be refinanced through
securitisation where this is appropriate and cost-effective.
The earliest maturity of any of the Group’s working capital debt is in December 2020, when the first of the Group’s retail bond issues matures.
The Group’s cash analysis continues to show a strong cash position, even after allowing scope for significant discretionary payments, and its
securitisation investments produce substantial cash flows.
In addition to its expertise in the securitisation market, evidenced by the PM26 and new warehouse transactions in the year, the Group has
demonstrated its ability to raise retail and corporate bond debt when required through its Euro Medium Term Note Programme and other
programmes. The Group’s access to debt is also enhanced by its corporate BBB rating, affirmed by Fitch Ratings in March 2019, and its status
as an issuer is evidenced by the BBB- rating of its £150.0 million Tier 2 bond.
As described in note 55 the Group’s capital base is subject to consolidated supervision by the PRA. Its capital at 30 September 2019 was in
excess of regulatory requirements and its forecasts indicate this will continue to be the case.
Viability statement
In considering making the viability statement the directors considered the three-year period commencing on 1 October 2019. This aligns with
the horizons used in the Group’s analysis of risk and includes the two years covered by the detailed group forecast, together with one year of
the less detailed forecasting period.
The directors considered:
• The Group’s financial and business position at the year end, described in section A3
• The Group’s forecasts, and the assumptions on which they were based
• The Group’s prospective access to future funding, both wholesale and retail
• Stress testing carried out as part of the Group’s ICAAP process
• The activities of the Group’s risk management process throughout the period
• Risk monitoring activities carried out by the Risk and Compliance Committee
•
Internal Audit reports in the year
Having considered all the factors described above the directors believe that the Group is well placed to manage its business risks, including
solvency and liquidity risks, successfully.
On this basis, the directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall
due over the three-year period commencing on 1 October 2019.
PAGE 51 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts While this statement is given in respect of the three-year period specified above, the directors have no reason to believe that the Group will
not be viable over the longer term. However, given the inherent uncertainties involved in forecasting over longer periods, the shorter period has
been adopted.
Going concern statement
Accounting standards require the directors to assess the Group’s ability to continue to adopt the going concern basis of accounting. In performing
this assessment, the directors consider all available information about the future, the possible outcomes of events and changes in conditions
and the realistically possible responses to such events and conditions that would be available to them, having regard to the ‘Guidance on Risk
Management, Internal Control and Related Financial and Business Reporting’ published by the FRC in September 2014.
In order to assess the appropriateness of the going concern basis the directors considered the Group’s financial position, the cash flow
requirements laid out in its forecasts, its access to funding, the assumptions underlying the forecasts and the potential risks affecting them.
After performing this assessment, the directors concluded that it was appropriate for them to continue to adopt the going concern basis in
preparing the Annual Report and Accounts.
PAGE 52 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A5
Corporate responsibility
The Group believes that the long-term interests of shareholders, employees, customers and other stakeholders are best served by acting in a
socially responsible manner and aims to ensure that a high standard of corporate governance and corporate responsibility is maintained in all
areas of its business and operations.
A5.1 Non-Financial Information Statement
The Group includes information on certain environmental, social and governance matters in its strategic report in accordance with sections
414CA and 414CB of the Companies Act 2006.
In addition to the description of the Group’s business model, discussed in section A2, the Group’s remaining disclosures are included in this
section A5. This includes a discussion of the Group’s risk, policies, outcomes and key performance indicators with respect to each of the areas
set out in the Act, as follows:
Area
(a)
Environmental matters
(b)
Employees
(c)
(d)
(e)
Social matters
Respect for human rights
Anti-corruption and anti-bribery matters
A5.2 People
Reference
Section A5.3
Section A5.2
Section A5.4
Section A5.5
Section A5.6
The welfare, development and engagement of the Group’s employees are central to developing a strong culture, with employee capability and
motivation acknowledged as being central to the delivery of the Group’s strategy.
Engagement levels are monitored through external assessments, such as Investors in People (‘IIP’) and other external employee surveys. The
most recent survey was via the IIP assessment in February 2019 which noted that across the 27 themes assessed, 100 out of 108 indicators
were met with notable strengths including; a strong values-based culture, a clear people strategy that is built upon high levels of empowerment
and devolved accountability, and a universal and strong sense of pride for delivering quality and high standards of customer service. The Group
was reaccredited with the IIP Gold Standard which was first achieved in 2013 and it maintains its IIP Champion Status; a recognised best
practice status awarded to less than 1% of financial services companies in the UK. The next employee engagement survey is planned to take
place in June 2020.
PAGE 53 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Employment conditions
All of the Group’s employees are based in the UK and there is commitment to upholding all aspects of employment law. The Group believes
that its strategic objectives are best served by building a stable permanent skill base and therefore minimises its use of short-term and
temporary staff.
At 30 September 2019, employees on temporary or short-term contracts accounted for 2.1% of the workforce (2018: 0.9%) and no use was
made of zero-hours contracts. The Group’s annual employee turnover for the year was 11.5% (2018: 16.1%), returning to the Group’s longer-term
normal level.
Flexible working is actively encouraged across all areas, to promote a work-life balance for individuals and to ensure that the Group retains
the skills and experience of its people. The Group monitors working practices to ensure that it complies with the Working Time Regulations to
ensure no one is forced to work more than a 48 hour week over an average 17 week period. This includes the monitoring of any second jobs.
The Group generally only employs persons over the age of 18, except in connection with apprenticeship or other training arrangements.
Remuneration packages across the business are compliant with the UK’s national minimum wage rates. In addition, the Group has been
accredited as a Living Wage employer since June 2016, by the Living Wage Foundation. The independent Living Wage Foundation sets an
hourly rate calculated according to the cost of living in the UK which is updated annually. This is a higher rate than the government’s National
Living Wage. Accredited employers such as the Group must not only pay this rate to their own employees, but ensure that any contractors used
also undertake to do so.
When responding to changes in its business, the Group always seeks to minimise the requirement for compulsory redundancy, retraining and
redeploying employees wherever possible.
The Human Resources department actively works alongside the Group’s management to recruit, develop and retain capable people.
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 its customers. The Group has invested not only in
management training to ensure managers are equipped to support fair working practices, but also in educating all employees to ensure the
policy is fully embedded.
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
and that they should not be disadvantaged by unjust or unfair conditions or requirements.
The Group aims to ensure that applications for employment from people with disabilities and other under-represented groups are given full
and fair consideration and that all employees have access to the same training, development and job opportunities. Every effort is also made to
retrain and support employees who suffer from disabilities during their employment, including the provision of flexible working to assist their
return to work.
During this year, an automated recruitment system was introduced which automatically anonymises applicants at the first stage of selection.
This intervention was an intended action to minimise any unconscious bias and support the Group’s equality, diversity and inclusion strategy.
The Nomination Committee, as the board committee responsible for diversity issues across the Group, oversees policies and performance on
diversity. While the Group is confident that there is no systematic gender bias in its recruitment or remuneration practices, it is conscious of the
underrepresentation of women at senior levels in the financial services sector and it anticipates that one of the effects of its Women in Finance
initiative will be to erode the gender pay gap over time by increasing female representation at senior levels.
Women in Finance
The Group understands the significance and value of building strong and diverse teams, with leaders from all backgrounds. Gender diversity is
an important element of the Group’s people strategy and the Women in Finance Charter was signed in 2016.
The Women in Finance Charter, which is sponsored by HM Treasury, is an initiative amongst financial services companies in the UK, aimed at
promoting equality of opportunity in the workplace. The CFO is the project sponsor and progress against the Charter requirements is monitored
by the executive management.
In January 2017 the Group’s first set of internal targets under the charter was published on its website. They include a target of 35% female
representation in senior management roles by January 2022, increasing from 26% at the time the targets were set. All of the Group’s diversity
targets are published on the ‘Corporate Responsibility’ section of the Group’s website, together with annual progress updates.
PAGE 54 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The definition of senior management used in the Group’s ‘Women in Finance’ targets is the same as that used by the Hampton-Alexander
Review. The Group is pleased to confirm the proportion of female senior managers on this basis at 30 September 2019 was 35.9%
(2018: 29.1%), reaching its objective significantly ahead of the target date.
Gender Pay
As required by legislation, the Group has calculated its gender pay gap as at April 2019. The results will be published on the government website
and on the Group’s own website and are summarised below.
Median gender pay gap
Mean gender pay gap
Median bonus pay gap
Mean bonus pay gap
April 2019
April 2018
33.9%
41.3%
1.2%
76.9%
30.8%
36.8%
1.2%
84.6%
The median and mean pay gaps are broadly in line with the 39.1% median pay gap and 35.5% mean pay gap in the financial services sector
reported by the Office of National Statistics in their Annual Survey of Hours and Earnings published in October 2019. They are also broadly in
line with those for other businesses in the sector. While the gender pay gap has increased year-on-year, the Group’s initial analysis of the most
recent figures indicates that this is principally driven by the Titlestone acquisition undertaken between the two snapshot dates, and other
changes in the staffing mix. The Group is committed to increasing the representation of women in its senior roles, which will reduce the gender
pay gap in the longer term.
88.0% of male employees and 90.1% of female employees received a bonus (2018: 83.4% and 87.9%), as defined by legislation, which includes
payments under the Group’s profit related pay scheme. The difference between the mean and median bonuses reflects the impact of a very
small number of bonus payments to executive directors and other very senior staff.
The Group analyses gender pay gap data on an ongoing basis as part of the Women in Finance initiative, to identify potential issues and
determine what action might be required. However, work during the year reviewing groups of directly comparable positions did not suggest
evidence of systematic gender bias or unequal pay practices.
The Group welcomes the interest in this issue generated by the public reporting of gender pay but would favour a review of the detail of the
legislation in the light of experience to date to ensure all disclosures required are comparable and understandable.
Composition of the workforce
During the year the workforce has grown by 1.3% to 1,362 people (2018: 1,345). Information on the composition of the workforce at the year
end is summarised below:
Employees
Number
Percentage
Management grade employees
Number
Percentage
Senior managers
Number
Percentage
Directors
Number
Percentage
2019
Females
711
52.2%
115
35.4%
7
18.9%
2
22.2%
2019
Males
651
47.8%
210
64.6%
30
81.1%
7
77.8%
2018
Females
711
52.9%
98
34.4%
5
18.5%
2
18.2%
2018
Males
634
47.1%
187
65.6%
22
81.5%
9
81.8%
Of these employees, ethnic minority employees comprised 13.4% of the workforce (2018: 11.6%) and 1.8% of management grade employees
(2018: 1.2%). The definition of ‘senior manager’ used in the table above is that required by the Companies Act 2006 (Strategic Report and
Directors Report) Regulations 2013 which differs from that used by the Hampton-Alexander Review.
PAGE 55 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 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 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 learn and develop according to their abilities.
In June 2019 the Group conducted its third annual diversity survey to obtain anonymous feedback from employees on their age, gender,
ethnicity, sexual orientation, religious beliefs and disability. A positive response rate of 67% was received (2018: 72%) and, as expected, the
survey illustrated our workforce is diverse. The results were reviewed at executive level and the action plan, agreed in line with the Group’s
commitment to the Women in Finance Charter, was amended where appropriate. This plan includes requiring improved diversity from external
recruitment partners, providing more flexible working opportunities and the provision of mentoring support for individuals.
Health and wellbeing
The health and wellbeing of the Group’s employees is an important element of its people strategy. It offers a cycle-to-work scheme, provides
fruit in offices and other health benefits through employee schemes.
An internal team of emotional wellbeing volunteers, identified and trained with the support of the charity, Mind, during 2018, is now embedded
and provides support to individuals experiencing issues within their personal life or at work, which may impact on their emotional, psychological
or social wellbeing. Mental health awareness training was also provided to managers across the Group during the year, and a mobile app focused
on developing and maintaining positive mental health strategies is provided to all Group employees.
Training and development
The Group has been accredited under the ‘Investors in People’ scheme since 1997 and its Gold status was confirmed again in February 2019.
This demonstrates the Group’s commitment to the training and development of all its employees.
In addition, the Group has held Investors in People Champion status for the last six years. This is given to organisations who are seen as pioneers
in people management practices and role models in strategic leadership and is currently held by only 1% of financial services companies in
the UK. It involves the Group in active networking with other organisations and offering mentoring support to smaller organisations that are
working towards gaining Investors in People status.
All employees receive an appraisal at least annually. These reviews are designed to assist employees in developing their careers and to identify
and provide appropriate training opportunities. Appraisals also provide a method to track individual’s progress and identify opportunities to
develop them into further roles, thereby supporting the Group’s overall succession planning objectives.
During the year the Group joined the Women Ahead 30% Club cross-company mentoring scheme, providing 10 trained mentors to support
female mentees from other companies, whilst nominating 10 female mentees to receive external mentoring support at the same time. Feedback
from the first cohort was very positive and the Group will be continuing with an additional 10-person cohort for the forthcoming year.
The Group has continued to draw down on Apprenticeship Levy funds to support its development objectives and the internal Management
Academy was certified with the Chartered Management Institute (‘CMI’) to facilitate this. There are typically over 100 people completing
professional qualifications at any one time across the Group. The Group currently has 41 apprentices (3% of employees) registered under the
levy scheme, utilising 47% of its levy pot in the past 12 months. These apprenticeships cover a range of specialist and operational roles including
IT, finance, underwriting, and first line management. Whilst a higher take up would be desirable, the requirement for apprentices to spend 20%
of their time out of the business makes identifying suitable roles challenging.
The Group provides financial support for professional development and approximately 7.7% of employees are undertaking professional
qualifications at any one time. 40% of the employees achieving professional qualifications in the year were female.
During the period work has continued to embed the internal mentoring programme, accredited by the CMI, which helps to support succession
planning strategy and develop future leaders. Management development has been a core focus to support the Group’s wider succession
planning strategy, as well as developing more female employees to increase the pool of available internal candidates. The Group held a senior
leadership conference in January 2019 and two senior leadership development centres have been held during the period.
The corporate training and development strategy focusses on providing opportunities to develop all employees and is central to the achievement
of the Group’s business objectives. On average, employees received 6.9 days training in the year (2018: 7.5 days), which is significantly higher
than the average figure quoted by the Chartered Institute of Personnel and Development (‘CIPD’) of between 2.8 and 3.3 days for the private
sector. This included online training undertaken by all employees on various matters including regulatory requirements.
Recruitment
The Group remains committed to employing individuals from the communities in which it is based. We engage with local schools and colleges
in the Solihull area, where the Group has its headquarters, through careers fairs to offer ‘employability workshops’ and to promote ourselves as
a local employer. In addition, we have offered 11 work experience placements to local students this year.
We also run a successful ‘refer a friend’ scheme whereby employees receive a referral fee if an individual they refer for a role passes probation.
This year 29 individuals were successfully recruited through this scheme (2018: 55).
PAGE 56 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Employees’ involvement
The directors recognise the benefit of keeping employees informed of the progress of the business. The Group operates a People Forum,
attended by employee 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 and provide feedback on matters
affecting them.
The purpose of the Forum is to encourage and develop an employee voice to support effective decision making and continual business
improvement, to protect the Group’s strong culture and to deliver good customer outcomes. During the year, the Forum has been restructured
to reflect the current organisational structure. In addition, the People Forum has been designated as the channel through which employee
views will be communicated to the Group’s Board as required by the 2018 Code. The Forum will have direct contact with the Board, with regular
meetings with the non-executive directors commencing from November 2019. Specific outcomes from the engagement activities will be
reported in the Annual Report from 2020.
Employees at all locations are provided with regular information on the performance and plans of the Group, and the financial and economic
factors affecting it, through electronic information 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 appraisal process and communication between directors, managers,
teams and individual employees.
Involvement in industry initiatives on employment standards
This year the business has provided support to external working groups focussing on employment standards organised by industry bodies such
as UKF and the FLA.
The Group’s membership of the Investors in People Gold Club involves sharing best practice with other Gold Standard employers and it hosts
one networking event each year.
Health and Safety
The Group is committed to providing a healthy and safe working environment for all employees, contractors and visitors to its premises, and
those impacted by its operations in public areas.
The Group’s principal source of health and safety related risk is in the vehicle maintenance operation of Specialist Fleet Services Limited (‘SFS’)
undertaken at either directly controlled premises or any contracted sites. The Group aims to be compliant with all applicable health and safety
legal requirements, and to ensure that best practice management standards are implemented and maintained across all operations.
Employees and contractors, are provided with appropriate levels of information, instruction, training and supervision, to empower them to
take ownership of their responsibility for a healthy and safe environment and are encouraged to report any concerns in line with health and
safety objectives.
The Group’s occupational health and safety management system (‘OHSMS’) includes a health and safety policy, risk assessments, performance
evaluation and regular health and safety management meetings monitoring performance, objectives and targets.
The Group has a dedicated health and safety manager who reports, ultimately, to the Chief Operating Officer, the executive committee member
responsible. Health and safety incidents are classified as operational risk incidents for the purposes of the Group’s risk management system
and monitored through the operational risk management system and the Operational Risk Committee (‘ORC’).
In April 2019, the Group (excluding SFS) migrated to the new standard for OHSMS and is now certified to ISO45001:2018. Compliance is audited
bi-annually by a UKAS accredited auditor.
SFS has its own health and safety manager and OHSMS. Incidents are investigated locally with access to Group resources as required. The
operation is currently certificated to BS:18001 and intends to migrate to ISO45001:2018 during its next compliance audit cycle.
The number of fire marshals, first aiders and other qualified personnel is monitored, and continues to be sufficient with training and adequate
cover provided in all offices. Defibrillator machines are available at all sites.
Health and safety performance continues to be good with the number of accidents and incidents remaining at a low level. During the financial
year ended 30 September 2019, there were no prosecutions or any enforcement action from visits by the authorities for non-compliance in
respect of health and safety matters.
During the year, only 19 incidents were reported (2018: 14), all of a minor nature with 1 lost time incident reported under the Reporting of
Incidents, Disease and Dangerous Occurences Regulations 2013 (‘RIDDOR’) (2018: 1).
PAGE 57 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A5.3 Environmental issues
The Group’s environmental impacts can be considered under two headings, its operational impacts and the impact of its lending products. Until
recent periods the focus of the Group’s environmental policies has been on its own activities, which are described further below, but it is clearly
true that the use to which customers put the funds which are advanced to them will also have an impact. This gives rise to two related issues:
•
•
Climate change and other environmental factors may increase financial risks. As an example, increased flooding risk might have an adverse
impact on security asset valuations
Regulatory and governmental pressure might be brought to bear on lenders, amongst other businesses, to reduce the environmental
impacts of their product chains
The Group already considers these types of issue in its underwriting and credit risk processes to some extent. Examples of how the Mortgage
business manages its exposure to climate effects and seeks to promote environmentally positive behaviour by customers are given in
section A3.2.1.
During April 2019 the PRA published a Policy Statement noting that climate change, and society’s response to it, present financial risks which
are relevant to its objectives. In its view, while the financial risks from climate change may crystallise in full over longer time horizons, they are
also becoming apparent now. The Statement sets out the regulator’s expectations of the type of strategic approach it expects firms to adopt
in managing such financial risks.
In response to the PRA’s intervention and more widespread societal concerns, the Group is developing an enhanced approach to identifying the
potential impacts of climate change on its business and developing a system to managing the financial risks involved.
This process is still in its early stages and the Group will report on progress in future annual reports.
Operational Impact
The Group is mainly engaged in mortgage, consumer and commercial finance and therefore the overall environmental impact of its operations
is considered to be low.
SFS leases refuse collection vehicles to local authorities throughout the UK. SFS undertake additional aftersales activities that include servicing,
maintenance and breakdown support, hence has the most significant potential environmental impacts.
The main environmental impacts of the Group’s other operations are limited to universal environmental issues, such as resource use,
procurement in offices and business travel.
Policy
The Group complies with all applicable laws and regulations relating to the environment. Its environmental commitments are expressed in its
Green Charter which is approved by the CEO and kept under regular review.
The Green Charter aims to:
• Ensure all buildings occupied by the Group are managed efficiently
• Encourage employees to conserve energy
• Promote recycling by negotiating contracts and providing facilities to enable employees to recycle office waste and other used products
•
Control business travel by promoting video conferencing between sites when appropriate and provide opportunities for employees to
travel to work in various ways; such as providing cycle racks
• Ensure liaison with the local community through our Responsible Business initiatives
• Ensure that redundant equipment is disposed of in accordance with the Waste Electrical and Electronic Equipment Regulations (‘WEEE’)
• Ensure that all fluorescent light tubes are disposed of in a safe manner, compliant with appropriate regulation
• Arrange for paper waste products to be recycled, securely, by third parties
Groupwide recycling and awareness campaigns are also run to reduce various forms of waste such as food, consumables or energy.
Risk management
The Group’s environmental commitment is included within the Health, Safety and Environmental policy that is approved by the CEO and the
People Director and which is publicly displayed in its buildings. Energy data is collated by Group Property, the division responsible for managing
the Group’s premises. Consumption figures for all locations occupied, whether directly owned or tenanted, are actively monitored. This is
reported upwards to Board level.
SFS operates from several workshops around the UK and has exposure to several waste streams (oils, vehicle parts etc) that come from
its workshop activities. These are effectively managed under an environmental management system that is certificated to an International
Standard – ISO14001:2015. A dedicated health and safety manager has direct responsibility for environmental issues at all SFS sites.
PAGE 58 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The environmental risk inherent in the Group’s operations is managed by the Group Property function, and is within the remit of the Chief
Operating Officer. It is monitored within the Group’s operational risk management framework and is monitored by the second line Operational
Risk function and the ORC.
The Group complies with the Energy Savings and Opportunities Scheme (‘ESOS’). This is a UK Government initiative, under an EU Directive,
and requires the Group to identify and reduce its energy consumption. The Group is actively engaged in the data collection phase for the next
Environment Agency compliance submission under ESOS due in December 2019.
Supply chain and procurement
The principal suppliers of the Group comprise its outsourced savings administrator, legal and professional services providers, building lessors
and IT service providers. They therefore are exposed to similar operational environmental risks to those of the Group.
The Group remains committed to identifying, targeting and addressing inefficiencies within its supply chain. The procurement function is
currently working with key suppliers to identify solutions to continue to reduce the environmental impacts of our business activities whether
direct or indirectly.
All pre-printed stationery items used by the Group are from renewable sources certified by FSC. 80.3% of the purchased electricity in the year
was obtained from sources certified as renewable by the Office of Gas and Electricity Markets (‘OFGEM’).
Environmental initiatives
The Group’s environmental initiatives in the period include:
• Sourcing electricity for the Group’s largest sites from 100% renewable energy sources
•
•
Increasing the proportion of sustainably sourced paper in printers and photocopiers. This now covers approximately 93% of the Group’s
operations
Notifying shareholders than half-year financial reports will only be available via our website from 2020, to reduce the environmental impact
from shareholder communications
The financial year ending 30 September 2020 will see objectives being established against current energy performance to further reduce
consumption through energy initiatives, new plant and technology.
Performance indicators
The environmental key performance indicators for the Group, determined having regard to the Reporting Guidelines published by the
Department of Business, Energy and Industrial Strategy (‘BEIS’) and the Department for Environment, Food and Rural Affairs (‘DEFRA’) in
March 2019, are set out below.
The Group does not consider it has significant environmental impacts under the headings ‘Resource Efficiency and Materials’, ‘Emissions to
Land, Air and Water’ or ‘Biodiversity and Ecosystem Services’ set out in the Guidelines, due to the nature of its business activities.
This information is presented for the twelve months ended 30 September in each year and includes all entities included in the Group’s financial
statements. Information for acquired entities is included from the acquisition date. Normalised data is based on adjusted total operating
income of £297.6 million (excluding the £9.7 million gain on derecognition) (2018: £273.9 million, excluding the £28.0 million gain on financial
asset sales).
PAGE 59 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Greenhouse gas (‘GHG’) emissions
Scope 1 (Direct emissions)
Combustion of fuel:
Operation of gas heating boilers
Petrol and diesel used by company cars
Operation of facilities:
Air conditioning systems
Scope 2 (Energy indirect emissions)
Directly purchased electricity
Total scope 1 and 2
Normalised tonnes - scope 1 and 2 CO2 per £m income
Scope 3 (Other indirect emissions)
Fuel and energy related activities not included in scope 1 or 2
Water consumption
Waste generated in operations
Total scope 3
Total scopes 1, 2 and 3
Normalised tonnes scope 1, 2 and 3 CO2 per £m income
2019
2018
Tonnes CO2
Tonnes CO2
519
679
24
1,222
995
2,217
7.5
542
14
21
577
2,794
9.4
653
641
20
1,314
1,163
2,477
9.0
637
11
20
668
3,145
11.5
CO2 values above are calculated based on the DEFRA / BEIS guidelines published in August 2019. CO2 values for the year ended 30 September 2018
have been restated for the revised conversion factors published by DEFRA / BEIS.
The amounts shown above for total scope 1 and scope 2 emissions are those required to be reported under the Companies Act (Strategic Report
and Directors Reports) Regulations 2013. Other scope 3 emissions not reported above are not considered to be significant.
The Group continues to manage its consumption levels carefully and, in the period, continued to optimise its use of its resources. It also benefits
from the reduction in GHG conversion factors applying to UK purchased electricity as the profile of generation activities in the country changes
towards renewables. These factors combined to reduce the normalised emissions figure.
The Group has not been involved in any prosecutions, accidents or similar non-compliances in respect of environmental matters, nor incurred any
fines in respect of such matters.
Power usage
The Group uses mains electricity and natural gas from the UK grid to provide heat, light and power to its office buildings. It also uses fuel in
company vehicles and through business travel of employees. The amount of power used in the year ended 30 September 2019 is shown below.
Renewable electricity
Other electricity
Electricity
Natural gas
Motor fuel
Total
Normalised MWh per £m income
2019
MWh
3,123.5
768.1
3,891.6
2,817.1
3,099.9
9,808.6
33.0
2018
MWh
4,107.5
3,547.6
2,913.9
2017
MWh
4,040.1
3,192.4
3,675.9
10,569.0
10,908.4
38.6
43.2
Consumption levels have remained broadly stable over the year. However, the normalised usage has continued to improve with more efficient
utilisation of the Group’s facilities.
PAGE 60 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Gas and electricity usage are based on consumption recorded on purchase invoices. Vehicle fuel usage is based upon expense claims and
recorded mileage.
For the first time, in the year ended 30 September 2019, the Group has been able to report that a proportion of the electricity is sourced from
renewable energy sources, as accredited by OFGEM.
The 2019 DEFRA / BEIS guidelines also require that the Group report on power usage including the impact of fuel used by company vehicles.
This figure was not reported prior to this year, and additional comparative figures have been provided above.
Water usage
The Group’s water usage is limited to the consumption of piped water in the UK and no water is extracted directly. Water usage in the year ended
30 September 2019 was 13,010m3 (2018: 10,155 m3), based upon consumption recorded on purchase invoices, a normalised amount of 43.7m3
per £m income (2018: 37.1m3 per £m income). A water saving initiative is in place which is intended to reduce year on year water usage across
the sites where the Group has full responsibility for the premises occupied.
Waste
SFS are the Group’s primary waste producers. Their vehicle servicing activities generate a variety of different waste steams – including various
grades of oil, and a range of metals and plastics. These wastes are managed responsibly in accordance with an ISO14001:2015 certificated
management system. Waste streams generated by SFS are disposed of in accordance with the waste hierarchy before being consigned to
approved waste transfer stations under contract and Waste Transfer Notes obtained.
The Group’s waste output outside SFS consists of a mixture of general office waste types which includes principally paper and cardboard
with some wood, plastic and metals. The Group provides facilities in its offices for recycling paper, cardboard, newspapers, glass, plastics and
aluminium and steel cans. Batteries and printer and photocopier cartridges are collected and sent for recycling.
All the Group’s waste is either recycled or sent to landfill.
Amounts of waste generated in the year ended 30 September 2019 together with the methods of disposal are shown below.
Recycled
Landfill
Total
Normalised tonnes per £m income
Waste generation data is based upon volumes reported on disposal invoices.
2019
Tonnes
122
187
309
1.04
2018
Tonnes
202
154
356
1.30
2017
Tonnes
282
169
451
1.78
A5.4 Social and community matters
The Group’s activities are based wholly within the United Kingdom. It operates within the legal and regulatory framework of the UK,
acknowledging the importance of corporate responsibility and citizenship in its relationships with its customers, the wider community and
other stakeholders.
Where possible, it uses its lending relationships to promote good practice. In particular, its buy-to-let mortgage division demands minimum
standards from landlords in the properties it funds. This form of intervention should drive up standards in the private rented sector.
Commitment to our customers
The Group’s strategic objective is to be a prudent, risk focussed, specialist bank with a closely controlled, cost efficient operating model which
places the delivery of fair customer outcomes at its core.
PAGE 61 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Putting customers’ interests at the heart of the business is therefore integral to the achievement of that objective, and the Group’s culture. We
want our customers to be confident that we will always consider their needs and act fairly and responsibly in our dealings with them. We strive
to ensure that all our customers can be confident that:
• Products and services are designed to meet their needs
• Our employees are appropriately skilled and experienced to provide the services they require
• The information given to them will be clear and jargon free
• Products will perform as they are led to expect
• They will not face unreasonable post-sale barriers to change a product, switch provider, submit a claim or make a complaint
• All complaints will be listened to and claims assessed carefully, fairly and promptly
• Where applicable, they will be made aware of how they can refer their complaint to the FOS
•
If they are vulnerable and/or in financial difficulties, we will provide a high level of support and make sure they are signposted to sources of
independent advice
• They will be made aware of the FSCS and the protection this provides for them
The desire to achieve positive outcomes for our customers is an important commercial differentiator which has helped the Group build strong
relationships over many years. This is supported by a focus in employee training programmes on areas which impact on customer outcomes,
such as the correct approach to working with vulnerable customers. This pro-active approach accords with the FCA’s Principles for Business,
particularly with regard to treating customers fairly and ensuring that all communications are clear, fair and not misleading. We ensure that we
know how well we are performing in respect of these requirements, regularly adjusting what we do to deliver better customer solutions.
The Board and executive management are committed to maintaining and developing this culture across all the Group’s businesses.
Complaint handling
We do not always get things right and take customer complaints very seriously. Each complaint is acknowledged promptly, and the Group works
with customers to understand their feedback, investigating these fully and responding swiftly in a fair and open manner.
The Group aims to resolve complaints at the first point of contact but acknowledges that some complaints will require further specialist
investigation and time to resolve. Where this is the case, regular contact is maintained with the customer to keep them informed of the progress
of their complaint. The Group has also established contacts within previous service providers to ensure any relevant complaint is resolved at the
earliest possible opportunity where appropriate.
Where applicable, ‘Alternative Dispute Resolution’ information is provided to customers to allow them to appeal to independent parties if they
are not satisfied with our response. These include the FOS, the FLA and the Credit Services Association. Where customers feel the need to
appeal, we co-operate fully and promptly with any settlements and awards made by these parties.
Every complaint is viewed as an opportunity to improve our business, an opportunity to identify where complaint handling is going wrong, and
most importantly, an opportunity to put things right for our customers. Root cause analysis is completed on complaints to ensure appropriate
corrective actions are taken to address the issue and minimise the risk of re-occurrence for other customers.
Information on the number and nature of complaints and on their resolution is reported regularly through the Conduct and Compliance
Committee to the board level Risk and Compliance Committee for monitoring and, if appropriate, for action to be taken.
Supporting the community
The Group contributes to registered charities relating to financial services or serving the local communities in which it operates. Contributions
of £1,522,000 (2018: £1,950,000) were made by the Group during the year to the work of the Foundation for Credit Counselling which operates
the StepChange Debt Charity. The Group also contributed to charities throughout the year by way of single donations.
Other charitable contributions made in the year totalled £24,200 (2018: £25,300). 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 including:
Kids Cancer Charity, 3H Fund - Helping Hands for Holidays, Lupus UK, Multiple Sclerosis Society, Chicks, Soroptimist International Solihull and
District, Kids in Action and Super Hero Sport Foundation, amongst others.
Employees have also been making a difference to the local community in many ways. A volunteering programme was launched in January 2019
and to date employees have delivered 47 volunteering days (3.4% engagement), targeting issues linked to poverty. Activities have included:
• Volunteering at SIFA Fireside, a specialist centre in the centre of Birmingham dedicated to supporting the homeless people of Birmingham
• Supporting a local primary school to renovate their playground
•
Volunteering at a “Ready for Work” initiative run by Business in the Community that supports getting homeless people back into the
workplace
Employees also took part in education initiatives, supporting ‘Life Ready’ days, which provide an opportunity to talk to school students about
managing finances, budgeting and implications of debt, and attending Careers Conventions at local schools.
PAGE 62 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts In addition, the Group’s External Relations team arranged ‘the Great Mortgage Sleep Out’ in November 2018 to raise awareness of homelessness,
which raised £15,000 for youth homelessness charities, with 34 individuals participating.
At Christmas 2018, food parcels were collected for Christians Against Poverty, with 134 food parcels delivered to 80 families.
The Group also supports Paragon’s Charity Committee, consisting of volunteer employees, which organises a variety of fundraising activities
throughout the year. In the calendar year 2018, £15,772 was raised for Solihull Mind and Birmingham Children’s Hospital, while in the first nine
months of 2019, £15,532 has been raised for Dementia UK. All employees are given the opportunity to nominate a charity each year and a vote
is carried out amongst the employees to select the charity or charities to benefit from the following year’s fundraising activities.
Taxation policy and payments
Materially all of the Group’s taxable income arises in the UK and therefore it has no presence in jurisdictions considered to enable tax base
erosion and profit shifting.
The Group’s tax strategy is to comply with all relevant tax obligations whilst cooperating fully with the tax authorities. The Group recognises
that in generating profits which can be distributed to shareholders it benefits from resources provided by government and the payment of tax
is a contribution towards the cost of those resources. The Group will only undertake tax planning that supports commercial activities and, in the
UK context, is not contrary to the intention of Parliament.
As a group containing a bank, the Group is subject to The Code of Practice on Taxation for Banks (the ‘Bank Tax Code’) published by Her
Majesty’s Revenue and Customs (‘HMRC’) in March 2013. The Group has previously confirmed to HMRC that it was unconditionally committed
to complying with the Bank Tax Code, and formally re-approved the Group’s tax governance policies and the tax strategy outlined above.
During each financial year the Group publishes a tax strategy document for that year on its website, in accordance with the Finance Act 2016.
This document addresses the following matters:
• The approach of the Group to risk management and governance arrangements in relation to UK taxation
• The attitude of the Group towards tax planning (so far as affecting UK taxation)
• The level of risk in relation to UK taxation that the Group is prepared to accept
• The approach of the Group towards its dealings with HMRC
The third such statement was published during the year and can be found in the investor relations section of the Group’s website.
The published strategy is owned by the Board collectively in accordance with HMRC’s published expectations. The Chief Financial Officer has
been designated as the Senior Accounting Officer for tax purposes and, as such, reviews compliance with the Group’s policies each year.
The Group has an open and positive relationship with HMRC, meeting with their representatives on a regular basis, and is committed to full
disclosure and transparency in all matters.
The Group is resident and operates in the UK and its tax payments to the UK authorities include not only corporation tax but also substantial
payroll taxes. The amounts of the Group’s cash payments to UK national and local tax authorities in the year, including Pay As You Earn (‘PAYE’)
and National Insurance (‘NI’) contributions deducted from employee wages and salaries were as follows:
Corporation tax
PAYE and NI
VAT
Stamp duty
Total national taxation
Business rates
2019
£m
39.4
27.3
2.1
0.1
68.9
1.4
70.3
2018
£m
32.0
28.0
1.6
0.2
61.8
1.1
62.9
A5.5 Human rights
The Group respects all human rights and in conducting its business regards those rights relating to non-discrimination, fair treatment and
respect for privacy to be the most relevant and to have the greatest potential impact on its key stakeholder groups of customers, employees
and suppliers.
The Group’s commitment to supporting its people’s employment rights is described in section A5.2.
PAGE 63 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The Group operates exclusively in the UK and, as such, is subject to the European Convention on Human Rights and the UK Human Rights
Act 1998.
The Board and the CEO have overall responsibility for ensuring that all areas within the Group uphold and promote respect for human rights.
The Group seeks to anticipate, prevent and mitigate any potential negative human rights impacts as well as enhance positive impacts through
its policies and procedures and, in particular, through its policies regarding employment, equality and diversity, treating customers fairly and
information security.
The Group’s policies seek to ensure that employees comply with the relevant legislation and regulations in place in the UK and to promote good
practice. The Group’s policies are formulated and kept up to date by the relevant business areas, authorised in accordance with the Group’s
governance procedures and are communicated to all employees and included in the Human Resources Policies Manual.
The Group’s compliance with human rights regulation falls within its overall compliance regime, and any breaches or potential breaches would
be investigated and addressed through the Group’s risk management framework.
The Group supports the objective of the Modern Slavery Act 2015, in raising awareness of modern slavery and human trafficking. The Group’s
annual Modern Slavery Statement is published on its website and also reflected in relevant policies.
The Group is committed to ensuring that there is no modern slavery or human trafficking in its supply chains or in any part of the business and to
acting ethically and with integrity in all business relationships. It actively engages with suppliers to ensure that compliance with Modern Slavery
legislation is achieved.
The statement describing the Group’s policies for achieving this can be found on the Group’s website: www.paragonbankinggroup.co.uk.
The Group undertakes extensive monitoring of the implementation of all of its policies and has not been made aware of any incident in which the
organisation’s activities have resulted in an abuse of human rights or a breach of Modern Slavery legislation. No fines or prosecutions in respect
of non-compliance have been incurred.
A5.6 Business practices
The Group carries out its business fairly, honestly and openly. It has a comprehensive anti-bribery and corruption policy, endorsed by the
directors, covering all employees and operated throughout the Group. It will not make bribes, nor will it condone the offering of bribes on its
behalf. It is the Group’s policy that it will not accept bribes, nor will it agree to them being accepted on its behalf and will avoid doing business
with those who do not accept its values and who may harm its reputation.
The Group carries out an annual risk assessment as required by the Bribery Act 2010 and concluded that it is not a company with a high risk of
bribery. The Group conducts all of its business within the UK and its only significant outsourcing arrangement relates to the administration of its
savings operations by the outsourcing arm of a major UK building society. The UK is not considered a jurisdiction with a high incidence of corrupt
practices, ranking joint 11th in the Corruption Perceptions Index for 2018, out of 180 countries. However, the Group takes its responsibilities
seriously and will not tolerate bribery in any form on any scale and, as such, its policies and procedures are kept under regular review. The Group
will self-report any serious incidence of bribery or corruption that is identified.
The Group’s policies cover the conduct of its business, the Group’s interaction with suppliers and contractors and the giving or receiving of gifts
and corporate hospitality. It prohibits facilitation payments. Before new suppliers are approved, the Group’s procedure requires that they must
be assessed against the requirements of the anti-bribery and corruption policy. The policy is updated and a risk assessment conducted on an
annual basis.
All employees are required to read the Group’s anti-bribery and corruption policy and undertake annual on-line training to assess their
understanding. The anti-bribery culture forms part of the induction course for all new employees and is reinforced at subsequent training
sessions. Any employee found to be in breach of these policies will be subject to disciplinary action. No such disciplinary action has taken place
in the year ended 30 September 2019.
The CRO, in conjunction with the Head of Financial Crime, who are both part of the ‘second line’ Risk and Compliance function, are responsible
for ensuring the Bribery Act risk assessment and resulting policies and procedures are in place and reviewed on a regular basis. They are also
responsible for ensuring any changes in the law are noted and applied to the Group’s policies and procedures, where appropriate.
As a financial services entity, the Group also has procedures in place to ensure it cannot be used to facilitate money laundering, sanctions abuse
or other forms of financial crime. Employees receive regular annual training in these areas, with their understanding being tested and levels of
completion reported to regulators. The Group’s money laundering reporting officer is the Deputy CRO, who is part of the second line Risk and
Compliance function.
All business heads are responsible for having the appropriate controls in place to ensure that employees adhere to the anti-bribery and
corruption policies and procedures and other policies relating to business practices at all times. This is monitored as part of the Group’s risk
management process and reviewed, as appropriate by the Internal Audit function.
A whistleblowing hotline, run by an independent third party, is available to staff who have concerns over any aspects of the Group’s business
practices. This is described further in section B5.7.
The Group has not been involved in any incidents resulting in prosecutions, fines, or penalties or in similar incidents of non-compliance in respect
of bribery, corruption or other illegal business practices (2018: none).
PAGE 64 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A6
Approval of Strategic Report
Section A of this Annual Report comprises a Strategic Report for the Group which has been drawn up and presented in accordance with, and
in reliance upon, applicable English company law, in particular Chapter 4A of the Companies Act 2006, and the liabilities of the directors in
connection with this report shall be subject to the limitations and restrictions provided by such law.
It should be noted that the Strategic Report has been prepared for the Group as a whole, and therefore gives greater emphasis to those matters
which are significant to the Company and its subsidiaries when viewed as a whole.
Approved by the Board of Directors and signed on behalf of the Board.
Pandora Sharp
Company Secretary
26 November 2019
PAGE 65 • Strategic Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B.
CORPORATE
GOVERNANCE
How the Group is run and how risk is managed
B1
B2
B3
B4
B5
B6
B7
B8
B9
Chair of the Board’s statement
An overview of governance in the year
Board of directors
The directors and their experience
Corporate governance
The system of governance, how the Board operates and how the Group complies with
the Code
Nomination Committee
Policies and procedures on governance, board appointments and diversity
Audit Committee
How the Group controls its external and internal audit processes and its financial
reporting systems
Remuneration
Policies and procedures determining how directors are remunerated
Risk management
How the Group identifies and manages risk in its businesses
Directors’ report
Other information about the structure of the Group required by legislation
Directors’ responsibilities
Statement of the responsibilities of the directors in relation to the preparation of the
financial statements
Page 68
Page 70
Page 75
Page 82
Page 84
Page 93
Page 125
Page 140
Page 144
B1
Chair's statement on
corporate governance
Dear Shareholder
It is with pleasure that I introduce the corporate governance report this
year in what has been another significant year with most companies
adopting the UK Corporate Governance Code 2018 (‘the 2018 Code’)
during the calendar year. The 2018 Code emphasises strongly the
contribution of good corporate governance in the achievement of
long-term sustainable success and focusses on a number of areas
that have developed in priority, rightly so, since the first introduction
of the UK Corporate Governance Code in 1992, as well as being a step
change from the 2016 version of the Code. In particular, I welcome
the emphasis on workforce engagement and diversity at all levels
and look forward to working with the Board and management team in
developing further our initiatives in these areas.
As a Board we have chosen to utilise a formal workforce advisory
panel, the People Forum, as the mechanism to engage with the Group’s
workforce. This forum has been based on an existing feedback
mechanism. In addition to feedback from such meetings being
advised to the Board on a regular basis there will also be attendance
at the People Forum by myself and/or a non-executive director at
least twice a year, with the first meeting, on executive remuneration,
having taken place in November 2019. The Board and the Forum
will consider other areas to discuss over the coming year, to ensure
two-way communication and facilitated dialogue exists between the
Board and the workforce, with information feeding into the Board’s
decision-making process and communications back to the workforce
on how the Board has considered and acted on it.
Dialogue with shareholders and regulators, two of our key
stakeholders, takes place frequently during the year and, as part of
the annual regulatory and governance cycles, I, as well as a number
of my Board colleagues, meet with these stakeholders. It is important
to maintain and manage positively such relationships and I consider
these discussions are key to ensuring the ongoing sustainability of
the Group. The Group also considers its other stakeholders including
its workforce, the wider community and environment; customers;
brokers and other
its
operating cycle.
intermediaries, as appropriate, during
As I noted in last year’s report, the Board has adopted the Hampton-
Alexander Review target of at least a third female representation on
the Board by the end of 2020 and we have been working towards
this target during the year. I am passionate about ensuring that the
Board and the Group are diverse, reflective of the communities
in which we operate, and it is one of my personal goals as Chair to
improve the Group’s position. Work undertaken during the year in
respect of below-board Hampton-Alexander targets, as part of the
Women in Finance Charter, has resulted in ‘female senior managers
as a percentage of total senior management’ reaching its target of
35% as at 30 September 2019 and I congratulate management on
reaching this milestone more than a year ahead of our target date.
With the upcoming retirement of Peter Hartill in February 2020 the
Board is currently recruiting for a new Audit Committee Chair. To
help ensure that we meet the Hampton-Alexander target, diversity
of gender and background has been emphasised when considering
candidates. It has proved a challenging recruitment, with strong
candidates being in high demand. However, I am hopeful of an
appointment being announced shortly after the AGM in February
(subject to regulatory and Board approval). In addition, options for
the appointment of a new Senior Independent Director are currently
being considered. Further detail on this and the other work of the
Nomination Committee during the year can be found in section B4.
Fiona Clutterbuck, Chair of the Board
I welcome the emphasis on workforce
engagement and diversity at all levels
and look forward to working with
the Board and management team in
developing further our initiatives in
these areas...
PAGE 68 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Both Peter Hartill and John Heron are due to retire before the
2020 AGM and I would like to thank them personally, and on behalf of
the Board, for their longstanding commitment to the Group. Peter has
been the Senior Independent Director throughout my period as Chair,
and as such his support and challenge have been hugely appreciated.
He has considerable knowledge of the Group and its people and this
experience has been invaluable to me. John is the Group’s longest
serving employee and his in-depth knowledge of the buy-to-let
mortgage market will be greatly missed as well as his broader, very
valuable contribution to Board and management discussions. Mine
and the Board’s best wishes for the future go to both of them.
During the year the Board undertook its triennial externally facilitated
board evaluation with the assistance of
Independent Board
Evaluation’s Ffion Hague. It was a thorough, and forward-focused
evaluation and further detail can be found later in the report. We will
be working on the outputs from the evaluation during the upcoming
financial year and an action plan is currently being produced.
Another area that we are particularly proud of at Paragon is our strong
culture, which is also highlighted in the 2018 Code. In the upcoming
year, for the second time, a review of culture will be undertaken in
addition to a review of the Group’s risk culture. In addition, during
the Investors in People assessment which took place in the financial
year under review, various indictors were considered and notable
strengths identified included a strong values-based culture, a clear
people strategy that is built on high levels of empowerment and
devolved accountability. As the Group grows in size the Board is
committed to ensuring that these values remain a key element of
the business.
My meetings with shareholders, and shareholder advisory bodies,
as part of the remuneration review (see B6 for further detail) have
frequently also touched on other governance matters, such as
succession planning, diversity and workforce engagement and such
discussions help to assist in the development of the governance
process both at board level and within the wider organisation. I would
like to thank shareholders for their continued interest in the Group
and the questions and challenges they raise when we meet.
The Company will be holding its AGM on 13 February 2020 and
I
look forward to welcoming shareholders and discussing the
Group’s progress.
Fiona Clutterbuck
Chair of the Board
26 November 2019
PAGE 69 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B2
Board of directors
Fiona J Clutterbuck (Age 61)
Chair of the Board
Nigel S Terrington (Age 59)
Chief Executive
Appointed to the Board as an independent non-executive
director in 2012 and became Chair of the Board in May 2018
Appointed to the Board as Treasury Director in 1990, Finance
Director in 1992 and became Chief Executive in 1995
Experience
Experience and expertise*
Fiona Clutterbuck has many years of corporate finance
experience at leading UK and international investment banks,
specialising in financial institutions.
During her career she has held the positions of Head of
Strategy, Corporate Development and Communications at
Phoenix Group, Managing Director and Head of Financial
Institutions Advisory at ABN AMRO Investment Bank,
Managing Director and Global Co-Head of Financial Institutions
Group at HSBC Investment Bank and was a director at Hill
Samuel Bank Limited.
Specific areas of expertise*
•
Long term understanding of the Group, its markets and
its people
• Strong and broad listed plc experience
• Strategic analysis skills
• Detailed knowledge of the executive remuneration market
Nigel Terrington’s early career began in investment banking,
which included working for UBS where he ran its Financial
Institutions Group. He joined the Group in 1987, becoming
Treasurer shortly thereafter, before being appointed as
Finance Director and then Chief Executive.
He has been Chair of the Council of Mortgage Lenders (‘CML’),
Chair of the Intermediary Mortgage Lenders Association
(‘IMLA’), Chair of the FLA Consumer Finance Division, a
member of the Mortgage Board of UK Finance (previously
CML) and a Board member of the FLA.
Nigel is an associate of the Chartered Institute of Bankers. In
2017, he received an Honorary Doctorate from Birmingham
City University for services to the finance industry.
Overall, Nigel has expertise gained from long term, through-
the-cycle, strategic and detailed understanding of the Group,
its markets, its operations and its people. He saw the Group
through both the 1992 and 2007 financial crises and has led
the diversification of the Group from a monoline buy-to-let
lender to its current broadly-based specialist banking group.
Committee membership
Chair: Nomination Committee
Current external appointments:
Member of HM Treasury’s Home Finance Forum
Member: Risk and Compliance and Remuneration Committees
Member of Bank of England’s Residential Property Forum
Current external appointments
Non-executive director of Hargreaves Lansdown PLC, chair of
its remuneration committee and member of its audit, risk and
nomination committees
Non-executive director of Sampo PLC (Finnish listed financial
services company) and a member of its audit committee
PAGE 70 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Richard J Woodman (Age 54)
Chief Financial Officer
Appointed to the Board as Director of Corporate
Development in 2012 and became Chief Financial Officer in
June 2014
John A Heron (Age 60)
Managing Director, Mortgages
Appointed to the Board in 2003
Not seeking re-election at 2020 AGM
Experience and expertise*
Experience and expertise*
Richard Woodman joined the Group in 1989 and has held
various senior strategic and financial roles, including Director
of Business Analysis and Planning and Managing Director of
Idem Capital.
He has taken a lead role in the Group’s strategic development
and, in particular, in the loan portfolio acquisition programme
through Idem Capital and the Group’s M&A programme.
He is a member of the Chartered Institute of Management
Accountants.
Broadly, Richard has expertise gained from long term,
through-the-cycle, knowledge and understanding of the
Group, its markets and its operations, in particular its financial
management controls, liquidity and stress testing.
Current external appointments:
None
John Heron joined the Group in January 1986 following a
number of years in the building society industry and is the
Group’s longest serving employee.
John has been instrumental in the development of Paragon’s
buy-to-let mortgage lending programme.
As Managing Director, Mortgages, John is responsible for all
aspects of the Group’s mortgage business which includes the
origination and management of buy-to-let and residential first
and second charge mortgages.
He has been Chair of the Buy-to-Let Panel of the CML and a
member of the IMLA Board.
He is a fellow of the Chartered Institute of Bankers.
John has long term, through-the-cycle, understanding of
the Group, the buy-to-let lending market, its operations, its
management and its people. He has been a significant leader
in the buy-to-let lending market since its establishment in the
late 1990s.
Current external appointments:
Member of UKF Mortgages Product Board
*
All directors have broad knowledge of all areas of the Group’s business but the ‘areas of expertise’ highlight specific areas in relation to an individual’s contribution
to the Group’s long-term sustainable success
PAGE 71 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B2
Board of directors
Hugo R Tudor (Age 56)
Non-executive director
Appointed in 2014 – five years served
Skills and experience
Hugo Tudor spent 26 years in the fund management industry,
originally with Schroders and most recently with BlackRock,
covering a wide range of UK equities. He is a Chartered
Financial Analyst and a Chartered Accountant.
Specific areas of expertise*
• Detailed knowledge of the investor perspective
•
A strong understanding of the executive remuneration
market
Committee membership
Chair: Remuneration Committee
Member: Audit and Risk and Compliance Committees
Current external appointments
Director: Damus Capital Limited
Director: Vitec Global Limited, Vitec Air Systems Limited and
Vitec Aspida Limited
Peter J N Hartill (Age 70)
Non-executive director
Non-executive director since 2011 and became Senior
Independent Director in June 2018
Appointed in 2011 – eight years served
Not seeking re-election at 2020 AGM
Experience
Peter Hartill spent forty years with Deloitte, becoming a senior
audit partner and a business advisor with experience across
a wide range of industries and business issues. Specifically,
he has considerable experience in acquisitions and disposals,
capital raising, risk control and corporate governance in the
financial services sector.
He is a Chartered Accountant and has been Chair of the Audit
Committee since 2011.
Specific areas of expertise*
•
•
Detailed knowledge and experience of the financial services
sector, accounting and auditing practice as well as of the
audit market and accounting regulations
Detailed knowledge of the Group’s financial accounting
practices
Committee membership
Chair: Audit Committee
Member: Risk and Compliance, Remuneration and Nomination
Committees
Current external appointments
Chair: Deeley Group Limited
PAGE 72 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Barbara A Ridpath (Age 63)
Non-executive director
Appointed in 2017 – two years served
Finlay F Williamson (Age 60)
Non-executive director
Appointed in 2017 – two years served
Skills and experience
Barbara Ridpath has worked in finance for most of her career,
in New York, London and Paris at the Federal Reserve Bank of
New York, Standard & Poor’s and JPMorgan.
She was instrumental in the development of UK mortgage
securitisation in the late 1980s and went on to lead the
Standard & Poor’s Ratings Group in Europe, the Middle East
and Africa.
Specific areas of expertise*
•
Strong knowledge of the operation of and implementation of
operational risk management systems
• Detailed knowledge of the securitisation market
Committee membership
Member: Audit, Nomination (since 24 January 2019) and Risk
and Compliance Committees
Current external appointments
Non-executive director of ORX, a trade association for
operational risk professionals
Member of the Ethical Investment Advisory Group of the
Church of England
Member of the International Advisory Council of the Institute
of Business Ethics (‘IBE’) from November 2019
Commissioner of the Marshall Aid Commemoration
Commission until July 2019 and member of the council and
executive committee at Chatham House (the Royal Institute of
International Affairs) until July 2019
Skills and experience
Finlay Williamson was Finance Director of Virgin Money
between 2009 and 2014, where he was responsible for
supporting the design and delivery of the company’s growth
strategy, including the assessment of potential markets, the
development of key propositions and the pursuit of non-
organic opportunities.
Prior to joining Virgin Money, Finlay had a long career at
Royal Bank of Scotland (‘RBS’), where he held a number of
senior finance roles, latterly as Finance Director for RBS’s
Manufacturing and Retail Direct divisions.
He was appointed to the Board of Paragon Bank PLC in
February 2015 and was Chair of its Risk and Compliance
Committee from that date.
Finlay is a Chartered Accountant and a fellow of the Chartered
Institute of Bankers in Scotland.
Specific areas of expertise*
•
•
In depth knowledge and experience of financial services
sector, accounting and risk operations
Detailed experience of overseeing the development of risk
management in the Group
Committee membership
Chair: Risk and Compliance Committee
Member: Audit Committee
Current external appointments
None
*
All directors have broad knowledge of all areas of the Group’s business but the ‘areas of expertise’ highlight specific areas in relation to an individual’s contribution
to the Group’s long-term sustainable success
PAGE 73 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B2
Board of directors
Graeme H Yorston (Age 62)
Non-executive director
Appointed in 2017 – two years served
Skills and experience
Graeme Yorston was Group Chief Executive of Principality
Building Society, the 6th largest mutual in the UK. He has over
43 years’ experience in financial services having carried out a
number of senior roles in Abbey National (now Santander).
Graeme has served on the CBI Council for Wales, the
Board of Business in the Community in Wales and was HRH
Ambassador for BITC in Wales for two years. He was awarded
Director of the Year in Wales by the Institute of Directors
in 2016.
Graeme is a Fellow of The Chartered Institute of Banking, holds
an MBA from Warwick Business School and was awarded an
Honorary Doctorate in Business Administration by Cardiff
Metropolitan University in 2017.
Specific areas of expertise*
• Strong retail banking sector knowledge and experience
• Detailed experience of overseeing IT systems
Committee membership
Member: Nomination, Remuneration (both since 24 January
2019) and Risk and Compliance Committees
Current external appointments
None
*
All directors have broad knowledge of all areas of the Group’s business but the ‘areas of expertise’ highlight specific areas in relation to an individual’s contribution
to the Group’s long-term sustainable success
PAGE 74 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B3
Corporate governance
B3.1 Board and Committee structures
Corporate governance snapshots
Executive
Committee*
Board of
Directors
Audit
Committee
Disclosure
Committee
Nomination
Committee
Remuneration
Committee
Risk and
Compliance
Committee (’RCC’)
Transaction
Committee
Asset and
Liability
Committee (’ALCO’)
Conduct and
Compliance
Committee (’CCC’)
Credit
Committee
Model Risk
Committee (’MRC’)
Operational Risk
Committee (’ORC’)
* Not a board committee
Summarised information on each of the board committees is set out below.
Committee
Chair
Audit
Remuneration
Risk and Compliance
Nomination
P J N Hartill
H R Tudor
F F Williamson
F J Clutterbuck
Minimum number of meetings
4
3
4
2
Further information
Section B5
Section B6
Section B7
Section B4
Members
Independent
non-executive
F J Clutterbuck Until 10 May 2018
P J N Hartill
H R Tudor
B A Ridpath
F F Williamson
G H Yorston
P Newberry
Audit
Remuneration
Risk and Compliance
Nomination
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Until 24 January 2019
From 24 January 2019
No
Until 24 January 2019
From 24 January 2019
Yes
From 24 January 2019
Yes
Yes
Yes
Yes
Yes
Yes Until 31 December 2018 Until 31 December 2018 Until 31 December 2018
Until 31 December 2018
Executive Committee is not a committee of the Board but provides support to the Chief Executive Officer (‘CEO’) in the day-to-day running
and management of the Group and, where necessary and appropriate, items discussed at Executive Committee are escalated to the Board for
further discussion.
PAGE 75 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Further documentation available on the Group’s website
• Matters Reserved for the Board
• Division of responsibilities – Chair, CEO and Senior Independent Director
• Terms of Reference – Audit, Nomination, Remuneration and Risk and Compliance Committees
•
Internal Audit Charter
B3.2 Operation of the Governance Framework
Board leadership and company purpose
The Board of Directors is responsible for promoting the long-term, sustainable success of the Group, generating value for shareholders and
contributing to wider society. It establishes the Group’s overall purpose, values and strategy and ensures the delivery of these within a robust
corporate governance and corporate responsibility framework. Purpose, values and strategy are described in section A2 and the corporate
governance framework is described in the following pages.
Code compliance
The Board is committed to the principles of corporate governance contained in the UK Corporate Governance Code issued by the FRC in
April 2016 (‘the 2016 Code’) and which is publicly available at www.frc.org.uk. Throughout the year ended 30 September 2019 the Company
complied with the principles and provisions of the 2016 Code (with one exception, as noted below). The Board has considered the impact of the
provisions of the 2018 Code, which is applicable to the Company from 1 October 2019, and has made a number of amendments to its practices
and procedures which it will continue to monitor during the year to ensure compliance.
During the year under review, there was a short period when the Company was not fully in compliance with the provisions of the 2016 Code due
to the period between the retirement of a director and a refresh of committee membership. The provision which the Company did not comply
with, and the period of non-compliance was:
•
From 1 January 2019 until 24 January 2019 there were only two independent non-executive directors on the Remuneration Committee
(2016 Code provision D.2.1)
During this period no meetings of the Remuneration Committee were scheduled or held.
Committee structures
The Board operates through a number of committees covering certain specific matters, illustrated in the chart shown in section B3.1 and the
membership of those committees is also shown in that section.
In addition to the regular committee structures the Board has also established a Disclosure Committee which assists in the design,
implementation and evaluation of disclosure controls and procedures; monitors compliance with the Company’s disclosure controls; considers
the requirements for announcement; and overall determines the disclosure treatment of material market information. The Committee’s
members are the Chair, CEO and CFO, of which any two can form a quorum.
Further, the Transaction Committee, which reports directly to the Board, consists of the CEO and the CFO, the Director of Treasury and
Structured Finance and the CRO, any two of which can form a quorum, but that quorum should include either the CEO or CFO. The Committee
meets to consider potential acquisitions or disposals of loan assets by the Idem Capital business, where these are not large enough to require
consideration at the Board, and also to approve, within delegated limits, wholesale term and/or revolving credit facilities proposed by the
Group’s Structured Lending operation.
Five main executive committees, the Asset and Liability Committee (‘ALCO’), the Credit Committee, the Model Risk Committee (‘MRC’), the
Operational Risk Committee (‘ORC’) and the Conduct and Compliance Committee (‘CCC’), with the membership consisting of executive
directors and appropriate senior employees, report to the Risk and Compliance Committee. All of these committees are described further in the
Risk Management Section B7. During the year Hugo Tudor became a permanent attendee at the Model Risk Committee as part of the Group’s
governance changes aligned with its application for IRB status.
In addition, the Group’s Executive Committee provides support to the CEO in the day-to-day running and management of the Group.
All 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 Board’s main committees, being Audit, Nomination, Risk and Compliance and Remuneration are available on the
Group’s website.
PAGE 76 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Board and committee attendance
The attendance of individual directors at the regular meetings of the Board and its main committees in the year is set out below, with the
number of meetings each was eligible to attend shown in brackets. Directors who are unable to attend meetings receive the papers and any
comments from them are reported to the relevant meeting. Directors have attended a number of ad hoc meetings during the year in addition to
the regular Board meetings and have contributed to discussions outside of the regular meeting calendar.
Director
Fiona J Clutterbuck
Nigel S Terrington
Richard J Woodman
John A Heron
Peter J N Hartill
Hugo R Tudor
Barbara A Ridpath
Finlay F Williamson
Graeme H Yorston
Alan K Fletcher
Patrick J Newberry
Board
10 (10)
10 (10)
10 (10)
9 (10)
10 (10)
10 (10)
10 (10)
10 (10)
10 (10)
2 (2)
2 (2)
Audit
Committee
Risk and Compliance
Committee
Remuneration
Committee
Nomination
Committee
-
-
-
-
6 (6)
6 (6)
6 (6)
6 (6)
1 (1)
-
1 (1)
5 (5)
4 (4)
5 (5)
-
-
-
5 (5)
5 (5)
5 (5)
5 (5)
5 (5)
-
1 (1)
-
-
-
4 (4)
4 (4)
-
-
3 (3)
-
1 (1)
-
-
-
5 (5)
1 (1)
4 (4)
-
-
-
0 (0)
Directors also attended an annual two-day strategy event, held off site, to enable further, more detailed, discussion of the Group’s position and
future development. This strategy event has been a regular fixture in the Group’s governance calendar for a number of years and recently has
also been attended by the Group’s executive management group.
The Remuneration Committee held a workshop and a number of ad hoc meetings of its working group in respect of the proposed new policy
during the year.
Conflicts of interest
The Board has agreed a policy for managing conflicts and a process to identify and authorise any conflicts that might arise, which was recently
updated. At each meeting of the Board and its committees, actual or potential conflicts of interest in respect of any director are reviewed.
The Board recognises the benefits that can flow from non-executive directors holding other appointments but requires them to seek the
agreement of the Chair before entering into any commitments that might affect the time they can devote to the Company.
Whistleblowing
The Group maintains a whistleblowing process to enable employees or other stakeholders to raise concerns anonymously. This is described
further in section B5.7.
Culture
The Group is proud of its supportive culture which has been noted as part of its Investors in People accreditation (see Section A5.2), renewed at
Gold level in the year. In the financial year ending 30 September 2020 it is intended that a review of the Group’s culture will be undertaken which
will be considered by the Risk and Compliance Committee and any necessary actions arising from that report will be considered by the Board. It
is the intention that a culture review will form an annual part of the Compliance monitoring plan in future. In addition, a review of the risk culture
will be undertaken by Internal Audit and reported to the Audit Committee.
The welfare, development and engagement of employees is central to Paragon’s culture. There is a robust Well-Being Strategy in place with
an Emotional Well-Being Team who are fully supported and invested in by keeping their knowledge current. The Group is a member of the
Lord Mayor’s Appeal “This is Me” which is a campaign to provide employers with the tools to change cultures relating to mental health. During
the year a number of workshops have been held on increasing education in areas such as the menopause, health and well-being, nutrition and
weight management. See also Section A5.2 for information relating to how the Group invests in its people.
To encourage employee participation within our communities, a scheme was introduced in the year whereby employees have a paid annual
volunteer day to use at a charity of their choice. Further detail on other charitable activities can be found at A5.4.
PAGE 77 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Board and stakeholders
The Board, in its deliberations and decision-making processes takes into account the views of the Group’s stakeholders and, where applicable,
considers the impact of those decisions on the communities and environment within which the Group operates. While good corporate
governance is important to the Board, so too is maintaining a reputation for high standards of business conduct in all of the Group’s operations,
and management of conduct risk is a key part of the risk management framework. Section A5 sets out information on corporate responsibility
including the Group’s people policies and engagement with employees, its involvement in industry initiatives, its support for the community and
its environmental, social and conduct impacts.
The People Director and the executive directors report to the Board regularly on the views of the Group’s employees and the impact of
new projects on the workforce is taken into account. With the 2018 Code applying to the Company from 1 October 2019 the channels for
interactions between employees and the Board have been reviewed and strengthened, with the People Forum becoming the formal workforce
advisory panel as provided for by the 2018 Code. For further information on the operation of the People Forum, see section A5.2 and the Chair’s
introduction. For information on investing in and rewarding the workforce see section A5.2.
Regard is had to the impact of principal strategic decisions on employees, for example, due diligence on potential acquisitions will consider
remuneration packages in the target in comparison to Group employees. Performance on the integration of employees of acquired entities,
post-acquisition, will be reported at board level.
A number of its brokers, contractors and other suppliers are of significant importance to the Group’s operations and a close relationship is
maintained, and reported to the Board, to help ensure that the Group runs effectively.
The Group also endeavours to maintain an open and transparent relationship with its various regulators, including the PRA and FCA. Its
relationship with HMRC and the principles it applies to its tax affairs are described in section A5.4. Interactions with the PRA during the year
have included meetings with the Chair and other non-executive directors as well as those involving executive directors.
Shareholders
The Board encourages communication with the Company’s institutional and private investors. All shareholders have at least twenty working
days’ notice of the AGM at which the directors and committee chairs are available for questions. The AGM is held in London during business
hours and provides an opportunity for directors to report to investors on the Group’s activities, to answer their questions and receive their
views. At all general meetings shareholders have an opportunity to vote separately on each resolution and all proxy votes lodged are counted
and the balances for, against and directed to be withheld in respect of each resolution are announced.
The Chair, CEO and CFO 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, enabling them to develop an understanding of major shareholders’ views of the Group, and take
those views into account when determining strategy. During the year ended 30 September 2019 meetings were held with investors from the
UK, Europe and North America. From time to time other presentations are made to institutional investors and analysts to enable them to gain a
greater understanding of important aspects of the Group’s business, including, this year on the introduction of IFRS 9.
The Chair of the Board, the Chair of the Remuneration Committee and the Company Secretary consulted with a number of the Company’s larger
shareholders during Summer 2019 to discuss remuneration policies and other corporate governance matters. The Company made approaches
to all its significant shareholders and meetings were held with 18 shareholders representing approximately 69% of total voting rights. The
comments received were considered by the Remuneration Committee in determining the Group’s approach to executive compensation and
amendments made to the initial proposals. In addition, the results of all of these meetings were reported to the Board so that all directors were
made aware of shareholder views.
The Senior Independent Director is also made aware of views expressed by shareholders to other members of the Board, via the Company’s
brokers or through the Investor Relations team and is available to meet with shareholders should they wish. Such meetings can be arranged via
the Company Secretary.
Division of responsibilities
Currently the Board consists of the Chair, three executive directors and five independent non-executive directors. At the start of the year the
Board included six independent non-executive directors, and a non-independent non-executive director Alan Fletcher. Patrick Newberry and
Alan Fletcher resigned on 31 December 2018. All the directors bring a broad and valuable range of experience to the Company and further
details, together with other biographical details, are set out in Section B2. The Chair’s other business commitments are also set out in the
biographical details section.
Throughout the year the independent non-executive directors have formed the majority of the Board and consequently the balance between
independent and non-independent directors has been appropriate. There is a strong non-executive representation on the Board, including
the Senior Independent Director, providing effective balance and challenge. The non-executive directors meet with the Chair, from time to
time, without the presence of the executive directors. All non-executive directors are appointed for fixed terms. The Chair was considered
independent on appointment.
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.
The division of responsibilities between the Chair, CEO and Senior Independent Director is clearly established, set out in writing, agreed by the
Board and is available on the Group’s website.
PAGE 78 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Matters reserved for the Board
The schedule of matters reserved for the Board, which was reviewed during the year and is available on the Group’s website, details the key
matters for which the Board is responsible, including:
•
Promoting the long-term sustainable success of the Company and Group, generating value for shareholders and contributing to
wider society
• Setting and confirming the Group’s purpose, values and strategy in a manner that aligns with and promotes the Group’s culture
• Approving major capital projects and material acquisitions and disposals
•
Approving the annual corporate plan including the business plan, operating and capital expenditure budgets and any material changes
to them ensuring that the necessary resources are in place for the Group to meet its objectives and measure performance against
those objectives
• Approving the Company’s dividend and corporate governance arrangements
•
•
Establishing procedures to manage risk, oversee the internal control framework and determine the nature and extent of the principal risks
the Group is willing to take in order to achieve its long-term strategic objectives
Ensuring that the workforce can raise any matters of concern in confidence and, if they wish, anonymously and that there are no negative
repercussions from doing so
Matters considered by the Board
The Board has reviewed a number of discrete projects/items during the year as follows:
• Monitored and reviewed the Group’s ongoing project for the submission of its application to the PRA in respect of IRB
• Discussed future IT strategy in particular for SME lending but also on a groupwide basis
• Discussed the integration of the Titlestone acquisition as well as the re-positioning of Paragon Development Finance
•
With the Nomination Committee, considered the appointment of a new Audit Committee Chair/Senior Independent Director and other
changes to the structure of its committees
• Addressed various governance regulation changes including the 2018 Code
• Considered and managed the potential impact of Brexit and other macro-economic uncertainties on the Group
In addition, it regularly receives, reviews and considers reports on the following matters:
• Strategic matters
• Potential acquisition opportunities
• Business performance
• Results, management accounts and financial commentary
• Operational reports from business areas
• Treasury and funding matters
•
Legal and governance matters
• The work of the Board’s committees
• Matters arising from subsidiary company board and management meetings
•
Investor relations and shareholder feedback
All directors receive sufficient relevant information on financial, business and corporate issues prior to meetings.
Subsidiary governance
A number of the corporate entities within the Group are regulated either by the PRA and the FCA or solely by the FCA. The Company has
oversight of these entities as part of its overall responsibility for the management of the Group and also to ensure that the Group’s values and
standards in regulated spheres are met.
Since the completion of the strategic reorganisation of the Group in September 2017 the directors of the Company have also comprised the
Board of Paragon Bank PLC. The boards of both companies meet jointly in most circumstances and the meetings described earlier in the report
(with the exception of the meetings of the Nomination Committee) were joint meetings. Oversight of Paragon Bank PLC, consequently, forms
an intrinsic part of the board and committee meetings of the Company. Consequently, although Paragon Bank PLC may not be obliged to
report its corporate governance arrangements against the 2016 Code, it has, since September 2017, had arrangements similar to those of the
Company, excepting that it has no external shareholders.
PAGE 79 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Composition, succession
Composition and succession for the Board and senior management are considered within the Nomination Committee’s report.
Board evaluation
The Board, individual directors and the Board’s main committees are reviewed annually, with this year’s review being an externally facilitated
triennial review as required by the 2016 Code.
A number of providers were considered to undertake this important review, with Independent Board Evaluation ultimately being appointed. The
lead review work was undertaken by Ffion Hague. Neither Independent Board Evaluation nor Ffion Hague have undertaken any other work for
the Group and have no other connection with the Group.
The evaluation considered the performance of the Board and its Committees and all individual directors (except John Heron, who is due to retire
and it is not intended to replace the executive director element of his role), including the Chair. The evaluation process consisted of detailed
interviews in June 2019 with every board member. All participants were interviewed for 1.5 hours by Ffion Hague according to a set agenda,
tailored for the Board. In addition, the Group’s People Director, Chief Risk Officer, Director of Internal Audit and Company Secretary were
also interviewed.
Draft conclusions were discussed with the Chair and subsequently discussed with the Board at its meeting in July 2019 with Ffion Hague
present. Ffion Hague gave individual feedback to committee chairs on the performance of each committee and discussed the report on the
Chair’s performance with the Senior Independent Director. This report was subsequently discussed with the Chair. In addition, the Chair received
a report with feedback on individual directors (excluding John Heron). Discussion and review of the performance of the executive directors took
place at the Remuneration Committee meeting in September 2019 that considered remuneration packages for 2019/20.
A schedule of follow up matters was considered by the Board in October 2019 and actions will be refined and monitored over the next
financial year.
The broad message across all contributors to the review was that the Board was covering the appropriate ground, took its responsibilities very
seriously and was capable of very effective challenge, for example where acquisition decisions were being considered.
More detailed findings from the evaluation included the following against which progress will be reported next year.
Issue
Board
Recommendation / Action
Board composition and induction
Certain skills gaps to be filled through future appointments with an emphasis on public company
experience. Skills matrix to be updated and regularly reviewed by Nomination Committee, with
enhanced training on bespoke topics for non-executive directors.
Succession planning
Succession plans to be enhanced with an emphasis on recruiting for public company experience and
training internal candidates.
Agendas, papers and
presentations
A long-serving executive team requires enhanced succession planning with the depth and range of
executive team experience to be enhanced. The Board will identify opportunities to meet high-
potential individuals throughout the business as part of its greater focus on succession planning.
Maximising efficiency through condensing presentations, challenging the need for extraneous detail
and ensuring all papers are distributed well in advance of meetings. Revised templates to be used to
ensure a standard approach to presentations with an appropriate limit on length. Enhanced metrics
for non-financial issues to be produced, particularly in relation to customers and employees. Work
has commenced on revising presentation methods and styles and will continue during the year.
Board and committee interaction
Enhanced committee reporting to be implemented. Greater challenge in all meetings to be
encouraged, with sufficient time allocated for each topic as appropriate.
This will be incorporated, in detail, into the Committee’s annual timetable.
Work has commenced to revise presentation methods and styles as noted above, and this will be
particularly emphasised for the Risk and Compliance Committee.
Nomination Committee
Succession planning for the
Executive Directors to be a key
focus for the year ahead.
Risk and Compliance Committee
Tighter procedure around
committee papers and discipline
around the separation between the
Committee and main board should
be adopted.
PAGE 80 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Training
The non-executive directors have received presentations during the year on various aspects of the Group’s activities. The Board has dedicated
one and a half days to training annually and will undertake additional training as required by the Group’s strategy and operational needs. By
way of example, the Board has received training/updates on such matters as IRB and IFRS9 as well as operational resilience and cyber security
during the year. In addition, training has been provided by external advisers on topics such as the economy, and the markets and regulatory
environments in which the Group operates or is considering operating in.
The non-executive directors also completed a variety of the regular training modules that are mandatory for all employees. Subjects covered in
the year included modern slavery, equality and diversity, health and safety, data protection, money laundering, financial crime, whistleblowing,
business continuity, information security and conduct risk.
The Chair concluded her induction programme during the year and this covered such areas as Asset Finance, Savings and operational resilience.
Ongoing development opportunities for all directors will be provided, as required, during the forthcoming financial year. A training schedule is
maintained by the Group’s Human Resources department.
At the Annual General Meeting the Chair will confirm to shareholders, when proposing the re-election of any non-executive director, that,
following formal performance evaluation, the individual’s performance continues to be effective and demonstrates commitment to the role.
The letters of appointment of the non-executive directors will be available for inspection at the Annual General Meeting.
Audit, risk and internal control
Information on how the Group has applied the provisions of the 2016 Code relating to audit, risk and internal control is set out in section B5.
The directors’ responsibility for the financial statements is described in Section B8.
Remuneration
Information on how the Group has applied the provisions of the 2016 Code relating to remuneration is set out in the Directors’ Remuneration
Report in Section B6.
PAGE 81 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B4
Nomination Committee
Operation of the Committee
The Committee currently comprises three independent non-executive directors and the Chair of the Board who also chairs the Committee.
Additionally, during the year, Patrick Newberry was a member of the Committee until 31 December 2018 and on 24 January 2019 Graeme
Yorston was appointed in his place, while Barbara Ridpath replaced Hugo Tudor. Therefore, throughout the year, all of the Committee’s members
were independent non-executive directors. The Chair was considered independent on appointment as Chair of the Board.
The Committee’s role includes:
•
•
Ensuring that there is a formal, rigorous and transparent procedure for the appointment of new directors to the Board of Directors of
the Company; to lead the process for Board appointments and make recommendations to the Board. Ultimate responsibility for any
appointment remains with the Board
Keeping under review the structure, size and composition of the Board (including its skills, experience, independence, knowledge and
diversity) and making any recommendations it deems necessary to ensure that it is effective and able to operate in the best interests of
shareholders and other stakeholders
• Considering re-appointment of directors, re-election of directors and the independence of non-executive directors
•
•
Ensuring that plans are in place for orderly succession to positions on the Board and senior management and overseeing the development
of a diverse pipeline for succession to the Board and senior management roles
Overseeing the Group’s initiatives on management diversity, with a particular focus on its participation in external programmes, such as the
Women in Finance Charter and reporting such as gender pay reporting
During the coming financial year, the Committee will take on the additional responsibility of monitoring workforce engagement on behalf of
the Board.
Issues considered by the Committee during the year
Succession planning - Board
During the year the Committee initiated a search for a new Audit Committee Chair due to the impending retirement of Peter Hartill. This search
was undertaken in conjunction with an external management consulting company (Korn Ferry) which has no other connection with the Group
or any individual director. A candidate list which emphasised diversity of gender and background was requested and received from Korn Ferry.
The search involved candidate interviews with various members of the Board and senior management to ensure cultural fit and the capacity
for the candidate to devote sufficient time to the appointment as well as the competence in accounting and auditing necessary for the Audit
Committee Chair role.
The Committee considered the balance of skills, experience, independence and knowledge on the Board and in the light of this a description of
the role and capabilities required for these appointments was prepared.
In January 2019 the Committee also reviewed the structure of the Board committees following changes to the Board and it proposed that
Graeme Yorston cease to be a member of the Audit Committee and became a member of the Remuneration Committee, Hugo Tudor cease
to be a member of the Nomination Committee and that Barbara Ridpath be appointed to the Nomination Committee. This was part of the
Committee’s role to keep under review the structure, size and composition of the Board’s Committee and to ensure that each non-executive
director has sufficient time to undertake their committee responsibilities as well as broadening the skills base for recently appointed directors
to ensure future successful operation of the committees. These changes were agreed by the Board on 24 January 2019.
Succession plans for the Board and senior management were reviewed during the financial year. The tenure of non-executive directors is
monitored by the Committee. Emergency cover is in place for the executive directors and their direct reports.
Succession planning – senior management
The Human Resources department has a wider succession development plan for senior management roles across the Group, prioritising those
positions likely to require recruitment within the next five years. The Committee has received reports during the year on the Group’s senior
leadership development programme and will continue to monitor this on a regular basis. Further information can be found in Section A5.2.
PAGE 82 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Risk mitigation for the loss of senior employees will continue to include the ongoing development of employees, as well as work to further
validate potential candidates for senior positions. Development work on potential candidates occurs with those employees remaining in their
current roles, as this training is undertaken so as to minimise business impact while ensuring that candidates are enabled to undertake a more
senior role in due course. The Group’s preference, where possible, is that internal candidates are developed and supported to undertake senior
roles as this assists in the ongoing maintenance of its strong culture and values. In addition, the senior leadership development programme is
also focusing on increasing the diversity of the Group’s talent pool in support of the overall approach to equality and diversity.
Board skills matrix
The Committee considered a revised skills matrix at its September 2019 meeting following the outputs from the Strategy Event in June 2019.
The revised matrix will reflect the strategy of the Group becoming a technology-enabled specialist bank by 2025 and as such includes skills
consideration on such matters as demonstrating sound knowledge of the UK financial services sector; understanding capital requirements and
liquidity models; insight into the application of technology in a financial services environment; and understanding the specialist lending sector.
Diversity
The Group recognises the importance of diversity, including gender diversity, at all levels of the organisation. The Group strongly values
diversity on the Board, not only of gender, but also of experience and background, recognising the contribution such diversity can make towards
achieving the appropriate balance of skills and knowledge which an effective board of directors requires. The Board is committed to ensuring,
in line with the Hampton-Alexander Review recommendations, that female directors will comprise 33% of the Board by the end of 2020 and,
as noted above, the Committee is endeavouring to make progress towards this target, despite a challenging market, with the candidate list that
was considered for the role of Audit Committee Chair.
The Board has always believed, and continues to believe, in appointing the best person to any role regardless of gender or other points of
diversity and this belief is reflected and operates across all appointments made by the Group. However, the Board recognises that measurement
and publication of targets can assist in driving forward change and developing a talent pipeline in a sector where gender diversity has been
difficult to achieve. For this reason, the Group signed up to HM Treasury’s Women in Finance Charter initiative during 2016 and agreed targets
in respect of gender and ethnic diversity amongst the Group’s senior management.
By the end of September 2019 slightly in excess of 35% of senior roles, using the Hampton-Alexander measure, were female, meaning that the
Group had achieved its Women in Finance Charter commitment for 35% of senior management roles to be held by women by 2022, in advance
of that date. The Board will review the targets for Women in Finance during the upcoming year.
During the year the Committee reviewed the Group’s gender pay report and supporting analysis. It closely monitored changes since the previous
report and considered the underlying challenges with the reporting and in the management structure that make balancing gender pay difficult
for the Group, as is the case for other financial services firms. This will continue to be a focus for the Committee.
As is clear from the existence of the Women in Finance initiative, obtaining full diversification of gender in the financial services sector is
particularly challenging given the size of the female talent pool across the industry. Similar issues apply to advancing diversity of ethnicity in
the sector. The targets adopted reflect the Board’s commitment to ensuring that diversity considerations throughout the Group are wider
than gender. The Committee regularly reviews the Group’s Equality, Diversity and Inclusion Policy to ensure good practice is achieved and that
policies are compliant with the 2016 Code requirements.
The Group’s diversity policies are described in Section A5.2. The Equality, Diversity and Inclusion policy was updated during the year to reflect
the 2018 Code. Information on the composition of the workforce, including the gender balance of those in senior management and their direct
reports, is given in Section A5.2 and the Group’s gender pay statistics are also discussed in that section.
Workforce engagement
The Committee will, in the future, receive an annual report on workforce engagement, as noted in the Chair’s statement, and this will form part
of its monitoring and reviewing responsibilities under the 2018 Code. In addition to the enhanced role for the People Forum, an overarching
framework of workforce engagement will coordinate current employee feedback methods. These include formal structured engagement
surveys (which occur in depth on an 18-month cycle as well as more regularly on ad-hoc topics), yearly employee presentations, appraisals,
one-to-ones and team meetings, as well as less formal structures such as senior leaders ‘walking the floor’. The results from these will be
gathered by the People Director and reported to the Executive Committee and the Conduct and Compliance Committee, with the effectiveness
of these channels assessed and reported on an annual basis to the Nomination Committee. All employee feedback, either using the existing
methods or through the People Forum consultations with the relevant Board member(s), will be collected and analysed to distil a wide range of
views for the Board to consider as part of its decision-making process.
PAGE 83 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B5
Audit Committee
B5.1
Statement by the Chair of the Audit Committee
Dear Shareholder
The year ended 30 September 2019 has been one which has
seen significant developments in the auditing, accounting and
reporting landscape affecting the Group combining to provide the
Committee with a full agenda.
The introduction of IFRS 9 in the period has impacted on the most
significant judgemental areas of the Group’s accounting with the
Committee having to consider the appropriateness of transition
adjustments as well as the embedding of the new rules on a
business as usual basis.
At the same time, the Committee had to consider changes to
its remit required by the introduction of the new Code from 1
October 2019, as well as potential regulatory changes affecting
accounting, reporting and auditing in the UK, including those
which might arise from the various potential outcomes of the
Brexit process.
Internally, as described in Section B4, the membership of the
Committee was reviewed following Board changes to enable the
remaining non-executive members to provide greater focus on the
Committee’s remit. The Committee was also subject to review as
part of the external board effectiveness assessment (see section
B3.2) and welcomed Sarah Mayne as the Group’s new Internal
Audit Director.
This activity has taken place against a background of growth
and change in the Group’s business, increasing regulations and
guidance and increased focus on audit and reporting issues
across the corporate sector as a whole.
As a Committee, our responsibility is to ensure that financial
information published by the Group properly presents its activities
to all stakeholders and other interested parties in a way that is
transparent, useful and understandable, as well as overseeing the
effective delivery of both external and internal audit services.
During the year, the Committee met five times and its principal
activities were as follows:
•
•
•
The review of the annual and half-yearly financial statements
to ensure these properly present the Group’s activities in
accordance with accounting standards, law, regulations and
market practice
The consideration of the appropriateness and application of
the Group’s accounting policies for the recognition of interest
impairment amongst other significant
loan
income and
accounting issues
In particular, considering the impact on accounting for credit
losses of the transition to IFRS 9 from 1 October 2018. This
included assessment of the approach adopted, assumptions
made and disclosures provided in the Group’s external and
internal reporting
Peter Hartill, Chair of the Audit Committee
The introduction of IFRS 9 in the
period has impacted on the most
significant judgemental areas of
the Group’s accounting...
PAGE 84 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts •
•
•
•
•
•
The review of other financial information published by the Group,
such as Pillar III disclosures required by banking regulations
The supervision of the process leading to the appointment of a
new Internal Audit Director and her induction into the business
The supervision of the internal audit function and consideration of
its findings
Overseeing the integration of the Titlestone operation acquired
in the year ended 30 September 2018 into the Group’s financial
reporting and control framework
Approval of new terms of reference for the Committee to ensure
compliance with the 2018 Code from 1 October 2019
Considering the Group’s readiness to address other forthcoming
accounting changes which will affect it, such as IFRS 16
In the financial year ending 30 September 2020 the Committee’s
main priorities will include:
•
•
•
Continued monitoring of the Group’s
impairment
processes in the light of best practice developments and actual
outturns
IFRS 9
Considering ongoing developments
regulatory
environments surrounding accounting, reporting and auditing and
ensuring the Group is well positioned to respond appropriately
the
in
Ensuring that the Group’s control processes evolve alongside
developments in the business
This will be my last report as Audit Committee Chair, having announced
my intention to stand down from the Board at the next AGM. I would
like to thank my colleagues on the Committee, the Group’s Internal
Audit and Finance teams and the external auditors, both KPMG and
the previous incumbents, Deloitte, for their contributions to the
Committee’s deliberations over the nine years I have served as Chair.
These nine years have seen momentous changes in the Group’s
business, its regulatory landscape and the accounting standards
affecting it, and I do not expect any reduction in the pace of change - I
wish my successor well in dealing with it.
I commend this report to shareholders and ask you to support the
resolutions concerning the reappointment of KPMG LLP (‘KPMG’) as
auditors and their remuneration at the AGM in 2020.
Peter Hartill
Chair of the Audit Committee
26 November 2019
PAGE 85 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B5.2 Operation of the Committee
The Audit Committee currently comprises four independent non-executive directors of the Company whose relevant experience is set out in
Section B2. Additionally, Patrick Newberry served as a member of the Committee until his resignation from the Board on 31 December 2018
and Graeme Yorston was a member of the Committee until 24 January 2019. The terms of reference of the Committee include all matters
indicated by Disclosure and Transparency Rule DTR 7.1 and the Code. New terms of reference, aligned with the 2018 Code, were approved in
September 2019. The Committee’s key responsibilities include:
• Monitoring the integrity of the Group’s financial reporting
• Reviewing the Group’s risk management and internal control systems
• Monitoring and reviewing the effectiveness of the Group’s Internal Audit function
• Monitoring the relationship between the Group and the external auditor
It also provides a forum through which the Group’s external and internal audit functions report to the non executive directors, and the
effectiveness of these functions is assessed.
The Internal Audit Director reports to the Chair of the Committee. She attends all meetings of the Committee and also reports regularly to the
Risk and Compliance Committee.
The Committee considers that, as a whole, it possesses the competence relevant to the sector in which the Group operates that the Code
requires. Peter Hartill has competence in accounting and auditing while other committee members have experience in various aspects of the
financial services industry.
The Committee meets at least four times a year and has an agenda linked to events in the Group’s financial calendar. Meetings generally take
place before the half year and year end reporting dates in March and September and before the approval of results in May and November.
The Committee normally invites the Chair of the Board, the executive directors, Chief Risk Officer, Group Financial Controller, Internal Audit
Director and a partner and other representatives from the external auditor to attend meetings of the Committee, although it reserves the right
to request any of these individuals to withdraw.
For part of each meeting the Committee meets separately with representatives of the external auditor and with the Internal Audit Director
without any other persons present.
The Committee approves and monitors progress against the Group’s Internal Audit Plan. It assesses the adequacy of resources available to the
Internal Audit function and it receives reports of internal audit reviews conducted across the Group.
From time to time, when there are major changes in the Group’s accounting policies or audit arrangements in progress, the Chair of the
Committee has held meetings with shareholders and is prepared to meet investors in the future to discuss such matters.
Details of the Committee members’ attendance at meetings and the Board’s evaluation of the Committee’s effectiveness are given in
Section B3.2.
B5.3
Significant issues addressed by the Committee in relation to
the Financial Statements
The Committee considers whether the accounting policies adopted by the Group are suitable and whether significant estimates and
judgements made by the management are appropriate. In evaluating the Group’s financial statements for the year ended 30 September 2019
the Committee considered particularly:
•
•
The calculation of interest income under the Effective Interest Rate (‘EIR’) method for both internally originated and purchased loan assets
and the Group’s borrowings
The levels of impairment provision against loan assets and, in particular, the transition to the impairment requirements of IFRS 9 in
the period
• The requirement for any impairment provision against the purchased goodwill carried in the Group’s balance sheet
• The derecognition of the assets and liabilities of the Paragon Mortgages (No. 12) PLC (‘PM12’) securitisation
• The valuation of the deficit in the Group’s defined benefit pension scheme
• The viability statement which the Group is required to make under the Code
• The Group’s capital and funding position and the Group forecasts for future periods
The Committee also considered whether this Annual Report, taken as a whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group’s performance, business model and strategy.
PAGE 86 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts In each of these areas the Committee was provided with papers discussing the position shown in the accounts, the underlying market conditions
and assumptions and the methodology adopted for any calculations. The papers also detailed any changes in approach from previous periods.
These were reviewed in detail and discussed with the relevant Group employees and the results of this work were considered, together
with the results of testing by the external auditor. There were no material or significant disagreements between the management and the
external auditor.
Particular matters which the Committee focused on in each of these areas were:
Matter
Particular areas of focus
Interest income and
expense recognition
As required by IFRS 9, the Group recognises income from loan balances on an EIR basis, which is intended to
produce a constant yield throughout the behavioural life of the loan, taking account of such matters as costs
of procuration, and initially fixed or discounted interest rates. The calculation therefore rests on assumptions
about the future behaviour of the Group’s customers. A similar approach is taken to assessing interest on
borrowings, where redemption profiles and anticipated refinancing dates influence expense recognition.
The Committee assessed the appropriateness of the assumptions made, considering performance of the
portfolios against expectations and the impact of changes in product specifications.
Redemption profiles used in the modelling of mortgage books and the availability of alternative offerings in the
market were areas of particular focus.
Further information on these estimates can be found in note 65b to the accounts, and the interest income and
expense recognised on this basis is shown in notes 4 and 5.
Loan impairment
IFRS 9 requires that companies provide for expected future credit losses on any financial asset held on the
balance sheet on the amortised cost basis.
As a forward-looking measure, the determination of such provisions is heavily dependent on the use of
judgement and estimation techniques to evaluate the likelihood of loss on accounts and the potential amount of
any loss, should one occur.
In order to satisfy itself that the process applied by the Group resulted in an appropriate level of provisioning in
accordance with IFRS 9, the Committee considered particularly:
• The methods used to estimate probabilities of loss and potential losses
• The assumptions used as inputs in these calculations
• The economic projections used in deriving future loss expectation
•
The definitions of significant increase in credit risk, credit impairment and default for expected credit loss
(‘ECL’) purposes
To substantiate these decisions, the Committee considered actual results in the year compared to those
predicted by the impairment methodology and the continuing relevance of historical information used in the
process based on present economic conditions, lending and account administration practices.
Particular consideration was given to the Group’s receiver of rent portfolios and the level to which their ultimate
loss levels accorded with expectations. The Committee also reviewed the appropriateness and adequacy of
additional provisions made for particular cases and factors not allowed for in the impairment process.
Further information on these estimates can be found in note 65a to the accounts, the impairment charge for the
year and the movements in provision for impairment are shown in note 23.
The Group’s exposure to credit risk is discussed in note 57.
Goodwill impairment
The Group is required to assess, at the end of the year, whether the carrying value of the acquired goodwill
balance in its accounts, which is not subject to amortisation under IFRS, remains appropriate or whether
any impairment has occurred. This includes both newly acquired goodwill and goodwill arising from previous
acquisitions.
In considering whether any impairment of goodwill had occurred the Committee considered particularly the
Group’s forecasts for the cash flows to be generated by the acquired businesses and their reasonableness in
the light of current trading performance and the Group’s strategy for these operations.
The potential impairment of goodwill is discussed in notes 65c and 29.
PAGE 87 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Matter
Particular areas of focus
Derecognition of
assets and liabilities
During the year, the Group disposed of its residual interest in the PM12 securitisation transaction. IFRS 9
requires the directors to consider whether the terms of this transaction meet the criteria set out in the Standard
for derecognition of the assets and liabilities of the securitisation.
The Committee considered the contractual terms of the transaction, the changes brought about in the Group’s
risk exposures and the detailed rules set out in the standard. They also took account of views expressed by
external technical experts.
The nature of this judgement is discussed in note 64 and the financial effect of the transaction is discussed in
note 7.
Pension deficit
The deficit on the Group’s defined benefit pension plan is valued in accordance with IAS 19, which requires an
actuarial valuation of the plan liabilities. Such a valuation is based on assumptions including market interest
rates, inflation and mortality rates in the Plan.
In order to satisfy itself as to the appropriateness of these assumptions, the Committee considered their
derivation and the market data underlying them. These were compared to market benchmarks and advice from
the Group’s actuarial advisers. The Committee also considered benchmarking data provided by the external
auditor.
Further information on the Plan deficit, the basis of valuation and the assumptions underlying it can be found in
note 41 to the accounts, along with an analysis of sensitivities to the more significant assumptions.
Viability statement
The Board is required by the Code and the Listing Rules to make a viability statement in the Annual Report. The
Committee has been asked to express an opinion to the Board as to whether this statement could properly be
made.
The Committee considered aspects of the work of the Board and its various committees which addressed the
Group’s business model, risk profile, access to funds and future strategy. They also considered guidance issued
by the FRC and stress testing which had been carried out in the year.
A fuller discussion of the directors’ consideration of the viability statement is set out in Section A4.
Capital and funding
The Board is required by the Code and the Listing Rules to make a going concern statement in the Annual
Report. The Committee has been asked to express an opinion to the Board as to whether this statement could
properly be made.
The Committee considered the Group’s detailed forecasts and the implicit cash and capital requirements.
The Committee discussed availability of funding, potential stress events and the impact of the economic
environment.
A fuller discussion of the directors’ consideration of the going concern statement is set out in Section A4.
Internal Control and
Risk Management
The Board is required to make statements in the Annual Report and Accounts relating to the Group’s systems of
internal controls and risk management.
The Committee considered an evaluation prepared by the Risk function, together with the findings of internal
audit reports in the year and its own engagement with the management information of the Group and the
executive directors. On the basis of these activities the Committee concluded that it could advise the Board
that the statements were appropriate.
The Board statements on internal control and risk management are set out in Section B3.
Fair, balanced and
understandable
The Board is required by the Code to state whether, in its view, the Annual Report is fair, balanced and
understandable. The Committee has been asked to express an opinion to the Board as to whether this
statement could properly be made.
The Committee considered the draft Annual Report for the financial year, as a whole, satisfying itself that the
process for the preparation and review of its various sections, was appropriate. The Committee especially
focussed on areas where disclosure requirements had changed or where new activities were to be reported
on. Based on this exercise, and the Committee’s own understanding of the business in the year, it determined
whether the Annual Report, overall, portrayed the Group’s activities, position and results properly.
The discussion of future accounting changes required by IAS 8 (note 62) is an output of the ongoing IFRS 16 implementation project which the
Committee has considered during the period and the Committee reflected upon whether the disclosure made in the accounts was appropriate.
The Committee was able to reach satisfactory conclusions on all of these areas and therefore resolved to commend the Annual Report to the
Board for approval, and to advise the Board that it can conclude that the Annual Report is fair, balanced and understandable.
Earlier in the year the Committee had considered each of these areas, where applicable, in the same manner in concluding that it could commend
the Group’s half-yearly financial report for the six months ended 31 March 2019 to the Board for approval.
The Committees consideration of the financial statements for the year ended 30 September 2018, which took place in the year under review,
is discussed in the Audit Committee report for that year.
PAGE 88 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B5.4
Other financial reporting matters considered by the Committee
IFRS 9 Transition
On 20 March 2019, the Group published a report outlining the financial and capital impacts of its transition to IFRS 9 as at 1 October 2018. The
Committee considered this report and the basis on which it was prepared, in the same way as detailed for the year end under ‘Loan Impairment’.
It also considered its communications with the external auditors on the subject of IFRS 9 to the date of approval. Following this consideration,
the Committee was able to commend the transition report for Board approval as a fair representation of the impact of transition.
Pillar III report
The CRR requires that a firm’s Pillar III report is subject to the same review processes as its annual report and accounts. The Committee
therefore reviewed the Group’s Pillar III report, considering whether it included all material matters required by the CRR and its supporting
requirements, and whether it formed a fair representation of these matters.
Correspondence with FRC
During the year, the Group’s financial statements were reviewed by the Conduct Committee of the FRC. Such reviews are based on the annual
report and accounts alone, and do not benefit from detailed knowledge of the Group’s business or individual transactions reported upon, but
are carried out by FRC staff who have an understanding of the relevant legal and accounting frameworks. FRC reviews provide no assurance
as to the correctness of accounts, they consider only compliance with reporting requirements and the FRC accepts no liability to the Group or
third parties in respect of them.
The Group prepared a response to the FRC which was presented to the Committee together with appropriate supporting information. These
were considered by the Committee who also consulted with the external auditor before the response was provided to the FRC.
Following receipt of the response, the FRC closed its enquiry. The FRC’s observations have been considered in drafting the financial statements
for the year ended 30 September 2019, particularly in the compilation of the new and extended disclosures under IFRS 7, required for the first
time this year.
B5.5 External auditor
The Committee is responsible for assessing the effectiveness of the external audit process, for monitoring the independence and objectivity
of the external auditor and for making recommendations to the Board in relation to the appointment and remuneration of external auditors.
The Committee is also responsible for developing and implementing the Group’s policy on the provision of non-audit services by the external
auditor, which was reviewed in the year.
Audit tendering
On 24 September 2014, the Competition and Markets Authority finalised its investigation into the audit market and published The Statutory Audit
Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities)
Order 2014 (the ‘Order’). The provisions of the Order are consistent with requirements introduced by European legislation. The Order first
applied to the Group from the beginning of the year ended 30 September 2016 and requires that only the Committee can agree the fees and
terms of service of the external auditors, initiate and supervise a tendering process or recommend the appointment of an external auditor to the
Board following a tender process. The Group has complied with the requirements of the Order during the year.
KPMG were appointed as auditors, following a competitive tender process, with effect from the year ended 30 September 2016 at the Annual
General Meeting in February 2016. The financial year ended 30 September 2019 is the fourth reported on by KPMG. Simon Clark has served
as engagement partner since the year ended 30 September 2018. He has been involved in the audit assignment since KPMG’s appointment.
The Group is therefore not subject to a legal requirement to undertake an audit tender until ten years have elapsed, and will report to
shareholders no later than after the completion of the fifth year (the year ending 30 September 2020), and in each subsequent year thereafter,
its conclusions on whether a further tender is in the Group’s interest at that time.
Other than the legal requirements of the Order and the general constraints imposed by the current structure of the UK audit market, the
Committee has not identified any factors which might restrict its choice of external auditor.
PAGE 89 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Audit effectiveness
The Committee has considered the effectiveness of the external audit for the year ended 30 September 2019 and the Group’s relationship
with the external auditor, KPMG, on an on-going basis, and has conducted a formal review of the effectiveness of the annual audit before
commending this Annual Report to the Board. This review consisted of the following steps:
•
A list of relevant questions was considered by senior management who submitted their responses in writing to the Committee in advance
of the meeting convened to consider the Annual Report
• The Committee members considered their experience of the audit process in advance of that meeting
•
At the meeting the Committee discussed the results of the exercise with the senior financial management of the Group, without the external
auditor present
• The Committee then addressed the evaluation, as appropriate, with the external auditors
The Committee was able to conclude, on the basis of this exercise and its experience over the year, that the external audit process remained
effective and that the auditor was independent and objective, up to the signing date of this report. A further review will be carried out following
the completion of audit procedures on all Group companies and reported on in next year’s Annual Report.
The effectiveness review addressing the conduct of the 2018 audit, undertaken at the time of approval of the 2018 Group accounts was
updated once the external audit process for all Group companies had been completed and affirmed the original conclusion, that the external
audit was independent and objective and that the audit process was effective for that financial year.
In conjunction with the effectiveness review, before recommending the re-appointment of the External Auditor, the Committee must consider
whether they are able to provide the required service to the appropriate standard and are independent of the Group. To this end, the Committee
considered whether KPMG’s understanding of the Group’s business, their access to appropriate financial services and regulatory specialists
within their firm, both locally and nationally, and their understanding of the sectors in which the Group operates were appropriate to the
Group’s needs.
As part of this exercise the Committee also considered the transparency report presented by the external auditor and the FRC’s most recent
audit inspection review on KPMG, published in July 2019. In this report the FRC noted that while results at KPMG had improved year-on-year, the
firm remained subject to increased regulatory scrutiny. The Committee received a presentation from the external auditor which described the
steps being taken by the firm to enhance audit quality and discussed this and the FRC findings with the audit partner and other representatives.
As a result of these exercises the Committee concluded that it would recommend to the Board that a resolution to reappoint KPMG as external
auditor for the year ending 30 September 2020 should be proposed at the forthcoming AGM.
Independence policy
Both the Committee and the external auditor have safeguards in place to avoid any compromise of the independence and objectivity of
the external auditor. The Committee considers the independence of the external auditor annually and the Group has a formal policy for the
engagement of its external auditor to supply non-audit services, reviewed, most recently, in September 2019. 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
auditor’s opinion on the Group’s financial statements.
The policy precludes the appointment of the external auditor to provide any service where there is involvement in management functions or
decision making, or any service on which management might place primary reliance in determining the adequacy of internal controls, financial
systems or financial reporting. It also precludes the external auditor from providing tax or remuneration advice. Internal audit services may not
be provided by the external auditor. The Committee must approve any engagement of the external auditor for non-audit work, except where
the fee involved is clearly trivial. The policy sets out rules for the employment of former employees of the external auditor and procedures for
monitoring such persons within the organisation.
The Committee reviews, on a regular basis, the levels of fees paid to all major accounting firms to identify any matters which might impact on
those firms’ ability to tender for the group audit at any future date.
Fees paid to the external auditor
Fees paid to the external auditor are shown in note 13 to the accounts. No services other than services required to be provided by external
auditors by legislation or regulation, such as the review of half-yearly financial information and profit verification for regulatory purposes, were
provided by KPMG.
Audit fees of Group entities for the year have increased by 16.4% to £1,352,000 (2018: £1,161,000). This was a result of an increase in scope as
a result of acquisitions and additional work related to the introduction of IFRS 9.
No fees were paid to KPMG, the Group’s external auditor, for non-audit services during the year (2018: £68,000, excluding VAT).
The EU Audit Regulation (which is directly applicable in the UK for the time being) contains a 70% cap on non-audit fees for services
provided to EEA Public Interest Entities (‘PIEs’) including audit-related services other than those services required by EU or national law. The
calculation applies for the first year commencing after June 2019 which means that this restriction applies from the Group’s year ending
30 September 2020. Non-audit fees paid to the auditor for the year ending 30 September 2020 should be no more than 70% of the average of
the audit fees for 2017, 2018 and 2019, expected to be approximately £750,000.
PAGE 90 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The Group actively considers other providers for the type of non-audit services typically provided by accounting firms. It maintains on-going
relationships relating to tax, remuneration and regulatory advice with firms other than the external auditor’s firm and considers discrete
projects on a case-by-case basis. The Group has engaged with a number of firms, including some outside the ‘big four’ largest audit firms for
assignments during the year, assessing each firm’s appropriateness for the particular assignment before an appointment was made. Fees paid
to audit firms (excluding VAT), excluding the Group audit and related fees, can be analysed as shown below:
Auditors – KPMG
Other big four firms
Other firms
2019
£000
-
2,393
6
2,399
2018
£000
68
926
3
997
The Group maintains relationships with all of the major accounting firms and considers a variety of providers for this type of assignment.
B5.6
Internal Audit
The Committee is responsible for considering and approving the remit of the internal audit function, approving the internal audit plan, and
ensuring it has adequate resources and appropriate access to information to enable it to perform its function effectively and in accordance
with the relevant professional standards. The Committee also ensures that the internal audit function has adequate standing and is free from
management or other restrictions which may impair its independence.
Operations
During the year, the Committee considered and approved the annual internal audit plan, which is based on an assessment of the key risks faced
by the Group. Progress in respect of the plan is monitored throughout the year and the Committee assesses, on an ongoing basis, whether the
internal audit function has sufficient and appropriate skilled resources to complete the plan. With the approval of the Committee, the audit plan
and the related resource requirement may be revised during the year, based on the ongoing assessment of the key risks or in response to the
requirements of the Group.
The Internal Audit Director met regularly throughout the year with the Chair of the Committee to discuss progress against plan, outstanding
agreed actions, and departmental resourcing. Ahead of finalisation of the audit plan for the year ending 30 September 2020, the Chair of the
Committee met with the Internal Audit Director to discuss audit planning priorities, key business risks and assess current resourcing.
During the year, the appointment process for the Group’s new Internal Audit Director was finalised and she took up her appointment in
November 2018. Following her appointment, she underwent a thorough programme of familiarisation with the Internal Audit function and the
Group’s activities and, following this, considered potential enhancements to the Internal Audit approach.
At the request of the PRA, as part of a market-wide review, during the year ended 30 September 2019, internal audit has undertaken specific
review work to assess the adequacy of management information provided to the Board to measure and monitor operational resilience against
risk appetite. This review was co-sourced under an agreement with a third-party accounting firm on a subject matter expertise basis. Certain
other technical or specialist reviews of the first and second line have also been undertaken including an element of co-sourced input where it
was deemed by the Internal Audit Director that such skills would complement and develop those of the internal team.
All internal audit reports are circulated to the Board. Significant findings of internal audit reports are discussed at meetings of the Committee
throughout the year. Overdue actions graded medium or above are reviewed and challenged at both the Committee and the Risk and
Compliance Committee.
Effectiveness
The Committee assesses the effectiveness of the Internal Audit function by reference to standards published by the Chartered Institute of
Internal Auditors. In 2019, the Committee considered the output of an internal quality assessment prepared on this basis and concluded that
the function was satisfactory.
An external quality assessment (‘EQA’) was last commissioned in 2018 to benchmark internal audit activities against best practice and peers.
Progress on the EQA actions arising from this review has been reported to and monitored by the Committee in the year to ensure they are being
properly addressed.
As a matter of policy, the Committee intends to commission an EQA at least every five years.
PAGE 91 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B5.7 Whistleblowing
The Group has an established procedure whereby employees can make disclosures regarding malpractice within the Group on a confidential
basis, in accordance with the Public Interest Disclosure Act 1998 (‘PIDA’). The policy also makes provision to ensure that no employee making
such a disclosure suffers any detriment by doing so. A whistleblowing service is operated for the Group, at arm’s length, by a third-party charity,
Protect. This process was supervised by the Committee during the year and any amendments to the policy required the approval of the Chair
of the Committee.
During September 2019, responsibility for receiving and acting on whistleblowing reports was transferred from the Committee to the Board,
in accordance with the requirements of the 2018 Code. The Committee will retain responsibility for reviewing the operation of the process.
There is a right of appeal, currently to the Chair of the Committee, where the employee is dissatisfied with the outcome and his decision is final
in all cases.
To ensure that the policy is embedded in the operations of the Group all employees received training on the requirements of PIDA and the
Group’s policy during the year and were tested to ensure their understanding. There were also internal publicity campaigns promoting the
whistleblowing procedures.
During the year ended 30 September 2019, a small number of whistleblowing incidents were investigated. Each matter was fully reviewed
by the Whistleblowing Committee and subsequently considered by the Committee. The investigation found that none of the incidents were
material in nature. Whilst actions did arise following the investigations, these were minor.
PAGE 92 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
B6
Remuneration report
This report covers the activities of the Remuneration Committee for the year ended 30 September 2019 and sets out the remuneration details
for the executive and non-executive directors of the Company. It has been prepared in accordance with Schedule 8 of The Large and Medium-
sized Companies and Groups (Accounts and Reports) Regulations 2008, as amended, and the principles of the Code.
This report consists of the Statement by the Chair of the Committee (B6.1), the Annual Report on Remuneration (B6.2) and the full Remuneration
Policy (B6.3) proposed to apply from the close of the Annual General Meeting to be held on 13 February 2020.
B6.1
Statement by the Chair of the Remuneration Committee
Dear Shareholder
The philosophy underpinning the Group’s remuneration policy
remains unchanged and continues to be adopted throughout
the organisation; seeking to recognise fairly and equitably the
contributions of all employees within the Group. For executive
directors, the aim is to ensure that their rewards are aligned with
the interests of shareholders through the achievement of both the
Group’s shorter term and strategic objectives, whilst meeting the
core objective of being motivating and retentive. The Committee
listened to the feedback at the 2019 AGM and recognised the need
to alter the approach to determining short term incentive awards,
in particular to remove the scalar in the year ended 30 September
2019 for the executive directors. The results of this are set out in the
Annual Report on Remuneration.
Business performance
Hugo Tudor, Chair of the Remuneration Committee
The philosophy underpinning
the Group’s remuneration policy
remains unchanged... seeking to
recognise fairly and equitably the
contributions of all employees
within the Group...
The year saw growth in the Group’s loan books, with new lending
up 8.5% to £2,532.4 million which contributed to an increase
in underlying profit by 5.0% to £164.4 million. Profit before tax
on the statutory basis fell by 12.4% to £159.0 million following a
£28.0 million gain on Idem Capital assets in 2018. This led to
underlying EPS increasing by 6.0% to 51.1 pence (2018: 48.2 pence)
and statutory EPS decreasing to 49.4 pence (2018: 55.9 pence).
Funding was enhanced with the continued growth of the Group’s
savings deposit base to £6.4 billion from £5.3 billion a year earlier,
whilst continuing to access the capital markets through the latest
securitisation. The Group’s capital position remains strong, with a
regulatory CET1 ratio of 13.7% (2018: 13.8%), representing a more
efficient capital position enhanced by the sale of a legacy residual
securitisation investment and accompanying share buy-back.
Variable pay earned in the year
Reflecting on shareholder feedback, during the year the Committee
made some changes to the operation of the annual bonus. These
changes reflect current best practice and support the introduction
of the new policy set out below. The personal scalar element has
been removed from the bonus framework and the assessment of
performance has transitioned to a scorecard of performance metrics:
30% financial performance, 30% strategic and future value, 20% risk
management, 20% personal performance.
PAGE 93 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The Committee has reflected the strong performance in the year when applying the existing remuneration policy and changes made to the
operation of the bonus following shareholder feedback at the 2019 AGM. Performance bonuses of 89.4% of maximum for Mr N S Terrington,
Mr R J Woodman and Mr J A Heron have been awarded. In reaching its decision the Committee has reviewed performance against a number of
financial and risk-based targets, as well as taking individual performance into account.
This year’s bonus awards reflect the executive directors’ excellent performance in achieving an increase in underlying profit, RoTE, NIM
progression and new lending (details of which are noted further in the report) within a turbulent and uncertain external environment and
replacing income lost through the amortisation of the Idem Capital portfolio. The objectives are detailed in section B6.2.2, including disclosure
of the target range for the year ended 30 September 2019, as well as retrospective disclosure for the year ended 30 September 2018. This
year’s target range is being disclosed immediately following the financial year for the first time in response to shareholder feedback.
Long term incentive awards under the Paragon Performance Share Plan (‘PSP’) which were granted in December 2016 are due to mature in
December 2019. These awards are subject to performance conditions related to a Total Shareholder Return (‘TSR’) performance condition,
measured against a bespoke comparator group of listed financial services entities (50% of the award), EPS growth (25% of the award) and for
the first time a risk condition based on factors including regulatory, customer, conduct, operational, credit, capital and liquidity risks (25% of
the award).
The performance of the business over the three-year performance period was very strong, leading to the TSR element vesting in full, and the
EPS (22.94% out of a possible 25.00%) and risk (22.50% out of a possible 25.00%) elements vesting at near maximum. The outcome of the
risk condition has been independently assessed by the Committee, supported by the Chair of the Risk and Compliance Committee and the
Group’s Chief Risk Officer. The Committee has considered the financial underpin for these awards, which for the 2016 award was different for
Bank employees at the time prior to vesting, and agreed that based on this evaluation, 95.44% of these awards will vest on 1 December 2019.
Shareholder engagement and key changes to the remuneration structure for 2020
The current remuneration policy was approved by shareholders at the 2017 AGM to apply for a period of three years. Therefore, the Group’s
remuneration policy must be put to the shareholders again at the 2020 AGM and, consequently, the Committee undertook a full and
comprehensive review of the policy during the year. Since the 2019 AGM, an active dialogue with the majority of the Group’s major shareholders
has been maintained and a series of productive and helpful consultations have taken place with me, the Chair of the Board and the Company
Secretary. A total of 18 shareholders took part in these consultations, equating to approximately 69% of total voting rights (based on the
Company’s total voting rights as at 30 September 2019) and I am extremely grateful for their constructive feedback. These meetings were
positive in tone whilst appropriately challenging and, importantly, have helped to shape the Committee’s thinking in the design of the new policy.
Continued strong and sustainable growth for the Group will mean it is likely to be subject to increased financial services specific remuneration
requirements during the lifetime of the new policy. As a result, the Committee is proposing a significant restructuring of the balance between
fixed and variable pay for the executive directors, as well as potentially longer time horizons on pay in due course, and the key changes are set
out below.
The policy is intended to apply for the three years following the 2020 AGM, in line with the legal requirement. In developing the new policy, the
Committee had four key objectives:
• Responding to shareholder feedback
Defining a balanced set of metrics which reward fairly, drive the Group’s strategy, align to the Group’s values, promote a strong culture and
are supported by shareholders
•
Addressing regulatory requirements over the lifetime of the new policy
The Committee anticipates the Group, during the policy lifetime, becoming subject to increased levels of remuneration regulation as a
larger firm (known as a Level 2 CRD IV firm). Consequently it needs to rebalance pay to ensure compliance with the 2:1 variable pay cap in
readiness for this change now, so that shareholders have full visibility of the remuneration changes ahead
• Delivering alignment with the 2018 Code
Develop policies which will be compliant going forward including improving alignment on pension provision
• Meeting the Committee’s remuneration philosophy
Apply the same reward principles throughout the Group to motivate and retain senior management and key roles critical to the delivery of
the Group’s strategy, rewarding fairly for strong performance and delivering a balanced package of fixed and variable pay, short and long
term incentives with a focus on using equity
PAGE 94 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
To reflect the objectives and to meet the requirements of CRD IV the Committee is proposing to:
•
•
•
•
•
•
•
•
•
•
•
Introduce a cap on variable remuneration of twice fixed remuneration
Increase the base salary of the CEO and CFO by 19% to support in rebalancing remuneration
Introduce a fixed role-based allowance, paid in shares and released in five equal annual tranches
Reduce pension contributions from 45% of salary to 20% of salary for incumbent executive directors to align with average contributions
made to the wider workforce. For new external hires, pension contributions to be 10% of salary
Reduce the maximum annual bonus opportunity from 200% of salary to 150% of salary
Reduce the maximum annual PSP opportunity from 200% of salary to 180% of salary
Reduce weighting on relative TSR under the PSP with awards granted under the new policy assessed against a broader scorecard of
metrics: 25% relative TSR, 25% EPS, 25% risk, 25% customer and people metrics
Introduce a two year holding period post vesting for the PSP
Introduce a formal post-employment shareholding requirement to align executive directors’ interests further with those of shareholders
Extend malus and clawback provisions to ensure the Committee has the appropriate authority to reduce remuneration in the appropriate
scenarios
Introduce significantly extended deferral and retention variable pay requirements once the Group becomes a PRA Level 2 remuneration
firm to align with regulatory rules and expectations for Senior Managers
The impact of all of these changes is for the cash paid to executive directors to be slightly lower but with the addition of the role-based allowance
the non-variable element of the package increases by approximately 18%. At maximum the total package increases by about 3.5% reflecting
an inflationary increase for the year. We considered carefully the argument to reduce this, reflecting the greater certainty from a higher
non-variable package, but, in light of the significant deferrals that arise from CRD IV, we believe that this would be unreasonable.
Overall, variable pay will continue to be a key component of reward but is rebalanced to address the fact the Group is on the cusp of Level 2
status. Pension is significantly reduced to bring closer alignment with provision for the average of the workforce and variable pay will be more
heavily geared to long term and equity incentives. The role-based allowance will deliver further value in equity and extending this allowance over
five years will drive shareholder alignment.
The most important challenge for the Committee will be to continue to ensure that the remuneration policy remains appropriately structured
to retain and motivate the executive directors, whilst providing alignment with shareholders and, critically, directly linking to the achievement
of the Group’s strategy.
I commend this report to shareholders and ask you to support the resolutions to approve the Company’s Directors’ Remuneration Report and
the new remuneration policy set out in Section B6.3.
Hugo Tudor
Chair of the Remuneration Committee
26 November 2019
PAGE 95 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B6.2 Annual report on remuneration
Remuneration summary
The information provided in this section is not subject to audit
Aligning our pay principles to our strategy during the year ended 30 September 2019:
The success factors
on which the Group’s
strategic priorities
are based
Translation into reward principles and structure
Credit quality
Risk measures and future value of new business
Risk assessment
Bonus
Performance share plan
Loan pricing
Future value of new business and financial
performance
EPS growth and TSR
Funding
Risk measure and financial performance
EPS growth, TSR and risk assessment
Strong financial foundations
Financial performance
Relative TSR, EPS and risk assessment
Efficient utilisation of the
Group’s capital base
Risk measures
Relative TSR and risk assessment
Cost control
Profit measures and personal objectives
EPS growth
A customer focused culture
Personal objectives
Risk assessment includes customer engagement
measures
These success factors deliver enhancement of shareholder value and align with the Group’s reward structure
At a glance summary of remuneration during the year ended 30 September 2019:
N S Terrington
R J Woodman
J A Heron
Salary increase
3%
3%
3%
Salary
£000
503
317
268
Bonus earned
as % of maximum
PSP vesting
89.4%
89.4%
89.4%
95.44%
95.44%
95.44%
The annual report on remuneration includes:
• The Remuneration Committee, its key responsibilities and advisers (B6.2.1)
• The remuneration of the directors for the year ended 30 September 2019 (B6.2.2)
• How the remuneration policy will be applied to the directors in the year ending 30 September 2020 (B6.2.3)
• Other disclosures required by the Regulations (B6.2.4)
• Policy for executive and non-executive directors for approval at the AGM in 2020 (B6.3)
PAGE 96 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B6.2.1 The Remuneration Committee, key responsibilities and advisers
The information provided in this section is not subject to audit
Committee membership during the year ended 30 September 2019
The members of the Committee during the year were:
Hugo Tudor
Chair
Fiona Clutterbuck
Member all year
Peter Hartill
Member all year
Graeme Yorston
From 24 January 2019
Patrick Newberry
Until 31 December 2018
None of the non-executive directors who sit on the Committee has any personal financial interest (other than as a shareholder) or conflict of
interest arising from cross-directorships or day-to-day involvement in running the business.
Key responsibilities
The Committee determines the Company’s policy on executive remuneration, including pension rights and compensation payments
of the executive directors. It sets the remuneration for each of the executive directors, the Chair of the Board, the Company Secretary, all
Senior Management and Certification Regime personnel under the rules of the PRA/FCA which includes the Director of Internal Audit and the
Chief Risk Officer.
The Committee will also review workplace remuneration and related policies and the alignment of incentives and rewards with culture; and
when setting the policy for executive director remuneration, take into account those matters.
It will also consider the Group remuneration policy for all employees (excluding executive directors) and review and approve the Group’s
schedule of Material Risk Takers, under financial services regulatory remuneration rules.
No director contributes to any decision about his or her own remuneration.
The terms of reference for the Committee are available on the Group’s website.
Attendees
The CEO, People Director, Chief Risk Officer, Company Secretary, other non-executive directors (including the Chair of the Risk and Compliance
Committee) and external remuneration advisors attend by invitation.
Advisors
During the year, the Committee considered advice from:
•
Deloitte LLP (‘Deloitte’) who were appointed as the Committee’s independent advisor in February 2016 following a review process. Deloitte
is a founder member of the Remuneration Consultants Group and as such voluntarily operates under its Code of Conduct in relation to
executive remuneration in the UK. This supports the Committee’s view that all advice received during the year was objective and independent
The total fees paid to Deloitte for advice to the Committee during the year amounted to £160,000 (including VAT). Deloitte provided other
professional services to the Group during the year including share scheme advice, regulatory support, customer contact support and
co-sourced internal audit services
•
The CEO, the Chair of the Risk and Compliance Committee, the People Director and Chief Risk Officer in determining remuneration for the
year for executive directors and senior management
Statement of voting at Annual General Meeting
The table below sets out actual voting in respect of the resolutions to approve the Annual Report on Remuneration at the Company’s AGM on
14 February 2019 and the Remuneration Policy at the AGM on 9 February 2017.
Resolution
Votes for
Annual Report on Remuneration
170,875,932
Remuneration Policy
195,090,537
% for
86.36
95.06
Votes against
% against
Total votes cast
Votes withheld
26,986,282
10,145,210
13.64
4.94
197,862,214
6,557,937
205,235,747
4,242
PAGE 97 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
B6.2.2 Directors’ remuneration for the year ended 30 September 2019
The information provided in this section has been audited
Single total figure of remuneration for executive directors
Year ended 30 September 2019
N S Terrington
R J Woodman
J A Heron
£000
£000
£000
Fixed remuneration
Salaries and fees
Allowances and benefits1
Benefits in kind from the performance of duties2
Pension allowance
Variable remuneration
Cash bonus
Deferred bonus
Dividend on vested deferred bonus3
Share awards
Total
503
14
11
226
687
212
-
1,222
2,875
317
12
-
143
437
129
-
769
268
12
15
121
372
107
25
651
1,807
1,571
Year ended 30 September 2018
N S Terrington
R J Woodman
J A Heron
£000
£000
£000
Fixed remuneration
Salaries and fees
Allowances and benefits1
Benefits in kind from the performance of duties2
Pension allowance
Variable remuneration
Cash bonus
Deferred bonus
Dividend on vested deferred bonus3
Share awards4
489
14
7
220
672
207
-
817
308
12
-
138
428
126
16
515
Total
2,426
1,543
260
12
20
117
364
105
-
436
1,314
Total
£000
1,088
38
26
490
1,496
448
25
2,642
6,253
Total
£000
1,057
38
27
475
1,464
438
16
1,768
5,283
1.
2
“Allowances and benefits” includes private health cover, fuel benefit and company car provision or company car allowance (£10,000 to £12,000).
“Benefits in kind from the performance of duties” – the Company reimburses executive directors in respect of certain travel costs incurred in connection with the performance of their
duties. The Group has been advised that the reimbursement of some of these costs constitutes a taxable benefit in kind. The Group has agreed to provide an allowance to these directors
to cover the tax liability. The amounts shown represent the payments HMRC treats as taxable together with an allowance to cover the tax.
3.
Dividend on vested bonus is the accrued dividends to the date of exercise paid on deferred bonuses which were exercised during the year. Under the policy which was adopted at the 2017
AGM, dividends will accrue to the point of vesting on deferred share awards made in respect of the year ended 30 September 2017 and thereafter.
4.
The share awards value for the year ended 30 September 2018 has been restated to reflect the market value of the shares under the PSP that vested on 22 December 2018 as at that date.
PAGE 98 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Pension allowance and pension accruals
Nigel Terrington, Richard Woodman and John Heron were members of the Paragon Pension Plan (‘the Plan’), the Group’s defined benefit pension
plan, until 30 September 2016. Following which time, they took a cash equivalent transfer of benefits in the Plan, receiving a lump sum value on
a no gain, no loss basis and have no further entitlement.
The executive directors had previously ceased pension accrual under the Plan in return for a cash supplement calculated, as a percentage of
salary, to equate to the cost of the Group’s contributions towards future service benefits had each individual stayed within the Plan for their
future service accrual. This supplement was assessed every three years and was last assessed by the Group’s actuaries during 2017. Following
this assessment, recognising the substantial cost to the Group of meeting these obligations, the Committee asked the executive directors to
agree to fix this cash supplement at 45% of base salary so that the Group would have known costs associated with pension provision. For all
three directors, the fixed percentage was a lower amount than their actual contractual entitlement based on the most recent figures presented
by the Group’s actuaries.
These contributions in respect of further pension provision for each of the directors are shown as ‘pension allowance’ in the single total figure
of remuneration table. The change to 45% was made with effect from 1 April 2017, and no compensation was paid or payable to the executive
directors in respect of this change.
Annual bonus
The annual bonus for the year ended 30 September 2019 was based on performance against business, financial and risk measures and personal
strategic objectives. The personal element was altered part way through the year in response to shareholder feedback at the 2019 AGM with
the scale factor removed and a broader range of financial measures considered by the Committee. Consequently, the bonus award allocation
was as follows:
Balanced scorecard of objectives
Maximum award
Bonus outcome
Financial performance
30%
23.6%
Operating profit
Return on tangible equity
Net Interest Margin (“NIM”) progression
Net loan increases
Future value and strategic development
30%
25.8%
Development activities
Pipeline
Embedded value
Liability management
Risk management
Operation within levels for risk tolerance metrics agreed by the Board
Personal performance
Delivery against personal objectives
20%
20%
20.0%
20.0%
Total
100%
89.4%
PAGE 99 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Balanced scorecard assessment
Performance for the year and the resulting award levels in respect of the business element were as follows:
Measure
Weighting Threshold
Target
Stretch
Actual
Outcome
Overall
Financial
performance
30%
Underlying
profit
Underlying
RoTE
Underlying NIM
progression
Net loan
increases
Future value &
strategy
Development
activities
45%
£160.0m
£164.0m
£170.0m
£164.4m
40%
14.0%
14.25%
14.50%
14.60%
10%
0.02%
0.05%
0.08%
0.08%
5%
3.0%
5.0%
7.5%
7.0%
30%
Qualitative assessment by the Committee of:
Development activities during the year
25%
PM12 disposal
Expanded savings addressable market
PM12 disposal at premium
to book value with
enhancement to capital ratios
Retail funding now exceeds
£6.4bn
24.1
40.0
10.0
4.5
78.6
20.0
23.6%
Pipeline
25%
The pipeline and its support for the
delivery of the following year’s strategy
assessed by reference to mix, trends, yield
and quality considerations
Embedded
value
25%
New originations during the year assessed
by reference to diversification strategy,
credit standards and yield considerations
Liability
management
25%
Qualitative assessment by the Committee
of achievements during the year
Underlying NIM at 2.29% and
underlying RoTE at 14.6%
23.0
Specialist buy-to-let lending
88.8% of total at £1,315.2m,
including a high proportion
of five-year products at good
margin. Total non-buy-to-let
lending at £1,057.9m
First SONIA securitisation
Savings addressable market
expanded from £130bn to
£225bn through proposition
development
20.0
23.0
Risk
20%
• Strong capital ratio
• Strong liquidity ratios with proactive management to counter potential Brexit threats
• Best in class credit risk management
• Total number of complaints and operational losses remained well within appetite
• Conduct Risk framework further embedded with increased quality assurance focus
• Progress in operational resilience risk management
Personal
performance
20%
86.0
25.8%
20.0
20.0%
As detailed in the directors’ individual performance below
20.0
20.0%
PAGE 100 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Individual performance assessments
The following overarching objectives were applicable to all executive directors:
• Provide strategic leadership to deliver the business plan aligned to the Group’s strategy
• Deliver the planned financial performance within the parameters of the Group’s risk appetite
• Safeguard fair outcomes for customers to ensure they are central to the Group’s operations
• Ensure secure and stable platforms are in place to deliver longer term strategic goals
• Embed the restructure across processes, systems and ways of working to maximise value
• Ensure the Group meets all risk, compliance and regulatory requirements
• Comply with the Senior Managers and Certification Regime and ensure it is embedded
• Protect the Group’s strong culture with capable and motivated employees
The directors’ individual objectives, in addition to those above, and the assessments made are set out below:
Executive director
Individual targets
Actual performance
N S Terrington
In addition to strong leadership, delivery of the Group’s business plan and financial performance, upholding
our corporate values, ensuring our customers are at the heart of everything the Group does and extending the
Paragon brand and all within the Group’s risk management framework, the following annual personal objectives
were agreed:
Broaden the Group’s presence as a leading UK
specialist lender
Specialist buy-to-let lending 88.8% of total at
£1,315.2m (2018: £1,185.5m)
Deliver strong organic new business generation
Total non-buy-to-let lending £1,051.9m
(2018: £837.7m)
Actively assess M&A opportunities to broaden the
Group’s diversification strategy
Drive the business towards the optimisation of RoTE
on a sustainable basis over the medium term
Continued proactive assessment of a number of
potential opportunities to diversify the Group’s
strategy
Volume and margin management and financial risk
management has positioned the Group for future
growth with underlying NIM at 2.29% and underlying
RoTE at 14.6%
Develop an increased awareness of conduct risk to
appropriately control and monitor inherent and residual
risks
Conduct risk increasingly embedded with enhanced
QA and improved complaints monitoring
Build a succession plan pipeline for Executive
Committee roles
Implementation of senior leadership development
programme with a cohort of 21 internal high potential
individuals
PAGE 101 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Executive director
Individual targets
Actual performance
R J Woodman
In addition to strong leadership, delivery of the Group’s business plan and financial performance, upholding our
corporate values, ensuring our customers are at the heart of everything we do and extending the Paragon brand
and all within the Group’s risk management framework, the following annual personal objectives were agreed:
Optimise the Group’s funding costs to support lending
activities
Retail funding from customers’ deposits now exceeds
£6.4bn
Continue to advance the Group’s application for IRB
authorisation
Paragon Mortgages (No. 12) PLC executed providing
enhancement to capital ratios
IFRS 9 first full year delivered without any issues
Considerable increase in activity to the point the
application is ready for submission, including the
creation of a bespoke stress testing framework
Ensure actions progress to support the Group’s
diversity targets
Women in Finance Charter target achieved 16 months
ahead of original plan
Continue to provide oversight of the funding required
and liquidity management
Strong performance during a particularly busy year for
transactions, system changes and pricing
Continue to provide oversight and management of the
investor relations programme including equity analysts
Strong engagement with analyst community
Further strong progress in reducing Group
encumbrance levels towards sector norms
Executive director
Individual targets
Actual performance
J A Heron
In addition to strong leadership, delivery of the Group’s business plan and financial performance, upholding our
corporate values, ensuring our customers are at the heart of everything we do, management of all buy-to-let
activities, lending controls and customer engagement, all within the Group’s risk management framework, the
following annual personal objectives were agreed:
Achieve £1,612.4m of buy-to-let and second charge
mortgage originations
Lending in line with the levels indicated to the market
with a strong pipeline and an outstanding credit
performance
Enhance the customer and intermediary experience
through redefined processes
NPS averaging +65 compared to +45 for the sector,
strong and successful launch of an intermediary portal
Develop bespoke commercial underwriting offering
with individual terms and pricing
Yields and NIM maintained notwithstanding industry
wide pressures, leading to a more favourable business
mix than originally planned
Annual bonus outcome
The resulting bonuses for the year ended 30 September 2019 were as follows:
Executive
director
Financial
performance
Future value
and strategy
Risk
Personal
performance
Total
Total
Cash
N S Terrington
R J Woodman
J A Heron
23.6%
23.6%
23.6%
25.8%
25.8%
25.8%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
89.4%
89.4%
89.4%
899
566
479
687
437
372
£000
£000
Share
value
£000
212
129
107
25% of amounts awarded in excess of £50,000 are deferred into nil cost options under the Deferred Share Bonus Plan (‘DSBP’) which can be
exercised after three years. No further performance conditions apply to the deferred shares.
PAGE 102 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Retrospective disclosure of business element targets for the year ended 30 September 2018
The threshold and maximum performance targets in relation to the business element performance conditions for the financial year ended
30 September 2018 are no longer considered commercially sensitive and are therefore disclosed below. Actual performance has also been
provided for reference.
Measure
Threshold performance
Target
Maximum
Actual
Financial performance
Adjusted operating profit
£148.9m
£156.8m
£164.6m
£156.5m
Future value of new business
Lending
£2,221.8m
£2,338.7m
£2,455.6m
£2,333.2m
Debt purchase investments
£54.0m
£60.0m
£66.0m
£83.4m
The future value of new business was written in line with the Group’s required return and risk appetite.
Risk
The Group operated within the risk tolerance levels set by the Board for capital ratios, liquidity positions,
new business and operational and regulatory risk. It also developed its plan to mitigate longer term
strategic risk.
Performance Share Plan
Awards vesting in respect of the year ended 30 September 2019
Awards granted in December 2016 under the Group’s PSP are subject to performance conditions measured over the three financial years
ended 30 September 2019.
Performance
condition
Relative TSR*
EPS growth
Risk
Weighting
Threshold vesting for 25% of
maximum award
Maximum
vesting
50%
25%
25%
Median performance
Upper quartile
performance
RPI plus 3% p.a.
RPI plus 7% p.a. RPI plus 6.56% p.a.
n/a
n/a
90%
Actual
performance
Above upper
quartile
Total as a % of maximum award
Total as a % of salary at grant
Vesting
outcome
100.00%
91.74%
90.00%
95.44%
190.88%
*
The comparator group for TSR purposes agreed at the time of grant was: Aldermore Group PLC, Arrow Global Group PLC, Barclays PLC, Close Brothers Group PLC, CYBG PLC,
Lloyds Banking Group PLC, Metro Bank PLC, OneSavings Bank PLC, Provident Financial PLC, Royal Bank of Scotland Group PLC, Shawbrook Group PLC, Secure Trust Bank PLC and
Virgin Money Holdings (UK) PLC.
There is straight-line vesting between the threshold and maximum for the TSR and EPS conditions and no reward below threshold performance.
The risk metric measures the Group’s performance against six equally weighted risk categories - material regulatory breaches, customer
service, management of liquidity and capital risk, credit losses against risk appetite, management of conduct risk, material risk events over the
performance period. The performance of the Group against these metrics was independently assessed by the Committee, supported by the
Chair of the Risk and Compliance Committee and the Group’s Chief Risk Officer, and the outcome reflects the strong level of performance over
this period.
Vesting was also subject to the Committee’s determination, in respect of the financial underpin, whether the level of vesting reflected the
overall financial performance of the Group.
PAGE 103 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The vesting percentage has been reviewed by the Committee and details of the shares which will vest on 1 December 2019 are set out below.
Total shares granted
Vesting outcome
Total shares awarded1
Share price2
PSP value
N S Terrington
R J Woodman
J A Heron
262,114
165,074
139,753
95.44%
95.44%
95.44%
250,161
157,546
133,380
£
4.3706
4.3706
4.3706
£000
1,222
769
651
1.
2.
In accordance with the rules of the PSP, participants are entitled on exercise to additional value equal to the dividends that would have been paid on vested shares in respect of dividend
record dates between the grant date and vesting date. Accordingly, the share award values also include £0.5130 per vested share in respect of such dividends.
The PSP value has been estimated using the average closing share price for the three months ended 30 September 2019. The actual value of the awards will not be known until the awards
vest in December 2019, as it will be based on closing share price at that date.
Awards granted during the year ended 30 September 2019
On 14 December 2018 the following awards were granted under the PSP with a face value of 200% of salary.
Executive director
N S Terrington
R J Woodman
J A Heron
Salary
£000
503
317
268
Percentage grant
Face value of grant
Share price1
Number of shares
200%
200%
200%
£000
1,006
634
537
£
4.4300
4.4300
4.4300
227,156
143,059
121,117
1.
Based on the average closing mid-market price of the Company’s shares on each of the five dealing days following the announcement of the Company’s results for the financial year ended
30 September 2018, being the price used to determine the number of shares in accordance with the Directors’ Remuneration Policy.
The PSP awards are subject to the following performance conditions, with a performance period of the three years ending 30 September 2021:
Performance measure
Relative TSR
EPS
Risk
Weighting
Threshold vesting for 25% of
maximum award
Maximum
vesting
50%
25%
25%
Median performance
Upper quartile performance
Basic EPS of 60 pence
Basic EPS of 68 pence or more
Based on an assessment of a balanced scorecard of risk and compliance
factors (see below)
There is straight-line vesting between the threshold and maximum for the TSR and EPS conditions and no reward below threshold performance.
In addition, prior to any awards vesting under any element, the Committee must be satisfied that the individual’s performance and the underlying
financial performance of the Company are satisfactory given the level of vesting.
Reflecting the Group’s evolution and growth, the Committee determined that achievement of absolute EPS targets would be more appropriate
than measuring EPS growth relative to RPI as was indicated in the Directors’ Remuneration Report last year (particularly given the external
economic climate). The Committee is satisfied that these absolute EPS targets are no less stretching than the relative growth targets originally
proposed but are more relevant and transparent for all stakeholders.
PAGE 104 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Relative TSR measure
The comparator group for the purposes of the relative TSR condition is:
Amigo Holdings PLC
Arrow Global Group PLC
Barclays PLC
Charter Court Financial
Services Group PLC
Close Brothers Group PLC
Funding Circle Holdings PLC
Lloyds Banking Group PLC
Metro Bank PLC
OneSavings Bank PLC
Provident Financial PLC
Royal Bank of Scotland
Group PLC
Secure Trust Bank PLC
S&U PLC
Virgin Money UK PLC
Risk measure
The risk management performance condition is assessed by reference to risk management performance and the application of a strong risk
culture across the Group taking into account:
Material regulatory breaches
Customer service
Management of liquidity and capital risk
Credit losses against risk appetite
Management of conduct risk
Material risk events over the performance period
Disclosure of assessment against performance of the risk element will be made in the Annual Report on Remuneration for the year of vesting.
Chairman and non-executive director fees
Chair of the Board
F J Clutterbuck
Non-executive directors
A K Fletcher1
P J N Hartill
P J Newberry2
B A Ridpath
H R Tudor
F F Williamson
G H Yorston
Total
Year ended 30 September 2019
Year ended 30 September 2018
Fees
£000
Benefits
£000
Total
£000
Fees
£000
Benefits
£000
Total
£000
255
14
269
159
5
164
16
95
16
65
85
85
65
-
-
-
-
-
-
-
16
95
16
65
85
85
65
65
88
65
65
70
85
65
-
-
-
-
-
-
-
65
88
65
65
70
85
65
682
14
696
662
5
667
1.
Resigned from the Board on 31 December 2018. In addition to the fees earned as a non-executive director, Mr A K Fletcher served as a director of the Corporate Trustee of the Plan and
received £4,000 (2018: £15,000) during the year in respect of that appointment from Paragon Finance PLC, the sponsoring company of the Plan and a subsidiary of the Group, while serving
as a director of the Company.
2. Resigned from the Board on 31 December 2018.
PAGE 105 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Directors’ share interests
The interests of the executive directors in the shares of the Company at 30 September 2019 (including those held by their connected persons)
were:
Unvested awards subject to performance conditions
PSP1 2
432,348
272,286
230,518
Unvested awards not subject to performance conditions
N S Terrington
R J Woodman
Number
Number
J A Heron
Number
DSBP
Sharesave
Total unvested awards
Vested but unexercised awards
PSP2
DSBP
Total vested but unexercised awards
Shares beneficially held
Total interest in shares
Awards exercised in the year3
PSP
DSBP
Sharesave
Total awards exercised in the year
138,897
12,026
583,271
542,090
168,232
710,322
781,269
84,059
12,026
368,371
437,218
63,482
500,700
226,051
2,074,862
1,095,122
-
-
-
-
-
-
-
-
63,503
-
294,021
133,380
-
133,380
274,723
702,124
100,440
41,150
7,216
148,806
1.
2.
3.
In addition to the unvested PSP awards in the table, each executive director holds a tax qualifying option under the Company Share Option Plan (‘CSOP’) over 6,279 shares at an exercise
price of £4.7776 per share, as part of the awards granted on 8 December 2017. If a CSOP option is exercised at a gain, the number of shares the director will receive under the PSP will be
reduced by the same value, to ensure that the total pre-tax benefit is not increased by the grant of the CSOP options. Therefore, the value of each award, in aggregate, is equivalent to that
of a PSP award and the CSOP options may be disregarded in determining the value.
For the purposes of the table above the awards granted in December 2016 are assumed to be vested but unexercised in respect of the percentage which it is estimated will vest (95.44%)
and to have lapsed in respect of the balance.
The PSP and DSBP awards were exercised on 27 June 2019, when the share price was £4.3446. The Sharesave awards were exercised on 5 August 2019 when the share price was
£3.9240.
The interests of the Chairman and the non-executive directors at 30 September 2019, which consist entirely of ordinary shares, beneficially
held, were as follows:
F J Clutterbuck
P J N Hartill
B A Ridpath
H R Tudor
F F Williamson
G H Yorston
2019
8,372
7,000
2,358
100,000
3,000
2,307
As at 31 October 2019, the last practicable date prior to approving this Report, the Company has not been advised of any changes to the
interests of the directors and their connected persons as set out in the tables above.
PAGE 106 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Share ownership guidelines
All executive directors are encouraged to hold a minimum number of shares in the Company with a value of 200% of their salary, calculated at
31 December each year. The valuation for shares held before 1 January 2017 is based on the average price of the Company’s shares over a rolling
three-year period. For shares acquired after that date the valuation is based on the market value of the shares at the date of acquisition. The
value, net of income tax and national insurance, of vested but unexercised shares granted under the DSBP and under the PSP count towards
the aggregate shares held by each director in respect of the policy.
The chart below compares the executive directors’ holdings at 30 September 2019 to those required by the guidelines, expressed in value
terms as a percentage of salary at 30 September 2019.
Directors’ shareholding guidelines
30 September 2019
At 30 September 2019, all of the executive directors’ holdings were in accordance with guideline levels.
B6.2.3 Application of remuneration policy for the year ending 30 September 2020
The information provided in this section of the Directors’ Remuneration Report is not subject to audit. The details set out are subject to
shareholder approval of the new policy at the 2020 AGM.
Executive directors
Base salary
To reflect the rebalancing of fixed and variable pay in readiness for Level 2 banking status during the life of the new policy, the salaries of
Nigel Terrington and Richard Woodman will increase by 19%, backdated to 1 October 2019, subject to approval at the 2020 AGM.
The salary for John Heron was increased by 3% from 1 October 2019, in line with the level of increases for the Group’s wider workforce. Mr Heron
is retiring prior to the proposed policy for the year ending 30 September 2020 being put to shareholders for approval.
Salary with effect from
1 October 2019
1 October 2018
£
598,754
377,087
276,350
£
503,150
316,875
268,275
N S Terrington
R J Woodman
J A Heron
PAGE 107 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accountspercentage of salary8007006005004003002001000Required shareholdingN S TerringtonR J WoodmanJ A Heron200%774%530%412% Allowances and benefits and pension contributions
Pension contributions will reduce from 45% of salary to 20% of salary for incumbent executive directors to align with average contributions
made to the wider workforce. For new external hires pension contributions will be 10% of salary.
A fixed role-based pay allowance will be introduced, paid in shares over five years and released in five equal annual tranches. The allowance is
structured to meet all fixed pay tests within the EBA guidelines. The allowance will be £140,000 p.a. for Mr N S Terrington and £90,000 p.a. for
Mr R J Woodman. No role-based allowance will be payable to Mr J A Heron as he intends to retire from the Group prior to the Annual General
Meeting in February 2020.
Allowances and benefits remain unchanged other than pension contributions and the introduction of a fixed role-based pay allowance to meet
the requirements of CRD IV.
Annual bonus
The annual bonus structure is based on a revised scorecard of measurements; 30% on financial performance, 30% on future value of new
business and strategic management, 20% on risk management and 20% on personal performance.
The Committee has chosen not to disclose, in advance, the performance targets for the forthcoming year as these are felt to be commercially
sensitive. Retrospective disclosure of the targets and performance against them will be set out in next year’s Annual Report on Remuneration
except to the extent that any measure/target remains commercially sensitive.
The maximum award will reduce to 150% of salary (previously 200%). Executive directors will continue to be required to defer 25% of amounts
awarded in excess of £50,000 in shares. The Committee may require higher levels of deferment or the executive may elect to defer a greater
proportion. However, it is anticipated that deferral arrangements will remain unchanged until such point as the Group becomes a larger banking
group and therefore subject to PRA level 2 remuneration requirements.
PSP awards
Award levels for executive directors is reduced to 180% (previously 200%) of base salary. The performance conditions and targets are
summarised below:
Performance measure
Weighting
Relative TSR
Basic EPS
Risk
25%
25%
25%
Customer and people
25%
Threshold vesting for 25%
of maximum award
Maximum
vesting
Median performance
Upper quartile performance
60.0p
67.0p or more
50% weighting on an assessment from the Chief Risk Officer of the six key
elements of the Group’s risk appetite: regulatory breaches, customer service,
conduct, operational, capital and liquidity and credit losses
50% weighting on a strategic risk assessment to reflect the management of risk
with regard to the delivery of the Group’s medium term strategy
50% weighting on Customer elements which are not disclosed due to
commercial sensitivity but will be on vesting. This element will be evaluated by
the Chair of the Risk and Compliance Committee
50% weighting on People elements, which will consider employee engagement,
voluntary attrition and diversity targets compared to industry averages
There is straight-line vesting between threshold and maximum and no reward for below threshold performance.
In addition, prior to any awards vesting, the Committee must be satisfied that the individual performance and underlying financial performance
of the Group are satisfactory given the level of vesting.
PAGE 108 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Relative TSR test
The comparator group for the purposes of the relative TSR test for the 2019/20 grant will be:
Amigo Holdings PLC
Arrow Global Group PLC
Barclays PLC
Close Brothers Group PLC
Funding Circle Holdings PLC
Lloyds Banking Group PLC
Metro Bank PLC
OneSavings Bank PLC
Provident Financial PLC
Royal Bank of Scotland
Group PLC
Secure Trust Bank PLC
S&U PLC
Virgin Money UK PLC
Chair of the Board’s and non-executive directors’ fees
Chair of the Board’s fee
Base fee for non-executive directors
Additional fee for Senior Independent Director
Additional fee for chairs of committees1
Fee with effect from
1 October 2019
1 October 2018
£000
255
65
10
20
£000
255
65
10
20
1.
The additional fee for chair of committees is currently payable to the Chairs of the Remuneration, Audit, and Risk and Compliance Committees, but would be payable for the chairing of such
additional committees as might be authorised by the Board.
B6.2.4 Other information
The information provided in this section of the Directors’ Remuneration Report is not subject to audit
Performance graph and table
The following graph shows the Company’s TSR performance compared with the performance of the FTSE All Share General Financial sector
index. This graph shows the value, by 30 September 2019, of £100 invested in Paragon Banking Group PLC on 30 September 2009, compared
with £100 invested in the FTSE 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.
Ten-year return index for the FTSE All Share General Financial Sector
Ten years ended 30 September 2019
PAGE 109 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and AccountsParagon Banking Group PLCFTSE All Share General Financial SectorValue (£)500400300200100020092010201120122013201420152016201720182019 The following table shows the total remuneration, as included in the single figure table, and the amount vesting under short-term and long-term
incentives as a percentage of the maximum that could have been achieved, in respect of the CEO, Mr N S Terrington, over the past ten years.
Single figure of total
remuneration
Annual bonus earned against
maximum opportunity
Long-term incentive vesting outcome
against maximum opportunity
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
£000
2,875
2,426
2,305
1,956
2,546
3,113
2,655
2,565
2,382
1,209
%
89.4
90.0
90.0
75.0
100.0
100.0
85.0
87.5
87.5
75.0
%
95.44
72.47
63.51
50.00
100.00
100.00
100.00
100.00
58.60 and 85.10
58.60
Percentage change
The following table shows the change in certain aspects of the remuneration of the CEO, Mr N S Terrington:
Component
Salary
Benefits1
Benefits in kind in performance of duties2
Bonus
1.
‘Benefits’ includes private health cover, fuel benefit and company car provision or company car allowance.
2019
£000
503
14
11
899
2018
£000
489
14
7
879
Change
%
3
-
57
2
2.
‘Benefits in kind from the performance of duties’ arise where the Group reimburses executive directors in respect of certain travel costs incurred in connection with the performance
of their duties. The Group has been advised that the reimbursement of some of these costs constitutes a taxable benefit in kind. The Group has agreed to provide an allowance to Mr
Terrington to cover the tax liability. The amount shown represents the payments HMRC treats as taxable together with an allowance to cover the tax.
The Group’s pay review taking effect on 1 October 2018 awarded average percentage increases in wages and salaries to employees as a whole
of 3.10% (1 October 2017: 3.21%).
The Group awarded average bonus levels for the year ended 30 September 2019 of 3.71% (2018: 2.98%).
The nature and level of benefits available to employees in the year ended 30 September 2019 was broadly similar to that in the previous year.
CEO pay ratio
The table below sets out the CEO pay ratio at the 25th, median and 75th percentile employees within the Group. The Group used Option A
as defined in The Companies (Miscellaneous Reporting) Regulations 2018, as this calculation methodology was considered to be the most
accurate method. The 25th, median and 75th percentile pay ratios were calculated using the full time equivalent remuneration (prepared in the
same manner as those for the single figure table) for all UK employees during the financial year. Certain employees participate in discretionary
bonus schemes and long term incentive schemes.
25th percentile
50th percentile
75th percentile
Base salary
Total remuneration
CEO pay ratio
£21,000
£29,000
£53,000
£24,000
£32,000
£54,000
119:1
90:1
53:1
Base salaries shown above are the base salaries relating to the relevant identified employees.
The Group aims to provide a competitive remuneration package which is appropriate to promote the long-term success of the Group and to
apply this policy fairly and consistently to attract and motivate staff.
PAGE 110 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Relative importance of spend on pay
Set out below is a summary of the Group’s levels of expenditure on pay and other significant cash outflows.
Wages and salaries
Dividend paid
Loan advances and investment in portfolios
Corporation tax paid
Note
10
45
46
2019
£m
62.6
54.0
2,536.6
39.4
2018
£m
57.2
43.1
2,416.6
32.0
Change
£m
5.4
10.9
120.0
7.4
Loan advances and investment in portfolios is shown above as this is the principal application of cash used to generate income for the Group.
Corporation tax is contributed out of profit to the UK Government.
Executive directors’ share interests
The individual interests of the executive directors under the PSP are as follows:
Award
date
Market
price
At 1 October
2018
Awarded
Lapsed
Exercised At 30 September
2019
Exercisable
from
Number
Number
Number
Number
N S Terrington
18/12/2014
409.60p
22/12/2015
362.70p
01/12/2016†
369.40p
08/12/2017*
483.20p
Number
103,548
188,381
262,114
205,192
-
-
-
-
14/12/2018
401.00p
-
227,156
R J Woodman
10/12/2013
345.30p
18/12/2014
409.60p
22/12/2015
362.70p
01/12/2016†
369.40p
08/12/2017*
483.20p
69,525
91,508
118,639
165,074
129,227
-
-
-
-
-
14/12/2018
401.00p
-
143,059
J A Heron
22/12/2015
362.70p
01/12/2016†
369.40p
08/12/2017*
483.20p
100,440
139,753
109,401
-
-
-
14/12/2018
401.00p
-
121,117
-
-
11,953
-
-
-
-
-
7,528
-
-
-
6,373
-
-
-
-
-
-
-
-
-
-
-
-
-
103,548
18/12/2017
188,381
22/12/2018
250,161
01/12/2019
205,192
08/12/2020
227,156
14/12/2021
69,525
10/12/2016
91,508
18/12/2017
118,639
22/12/2018
157,546
01/12/2019
129,227
08/12/2020
143,059
14/12/2021
100,440
-
22/12/2018
-
-
-
133,380
01/12/2019
109,401
08/12/2020
121,117
14/12/2021
†
For the purpose of the table above, these awards are assumed to be vested in respect of the percentage which it is assumed will vest (95.44%) and to have lapsed in respect of the balance.
*
On 8 December 2017 each executive director was granted CSOP options over 6,279 shares, at an exercise price of £4.7776 per share, as part of his PSP award. If a CSOP option is exercised
at a gain, the number of shares that may be delivered under the PSP will be reduced at exercise by the same value to ensure that the total pre-tax benefit is not increased by the grant of
the CSOP options.
PAGE 111 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The individual interests of the executive directors under the DSBP are as follows:
Award
date
Market
price
At 1 October
2018
Awarded
Exercised
At 30 September
2019
Exercisable
from
Number
Number
Number
Number
N S Terrington
10/12/2013
345.30p
18/12/2014
409.60p
22/12/2015
362.70p
01/12/2016
369.40p
08/12/2017
483.20p
55,302
52,888
60,042
44,493
42,055
-
-
-
-
-
14/12/2018
401.00p
-
52,349
R J Woodman
18/12/2014
409.60p
22/12/2015
362.70p
01/12/2016
369.40p
08/12/2017
483.20p
26,965
36,517
26,742
25,517
-
-
-
-
14/12/2018
401.00p
-
31,800
J A Heron
18/12/2014
409.60p
22/12/2015
362.70p
01/12/2016
369.40p
08/12/2017
483.20p
19,249
21,901
17,849
19,217
-
-
-
-
14/12/2018
401.00p
-
26,437
-
-
-
-
-
-
-
-
-
-
-
19,249
21,901
-
-
-
55,302
52,888
60,042
44,493
42,055
52,349
26,965
36,517
26,742
25,517
31,800
-
-
17,849
19,217
26,437
10/12/2016
18/12/2017
22/12/2018
01/12/2019
08/12/2020
14/12/2021
18/12/2017
22/12/2018
01/12/2019
08/12/2020
14/12/2021
18/12/2017
22/12/2018
01/12/2019
08/12/2020
14/12/2021
The individual interests of the executive directors under the Sharesave Plan are as follows:
Award
date
Option
price
At 1 October
2018
Awarded
Exercised
At 30 September
2019
Exercisable
from
N S Terrington
20/06/2016
249.44p
R J Woodman
20/06/2016
249.44p
J A Heron
20/06/2016
249.44p
12,026
12,026
7,216
-
-
-
-
-
7,216
Number
Number
Number
Number
12,026
12,026
01/08/2021
01/08/2021
-
01/08/2019
PAGE 112 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B6.3 Policy report
The information provided in this part of the Directors’ Remuneration Report is not subject to audit
Introduction
This part of the Directors’ Remuneration Report sets out the directors’ remuneration policy that is proposed to apply from the close of the
Annual General Meeting to be held on 13 February 2020. The policy, once approved, will apply until the Annual General Meeting in 2023, unless
revised by a vote of shareholders ahead of that time.
Summary of Proposed Changes
The Company’s current directors’ remuneration policy was approved at the 2017 AGM with over 95% votes in favour, and took effect from
the date of that meeting.
As highlighted in the Remuneration Committee Chair’s statement, in light of recent corporate governance developments and the Group
likely to become subject to more stringent banking remuneration rules on the transition from a smaller Level 3 bank to a Level 2 CRD IV
bank during the life of this policy, it was necessary to undertake a detailed review of the remuneration policy to ensure full compliance and
alignment with market practice.
With this regulatory change in mind, the remuneration policy has been drafted with sufficient flexibility to ensure that we are able to remain
compliant as the regulatory status of the bank changes. It is the Committee’s intention that the revised remuneration policy will apply in
two stages.
As a result of the revised 2018 Code the following changes are being proposed:
•
•
•
•
Pension – reduction in the maximum pension contribution to 20% of salary for all incumbent executive directors to align with
the average contributions made in respect of the wider workforce. New executive directors would receive a maximum pension
contribution of 10% of salary
PSP – introduction of a post-vesting holding period of two years for awards granted in respect of financial year 2019/20 and any
subsequent year when the Group is not a Level 2 bank
Post-employment shareholding guidelines – executive directors will now be required to retain an interest in the Company’s shares for
two years following cessation of employment
Malus and clawback – extension of the provisions under which malus and clawback provisions can be applied to variable pay. We have
also taken the opportunity to align with market practice and regulatory expectations
• Discretion – introduction of a discretion enabling the Committee to apply judgement to all variable pay outcomes
Additionally, in anticipation of the Group’s transition from a Level 3 to a Level 2 bank, further changes are proposed to rebalance the
remuneration package in light of the CRD IV bonus cap requirements and significantly extend the deferral and holding periods applicable
to variable pay, as follows:
•
•
•
Role-based allowance – introduction of a role-based allowance for all executive directors to reflect market practice for dealing
with compliance with the bonus cap requirement. Each quarter the executive directors will receive shares which will be subject to
release over a period of five years from the relevant payment date, with a proportion of the shares released in equal tranches on each
anniversary
Bonus – reduction in opportunity from 200% to 150% of salary. On transition to a Level 2 bank, bonuses will no longer ordinarily be
deferred as a result of the significantly extended deferral and holding periods attached to PSP awards, however 50% of annual bonus
awards will be paid in shares that will be subject to a one year holding period
PSP – reduction in opportunity from 200% to 180% of salary. On transition to a Level 2 bank, vesting will occur in equal tranches
between the third and seventh anniversary of grant. A further 12-month post-vesting holding period will apply to each tranche
PAGE 113 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Elements of the remuneration policy for executive directors
The executive directors receive a combination of fixed and performance-related elements of remuneration. Fixed remuneration consists of
salary, benefits, pension scheme contributions or alternative retirement benefit provision and a role-based allowance. Performance-related
remuneration consists of participation in the annual bonus plan (including deferral) and the award of shares under the PSP. The performance-
related elements of remuneration are intended to represent an appropriate proportion of executive directors’ potential total remuneration.
Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Base salary
To provide a competitive, fixed
cash component that reflects the
scope of individual responsibilities
and recognises sustained
individual performance in the role.
Whilst no formal performance
conditions apply, an individual’s
performance in role is taken
into account in determining
any salary increase.
Remunerate fairly for individual
performance, having regard to
the importance of motivation.
Base salaries are typically
reviewed annually, taking into
account a number of factors
including (but not limited to)
the value of the individual,
the scope of their role, their
skills and experience and their
performance.
The Committee also takes into
account pay and conditions of
employees in the Group as a
whole, business performance
and prevailing market
conditions.
While there is no maximum
salary, if the Committee is
satisfied with the individual’s
performance, increases will
normally broadly follow those
awarded for the rest of the
organisation, in percentage of
salary terms.
Increases above the level
awarded for the rest of the
organisation may be awarded
in appropriate circumstances
which may include, but are not
limited to:
•
•
•
•
Changes in the scope
or responsibilities of a
director’s role;
Development or
performance in role;
A change in the size and/or
complexity of the business;
Change in market practice
or a director’s salary
substantially falling behind
a market competitive rate;
and/or
•
External factors such as
changes in regulatory
requirements
PAGE 114 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Benefits
To provide market levels of
benefits on a cost-effective basis.
Retirement benefits
To provide competitive post-
retirement benefits.
Fixed role-based allowance
To maintain a competitive
remuneration package with an
appropriate balance of fixed
and variable remuneration, with
delivery in shares for shareholder
alignment.
Private health cover for the
executive and their family, life
insurance cover of up to seven
times’ salary and company car
or cash alternative.
Other benefits may be
offered from time to time
taking into account individual
circumstances.
Executive directors receive
an annual contribution
to the Company defined
contribution pension scheme
or a cash supplement in lieu of
contribution (or a combination
thereof).
Annual allowance paid
quarterly or at any other
frequency that the Committee
deems appropriate, on the
basis that the after tax value
is delivered in shares which
are released to the executive
director on a pro-rata basis
over a five year period (or
such other period as may be
determined by the Committee
from time to time).
The role-based allowance is
non-pensionable and is not
taken into account for annual
bonus and PSP purposes.
The Committee retains the
discretion to amend the
retention period and/or pay
the fixed role-based allowance
in cash if required to do
so to meet any regulatory
requirements.
None.
Private health care benefits are
provided through third party
providers and therefore the
cost to the company and the
value to the director may vary
from year to year.
Whilst no absolute maximum
level of benefits has been set,
the level of benefits provided is
determined taking into account
individual circumstances,
overall cost to the business
and market practice.
Maximum 20% of salary for
incumbent executive directors
and 10% of salary for newly
recruited executive directors.
None.
None.
The fixed role-based
allowances are determined
based on the role, skills and
responsibility of each individual
and taking into account market
competitiveness of total
remuneration.
The maximum role-based
allowance is £140,000 p.a. for
the CEO and £90,000 p.a. for
the CFO. Any other executive
director (including those
appointed during the period
for which this policy applies)
may be eligible for a role-based
allowance of up to 25% of
salary.
The fixed role-based allowance
will be payable with effect
from 1 October 2019, subject
to approval of this policy at the
forthcoming AGM.
PAGE 115 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Annual bonus
To incentivise executives to
achieve specific, predetermined
goals that drive delivery of the
Company’s operational objectives.
To reward individual performance.
To encourage retention and
alignment with shareholders’
interests through deferral of a
proportion of bonus, awarded in
shares.
Each executive director’s
annual bonus is based on a mix
of financial and non-financial
performance measures,
measured over one year.
The annual bonus is
non-pensionable. Malus and
clawback apply to the annual
bonus as described in the
notes to this table.
A portion of the annual bonus
may be deferred and/or may
be paid in shares, dependent
on the regulatory status of
the bank and at the discretion
of the Committee. Awards
under the DSBP can take the
form of a nil-cost option with
a ten-year life, a conditional
award of shares or an award
of forfeitable shares. The use
of this deferral is described
below.
Maximum annual bonus
potential is 150% of salary in
respect of any given financial
year.
For target performance, a
bonus of 75% of salary will
be awarded, with additional
amounts being awarded for
exceptional performance.
The performance targets are
set by the Committee at the
start of the year with input, as
appropriate, from the Chair of
the Board and Chief Executive.
Performance measures
and their weightings are
reviewed annually to maintain
appropriateness and relevance.
If a bonus is based on a
strategic measure or personal
objective, the Committee
will determine the extent of
vesting between 0% and 100%
based on its assessment of the
extent to which the measure or
objective has been achieved.
For performance below
threshold, no bonus is payable.
Performance is assessed
against a range of measures,
with at least 50% relating
to financial metrics and any
balance reflecting non-
financial measures (including
risk) and/or achievement of
key personal and strategic
measures.
Implementation in 2019/20 and any other year in which the Group is not a Level 2 bank:
25% of amounts awarded in excess of £50,000 will be deferred under the DSBP, to be satisfied in shares, over a deferral period of three years.
Higher levels of deferral may be required by the Committee or, with the approval of the Committee may be elected for by the director. The
Committee retains discretion to pay the whole of the bonus in cash in circumstances where the amount to be deferred would, in the opinion of
the Committee, be so small as to make operation of the DSBP unduly administratively burdensome.
Awards may include the right to receive a number of shares determined by reference to dividends that would have been paid on shares in
respect of dividend record dates between grant and vesting, which may assume the reinvestment of dividends.
Implementation as a Level 2 bank:
After the Group becomes a Level 2 bank for regulatory purposes, the PSP will be the primary vehicle for meeting the deferral requirements
under the PRA remuneration requirements, although the Committee retains the right to defer such portion of an annual bonus award and over
such deferral period as it determines to ensure that regulatory requirements are met.
50% of the bonus earned will be paid in cash, and 50% will be paid in shares. Any shares delivered will normally be immediately vested and may
take the form of shares which must be retained for at least 12 months, or a right to acquire shares at the end of the holding period. In the former
scenario, the executive director may sell shares to cover the tax liability arising on the award. In the latter scenario, the award may include the
right to receive a dividend equivalent in respect of dividend record dates over the holding period. Where an award is subject to a deferral period
and does not benefit from dividends or dividend equivalents to meet regulatory requirements, the number of shares to be awarded may be
determined using a share price discounted for the expected dividend yield.
PAGE 116 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Performance Share Plan (‘PSP’)
To incentivise executives to
achieve enhanced returns for
shareholders.
To encourage long-term retention
of key executives.
To align the interests of executives
and shareholders.
An annual award of shares
subject to continued service
and performance conditions
assessed over a three-year
performance period.
The performance conditions
used are reviewed on an annual
basis to ensure they remain
appropriate.
Awards are structured as nil
cost options with a ten-year
life, a conditional award
of shares or an award of
forfeitable shares.
Implementation of the vesting
rules is described below the
table.
Malus and clawback apply to
the PSP as described below
this table.
Maximum award is 180%
of salary in respect of any
financial year.
25% of the awards will vest
for threshold performance,
with full vesting taking place
for equalling or exceeding the
maximum performance target.
In determining the number of
shares subject to an award,
the market value of a share
shall, unless the Committee
determines otherwise, be
assumed to be the average
share price for the five days
following the announcement of
the Company’s results for the
previous financial year.
Where awards do not
receive dividends or dividend
equivalents to meet regulatory
requirements, the number of
shares to be awarded may be
determined using a share price
discounted for the expected
dividend yield.
The Committee will take
into consideration prior
performance when assessing
the value of the PSP grant.
Forward-looking performance
is measured against a
long-term scorecard of
challenging performance
measures that reflect the
Company’s strategic priorities.
Performance conditions may
include financial measures
(e.g. adjusted EPS and/or
relative TSR), and non-financial
measures which may include
risk-based, people and/or
customer measures.
Performance measures
and their weightings, where
multiple measures are used,
are reviewed annually to
maintain appropriateness and
relevance.
Implementation in 2019/20 and in respect of any other year in which the Group is not a Level 2 bank:
Awards will normally vest at the end of the three year performance period and be subject to an additional two year holding period before they
are released to the participant.
The holding period may be operated on the basis that the executive director is required to retain the after tax value of shares for the holding
period, or that the award will only be “released”, so that the executive director is entitled to acquire vested shares, at the end of that period.
Awards may include the right to receive a dividend equivalent in respect of dividend record dates between grant and release, which may assume
the reinvestment of dividends.
Implementation as a Level 2 Bank:
When the Group becomes a Level 2 bank for regulatory purposes, at the end of the performance period, the performance outcome will be
used to assess the percentage of the awards that will vest. These shares will then normally vest in five equal tranches, with the first vesting
on or around the third anniversary of the grant date and the last instalment vesting on or around the seventh anniversary of the grant date, in
accordance with the PRA remuneration rules.
Each vested tranche will be subject to an additional one year holding period, taking the form of shares which must be retained for at least the
holding period, or a right to acquire shares at the end of the holding period. In the former scenario, the executive director may sell shares to
cover the tax liability arising on award. In the latter scenario, the award may include the right to receive a dividend equivalent in respect of
dividend record dates over the holding period.
PAGE 117 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Sharesave Plan
To provide all employees with
the opportunity to become
shareholders on similar terms.
Periodic invitations are made
to participate in the Company’s
Sharesave Plan.
HMRC monthly savings limits
apply.
None.
A savings contract over three
or five years with the funds
used on maturity either to
purchase shares by exercising
options or returned to the
participant.
The option is granted at a
discount to the share price at
the time of grant of up to 20%.
The Sharesave Plan provides
tax benefits in the UK subject
to satisfying certain HMRC
requirements and is operated
on an ‘all employee’ basis.
Malus and clawback
Annual bonus and PSP awards are subject to malus and clawback provisions in exceptional circumstances including the following:
•
If a higher payment than would otherwise have been the case is paid as a result of a material misstatement of a group company’s results
• Any error or inaccurate or misleading information or assumptions relating to a financial year
•
•
If the participant is dismissed for misconduct
If an individual was party to behaviour that resulted in serious reputational damage to a group company or a relevant business unit
• Occurrence of a material corporate failure in a group company or a relevant business unit
•
•
If there is reasonable evidence of employee misbehaviour or material error
A group company or relevant business unit suffers a material failure of risk management, taking account of the individual’s proximity to
and/or responsibility for the event
For up to three years following the payment of a cash bonus, the Committee may claw back any amount up to the gross amount of any cash
bonus. DSBP and PSP awards may be reduced or cancelled before vesting or clawed back for up to two years after vesting. However, following
the Company’s transition to a Level 2 firm for regulatory purposes, any incentive awards may be reduced or cancelled before vesting or clawed
back for a period of up to seven years from the grant date. This may be extended to ten years in the event of ongoing internal/regulatory
investigation at the end of the seven-year period.
Shareholding guidelines
All executive directors are requested to hold a number of shares in the Company with a market value of 200% of their salary. The guideline must
be met within a reasonable timeframe (typically expected to be within five years of appointment) and executive directors are normally required
to retain 50% of the shares acquired on the vesting of fixed role-based allowance, annual bonus, PSP or DSBP awards (after sales to cover tax)
until the guideline is met.
The number of shares, net of income tax and national insurance, subject to share-based awards that are no longer subject to further performance
requirements granted under the fixed role-based allowance, annual bonus, DSBP and PSP count towards the aggregate shares held by each
director for these purposes.
Reflecting best practice, the Committee has adopted a post-cessation shareholding requirement, effective from the adoption of this new
policy. This requires that for two years following cessation, an executive director must retain such of his ‘relevant’ shares as have a value (as at
cessation) equal to their shareholding guideline. If the executive director holds less than the required number of ‘relevant’ shares at any time,
he must retain the ‘relevant’ shares he holds. Shares, which the executive director has purchased are not ‘relevant’ shares for these purposes.
PAGE 118 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Operation of share plans
Awards under the Company’s share plans (and any applicable performance conditions) may be adjusted in the event of any variation of the
Company’s share capital, demerger or special dividend.
Awards under the Company’s share plans may vest early in the event of demerger, special dividend or other event which the Committee
considers would affect the Company’s share price, or in the event of a change of control. The extent to which PSP awards will vest will be
determined taking into account the extent to which performance conditions have been satisfied (as assessed by the Committee) and, unless
the Committee determines otherwise, the proportion of the vesting period that has elapsed.
Awards granted over shares may be settled in cash, in whole or in part. The Company does not intend to settle awards, or dividend equivalents
on awards, granted to executive directors in cash and would do so only where the particular circumstances make that appropriate, for example
where there is a regulatory restriction on the delivery of shares or to enable the payment of tax liabilities relating to the award.
Illustrations of the application of the remuneration policy
The chart below illustrates the remuneration opportunity provided to each executive director at different levels of performance for the coming
year, compared to their actual remuneration in the last two years:
Notes:
The basis of calculation for the above graphs and key assumptions used are as follows:
Fixed elements of
remuneration
Minimum
Target
Maximum
Maximum with 50%
share price growth
• Total fixed pay is based on the latest salary and role-based allowance
•
Estimated cash cost to the company of benefits and pension contributions received
under the remuneration policy
Annual bonus
(pay-out as % of maximum opportunity)
PSP
(vesting as % of maximum opportunity)
0%
0%
50%
50%
100%
100%
100%
100% plus 50% share
price growth
As Sharesave awards are provided on an all employee basis, they have not been included in the above analysis.
PAGE 119 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts£000sN S TerringtonMin£873Target£1,860Max£2,848Max with shareprice appeciation£3,3872018 (actual)£2,4262019 (actual)£2,875Min£555Target£1,177Max£1,799Max with shareprice appeciation£2,1382018 (actual)£1,5432019 (actual)£1,807R J Woodman4,0003,5003,0002,5002,0001,5001,0005000LTIPBonusTotal fixed100%47%31%32%38%26%30%36%34%26%47%24%29%31%31%38%26%26%48%30%37%33%26%31%43%100%31%43%27%48%24%29% Elements of the remuneration policy for the Chair and non-executive directors
The Chair receives a fee, a company car or cash alternative and is eligible for private health cover on an individual or family basis in the same
way as the executive directors. Non-executive directors are remunerated solely by fees. Neither the Chair nor the non-executive directors are
eligible to participate in any of the Company’s fixed role-based allowance, incentive or pension schemes and they are not entitled to receive
compensation for early termination of their terms of engagement.
Benefits may also be provided to non-executive directors related to the performance of their duties (for example, travel and subsistence).
Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Salary and fees
To ensure that the Group can
attract and retain the appropriate
number and mix of non-executive
directors with the correct
experience to provide balance,
oversight and challenge.
None.
Non-executive director fees
are reviewed on a periodic
basis and are subject to
the Articles of Association.
The Chair’s fee is set by the
Committee, whilst the non-
executive directors’ fees are
determined by the Board.
The Board will exercise
judgement in determining the
extent to which non-executive
directors’ fees are altered in
line with market practice, given
the requirement to attract and
retain the appropriate skills
and given the expected time
commitments.
Non-executive directors are
paid an annual base fee with
additional fees for additional
roles (for example, Senior
Independent Director or chair
of a board committee).
Non-executive directors may
be eligible to receive benefits
such as travel and other
reasonable expenses.
The Board will review fees
periodically to assess whether
they remain competitive and
appropriate in light of changes
in roles, responsibilities and/or
time commitment of the non-
executive directors. Increases
above those awarded for the
rest of the organisation may
be made to reflect the periodic
nature of any review.
The Articles of Association
of the Company contain a
maximum level of fees that
can be paid annually to non-
executive directors (currently
£2,000,000). This is reviewed
by the Board from time to time.
Where benefits are provided
to non-executive directors,
they will be provided at a level
considered to be appropriate,
taking into account individual
circumstances.
Choice of performance measures and approach to target setting
Annual bonus
The choice of the performance measures applicable to the annual bonus scheme reflects the Committee’s belief that incentives should be
appropriately challenging and tied to the achievement of financial and non-financial measures (including risk and other strategic measures) and
key personal objectives.
The Committee reviews the measures each year and varies them as appropriate to reflect the priorities for the business in the year ahead. A
sliding scale of targets is set for each measure to encourage continuous improvement and encourage the delivery of above-target performance.
PSP
The Committee will take into consideration prior Group and individual performance when assessing the value of the PSP grant level for
executive directors.
Forward-looking performance is measured against a long-term scorecard of financial and non-financial performance measures that reflect the
Company’s strategic priorities.
Financial metrics could include EPS, which would measure long-term profitability, and/or TSR that considers shareholder value creation as
a measure of market expectations of future performance. Other non-financial metrics could include risk or customer and people measures
that would provide a focus on key measures of Company’s long-term sustainability. Any risk metrics would be assessed across a range of
quantitative and qualitative measures which are business critical.
Discretion
The Committee retains the flexibility to make adjustments to the formulaic vesting level of incentive awards in instances where the outcome
would otherwise be unreflective of the wider shareholder experience and/or materially inappropriate in the context of unexpected or unforeseen
circumstances relating to the Company.
PAGE 120 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Changes to performance conditions
If an event occurs which results in the annual bonus or PSP performance conditions and/or targets being deemed no longer appropriate (i.e. a
material acquisition or divestment) then the Committee will have the ability to adjust the measures and/or targets and alter weightings so that
the conditions achieve their original purpose.
Recruitment and conditions of service
Policy on recruitment and promotion
Salaries for newly recruited directors will be set to reflect their skills and experience, the Company’s intended pay positioning and the market
rate for the role. If it is considered appropriate to appoint a new director on a below market salary (for example, to allow the director to gain
experience in the role) the individual’s salary may be increased to a market level by way of a series of above inflation increases over such period
as the Committee determines, subject to their performance and development in the role. A new appointment may also be offered a fixed
role-based allowance that reflects the individual’s role, skills and responsibilities, up to the permitted maximum set out in the policy table.
A new appointment would be offered benefits comparable to existing directors, other than, as described above, in respect of pension provision,
as well as other reasonable expenses such as legal, tax equalisation and relocation costs (if necessary, on a net of tax basis).
The prevailing maximum bonus opportunity for existing directors will not be exceeded for any newly recruited director and would be pro-rated
to reflect the proportion of the year worked. It may be necessary to set different performance measures and targets initially and/or to vary the
proportion of the annual bonus that will be deferred and the deferral period, dependent on the timing of the appointment and the nature of the
role taken up. Guaranteed bonuses will not be offered.
Long-term incentive awards will be granted in line with the policy outlined for existing directors, with the same maximum opportunity for any
newly recruited director. Awards may be granted shortly after an appointment (subject to the Company not being in a prohibited period).
The maximum level of variable remuneration that may be awarded (excluding buyout awards as referred to below) is 330% of salary.
The Committee may make payments or grant awards to a newly recruited executive to buy out entitlements (for example, bonus and share
awards) which will lapse on the executive’s departure from a previous position. In doing so, the Committee will take into account relevant factors,
including performance conditions attached to the lapsing arrangements and the time over which they would have vested. The approach to
buy-out awards is intended to be in line with the PRA remuneration rules, which state that the terms of any replacement awards should be no
more generous than the award forfeited on departure from the former employer.
In the event that an existing employee is promoted to the Board, any contractual commitments made to the employee prior to such promotion
will continue to be honoured even if they would not otherwise be consistent with the policy prevailing when the commitment is fulfilled.
Notice periods and terms of engagement
The Chair and executive directors hold one year rolling contracts in line with current market practice and the Committee reviews the terms of
these contracts regularly. The current service contracts for the executive directors are dated as follows:
Contract Date
N S Terrington
1 September 1990 (as amended 7 January 1993, 16 February 1993, 30 October 2001 and 10 March 2010)
R J Woodman
8 February 1996 (amended 10 March 2010)
J A Heron
1 September 1990 (amended 14 January 1993, 8 February 1993 and 10 March 2010)
All new executive directors will have service contracts that are terminable by the Company on a maximum of twelve months’ notice.
Chair and non-executive director appointments are for three years unless terminated earlier by, and at the discretion of, the director or the
Company. The required notice period is one year for the Chair and three months for the non-executive directors.
PAGE 121 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Current terms of engagement for the Chair and non-executive directors apply for the following periods:
Director
Period of engagement
F J Clutterbuck
10 May 2018 to 9 May 2021
P J N Hartill
11 February 2017 to 10 February 2020
B A Ridpath
20 September 2017 to 19 September 2020
H R Tudor
24 November 2017 to 23 November 2020
F F Williamson
20 September 2017 to 19 September 2020
G H Yorston
20 September 2017 to 19 September 2020
Policy on termination payments
The Company has discretion to make a payment in lieu of notice in respect of all or part of the notice period. Any such payment would consist
of salary, benefits and pension for the relevant part of the notice period. Specific change of control provisions or entitlements to enhanced
redundancy payments are excluded.
Fixed Role-Based Allowance
Executive directors will be entitled to receive their fixed role-based allowance in respect of any notice period (or any notice period that would
have applied but for the making of a payment in lieu of notice). Ordinarily the fixed role-based allowance will be paid at the usual time.
Shares subject to a fixed role-based allowance for the notice period and for previous fixed role-based allowance payments will be released over
the originally anticipated period, although the Committee has discretion to release shares early in specific circumstances, for example, in the
event of the death of an executive director.
Annual Bonus for the year of cessation
The payment of annual bonuses will be at the discretion of the Committee on an individual basis and the decision as to whether or not to
award an annual bonus in full or in part will be dependent on a number of factors, including the circumstances of the individual’s departure. For
example, in certain good leaver situations (injury or disability, redundancy, employment transferred outside the Group, or any other reason the
Committee decides) a bonus may be payable at the Committee’s discretion, based on an assessment of performance. Any annual bonus award
amounts paid will be pro-rated for time in service during the annual bonus period and will, subject to performance, be paid at the usual time and
in the usual form (although the Committee retains discretion to pay the annual bonus award earlier in appropriate circumstances).
Unvested DSBP Awards
For awards granted under the DSBP, good leaver status would result in awards vesting at the usual time, unless the Committee determines they
should vest earlier in appropriate circumstances. In other circumstances, DSBP awards will lapse.
Bonus awards subject to a holding period
If an individual leaves employment during a holding period, the default position will be for the holding period to continue for its originally
anticipated length. The Committee may end the holding period early.
Unvested PSP Awards
The default treatment for outstanding unvested PSP awards will be that they lapse on cessation of employment. In good leaver circumstances
(as described above), unvested awards will continue until the normal vesting date, vest subject to the satisfaction of the performance conditions,
and be released at the end of the originally anticipated holding period. However, the Committee may permit the award to vest and be released
at cessation subject to the satisfaction of the performance conditions (as assessed by the Committee) or vest and be released at the end of the
performance period subject to the satisfaction of the performance conditions. In any such case, the extent of vesting will be reduced to reflect
the proportion of the vesting period that has elapsed at the date of cessation, unless the Committee determines otherwise.
PAGE 122 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts PSP Awards subject to a holding period
If an individual leaves employment during a holding period, the default position will be for the holding period to continue for its originally
anticipated length. The Committee may permit the award to be released early, subject to any regulatory considerations. If the holding period is
operated on the basis that the executive director is only entitled to acquire vested shares at the end of the holding period, the award will lapse
if the executive director is dismissed for misconduct.
Other payments
The leaver provisions for any buyout award granted in connection with the recruitment of a director would be determined at the time of grant.
Any statutory entitlements or sums to settle or compromise claims in connection with the termination would be paid as necessary. In the
appropriate circumstances, outplacement services, legal fees and relocation expenses may be provided at normal market rates for directors,
along with payments in respect of accrued holiday.
There are no obligations in the non-executive directors’ letter of appointment that could give rise to payments for loss of office.
Consideration of employment conditions elsewhere in the Group
There is no employee representative on the Committee. However, employees have the opportunity to make comments on any aspect of the
Group’s activities through employee forums and surveys and the views of employees are taken into account by Human Resources. One of
the duties of the People Director is to brief the Board on employee views and, as a regular invitee to Committee meetings, this ensures that
decisions are made with appropriate insight to employees’ views. In addition, the People Forum will consider the relationship between executive
remuneration and pay and reward across the Group on a regular basis.
Directors and senior executives participate in the annual bonus scheme, which is designed to incentivise executives to achieve specific,
predetermined goals, reward individual performance and encourage retention through deferral of a proportion of the bonus. All employees
whose performance has been exceptional are eligible for a discretionary bonus.
Directors and senior employees are eligible to participate in the PSP. The plan is in place to encourage the long-term retention of key executives
who are considered to have the potential to influence shareholder value creation and awards are not offered to employees generally.
Employees below director and head of function level are eligible to participate in the Group’s profit related pay scheme, which pays out a flat
sum to all eligible staff based on a percentage of the Group’s profits.
In determining pay levels for the employees as a whole, the Group annually considers externally provided benchmark levels for comparable
jobs as well as individual development and performance. The general level of increase resulting from this review informs the Committee’s
deliberations on appropriate pay levels for the executive directors, together with external data specific to their roles which is used to ensure
that the levels of remuneration are appropriate.
Consideration of shareholders’ views
The Committee considers shareholder feedback received in relation to the AGM each year at a meeting shortly following the AGM. This
feedback, plus any additional feedback received during any meetings from time to time, is then considered as part of the Company’s annual
review of remuneration policy.
In addition, the Chair of the Committee and the Chair of the Board regularly engage directly with major shareholders and their representative
bodies and report their views back to the Committee, who take them into account when formulating any material changes to the remuneration
policy. During the year under review, for the purposes of discussing this proposed policy, shareholders representing 69% of the Company’s
equity (based on the total voting rights as at 30 September 2019) were contacted and account was taken of their views in shaping the policy.
Details of votes cast for and against the resolution to approve last year’s remuneration report and the resolution to approve the Directors’
Remuneration Policy at the 2017 AGM along with any matters relating to remuneration discussed with shareholders during the year are set out
in the Annual Report on Remuneration.
Legacy arrangements
The Committee retains discretion to make any remuneration payment or payment for loss of office outside the policy (including the exercising
of any discretion available in respect of any such payment) outside of this Remuneration Policy:
•
•
Where the terms of the payment were agreed before this Remuneration Policy came into effect, provided in the case of any payment whose
terms were agreed after 2 February 2014 and before this Remuneration Policy became effective, the remuneration payment or payment for
loss of office was permitted under the Company’s relevant former Directors’ Remuneration Policy
Where the terms of the payment were agreed at a time when the relevant individual was not a director of the Company and, in the opinion
of the Committee, the payment was not in consideration of the individual becoming a director of the Company
For these purposes, ‘payment’ includes the satisfaction of awards of variable remuneration and, in relation to an award over shares, the terms
of the payment are agreed at the time the award is granted.
PAGE 123 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B6.4 Approval of Directors’ Remuneration Report
The information provided in this part of the Directors’ Remuneration Report is not subject to audit
This Directors’ Remuneration Report, section B6 of the Annual Report and Accounts, including the Statement by the Chair of the Committee,
the Annual Report on Remuneration and the Policy Report, has been prepared in accordance with Schedule 8 to the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008 as amended and has been approved by the Board of Directors.
Signed on behalf of the Board of Directors
Hugo Tudor
Chair of the Remuneration Committee
26 November 2019
PAGE 124 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B7
Risk management
B7.1 Risk and Compliance Committee Chair’s Report
Finlay Williamson, Chair of the Risk and Compliance Committee
Our primary responsibility
continues to be the maintenance
of oversight of the effectiveness
of the Group’s risk management
framework...
Dear Shareholder
I am pleased to write to you again as Chair of the Risk and Compliance
Committee to explain how we, as a committee, have discharged our
responsibilities in the last year.
Our primary responsibility continues to be the maintenance of
oversight of the effectiveness of the Group’s risk management
framework and of the Group’s systems and controls for compliance
with its statutory and regulatory obligations. The Committee also
oversees the risk culture within the Group to ensure that this is
adequately embedded and is supportive of the overall risk appetite
set by the Board.
In discharging its responsibilities, the Committee relies on the support
of the Group’s Chief Risk Officer (‘CRO’). Malcolm Hayes, who had
held that position first with Paragon Bank then for the Group, since
the Bank’s licensing in 2014, informed me this year of his intention to
retire. The Committee and I would like to thank him for his role in the
development of the risk management system over that period and
wish him well for the future.
During the year, the Committee supervised the search for a new
CRO and an appointment is expected to be made shortly, subject to
regulatory approval.
The Committee has maintained an agenda that has balanced standing
review items with coverage of new or materially heightened risks and
deeper dives into areas considered worthy of greater focus.
Standing items covered in each meeting have included:
• Reviews of the principal risks facing the Group
•
•
•
•
Consideration of new or emerging risks and regulatory
developments
Consideration of the potential impact of key regulatory
developments
Consideration and challenge of management’s rating of the
various risk categories to which the Group is exposed
Consideration of the root causes and impact of material risk
events and the adequacy of actions undertaken by management
to address them
In addition, during the last year, the Committee:
•
•
Reviewed the Group’s risk appetite to ensure
it remained
consistent with the delivery of the Group’s strategic objectives,
proposing any required changes to the Board
Monitored and reviewed the potential impacts on the Group of
the Brexit process, given the continuing uncertainty around the
terms on which the UK might leave the EU
PAGE 125 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts •
•
•
Continued to monitor progress in respect of the Group’s strategic decision to seek regulatory approval to enhance credit risk management
by implementing an IRB approach
Considered regular focussed reviews of key risk areas including credit risk, capital risk, liquidity and market risk, conduct risk and across the
different categories of operational risk
Considered reviews on specific areas of focus including cyber security and operational resilience. This included monitoring the progress of
the Group in addressing the approach to operational resilience proposed in the regulatory discussion paper in 2018
• Reviewed, challenged and approved the Management Responsibilities Map
• Reviewed, challenged and approved the terms of reference of each of the executive risk committees
•
Reviewed, challenged and approved the Compliance Monitoring Plan (‘the Compliance Plan’) and subsequent updates to the Compliance
Plan
• Reviewed, challenged and approved the Money Laundering Reporting Officer’s annual report
• Considered and challenged reports in relation to ICAAP, ILAAP and RP recommending approval to the Board
• Challenged and approved various key risk policies
During the coming year, the Committee’s priorities will include:
• Completing the appointment of a new CRO and supervising their induction
•
•
•
Reviewing the Group’s risk appetite to ensure it remains consistent with delivery of the Group’s strategic objectives and proposing any
required changes in risk appetites to the Board
Continuing to review the potential impacts on the Group of the political and economic consequences of UK’s decision to withdraw from the
EU as details of the terms of exit and the basis of the future relationship become clearer
Reviewing and challenging the Group’s submissions to the PRA, in relation to its strategic decision to seek regulatory approval to implement
an IRB approach for credit risk
• Reviewing and challenging reports in relation to ICAAP, ILAAP and RP ahead of approval by the Board
•
Continuing its focus on ensuring that customers receive fair outcomes, including monitoring the treatment of vulnerable customers, and
ensuring that the management of conduct risk remains a key priority for the Group
• Overseeing a review of the Group’s culture and any actions identified by it
•
•
•
•
Monitoring the Group’s adherence to the FCA and PRA requirements in relation to the Senior Managers and Certification Regimes as they
are expanded across the financial services sector
Providing continued oversight and review of the operational resilience strategy and capability in light of further requirements which may
result following the expected publication of a regulatory consultation paper by the end of 2019
Ensuring the Group is well prepared to face the increasing challenges posed by climate change and the impact this may have on the Group’s
risk profile
Monitoring the impact on the Group of the scheduled withdrawal of LIBOR as the primary sterling interest rate benchmark and proposals to
replace it using SONIA derived measures
• Undertaking deep dives in relation to specific risk categories and business areas on both a rolling and ad hoc basis
Overall, I am pleased to confirm that in the last year the Committee has again, in my view, met its key objectives and carried out its role effectively.
As I look to the year ahead, it is clear that the economic, political and regulatory environment within which the Group operates will remain
challenging. In particular, the level of uncertainty surrounding the basis of the UK’s departure from the EU remains high, with the status of its
future trading relationships remaining extremely unclear. Whilst I remain confident that the Group has the skills and experience to manage the
risks it is likely to encounter in the year ahead, we remain vigilant to the need to reinforce these should circumstances change materially.
Finlay Williamson
Chair of the Risk and Compliance Committee
26 November 2019
PAGE 126 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B7.2 Risk governance
The Risk and Compliance Committee assists the Board in fulfilling its responsibilities for risk management and comprises the independent
non-executive directors and the Chair of the Board. Its terms of reference, which were reviewed and approved by the Board in October 2019,
include all matters indicated by the 2018 Code.
The Committee’s responsibilities include reviewing:
•
•
The effectiveness of the Group’s risk management framework and the extent to which risks inherent in the Group’s business activities are
controlled within the risk appetite established by the Board
The effectiveness of the Group’s systems and controls for compliance with statutory and regulatory obligations, as well as its obligations
under significant contracts
• The appropriateness of the Group’s risk culture, to ensure it supports the Group’s stated risk appetite
•
The effectiveness of the Group in addressing issues requiring remedial attention to ensure actions are completed in a timely manner and
minimise the potential for risk appetite thresholds to be exceeded
The Risk and Compliance Committee provides oversight and challenge to the Group’s enterprise-wide risk management arrangements. The
Committee is supported by an executive level Asset and Liability Committee, Conduct and Compliance Committee, Credit Committee, Model
Risk Committee and Operational Risk Committee.
The Committee meets at least four times a year and normally invites the executive directors, Chief Risk Officer (‘CRO’), Chief Operating Officer
and Internal Audit Director to attend its meetings. However, it reserves the right to request any of these individuals to withdraw or to request
the attendance of any other Group employee. The Committee meets with the CRO at least once a year, without the presence of executive
management, to discuss their remit and any issues arising from it.
The Committee also has the opportunity to meet with the Internal Audit Director and/or the external auditor without the presence of executive
management to discuss any matters that any of these parties believe should be discussed privately.
Agenda items for regular meetings of the Committee include:
• Reviewing the Group’s principal risks
• Receiving and considering reports relating to the Group’s consolidated risk profile
•
Receiving and considering reports relating to the Group’s performance against the Board’s risk appetite and the progress of any resulting
management actions to restore performance within approved target ranges
• Reviewing and approving the Compliance Plan and the proposed management actions to address any adverse reports
• Reviewing any proposed material changes to the Group’s risk appetite prior to approval by the Board
• Reviewing and approving the Group’s Recovery Plan (‘RP’) prior to approval by the Board
• Receiving reports relating to key regulatory developments affecting the Group
• Reviewing the Group’s conduct strategy and receiving reports from management on conduct risk
• Receiving reports from the Money Laundering Reporting Officer on compliance with anti-money laundering requirements
• Reviewing material operational risk events to assess the effectiveness of the Group risk and control assessment framework
• Reviewing the timeliness, effectiveness and progress of any executive management actions required to remediate issues identified
• Reviewing the Group’s capital and liquidity adequacy assessments and stress testing analysis
• Considering the minutes of its executive sub-committees
PAGE 127 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The structure of the executive committees reporting to the Committee and their reporting lines is illustrated below:
Risk and
Compliance
Committee
Asset and
Liability
Committee (’ALCO’)
Conduct and
Compliance
Committee (’CCC’)
Credit
Committee
Model Risk
Committee (’MRC’)
Operational Risk
Committee (’ORC’)
Each of the executive committees operates within terms of reference formally approved by the Risk and Compliance Committee. The primary
functions of each of these committees are described below.
Asset and Liability Committee (‘ALCO’)
ALCO comprises heads of relevant functions and is chaired by the CFO.
The principal purpose of ALCO is to monitor and review the financial risk management of the Group’s balance sheet. As such, it is responsible
for overseeing all aspects of market risk, liquidity risk and capital management as well as the treasury control framework. ALCO operates within
clearly delegated authorities, monitoring exposures and providing recommendations on actions required. It also monitors performance against
appetite on an on-going basis and makes recommendations for revisions to risk appetites to the Risk and Compliance Committee.
Conduct and Compliance Committee (‘CCC’)
The CCC comprises heads of relevant functions and is chaired by the Deputy CRO.
The CCC is responsible for overseeing the Group’s conduct risk and compliance arrangements. The Committee considers conduct risk
information such as details of conduct breaches; systems and procedures for delivering fair outcomes to customers; the product governance
framework; monitoring reports; and employee incentive schemes. It also considers product reviews from a customer perspective. With respect
to compliance, the CCC is responsible for overseeing the maintenance of effective systems and controls to meet conduct-related regulatory
obligations. It is also responsible for reviewing the quality, adequacy, resources, scope and nature of the work of the Compliance function,
including the annual Compliance Plan.
Credit Committee
The Credit Committee comprises senior managers from the risk, finance and collections functions and is chaired by the CRO.
The Credit Committee approves credit risk policies in respect of customer exposures and defines risk grading and underwriting criteria for
the Group. It also provides guidance and makes recommendations in order to implement the Group’s strategic plans for credit. The committee
oversees the management of the credit portfolios, the post origination risk management processes and the management of past due or
impaired credit accounts. It also monitors performance against appetite on an on-going basis and makes recommendations for revisions to the
credit risk appetites to the Risk and Compliance Committee. The Committee also operates the Group’s most senior lending mandate.
Model Risk Committee (‘MRC’)
The MRC comprises senior managers from risk, finance and the main business areas and is chaired by the CRO.
The role of the MRC is to review and make recommendations on all material aspects of the rating and estimation processes in relation to
key credit and finance models. The MRC also acts as the ‘Designated Committee’ for IRB purposes, approving all material aspects of IRB
rating systems.
Operational Risk Committee (‘ORC’)
The ORC comprises heads of relevant functions and is chaired by the CRO.
The ORC is responsible for overseeing the Group’s operational risk and business risk management arrangements, including those systems and
controls intended to counter the risk that the Group might be used to further financial crime. The Committee remit includes risks arising from
personnel, technology, and environmental matters within the business. The Committee considers key operational risk information such as key
risk indicators, themes within risk registers, emerging risks, loss events, control failures, and operational resilience measures.
It also monitors performance against appetite on an on-going basis and makes recommendations for revisions to the Risk and
Compliance Committee.
PAGE 128 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B7.3 Risk management culture
The Board is committed to maintaining an effective risk management framework that is consistent and commensurate with the nature,
complexity and risk profile of the business and is responsive to both internal and external events. The Group’s inherently conservative risk
appetite is expressed through the culture promoted by the Board and senior management. This has resulted in historically low levels of credit
and operational losses and the absence of any material conduct issues affecting customers.
The following risk principles are designed to support and protect the Group’s strategic goals:
• Risk management is used to protect the Group’s customers, shareholders, creditors and its reputation
•
•
•
•
•
The fair treatment of customers and the delivery of fair outcomes, particularly for those customers considered to be vulnerable, is central
to the Group’s risk management approach
The Group encourages a risk culture that has robust risk management at the heart of all decision-making within an open and transparent
environment
The Group only carries out business where the potential risk to itself and its customers has been considered together with the potential
reward and where the residual risk exposure is within its defined risk appetite
The Group utilises appropriate risk management processes to ensure that risks are identified, assessed, prioritised and managed in a
consistent way
Appropriate, timely and accurate risk management information is maintained and developed to support business decisions and to ensure
the Group operates within its agreed risk appetite
An independent Risk and Compliance function provides an effective second line oversight capability together with a source of specialist support
and advice for business areas in relation to the management of risk.
B7.4 Risk management framework
Introduction
The Group’s risk management framework is designed to enable management to identify and focus attention on the risks most significant to its
objectives and to provide an early warning of events that put those objectives at risk. The framework includes:
• The Risk and Compliance Committee and its sub-committees as described in B7.2
• A suite of risk policies, which include policies addressing:
o Conduct risk (including dealing with vulnerable customers and handling complaints)
o Credit risk
o Treasury risk
o Operational risk
o Data protection
o
Information security
o Health and safety
o Business continuity
o Outsourcing and supplier risk
o Anti-money laundering
o Anti-bribery and corruption
o Market abuse
o Whistleblowing
o Conflicts of interest
PAGE 129 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
• Dedicated teams within the Risk and Compliance function covering particular risk areas, led by experienced specialists, as described below
• Risk Champions appointed within all business areas to support the embedding of an effective risk culture across the Group
•
A well-established and experienced Internal Audit function, supported by ongoing co-source arrangements with external providers when
specific specialist skills are required
Three lines of defence model
The committee structures outlined above form the cornerstone for the governance of risk in a management framework organised within a
three lines of defence model as follows:
•
•
•
The first line of defence, comprising executive directors, together with managers and employees in operational and support areas, holds
primary responsibility for designing, operating and monitoring risk management and control processes
The second line of defence is provided by the Risk and Compliance function which is responsible for providing risk oversight and guidance
to the first line, in addition to providing independent challenge and review. The function is overseen by the Risk and Compliance Committee
and its supporting executive committees
The third line of defence is provided by the Internal Audit function which is responsible for reviewing the effectiveness of the first and
second lines of defence. This function is overseen by the Audit Committee
In addition, there are further external levels of control that complement the three internal layers, provided by the external audit process and the
monitoring activities of regulatory bodies.
The way in which the three lines of defence model aligns with the wider governance framework is illustrated below:
BOARD
Risk and
Compliance
Committee
Executive
Committee
Audit
Committee
Credit
Committee
Operational
Risk
Committee
Asset and
Liability
Committee
Conduct and
Compliance
Committee
Model Risk
Committee
1st Line
Business Risk Management
2nd Line
Risk Function Oversight
3rd Line
Internal Audit Independent Assurance
The risk management framework is intended to provide a structured and disciplined approach to the management of risk within agreed appetites
thereby supporting the achievement of the Group’s strategic objectives. The key objectives of the risk management framework are to:
• Promote an appropriate risk culture across the Group ensuring risk is considered as part of key strategic and business decision making
•
Establish standards for the consistent identification, measurement, monitoring, management and reporting of risk exposure and loss experience
• Outline the approach that will be taken in respect of setting and defining risk appetite and risk tolerances
•
•
•
Promote risk management and the proactive reduction of the frequency and severity of risk events, driving control improvements where
necessary
Facilitate adherence to regulatory requirements, including threshold conditions, capital standards and to support the regulatory requirements
associated with the ICAAP, ILAAP and RP
Provide senior management and relevant committees with risk reporting that will be relevant and appropriate, enabling timely action to be
taken in response to the information included within these reports
The Group publishes further information on its risk management system and risk profile in its Pillar III report, which can be found on the investor
relations section of the Group’s website at www.paragonbankinggroup.co.uk.
PAGE 130 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Risk management function
The Group’s Risk and Compliance function is headed by the CRO, who reports directly to the CEO. The key responsibilities of the CRO are to:
• Develop and maintain the risk management framework covering all areas of the Group
• Develop and maintain risk policies within that framework, ensuring these are consistent with the Board’s risk appetite
• Ensure that risks generated by the business are measured, monitored, controlled and reported on a timely basis
• Ensure compliance with all new and existing regulatory requirements
• Maintain open and constructive engagement with the regulatory authorities
The CRO is also responsible for the effective day-to-day running of the Risk and Compliance function and its relationship with the Board, its
committees and senior management as well as for championing the Group’s risk culture, providing support and advice to employees in the
discharge of their risk responsibilities.
During the year there has been further recruitment at all levels within the Risk and Compliance function to bolster the division’s strength and
ensure that its size, structure and resources remain appropriate. This also allows the Group to benefit from the wider perspective provided
by experienced external hires. The current function includes the following dedicated specialist second line areas which ultimately report to
the CRO:
• Credit Risk
•
Liquidity and Market Risk
• Conduct and Compliance Risk
• Operational Risk
•
IT and Cyber Security Risk
• Data Protection
• Property Risk
•
•
Financial Crime
IRB Development
PAGE 131 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B7.5 Principal risks and mitigation
The Group is exposed to a number of principal risks and uncertainties that arise from the operation of its business model and strategy. A
summary of those risks and uncertainties which could prevent the achievement of the Group’s strategic objectives, how the Group seeks to
mitigate those risks and the change in the perceived level of each risk in the last financial year are described below. These risks are discussed
in more granular detail in the Group’s Pillar III report, published on the Group website.
This analysis represents the Group’s gross risk position as presented to, and discussed by, the Risk and Compliance Committee as part of its
ongoing monitoring of the Group’s risk profile.
This summary should not be regarded as a complete statement of all potential risks and uncertainties faced by the Group but rather those which
the Group believes have the potential to have a significant impact on its financial performance and future prospects.
To identify and control the risks to which it is exposed, the Group employs a risk management framework. As part of this framework, principal
risks are identified and assessed within the key categories of Business Risk, Credit Risk, Conduct Risk, Operational Risk, Liquidity and Capital
Risk, Market Risk, and Pension Obligation Risk.
The changes in the perceived level of each risk in the last financial year are indicated using the symbols shown below:
Risk Increasing
Risk Decreasing
Risk Stable
BUSINESS RISK
Economic risk
Description
The potential for a deterioration in the UK’s
economic conditions is harder to forecast given
the continuing material uncertainties as to the
terms on which the UK will leave the EU.
Given that its income is wholly derived from
activities within the UK, the Group could be
materially affected by a severe downturn in the
UK economy, which could reduce demand for the
Group’s loan products, increase the number of
customers that default on their loans and cause
security asset values to fall.
Mitigation
The Group closely monitors political and economic developments in the UK and
overseas, with support from leading independent macro-economic and other
advisors. This information supports the senior management’s review of objectives
each year and helps inform business plans for each of the Group’s principal trading
operations.
As a lender and acquirer of credit portfolios, exposure to any material deterioration
in economic conditions is inevitable. The Board’s defined strategy is to limit this risk
by operating as a specialist lender in carefully chosen markets where its employees
have significant levels of experience and expertise.
The Group also uses stress testing to assess its expected performance under
a range of operating conditions. This provides the Board with an informed
understanding and appreciation of the Group’s capacity to withstand shocks of
varying severities. In addition to considering the credit implications of such economic
stress, the Board also considers the operational and liquidity implications of such
scenarios, which would include the potential to increase liquidity coverage ratios,
access contingent liquidity and further strengthen key risk and servicing functions as
and when required.
Change
Whilst UK economic performance has again been broadly stable
in the last financial year, the near-term outlook has continued
to remain uncertain given a lack of clarity as to the basis of the
UK’s withdrawal from and future relationship with the EU. This
continuing uncertainty has led to the overall risk assessment being
considered to have increased further in the last year.
PAGE 132 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
BUSINESS RISK
Concentration risk
Description
Lending to customers investing in the UK private
rented sector forms a substantial part of the
Group’s advances and assets.
It is therefore exposed to any systemic
deterioration in performance of the sector, which
will be influenced by underlying factors such
as house prices, supply of rental property, and
demographic changes.
The buy-to-let sector has been subject to a high
level of fiscal and regulatory intervention in recent
years. Where such changes make buy-to-let less
attractive or viable to customers’ businesses, the
Group is exposed to adverse consequences.
Concentration risks may also arise within other
business lines, affecting their performance.
Mitigation
The Group has a very deep understanding of the private rented sector built up over
many years of successful operations in the buy-to-let market. This includes a long
history of performance data through several economic cycles together with regular
independently conducted research commissioned over many years.
The Group seeks to use this expertise constructively by playing an active role in
shaping the development of policy for the private rented sector.
Given its specialist knowledge of the sector and its historically prudent approach to
underwriting, the Group has been well placed to respond effectively to the various
regulatory changes introduced in recent years in relation to buy-to-let lending.
A suite of concentration risk metrics is monitored by the Bank’s Credit Risk function
and reported monthly through the Credit Committee on to the Risk and Compliance
Committee. Potential areas of concentration relating not just to loan products but
also covering borrower, asset, or large exposure risk for example, are therefore
managed within defined limits.
The Group also continues to exploit opportunities to diversify the range of its
activities and income streams, consistent with its strategic objective of operating as
a prudent, risk focussed specialist lender.
Change
The Group continues to have significant exposure to buy-to-let
lending but, due to its specialist knowledge of the sector, it has
been able to respond positively to regulatory changes in recent
years. The Group’s diversification strategy has also positioned it to
reduce its reliance on this product line.
In the longer term, changes to the UK taxation regime and greater
regulatory intervention in the sector may reduce demand and
availability of buy-to-let lending products. However, the Group
continues to be confident in its ability to operate successfully in this
evolving environment.
Transition risk
Description
Mitigation
The Group has made a number of acquisitions in
previous periods.
The Board’s M&A strategy is that the Group will only consider acquisitions in areas of
business that it understands, and which are complementary to its existing activities.
While there have been no acquisitions in the
current accounting period, any failure to manage
effectively the transition and implementation
risks resulting from previous material corporate
acquisitions may impact adversely on the Group’s
financial performance and its reputation.
Extensive pre-acquisition due diligence is always undertaken with support from
respected, high quality advisors. Formal governance arrangements are applied to any
proposed acquisition and to subsequent integration projects, with regular progress
reporting to the executive team and the Board.
Where necessary, enhancements are made to the risk and control frameworks of
acquired businesses to ensure these are aligned to those within the wider Group.
Change
Ongoing integration activity has been successful and with no new
acquisitions undertaken, transition risk has reduced.
PAGE 133 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts CREDIT RISK
Customer risk
Description
Mitigation
Failure to screen potential borrowers, underwrite
new business, and manage repayments effectively
could expose the Group to the risk of unexpected
material losses.
Recoverable amounts on loans may also be
affected by adverse movements in security values
such as house and commercial asset prices.
The Group has comprehensive policies in place that set out detailed criteria which
must be met before loans are approved.
Credit policies incorporate limits for concentration risks arising from factors such as
large exposures to counterparties, geographical areas or types of lending.
The Group uses a range of sources to inform expectations of key external factors
such as interest rate movements, house price inflation, property rental inflation and
asset depreciation which are in turn used to guide policy and underwriting.
Change
The Group’s arrears rate and cost of risk have remained very low,
reflecting the maintenance of robust, proven credit disciplines,
generally stable economic conditions and the credit quality of
its borrowers. The potential for any credit deterioration due
to changing economic conditions, particularly given current
uncertainties regarding the UK’s future relationship with the EU,
is being monitored closely across all Group portfolios.
The Group’s approach to the management of credit risk and
the systems in place to mitigate that risk on both originated and
purchased assets are further described in note 57 to the
Group Accounts.
Counterparty risk
Description
Mitigation
The Group is exposed to the failure of
counterparties with which it places deposits, or
which provide hedging agreements to mitigate
interest rate and foreign exchange risk.
The Group has a strictly controlled number of approved treasury counterparties. To
be approved, counterparties must meet specific credit rating criteria.
Exposure to approved counterparties is monitored intra-day by senior management
within the Group’s Treasury function with all trading performed within approved
limits.
The credit quality of all treasury counterparties and the Group’s exposure to them is
reported monthly to ALCO.
Treasury counterparties are typically highly rated banks and, for all cash deposits
and derivative positions held within the Group’s securitisation structures, they must
comply with criteria set out in the financing arrangements, which are monitored
externally.
Where a counterparty to the Group’s cross-currency basis swaps fails to meet the
required credit criteria they are obliged under the terms of the instruments to set
aside a cash collateral deposit.
Change
The credit quality of the treasury counterparties with whom the
Group transacts has been maintained during the year and this risk is
therefore considered to have remained stable.
PAGE 134 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts CONDUCT RISK
Customer fair outcomes
Description
Mitigation
The Group provides a broad range of financial
services products across a number of brands to
consumers and small business customers.
As a result, the Group is exposed to potential
conduct risk should it fail to deliver fair outcomes
for its customers.
The Group has a formal Conduct Risk Management framework which includes
a number of detailed policies and standards addressing the fair treatment of
customers. At the centre of these is the Conduct Risk Policy, underpinned by
additional policies and standards. This sets out the Group’s overarching approach
to the management of conduct risk as part of a framework within which business
areas are required to develop systems and processes to identify, measure, manage,
monitor and report risks in accordance with stated risk appetites.
Systemic poor customer treatment may lead to
regulatory censure, reputational damage and
resulting reductions in profitability.
The management of conduct risk within the Group is tailored to the specific product
and customer type concerned. Business areas dealing with consumers have
dedicated quality and control teams which validate process adherence and the
delivery of fair treatment for customers. This may also include a dedicated customer
support team to manage customers deemed to be vulnerable.
The Conduct and Compliance Committee (‘CCC’) has a remit which includes
overseeing the fair treatment of customers.
The CCC also receives items for review and / or approval, such as product
governance submissions, conduct risk related policies and standards, business area
incentive schemes, compliance monitoring outputs and regulatory communications.
The Compliance function has a formal monitoring plan which is focussed on conduct
risk and the fair treatment of customers, particularly those that are defined as
vulnerable, or in financial difficulty. The plan is reviewed and approved on at least an
annual basis by the RCC.
Management actions to address any adverse compliance monitoring or Internal
Audit reports are overseen at the CCC, ORC and RCC.
The Group’s approach to employee remuneration means that very few staff are
included in financial incentive schemes. All schemes are required to be approved by
the CCC before implementation and then reviewed by the CCC at least annually.
Change
The Group operates in areas which are highly regulated and where
continuing changes to the regulatory conduct landscape heighten
the potential risk of financial losses or censure. In response to this,
the Group has continued to develop and embed its conduct risk
management framework during the year.
PAGE 135 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts OPERATIONAL RISK
People risk
Description
The Group is exposed to the risk that it is unable
to recruit and retain skilled senior management
and key personnel at all levels.
Failure to maintain the necessary skill base within
its workforce could have a material impact on
the Group’s ability to deliver its business plan and
strategic objectives.
This is a particular risk in respect of key specialist
and executive positions, where the institutional
knowledge of the incumbents would be very
difficult to replicate in the short term.
Mitigation
The Group manages and controls its key person dependency risk through effective
succession planning, recruitment, development and retention strategies.
External remuneration and reward structures are monitored to ensure the Group
remains competitive and is able to recruit and retain key personnel.
A range of employee benefits are offered in addition to base salaries including a
defined contribution pension scheme, Sharesave Plan and an annual profit related
pay scheme for most employees.
A Senior Leadership Development Programme and Manager and Team Leader
Academies have been created to develop pools of strong, capable individuals with
the potential to fill future managerial and specialist roles within the business.
The Group has been accredited under the ‘Investors in People’ scheme since 1997
and has held Champion status in the scheme since May 2014. This accreditation
is awarded to a very small proportion of organisations who are seen as pioneers in
people management practices and role models in strategic leadership.
Change
A strong employment market and particularly buoyant demand
for skilled financial services staff has again been a feature of the
last financial year. This has led to continued strong competition to
recruit and retain employees. Despite the increasingly competitive
external environment, the Group remains confident in its ability to
manage this risk.
PAGE 136 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts OPERATIONAL RISK
Systems risk
Description
Mitigation
The Group is exposed to the risk that its IT
infrastructure and systems are unable to support
its operational needs.
This includes the risk that the Group’s processes
fail to offer adequate protection against the threat
of cyber-crime.
Failure in Group IT systems, either in terms of
capacity or security, however caused, could
result in detriment to customers, regulatory
censure and reputational damage, while failure to
match market levels of functionality could have
an adverse impact on business volumes. All of
these factors could materially impact income and
profitability.
This risk also includes the potential that the
Group’s key outsourcing arrangements with
third parties could expose it to material loss or
reputational damage.
The Group has a formally agreed IT strategy which ensures that priority is given
to those areas which are most critical to the delivery of the Group’s strategy and
business plan. It maintains an ongoing programme of investment in IT infrastructure
and systems. The Group also employs a robust vendor management process to
select and monitor third party IT suppliers.
Over the last twelve months the Group has continued to invest in new technology
and services to maintain and increase its defence in depth strategy to protect its
operational capability. The implementation of a new Security Operations Centre
service has added third party security expertise to support the Group’s existing
specialist resource.
A formal Cyber Incident Response Plan is in place to ensure the Group is well placed
to deal with any issues or events. This is regularly reviewed and approved by the RCC.
There is ongoing focus on the information security management system
(ISO27001:2005) to which the Group is certified, to ensure that controls, testing and
user awareness are maintained and improved.
Change programmes are closely managed with robust control and testing processes
to ensure that system developments meet operational requirements and are
effectively implemented.
The Group has continued to invest significantly in order to further
enhance its operational resilience. However, the Group recognises
that while it continues to develop, and maintain a secure IT
infrastructure, the increased sophistication of cyber-crime attacks
continues to be a significant risk for the business in common with
the rest of the financial services sector.
Change
Regulatory risk
Description
The Group is exposed to the risk that its
financial performance and reputation could
suffer significantly if it fails to identify, interpret
and comply with relevant regulatory and legal
obligations.
The customers and market sectors to which
the Group supplies products, and the capital
markets from which it obtains some of its funding,
have been subject to increasing legislative and
regulatory intervention over recent years.
Mitigation
The Group has Risk and Compliance and Legal teams who review key regulatory
and legal developments to assess the impact on the Group’s operations. These
teams then work with business areas to provide advice on the implementation of
appropriate measures to meet identified requirements. Expert external advice is also
sought where necessary. Major regulatory or legal change initiatives are subject to
formal change governance with progress reporting to the RCC.
All employees are required to undertake regulatory training and testing to ensure
appropriate levels of competence are maintained. Those in relevant specialist roles
are also required to adhere to formal regulatory training and competence regimes.
The Compliance and Financial Crime functions maintain formal second line
monitoring plans. Progress against the plan and the issues identified within individual
reviews are reported to the CCC and the RCC to ensure that regulatory requirements
have been satisfactorily embedded, and any lessons learnt are applied across all
relevant areas of the Group.
Similarly, the Financial Crime function provides independent oversight of business
areas’ adherence to anti-money laundering and financial crime requirements.
During 2018-19 key regulatory initiatives have included the focus on operational
resilience and the impact of climate change. Work has commenced in both these
areas and will develop during 2019-20 as further clarity is received around regulatory
expectations.
Change
Whilst the Group considers that it continues to have robust
arrangements in place, the increasing scope and complexity of
regulatory regimes heightens the potential risk arising from any
failure to comply with current regulations or to respond effectively
to new and emerging ones.
PAGE 137 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts LIQUIDITY AND CAPITAL RISK
Funding risk
Description
The Group relies on its access to various sources
of funding to finance the origination of new
business, portfolio acquisitions and working
capital. If access to funding became restricted,
either through market movements or regulatory
intervention, this might result in the scaling back
or cessation of some business lines.
Retail deposit taking is central to the Group’s
funding plans and therefore changes in market
conditions could impact the ability of the business
to maintain the level of liquidity required to sustain
normal business activity.
Mitigation
The Group maintains a diversified range of both retail and wholesale medium and
long-term funding sources to cover future business requirements and liquidity to
cover shorter term funding needs.
Internally, comprehensive treasury policies are in place to ensure sufficient liquid
assets are maintained and that all financial obligations can be met as they fall due.
The Group, through Paragon Bank, is authorised to accept retail deposits. As such, it
is subject to regulation by the PRA. The Group aims to ensure that sufficient liquid
assets are held, at all times, to mitigate the liquidity risk inherent in deposit taking.
The Group has an experienced structured finance function who maintain
relationships with major participants in the capital markets and who have been
instrumental in many securitisation and debt issues. This gives it access to capital
markets when required.
The Company has a BBB investment grade credit rating from Fitch to support
maintenance of its access to funding markets.
Change
The Group remains well funded with sufficient liquidity to meet all
its financial obligations as they fall due.
It is well placed to access future funding from a wide range of
sources to meet its future funding requirements. During the year,
the Group demonstrated its ability to access the securitisation
market for additional funding on an ongoing basis, and its Fitch
rating was confirmed. Although there has been strong competition
for retail deposits, the overall risk is considered to have remained
stable.
Capital risk
Description
Mitigation
The changes made in the Basel III capital
regime by the BCBS regarding minimum capital
requirements from 2021 could impact on the
Group.
In order to further enhance its existing robust credit management capabilities and
to mitigate the risks of the proposed BCBS changes, the Group took a strategic
decision in 2016 to seek the necessary regulatory approval to implement an IRB
approach for credit risk.
The BCBS changes include increases in risk
weights for residential real estate exposures
where repayment is materially dependant on
cash flows generated by the property, which
may include certain categories of buy-to-let
lending. The Group’s capital requirements would,
therefore, be increased to some extent.
In support of this, the Group appointed an experienced director of IRB to lead this
initiative. A formal IRB project has since been initiated with support from respected
external specialist advisors to enable the Group to commence its application process
with the relevant regulatory authorities during the first half of the new financial year.
The Group’s IRB plan is well progressed, however a consultation paper produced in
September 2019 highlighted a need for aspirant firms to comply with certain future
regulations and requirements where the authorisation process extends beyond
2020. Whilst only a consultation at this stage, the Board has decided to ensure
its IRB models are fully compliant with this requirement before making its first
submissions to the PRA. The timing of the application will reflect the requirements of
the Policy Statement that will result from the consultation process.
Change
During the year, the UK and European authorities developed their
approach to the implementation of the Basel III changes. The
impacts of their decisions were considered, and the proposed
changes have been incorporated within the Group’s IRB project.
These developments did not change the Group’s assessment of the
likely impact of these changes.
Further information on the Group’s management of capital risk is
given in note 55 to the Group Accounts.
PAGE 138 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts MARKET RISK
Interest rate risk
Description
Mitigation
The Group is exposed to the risk that changes in
interest rates may adversely affect its net income
and profitability.
This risk is managed through Board approved risk appetite limits with comprehensive
treasury polices in place to ensure that the risk posed by changes and mismatches in
interest rates are effectively managed.
In particular, the Group’s profitability is determined
by the difference between the interest rates at
which it lends and those at which it borrows.
The Board’s risk management framework for Interest Rate Risk in the Banking Book
(‘IRRBB’) continues to evolve in line with updates in regulatory guidance on methods
expected to be used by banks for controlling such risks.
Changes in market interest rates could therefore
materially impact the Group’s profits as a result
of significant mismatches between its assets and
liabilities.
Day-to-day management of interest rate risk within Board approved limits is the
responsibility of Treasury with control and oversight provided by ALCO which reports
to the RCC.
The Group seeks to match the structure of assets and liabilities by using appropriate
financial instruments, such as interest rate swaps or cap agreements and fixed rate
retail liabilities.
Change
The Group’s interest risk exposure profile, relative to its balance
sheet has remained broadly similar and therefore associated risk
levels remain generally stable compared to previous periods. The
approach to managing the risks has, however, been enhanced to
reflect the EBA’s guidelines.
Further information regarding the Group’s management of interest
rate risk is given in note 59 to the Group Accounts.
PENSION OBLIGATION RISK
Pension obligation risk
Description
Mitigation
The Group operates a defined benefit pension
scheme and defined contribution pension
schemes in the UK.
There is a risk that the Group’s commitments
under its defined benefit scheme expose it to
the risk that the assets of the scheme may be
insufficient to meet its liabilities, either due to
adverse investment performance or inaccurate
assumptions, including future inflation levels,
members’ salaries or mortality rates.
The Group’s defined benefit scheme (‘the Plan’) was closed to new members with
effect from February 2002. Since that time, new employees have been invited to join
the Group’s defined contribution pension scheme which carries no investment or
mortality risk for the Group.
To mitigate the risks inherent in its exposure to the Plan, the Group conducts regular
asset-liability reviews in conjunction with the Trustee. These reviews are used to
assist the Trustee 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 reviews also assist the Trustee in managing the volatility in the
underlying investment performance and the risk of a significant increase in the
scheme deficit by providing information used in investment strategy decisions.
The Plan is subject to triennial formal valuation by the Plan actuary. The valuation
process as at 31 March 2019 is currently in progress, and will include the agreement
of a recovery plan between the Trustees and the Group which will aim to clear the
deficit in the Plan. This is will be agreed during the year ending 30 September 2020.
Change
Despite short-term fluctuations caused by market instability
in interest rates and asset prices, the Group considers the
underlying long-term funding position for the Plan to be robust and
sustainable.
Further details of the Group’s exposure to the Plan are given in note
41 to the Group Accounts.
PAGE 139 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B8
Directors’ report
The directors of Paragon Banking Group PLC (registered number 2336032) submit their Report prepared in accordance with Schedule 7 to
the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (‘Schedule 7’), which also includes additional
disclosures made in accordance with the requirements of the UK Listing Authority.
Directors and their interests
The directors of the Company during the year were:
F J Clutterbuck
N S Terrington
R J Woodman
J A Heron
A K Fletcher*
(resigned 31 December 2018)
P J N Hartill*
H R Tudor*
P J Newberry* (resigned 31 December 2018)
B A Ridpath*
F F Williamson*
G H Yorston*
* Non-executive directors throughout the year.
The directors’ interests in the shares of the Company are disclosed in the Directors’ Remuneration Report in Section B6. There have been no
changes in the directors’ interests in the share capital of the Company since 30 September 2019.
During the year, Mr H R Tudor sold all of his interest in the Company’s 6.00% sterling denominated notes due 2020 (2018: £300,000 held).
Other than as stated above, the directors had no interests in securities issued by the Company. The directors have no interests in the shares or
debentures of the Company’s subsidiary companies.
The appointment and replacement of the Company’s directors is governed by the Articles of Association of the Company (the ‘Articles’),
the Code, the Companies Act 2006 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, in
Sections B3 and B6. The Articles may only be amended by the Company’s shareholders in general meeting.
Under Article 161 of the Articles, the Company has qualifying third party indemnity provisions for the benefit of its directors, which were in place
throughout the year and which remain in force at the date of this report, in the form of directors’ and officers’ liability insurance. The directors’
and officers’ liability insurance covers directors of all of the Company’s subsidiary entities.
Under Article 85 of the Articles certain directors are required to submit themselves for reappointment. In accordance with the Code, however,
the Board has decided that it is appropriate for all directors to submit themselves for reappointment on an annual basis. Accordingly, all current
directors, other than Mr Hartill and Mr Heron, who have announced their intention to step down from the Board before the meeting, will retire
and seek reappointment at the AGM.
None of the directors has a service contract with the Company requiring more than 12 months’ notice of termination to be given.
A director has a statutory duty to avoid a situation in which he or she 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
by the other directors. The Articles 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.
PAGE 140 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
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 shares 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.
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 Articles and prevailing legislation. The Articles 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 12 to the accounts. Votes attaching to shares held by the Group’s employee benefit trust
are not exercised at general meetings of the Company.
The Company presently has the authority to issue ordinary shares up to a value of £86.8 million and to make market purchases of up to
26.0 million £1 ordinary shares, granted at the AGM on 14 February 2019. These authorities expire at the conclusion of the forthcoming AGM on
13 February 2020 and resolutions will be put to that meeting proposing that they be renewed.
Purchase of own shares
On 27 June 2019, the Group announced a share buy-back programme of £30.0 million. During the year, 6,048,852 £1 ordinary shares
(2018: 5,106,641) having an aggregate nominal value of £6,048,852 (2018: £5,106,641), were purchased under this programme. The reasons
for this purchase were set out in an announcement published on the regulatory news service of the London Stock Exchange at that time. Total
consideration paid in the year was £26.7 million, including costs (2018: £25.2 million).
All of the shares acquired under this programme were held initially as treasury shares.
On 31 July 2019, 21,630,434 of the treasury shares acquired under these programmes were cancelled. These shares had a nominal value of
£21,630,434 and represented 8.32% of the issued share capital excluding treasury shares at that time.
The number of treasury shares held at 30 September 2019 was 5,218,702 (2018: 20,800,284), representing 2.04% of the issued share
capital excluding treasury shares (2018: 7.98%). The maximum holding of treasury shares during the year was 21,769,034 (2018: 20,800,284)
representing 8.37% of the issued share capital excluding treasury shares at that time (2018: 7.98%).
Dividends
The directors recommend a final dividend of 14.2p per share (2018: 13.9p per share) which, taken with the interim dividend of 7.0p per share
(2018: 5.5p per share) paid on 26 July 2019, would give a total dividend for the year of 21.2p per share (2018: 19.4p per share).
Major shareholdings
Notifications of the following major voting interests in the Company’s ordinary share capital, notifiable in accordance with Chapter
5 of the FCA’s Disclosure and Transparency Rules or section 793 of the Companies Act 2006, had been received by the Company as at
30 September 2019 and at 31 October 2019, being a date not more than one month before the date of the notice convening the
forthcoming AGM.
31 October 2019
30 September 2018
Shareholder
Ordinary Shares
% Held
Ordinary Shares
Royal London Asset Management Limited
18,020,262
7.03%
18,020,262
Prudential PLC Group of Companies*
-
-
18,012,554
M&G PLC*
Franklin Templeton Fund Management Limited
Dimensional Fund Advisors LP
Norges Bank
16,933,305
13,061,935
13,033,648
11,007,893
6.60%
5.01%
5.08%
4.29%
-
13,061,935
13,033,648
11,007,893
% Held
7.03%
7.03%
-
5.10%
5.08%
4.29%
*Following the demerger of Prudential plc and M&G PLC, the holding previously held by the Prudential PLC Group of Companies is now held by M&G PLC.
Percentage holdings are calculated based on the total voting rights at the relevant date.
PAGE 141 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Significant agreements
The Company is not party to any significant agreements that would take effect, alter or terminate following a change of control of the company.
The Company does not have any agreements with any director or employee that would provide compensation for loss of office or employment
resulting from a takeover of the Company, except that provisions of the Company’s share based remuneration arrangements may cause awards
granted to employees under such plans to vest in such circumstances.
Research and development
During the year, the Group undertook certain projects to develop its IT capabilities which met the definition of research and development set
out in the guidelines issued by the Department of Business Innovation and Skills in 2010. Claims in respect of these activities were made in the
Group’s tax returns. The amounts involved were modest in the context of the Group accounts.
Political expenditure
Company law requires the disclosure of political donations and political expenditure by any Group company. During the year ended
30 September 2019 no such payments were made (2018: £nil).
Auditors
The directors have taken all reasonable steps to make themselves and the Company’s auditors, KPMG LLP (‘KPMG’), 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.
The directors, having considered the requirements for rotation of auditors, the length of service of KPMG and the conduct of the audit concluded
there was no present need to retender the audit. Therefore, a resolution for the reappointment of KPMG, who have expressed their willingness
to continue in office, as the auditors of the Company is to be proposed at the forthcoming AGM. The evaluation process is described more fully
in the Audit Committee Section B5.
Annual General Meeting
The Annual General Meeting of the Company will take place on 13 February 2020 in London. A notice convening the AGM is being circulated to
shareholders with this Annual Report and Accounts.
Listing Rule LR9.8.4
There are no matters which the Company is required to report under Listing Rule LR9.8.4, other than the fact that the trustees of its employee
share ownership trust (note 44) have waived their right to receive dividends on any shares held from time to time. As these shares are held on
the consolidated balance sheet, this has no effect on the amounts reported by the Group.
PAGE 142 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Information presented in other sections
Certain information required to be included in a directors’ report by Schedule 7 can be found in the other sections of the Annual Report, as
described below. 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.
• Commentary on the likely future developments in the business of the Group is included in the Strategic Report (Section A)
•
•
•
A description of the Group’s financial risk management objectives and policies, and its exposure to risks arising from its use of financial
instruments are set out in note 56 to the accounts and related notes
Information concerning directors’ contractual arrangements and entitlements under share based remuneration arrangements is given in
Section B6, the Directors’ Remuneration Report
Information concerning the employment of disabled persons and the involvement of employees in the business is given in Section
A5.2 – ‘People’
• Disclosures concerning greenhouse gas emissions are given in Section A5.3 – ‘Environmental Issues’
• Disclosures concerning events taking place after the balance sheet date are set out in note 32 to the accounts.
Rule DTR7.2.1 of the Disclosure Guidance and Transparency Rules requires the Group’s disclosures on Corporate Governance to be included in
the Directors’ Report. This information is presented in Sections B3, B4, B5, B6 and B7 and the information in these sections is incorporated by
reference into this Directors’ Report and is deemed to form part of this report.
Rule DTR4.1.5 of the Disclosure Guidance and Transparency Rules requires that the annual report of a listed company contains a management
report containing certain prescribed information. This Directors’ Report, including the other sections of the Annual Report incorporated by
reference, comprises a management report for the Group for the year ended 30 September 2019, for the purposes of the Disclosure Guidance
and Transparency Rules.
Section B8 of this Annual Report, together with the other sections of the Annual Report incorporated by reference, comprise a directors’ report
for the Company 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.
Approved by the Board of Directors and signed on behalf of the Board.
Pandora Sharp
Company Secretary
26 November 2019
PAGE 143 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts B9
Statement of directors’
responsibilities
in respect of financial statements
The directors are responsible for preparing this Annual Report, including the consolidated and company financial statements in accordance
with applicable law and regulations.
Company law requires the directors to prepare consolidated financial statements for the Group and separate financial statements for the
Company in respect of each financial year. In respect of the financial statements for the year ended 30 September 2019, that law includes
the Companies Act 2006 (‘the Act’) and Article 4 of the IAS Regulation. That law requires the directors to prepare the consolidated financial
statements in accordance with IFRS as adopted by the EU and they have also elected to prepare the financial statements of the Company in
accordance with IFRS as adopted by the EU.
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 (‘IASB’) ‘Framework for the Preparation and Presentation of Financial Statements’. In
virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRS.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of
the state of affairs of the Group and Company and the Group’s profit or loss for the year. In preparing each of the consolidated and Company
financial statements the directors are also required to:
• Select suitable accounting policies and apply them consistently
• Make judgements and estimates that are reasonable, relevant and reliable
•
State whether the consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU and whether the
company financial statements have been prepared in accordance with the Act
• Assess the ability of the Group and the Company to continue as a going concern, disclosing, as applicable, matters related to going concern
•
Use the going concern basis of accounting unless they intend to liquidate the Company and / or the Group or to cease operation or they have
no realistic alternative to doing so
• Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information
•
Provide additional disclosures when compliance with the specific requirements in IFRS 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 adequate accounting records for the Company which are sufficient to record and explain its
transactions, disclose with reasonable accuracy at any time its financial position and enable them to ensure that its financial statements comply
with the requirements of the Act.
They are responsible for the implementation of such internal control processes as they deem necessary to enable the preparation of financial
statements which are free from material misstatements, whether due to fraud or error, and have general responsibility for taking such steps as
are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations the directors are also responsible for the preparation of a strategic report, directors’ report, directors’
remuneration report and corporate governance statement which comply with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website
(www.paragonbankinggroup.co.uk). Legislation in the UK governing the preparation and dissemination of financial statements differs from
legislation in other jurisdictions.
PAGE 144 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Confirmation by the Board of Directors
Each of the current directors confirms that, to the best of their knowledge:
•
•
•
The financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company and of the Group taken as a whole
The Directors’ Report, including those other sections of the Annual Report incorporated by reference, comprises a management report for
the purposes of the Disclosure Guidance and Transparency Rules, and includes a fair review of the development and performance of the
business and the consolidated position of the Group taken as a whole, together with a description of the principal risks and uncertainties
that it faces
The Annual Report (including the consolidated and company financial statements), taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy
Approved by the Board of Directors and signed on behalf of the Board.
Pandora Sharp
Company Secretary
26 November 2019
PAGE 145 • Corporate Governance
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts C.
INDEPENDENT
AUDITOR’S REPORT
Report by the independent auditor of the Company, KPMG LLP, on the financial statements
C
Independent auditor’s report
To the members of Paragon Banking Group PLC
1. Our opinion is unmodified
We have audited the financial statements of Paragon Banking Group PLC (“the Company”) for the year ended 30 September 2019 which
comprise the:
- Consolidated Income Statement
- Consolidated Statement of Comprehensive Income
- Consolidated and Company Balance Sheets
- Consolidated and Company Cash Flow Statements
- Consolidated and Company Statements of Movements in Equity
- Related notes, including the accounting policies in note 63, other than the disclosures labelled as unaudited in note 55.
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 2019
and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by
the European Union (IFRSs as adopted by the EU);
the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU 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.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are
described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is
consistent with our report to the audit committee.
We were first appointed as auditor by the shareholders on 9 February 2016. The period of total uninterrupted engagement is for the four
financial years ended 30 September 2019. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in
accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services
prohibited by that standard were provided.
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and
include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had
the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We
summarise below the key audit matters, in arriving at our audit opinion above, together with our key audit procedures to address those matters
and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on
procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our
opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
PAGE 148 • Independent Auditor’s Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Key audit matter
Our response
The impact of uncertainties due to the UK exiting the European
Union on our audit
We developed a standardised firm-wide approach to the
consideration of the uncertainties arising from Brexit in planning
and performing our audits. Our procedures included:
Risk vs 2018:
Refer to the Chief Executive’s Review
Unprecedented levels of uncertainty
All audits assess and challenge the reasonableness of estimates,
in particular as described in impairment allowances on loans to
customers, interest receivable on loan accounts, recoverability
of goodwill and valuation of the defined benefit pension scheme
obligation, below, and related disclosures and the appropriateness
of the going concern basis of preparation of the financial
statements (see below). All of these depend on assessments of the
future economic environment and the Group’s future prospects and
performance.
In addition, we are required to consider the other information
presented in the Annual Report including the principal risks
disclosure and the viability statement and to consider the Directors’
statement that the Annual Report and financial statements taken
as a whole is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group and
Parent position and performance, business model and strategy.
Brexit is one of the most significant economic events for the
UK and at the date of this report its effects are subject to
unprecedented levels of uncertainty of outcomes, with the full
range of possible effects unknown.
•
•
•
Our Brexit knowledge – We considered the directors’
assessment of Brexit-related sources of risk for the Group’s
business and financial resources compared with our own
understanding of the risks. We considered the directors’ plans
to take action to mitigate the risks.
Sensitivity analysis – When addressing impairment allowances
on loans to customers, interest receivable on loan accounts,
recoverability of goodwill and valuation of the defined benefit
pension scheme obligation and other areas that depend
on forecasts, we compared the directors’ analysis to our
assessment of the full range of reasonably possible scenarios
resulting from Brexit uncertainty and, where forecast cash
flows are required to be discounted, considered adjustments to
discount rates for the level of remaining uncertainty.
Assessing transparency – As well as assessing individual
disclosures as part of our procedures on impairment allowances
on loans to customers, interest receivable on loan accounts,
recoverability of goodwill and valuation of the defined benefit
pension scheme obligation on our audit we considered all of
the Brexit related disclosures together, including those in the
strategic report, comparing the overall picture against our
understanding of the risks.
Our results
As reported under Impairment allowances on loans to customers,
interest receivable on loan accounts, recoverability of goodwill
and valuation of the defined benefit pension scheme obligation,
we found the resulting estimates and related disclosures of
Impairment allowances on loans to customers, interest receivable
on loan accounts, recoverability of goodwill and valuation of the
defined benefit pension scheme obligation and disclosures in
relation to going concern to be acceptable. However, no audit
should be expected to predict the unknowable factors or all
possible future implications for a company and this is particularly
the case in relation to Brexit.
PAGE 149 • Independent Auditor’s Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Key audit matter
Our response
Impairment allowances on loans to customers
Our audit procedures included:
Risk vs 2018:
(£41.9 million; 2018: £54.2 million)
Refer to the Audit Committee Report, accounting policy note and
note 23 (financial disclosures).
Subjective estimate
IFRS 9 was implemented by the Group on 1 October 2018. This new
and complex standard requires the Group to recognise expected
credit losses (‘ECL’) on financial instruments, which involves
significant judgement and estimates and resulted in an increase
in credit loss provisions. A significant proportion of the increase
relates to the Group’s receiver of rent portfolio. The quantum
and timing of cashflows as well as the realisation rate are key
assumptions in the provision calculation in that portfolio.
The key areas where we identified greater levels of director
judgement and therefore increased levels of audit focus in the
Group’s implementation of IFRS 9 are:
Economic scenarios – IFRS 9 requires the Group to measure ECLs
on a forward-looking basis reflecting a range of future economic
conditions. Significant management judgement is applied to
determining the economic scenarios used and the probability
weightings applied to its lending portfolios.
Significant Increase in Credit Risk (‘SICR’) – For the portfolios
the criteria selected to identify a significant increase in credit risk
is a key area of judgement within the Group’s ECL calculation as
these criteria determine whether a 12 month or lifetime provision is
recorded.
Model estimations – Inherently judgemental modelling is used to
estimate ECLs which involves determining Probabilities of Default
(‘PD’), Loss Given Default (‘LGD’), and Exposures at Default (‘EAD’).
The LGD models used in the portfolios are the key drivers of
the Group’s ECL results and are therefore the most significant
judgemental aspect of the Group’s ECL modelling approach.
The effect of these matters is that, as part of our risk assessment,
we determined that the impairment of loans to customers has a
high degree of estimation uncertainty, with a potential range of
reasonable outcomes greater than our materiality for the financial
statements as a whole, and possibly many times that amount.
The financial statements disclose the sensitivities estimated by
the Group.
•
Controls testing: We performed end to end process walk-
throughs to identify the key systems and controls used in
the ECL processes. We tested the relevant general IT and
applications controls over key systems used in the ECL process.
• Test of details: Key aspects of our testing involved:
-
-
-
Testing the key inputs and assumptions impacting
the Group’s overall ECL calculation to assess their
reasonableness. This included performing sensitivity
analysis to understand the significance of certain
assumptions; benchmarking procedures to compare
the Group’s key assumptions to comparable peer group
organisations; and assessing the key assumptions against
the Group’s historical experience;
Performing credit file reviews over individual loans in the
Group’s various loan portfolios on a risk assessed sample
basis to assess the reasonableness of the ECL measured on
certain loans; and
Performing recalculations of the ECL measured on certain
portfolios on a samples basis.
Our financial risk modelling expertise: We involved our own
financial risk modelling specialists in evaluating certain
IFRS 9 models. We used our knowledge of the Group and
our experience of the industry that the Group operates in to
independently assess the appropriateness of the Group’s IFRS
9 models and key components.
Our economic scenario expertise: We involved our
own economic specialists to assist us in assessing the
appropriateness of the Group’s methodology for determining
the economic scenarios used and the probability weightings
applied to them. We also assessed key economic variables
used which included agreeing samples of economic variables
to external sources as well as the overall reasonableness of
the economic forecasts by comparing the Group’s forecasts to
our own modelled forecasts. As part of this work we assessed
the reasonableness of the Group’s considerations of the ECL
impact of economic uncertainty, including Brexit.
Assessing transparency: We evaluated whether the disclosures
appropriately reflect and address the uncertainty which exists
when determining the Group’s overall ECL. As a part of this, we
assessed the sensitivity analysis that is disclosed. In addition,
we challenged whether the disclosure of the key judgments and
assumptions made was sufficiently clear.
•
•
•
Disclosure quality
Our results
The disclosures regarding the Group’s application of IFRS 9 are key
to understanding the change from IAS 39 as well as explaining the
key judgements and material inputs to the IFRS 9 ECL results.
The results of our testing were satisfactory and we considered the
credit impairment charge, provision recognised and the related
disclosures to be acceptable.
PAGE 150 • Independent Auditor’s Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Key audit matter
Our response
Interest receivable on loan accounts
Our procedures included:
Risk vs 2018:
Originated assets:
(£449.3 million; 2018: £408.9 million)
Refer to the Audit Committee Report, accounting policy note and
note 4 (financial disclosures).
Subjective estimate
The recognition of interest receivable on loan accounts under
the effective interest rate (‘EIR’) method requires the directors to
apply judgement, with the most critical estimate being the loans’
expected behavioural life for originated assets and estimated
remaining collections (‘ERCs’) for acquired loan portfolios.
•
•
Historical comparison: We critically assessed the Group’s
analysis and key assumptions over the repayment profiles by
comparing them to the Group’s historical trends and actual
portfolio behaviour; this included assessing the appropriateness
of the cohort segmentation and the treatment of product
switches; and
Sensitivity analysis: We performed sensitivity analysis over the
repayment profiles by applying alternative profiles based upon
the above procedures.
Acquired loan portfolios:
•
Historical comparison: We critically assessed the Group’s
cash flow forecasts by comparing them to current and past
performance of the Group’s portfolios, including recent cash
collections.
Both portfolios:
•
•
Assessing transparency: We critically assessed the adequacy
of the Group’s disclosures about the sensitivity of the interest
receivable on loan accounts to changes in key assumptions
reflected in the inherent risk; and
Controls: We tested management review controls over the
approval of the Group's repayment profiles;
Our results
We found the resulting estimate of interest receivable on loan
accounts and the related disclosures to be acceptable
(2018: acceptable).
Originated assets:
The expected life assumptions utilise repayment profiles which
represent how customers are expected to pay. These profiles
extend significantly into the future which creates a high level
of estimation uncertainty and subjects the judgement to future
market changes. The Group makes its expected life assumptions
based on its forecasting process which incorporates both historical
experience and judgemental overlays by management.
The cohorts of loans and advances which require the most
judgement are buy-to-let products which were originated by the
Group post-2010
Acquired loan portfolios:
For the Group’s acquired debt portfolio, the risk is that estimated
future cash collections are not reflected by actual cash receipts.
Given the nature of the Group’s debt portfolios, estimation of
future cash collections requires significant judgement to make
assumptions about the value, probability and timing of expected
future cash flows for each type of asset class within a portfolio.
The effect of these matters is that, as part of our risk assessment,
we determined that interest receivable on loan accounts has a
high degree of estimation uncertainty, with a potential range of
reasonable outcomes greater than our materiality for the financial
statements as a whole, and possibly many times that amount.
The financial statements disclose the sensitivities estimated by
the Group.
PAGE 151 • Independent Auditor’s Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Key audit matter
Recoverability of goodwill
Risk vs 2018:
(£164.4 million; 2018: £162.2 million)
Refer to the Audit Committee Report, accounting policy note and
note 29 (financial disclosures).
Forecast-based valuation:
Goodwill is significant and at risk of irrecoverability due to changes
in market factors since acquisition. The estimated recoverable
amount is subjective due to the inherent uncertainty involved in
forecasting future cash flows and deriving an appropriate discount
rate to reflect the time value of money.
In calculating the recoverable amount, the directors made
assumptions over the following key inputs; profitability growth, the
discount rate and the long-term growth rate.
The effect of these matters is that, as part of our risk assessment,
we determined that the recoverable amount has a high degree
of estimation uncertainty, with a potential range of reasonable
outcomes greater than our materiality for the financial statements
as a whole, and possibly many times that amount. The financial
statements (note 29) disclose the sensitivity estimated by
the Group.
Our response
Our procedures included:
•
•
•
•
Historical comparisons: We compared the Group’s previous
forecasting with actual results;
Benchmarking assumptions: We compared the Group’s
assumptions to externally derived data in relation to key
inputs such as projected economic growth and discount
rates, and challenged management on the forecast business
performance;
Sensitivity analysis: We performed breakeven analysis and
applied alternative scenarios based on the assumptions noted
above;
Assessing transparency: We critically assessed whether the
Group’s disclosures about the sensitivity of the outcome of
the impairment assessment to changes in key assumptions
reflected the risks inherent in the valuation of goodwill.
Our results
We found the resulting carrying amount of goodwill and the related
disclosures to be acceptable (2018: acceptable).
Key audit matter
Our response
Valuation of the defined benefit pension scheme obligation
Our procedures included:
•
•
•
Evaluation of actuary: We evaluated the competence,
independence and objectivity of the Group’s actuary in
assessing the Directors’ reliance upon their expert valuation
services.
Benchmarking assumptions: We critically assessed, using our
own actuarial specialists, the key assumptions applied, such as
the discount rate, inflation rate and mortality/life expectancy
against externally derived data and internal experience.
Assessing transparency: We assessed the adequacy of the
Group’s disclosures in respect of the sensitivity of the obligation
to the actuarial assumptions.
Our results
We found the valuation of the defined benefit scheme obligation
and the related disclosures to be acceptable (2018: acceptable).
Risk vs 2018:
(£147.3 million, 2018: £121.0 million)
Refer to the Audit Committee Report, accounting policy note and
note 41 (financial disclosures).
Subjective estimate
The audit risk associated with this key audit matter increased
during the year as a result of market volatility in the key
assumptions used in the calculations.
The Group operates a defined benefit pension scheme which has
been closed to new members for several years. At year-end, the
Group holds a net defined benefit pension scheme liability on the
statement of financial position, which includes gross
pension obligations.
Small changes in the assumptions and estimates used to value the
Group’s pension obligation (before deducting scheme assets) would
have a significant effect on the Group’s net defined
benefit obligation.
The effect of these matters is that, as part of our risk assessment,
we determined that the valuation of the defined benefit pension
scheme obligation has a high degree of estimation uncertainty,
with a potential range of reasonable outcomes greater than our
materiality for the financial statements as a whole. As a result we
have included this as a key audit matter. The financial statements
disclose the sensitivity estimated by the Group.
PAGE 152 • Independent Auditor’s Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Key audit matter
Our response
Recoverability of Parent company’s investment in subsidiaries
Our procedures included:
Risk vs 2018:
(£940.7 million; 2018: £984.4 million)
Refer to the accounting policy note and note 30
(financial disclosures).
Low risk, high value
The carrying amount of the Parent company’s investments in
subsidiaries represents 80.3% (2017: 70.9%) of the company’s
total assets.
Their recoverability is not at a high risk of significant misstatement
or subject to significant judgement. However, due to their
materiality in the context of the Parent company financial
statements, this is considered to be the area that had the greatest
effect on our overall Parent company audit.
•
Tests of detail: Comparing the carrying amount of 100% of
investments with the relevant subsidiaries’ draft balance sheets
to identify whether their net assets, being an approximation
of their minimum recoverable amount, were in excess of their
carrying amount and assessing whether those subsidiaries have
historically been profit-making.
Our results
We found the resulting carrying amount of the investments in
subsidiaries to be acceptable (2018: acceptable).
3. Our application of materiality and an overview of the scope of our audit
Materiality for the Group financial statements as a whole was set at £7.6 million (2018: £6.5 million), determined with reference to a benchmark
of Group profit before tax (of which it represents 4.8% (2018: 4.1%)).
Materiality for the Parent Company financial statements as a whole was set at £3.5 million (2018: £3.9 million), determined with reference to a
benchmark of net assets, of which it represents 0.6% (2018: 0.6%).
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £0.38 million, in addition to
other identified misstatements that warranted reporting on qualitative grounds.
The Group team performed the audit of the Group as if it was a single aggregated set of financial information. The audit was performed using
the materiality levels set out above.
4. We have nothing to report on going concern
The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group
or to cease their operations, and as they have concluded that the Company’s and the Group’s financial position means that this is realistic. They
have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going
concern for at least a year from the date of approval of the financial statements (‘the going concern period’).
Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty related to going
concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events
may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a
material uncertainty in this auditor's report is not a guarantee that the Group and the Company will continue in operation.
In our evaluation of the Directors’ conclusions, we considered the inherent risks to the Group’s and Company’s business model and analysed
how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over the going concern period. The
risks that we considered most likely to adversely affect the Group’s and Company’s available financial resources over this period were:
•
•
availability of funding and liquidity in the event of a market wide stress scenario including the impact of Brexit, and
impact on regulatory capital requirements in the event of an economic slowdown or recession.
As these were risks that could potentially cast significant doubt on the Group’s and the Company’s ability to continue as a going concern, we
considered sensitivities over the level of available financial resources indicated by the Group’s financial forecasts taking account of reasonably
possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively and evaluated the achievability of the
actions the Directors consider they would take to improve the position should the risks materialise.
Based on this work, we are required to report to you if:
•
we have anything material to add or draw attention to in relation to the directors’ statement in note 63(c) to the financial statements on the
use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s
use of that basis for a period of at least twelve months from the date of approval of the financial statements; or
•
the related statement under the Listing Rules is materially inconsistent with our audit knowledge.
We have nothing to report in these respects, and we did not identify going concern as a key audit matter.
PAGE 153 • Independent Auditor’s Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 5. We have nothing to report on the other information in the Annual Report
The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on
the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated
below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we
have not identified material misstatements in the other information.
Strategic Report and Directors’ Report
Based solely on our work on the other information:
• we have not identified material misstatements in the strategic report and the directors’ report;
•
•
in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
in our opinion those reports have been prepared in accordance with the Companies Act 2006.
Directors’ Remuneration Report
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:
•
•
•
the directors’ confirmation within ‘Future prospects’ section, that they have carried out a robust assessment of the principal risks facing the
Group, including those that would threaten its business model, future performance, solvency and liquidity;
the Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated; and
the directors’ explanation in the Viability Statement of how they have assessed the prospects of the Group, over what period they have done
so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the
Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.
Under the Listing Rules we are required to review the Viability Statement. We have nothing to report in this respect.
Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we
cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgments that
were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group’s and
Company’s longer-term viability.
Corporate governance disclosures
We are required to report to you if:
•
•
we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’
statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or
the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us
to the Audit Committee
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of
the UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
PAGE 154 • Independent Auditor’s Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 6.
We have nothing to report on the other matters on which we are required to report
by exception
Under the Companies Act 2006, we are required to report to you if, in our opinion:
•
•
adequate accounting records have not been kept by the Parent Company, or returns 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.
We have nothing to report in these respects.
7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out in section B9, the directors are responsible for: the preparation of the financial statements
including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and Parent Company’s ability
to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting
unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high
level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our
general commercial and sector experience, through discussion with the Directors and other management (as required by auditing standards),
and from inspection of the Group’s regulatory correspondence and discussed with the Directors and other management the policies and
procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and
remained alert to any indications of non-compliance throughout the audit.
The potential effect of these laws and regulations on the financial statements varies considerably.
Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including
related companies legislation, distributable profits legislation and taxation legislation) and we assessed the extent of compliance with these
laws and regulations as part of our procedures on the related financial statement items.
Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on
amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation or the loss of the Group’s license
to operate. We identified the following areas as those most likely to have such an effect: regulatory capital and liquidity and certain aspects
of company legislation recognising the financial and regulated nature of the Group’s activities and its legal form. Auditing standards limit the
required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and
inspection of regulatory and legal correspondence, if any.
Through these procedures, we became aware of actual or suspected non-compliance and considered the effect as part of our procedures on
the related financial statement items. The identified actual or suspected non-compliance was not sufficiently significant to our audit to result in
our response being identified as a key audit matter.
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the
financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example,
the further removed non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial
statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there
remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or
the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with
all laws and regulations.
PAGE 155 • Independent Auditor’s Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 8. The purpose of our audit work and to whom we owe our responsibilities
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 auditor’s
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.
Simon Clark (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
One Snowhill
Snow Hill Queensway
Birmingham
B4 6GH
26 November 2019
PAGE 156 • Independent Auditor’s Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts PAGE 157 • Independent Auditor’s Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts D.
THE
ACCOUNTS
Showing the financial position, results and cash flows of the Group and the
Company prepared in accordance with IFRS and UK law
D1
Primary Financial Statements
D1.1 Consolidated Income Statement
D1.2 Consolidated Statement of Comprehensive Income
D1.3 Consolidated Balance Sheet
D1.4 Company Balance Sheet
D1.5 Consolidated Cash Flow Statement
D1.6 Company Cash Flow Statement
D1.7 Consolidated Statement of Movements in Equity
D1.8 Company Statement of Movements in Equity
D2
Notes to the Accounts
D2.1 Notes To The Accounts - Analysis
D2.2 Notes To The Accounts - Capital and financial risk
D2.3 Notes To The Accounts - Basis of preparation
Page 160
Page 160
Page 161
Page 162
Page 163
Page 164
Page 164
Page 165
Page 166
Page 167
Page 167
Page 233
Page 255
D1
Primary Financial Statements
D1.1
Consolidated Income Statement
For the year ended 30 September 2019
Note
2019
2019
IFRS 9
IFRS 9
Interest receivable
Interest payable and similar charges
Net interest income
Other leasing income
Related costs
Net leasing income
Gain on derecognition of financial assets
Other income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Operating profit before fair value items
Fair value net gains / (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
4
5
6
6
7
8
9
23
14
15
Note
17
17
£m
18.3
(14.5)
3.8
9.7
15.4
£m
505.7
(227.3)
278.4
28.9
307.3
(125.2)
(8.0)
174.1
(15.1)
159.0
(31.6)
127.4
2019
49.4p
48.2p
The results for the current and preceding years relate entirely to continuing operations.
2018
IAS 39
£m
16.3
(12.5)
3.8
28.0
15.5
2018
IAS 39
£m
451.9
(197.3)
254.6
47.3
301.9
(114.2)
(7.4)
180.3
1.2
181.5
(35.7)
145.8
2018
55.9p
54.2p
PAGE 160 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts D1.2 Consolidated Statement of Comprehensive Income
For the year ended 30 September 2019
Profit for the year
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial (loss) / gain on pension scheme
Tax thereon
Items that may be reclassified subsequently to profit or loss
Cash flow hedge gains taken to equity
Tax thereon
Reclassification on derecognition
Tax thereon
Other comprehensive income for the year net of tax
Total comprehensive income for the year
Note
2019
2019
IFRS 9
IFRS 9
£m
£m
127.4
2018
IAS 39
£m
2018
IAS 39
£m
145.8
41
24
7
(16.5)
2.4
0.5
(0.1)
(0.9)
0.2
8.9
(1.7)
(14.1)
7.2
1.0
(0.2)
-
-
(0.3)
(14.4)
113.0
0.8
8.0
153.8
PAGE 161 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts D1.3 Consolidated Balance Sheet
For the year ended 30 September 2019
Note
Assets
Cash – central banks
Cash – retail banks
Short term investments
Loans to customers
Derivative financial assets
Sundry assets
Deferred tax assets
Property, plant and equipment
Intangible assets
Total assets
Liabilities
Short term bank borrowings
Retail deposits
Derivative financial liabilities
Asset backed loan notes
Secured bank borrowings
Retail bond issuance
Corporate bond issuance
Central bank facilities
Sundry liabilities
Current tax liabilities
Deferred tax liabilities
Retirement benefit obligations
Total liabilities
Called up share capital
Reserves
Own shares
Total equity
18
18
19
20
24
25
26
27
28
31
24
32
33
34
35
36
37
40
26
41
42
43
44
2019
IFRS 9
£m
816.4
409.0
-
2018
IFRS 9
£m
895.9
414.7
-
2018
IAS 39
£m
895.9
414.7
-
12,250.3
12,076.5
12,103.7
592.4
92.8
6.2
57.3
171.1
855.7
19.0
-
56.8
169.3
855.7
19.0
-
56.8
169.3
2017
IAS 39
£m
615.0
881.9
-
11,115.4
906.6
12.7
-
46.2
104.4
14,395.5
14,487.9
14,515.1
13,682.2
1.0
6,395.8
80.5
4,419.4
787.5
296.5
149.6
994.4
112.7
15.2
-
34.5
1.1
5,292.4
4.7
5,554.7
935.6
296.1
149.3
1,024.4
114.4
21.4
0.8
19.5
1.1
5,292.4
4.7
5,554.7
935.6
296.1
149.3
1,024.4
114.4
21.4
5.6
19.5
0.6
3,611.9
7.1
6,475.8
1,306.0
295.7
149.1
700.0
74.6
17.4
4.8
29.8
13,287.1
13,414.4
13,419.2
12,672.8
261.6
887.3
(40.5)
281.6
895.9
(104.0)
1,108.4
1,073.5
281.6
918.3
(104.0)
1,095.9
281.5
811.0
(83.1)
1,009.4
Total liabilities and equity
14,395.5
14,487.9
14,515.1
13,682.2
Approved by the Board of Directors on 26 November 2019.
Signed of behalf of the Board of Directors
N S Terrington
Chief Executive
R J Woodman
Chief Financial Officer
PAGE 162 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
D1.4 Company Balance Sheet
For the year ended 30 September 2019
Assets
Cash – retail banks
Sundry assets
Current tax assets
Property, plant and equipment
Investment in subsidiary undertakings
Total assets
Liabilities
Retail bond issuance
Corporate bond issuance
Sundry liabilities
Deferred tax liabilities
Total liabilities
Called up share capital
Reserves
Own shares
Total equity
Approved by the Board of Directors on 26 November 2019.
Signed of behalf of the Board of Directors
N S Terrington
Chief Executive
R J Woodman
Chief Financial Officer
Note
18
25
40
27
30
34
35
37
26
42
43
44
2019
IFRS 9
£m
14.1
107.3
2.8
-
940.7
1,064.9
296.5
149.6
27.4
1.6
475.1
261.6
351.2
(23.0)
589.8
2018
IAS 39
£m
24.9
217.0
-
-
984.4
1,226.3
296.1
149.3
128.5
1.8
575.7
281.6
460.8
(91.8)
650.6
2017
IAS 39
£m
277.6
40.1
-
18.6
819.1
1,155.4
295.7
149.1
39.4
1.8
486.0
281.5
454.5
(66.6)
669.4
1,064.9
1,226.3
1,155.4
PAGE 163 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
D1.5 Consolidated Cash Flow Statement
For the year ended 30 September 2019
Net cash generated by operating activities
Net cash generated / (utilised) by investing activities
Net cash (utilised) by financing activities
Net (decrease) in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
Represented by balances within:
Cash
Short-term bank borrowings
D1.6 Company Cash Flow Statement
For the year ended 30 September 2019
Net cash generated / (utilised) by operating activities
Net cash (utilised) by investing activities
Net cash (utilised) by financing activities
Net (decrease) in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
Represented by balances within:
Cash
Short-term bank borrowings
Note
46
47
48
18
Note
46
47
48
18
2019
£m
397.9
8.3
(491.3)
(85.1)
1,309.5
1,224.4
1,225.4
(1.0)
1,224.4
2019
£m
170.9
(105.1)
(76.6)
(10.8)
24.9
14.1
14.1
-
14.1
2018
£m
1,074.4
(282.8)
(978.4)
(186.8)
1,496.3
1,309.5
1,310.6
(1.1)
1,309.5
2018
£m
(30.5)
(154.3)
(67.9)
(252.7)
277.6
24.9
24.9
-
24.9
PAGE 164 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
D1.7 Consolidated Statement of Movements in Equity
For the year ended 30 September 2019 (IFRS 9)
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
Cash flow
hedging
reserve
Profit
and loss
account
Own
shares
Total
equity
£m
£m
£m
£m
£m
£m
£m
£m
-
-
-
-
(21.6)
-
1.6
-
-
-
-
-
-
-
-
2.5
-
-
-
-
-
-
21.6
-
-
-
-
(20.0)
2.5
21.6
-
-
-
-
-
-
-
-
-
-
-
(0.3)
(0.3)
-
-
-
-
-
-
127.4
(14.1)
113.3
(54.0)
(95.5)
-
(2.5)
5.9
0.4
-
-
-
-
95.5
(34.3)
2.3
-
-
127.4
(14.4)
113.0
(54.0)
-
(34.3)
3.9
5.9
0.4
(0.3)
(32.4)
63.5
34.9
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 45)
Shares cancelled
Own shares purchased
Exercise of share awards
Charge for share based
remuneration (note 10)
Tax on share based
remuneration
Net movement in equity in
the year
Opening equity
As previously reported
281.6
65.8
28.7
(70.2)
3.3
890.7
(104.0)
1,095.9
Change of accounting
policy (note 62)
As restated
Closing equity
-
281.6
261.6
-
65.8
68.3
-
28.7
50.3
-
(70.2)
(70.2)
-
3.3
3.0
(22.4)
-
(22.4)
868.3
835.9
(104.0)
1,073.5
(40.5)
1,108.4
For the year ended 30 September 2018 (IAS 39)
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
Cash flow
hedging
reserve
Profit
and loss
account
Own
shares
Total
equity
£m
£m
£m
£m
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 45)
Shares cancelled
Own shares purchased
-
-
-
-
-
-
-
-
-
-
-
-
Exercise of share awards
0.1
0.3
Charge for share based
remuneration (note 10)
Tax on share based
remuneration
Net movement in equity in
the year
Opening equity
Closing equity
-
-
0.1
281.5
281.6
-
-
0.3
65.5
65.8
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
28.7
28.7
(70.2)
(70.2)
£m
-
0.8
0.8
-
-
-
-
-
-
0.8
2.5
3.3
£m
£m
£m
145.8
7.2
153.0
(43.1)
-
-
(10.9)
6.1
1.1
-
-
-
-
-
(31.4)
10.5
-
-
145.8
8.0
153.8
(43.1)
-
(31.4)
-
6.1
1.1
106.2
(20.9)
86.5
784.5
890.7
(83.1)
1,009.4
(104.0)
1,095.9
PAGE 165 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts D1.8 Company Statement of Movements in Equity
For the year ended 30 September 2019 (IFRS 9)
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
£m
£m
£m
£m
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 45)
Shares cancelled
Own shares purchased
Exercise of share awards
Charge for share based
remuneration (note 10)
Net movement in equity in
the year
Opening equity
Closing equity
-
-
-
-
(21.6)
-
1.6
-
(20.0)
281.6
261.6
-
-
-
-
-
-
2.5
-
2.5
65.8
68.3
-
-
-
-
21.6
-
-
-
21.6
28.7
50.3
-
-
-
-
-
-
-
-
-
(23.7)
(23.7)
For the year ended 30 September 2018 (IAS 39)
Profit
and loss
account
Own
shares
Total
equity
£m
9.9
-
9.9
(54.0)
(95.5)
-
-
5.9
£m
-
-
-
-
95.5
(26.7)
-
-
£m
9.9
-
9.9
(54.0)
-
(26.7)
4.1
5.9
(133.7)
68.8
(60.8)
390.0
256.3
(91.8)
(23.0)
650.6
589.8
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
Profit
and loss
account
Own
shares
Total
equity
£m
£m
£m
£m
£m
£m
£m
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 45)
Shares cancelled
Own shares purchased
Exercise of share awards
Charge for share based
remuneration (note 10)
Net movement in equity in
the year
Opening equity
Closing equity
-
-
-
-
-
-
0.1
-
0.1
281.5
281.6
-
-
-
-
-
-
0.3
-
0.3
65.5
65.8
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
43.0
-
43.0
(43.1)
-
-
-
6.1
6.0
-
-
-
-
-
43.0
-
43.0
(43.1)
-
(25.2)
(25.2)
-
-
0.4
6.1
(25.2)
(18.8)
28.7
28.7
(23.7)
(23.7)
384.0
390.0
(66.6)
(91.8)
669.4
650.6
PAGE 166 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts D2
Notes to the accounts
For the year ended 30 September 2019
1.
GENERAL INFORMATION
Paragon Banking Group 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 51 Homer Road, Solihull, West Midlands, B91 3QJ. The nature of
the Group’s operations and its principal activities are set out in the Strategic Report in Section A2.
These financial statements are presented in pounds sterling, which is the currency of the economic environment in which the Group operates.
The remaining notes to the accounts are organised in to three sections:
• Analysis – providing further analysis and information on the amounts shown in the primary financial statements
•
•
Capital and Financial Risk Management – providing information on the Group’s management of operational and regulatory capital and its
principal financial risks
Basis of preparation – providing details of the Group’s accounting policies and of how they have been applied in the preparation of the
financial statements
D2.1 NOTES TO THE ACCOUNTS – ANALYSIS
For the year ended 30 September 2019
The notes set out below give more detailed analysis of the balances shown in the primary financial statements and further
information on how they relate to the operations, results and financial position of the Group and the Company.
2.
SEGMENTAL INFORMATION
The Group analyses its operations, both for internal management reporting and external financial reporting, on the basis of the markets from
which its assets are generated. The segments used are described below:
• Mortgages, including the Group’s buy-to-let, and owner-occupied first and second charge lending and related activities
•
Commercial Lending, including the Group’s equipment leasing activities, development finance, structured lending and other offerings
targeted towards SME customers, together with its motor finance business
•
Idem Capital, including loan assets acquired from third parties and legacy assets which share certain credit characteristics with them
Dedicated financing and administration costs of each of these businesses are allocated to the segment. Shared central costs are not allocated
between segments, nor is income from central cash balances or the carrying costs of unallocated savings balances.
Gains on derecognition of financial assets have not been allocated to segment results, nor have the costs arising in the year ended
30 September 2018 from the Iceberg and Titlestone acquisitions of £2.2m as those are not directly related to customer facing activity.
Loans to customers and operating lease assets are allocated to segments as are dedicated securitisation funding arrangements and their
related cross-currency basis swaps and cash balances.
Retail deposits and their related costs are allocated to the segments based on the utilisation of those deposits. Retail deposits raised in advance
of lending are not allocated.
Other assets and liabilities are not allocated between segments.
All of the Group’s operations are conducted in the UK, 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.
PAGE 167 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Financial information about these business segments, prepared on the same basis as used in the consolidated accounts of the Group, is
shown below.
Year ended 30 September 2019 (IFRS 9)
Interest receivable
Interest payable
Net interest income
Other operating income
Total operating income
Direct costs
Provisions for losses
Mortgages
Commercial
Lending
Idem
Capital
Unallocated
items
Total
Segments
£m
342.1
(164.3)
177.8
6.8
184.6
(15.7)
(1.0)
167.9
£m
95.7
(30.7)
65.0
11.0
76.0
(25.0)
(7.2)
43.8
£m
61.3
(7.0)
54.3
1.4
55.7
(7.9)
0.2
48.0
£m
6.6
(25.3)
(18.7)
9.7
(9.0)
(76.6)
-
(85.6)
£m
505.7
(227.3)
278.4
28.9
307.3
(125.2)
(8.0)
174.1
Year ended 30 September 2018 (IAS 39)
Mortgages
Commercial
Lending
Idem
Capital
Unallocated
items
Total
Segments
£m
4.8
(27.8)
(23.0)
28.1
5.1
(67.7)
-
(62.6)
2019
£m
174.1
(15.1)
159.0
£m
451.9
(197.3)
254.6
47.3
301.9
(114.2)
(7.4)
180.3
2018
£m
180.3
1.2
181.5
Interest receivable
Interest payable
Net interest income
Other operating income
Total operating income
Direct costs
Provisions for losses
£m
299.1
(141.5)
157.6
7.6
165.2
(14.9)
(5.5)
144.8
£m
50.1
(17.9)
32.2
10.9
43.1
(21.2)
(2.0)
19.9
£m
97.9
(10.1)
87.8
0.7
88.5
(10.4)
0.1
78.2
The segmental profits disclosed above reconcile to the group results as shown below.
Results shown above
Fair value items
Operating profit
PAGE 168 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The assets and liabilities attributable to each of the segments at 30 September 2019, 1 October 2018 and 30 September 2018 on the basis
described above were:
30 September 2019 (IFRS 9)
Segment assets
Loans to customers
Operating lease assets
Cross-currency basis swaps
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
1 October 2018 (IFRS 9)
Segment assets
Loans to customers
Operating lease assets
Cross-currency basis swaps
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
30 September 2018 (IAS 39)
Segment assets
Loans to customers
Operating lease assets
Cross-currency basis swaps
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
Note
Mortgages
Commercial
Lending
£m
£m
Idem
Capital
£m
Total
Segments
£m
20
27
24
18
10,344.1
-
582.7
353.1
1,452.1
36.3
-
-
389.9
12,186.1
-
-
-
36.3
582.7
353.1
11,279.9
1,488.4
389.9
13,158.2
5,367.2
5,206.9
10,574.1
1,822.5
-
1,822.5
Note
Mortgages
Commercial
Lending
£m
£m
20
27
24
18
10,449.5
-
829.7
319.0
1,131.3
35.4
-
-
11,598.2
1,166.7
4,702.4
6,457.2
11,159.6
1,443.5
-
1,443.5
303.1
-
303.1
Idem
Capital
£m
7,492.8
5,206.9
12,699.7
Total
Segments
£m
519.8
12,100.6
-
-
19.8
539.6
411.0
33.1
444.1
35.4
829.7
338.8
13,304.5
6,556.9
6,490.3
13,047.2
Note
Mortgages
Commercial
Lending
£m
£m
Idem
Capital
£m
Total
Segments
£m
20
27
24
18
10,473.5
-
829.7
319.0
1,133.2
35.4
-
-
11,622.2
1,168.6
4,702.4
6,457.2
11,159.6
1,443.5
-
1,443.5
521.1
12,127.8
-
-
19.8
540.9
411.0
33.1
444.1
35.4
829.7
338.8
13,331.7
6,556.9
6,490.3
13,047.2
An analysis of the Group’s financial assets by type and segment is shown in note 20. All of the assets shown above were located in the UK.
The additions to non-current assets, excluding financial assets, in the year which are included in segmental assets above are investments of
£11.6m (2018: £19.3m) in assets held for leasing under operating leases, included in the Commercial Lending segment. No other fixed asset
additions were allocated to segments.
PAGE 169 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The segmental assets and liabilities may be reconciled to the consolidated balance sheet as shown below.
2019
IFRS 9
£m
2018
IFRS 9
£m
2018
IAS 39
£m
13,158.2
13,304.5
13,331.7
872.3
9.7
21.0
171.1
163.2
971.8
26.0
21.4
169.3
(5.1)
971.8
26.0
21.4
169.3
(5.1)
14,395.5
14,487.9
14,515.1
2019
IFRS 9
£m
2018
IFRS 9
£m
2018
IAS 39
£m
12,699.7
13,047.2
13,047.2
(1,100.9)
80.5
1,441.5
15.2
34.5
116.6
(1,260.3)
4.7
1,470.9
22.2
19.5
110.2
(1,260.3)
4.7
1,470.9
27.0
19.5
110.2
13,287.1
13,414.4
13,419.2
Note
4
6
7
8
2019
IFRS 9
£m
505.7
18.3
9.7
15.4
549.1
348.9
121.2
62.7
532.8
16.3
549.1
2018
IAS 39
£m
451.9
16.3
28.0
15.5
511.7
306.7
73.5
98.6
478.8
32.9
511.7
Total segment assets
Unallocated assets
Central cash and investments
Unallocated derivatives
Operational property, plant and equipment
Intangible assets
Other
Total assets
Total segment liabilities
Unallocated liabilities
Unallocated retail deposits
Derivative financial instruments
Central bank borrowings
Tax liabilities
Retirement benefit obligations
Other
Total liabilities
3.
REVENUE
Interest receivable
Operating lease income
Gain on disposal of financial assets
Other income
Total revenue
Arising from:
Mortgages
Commercial Lending
Idem Capital
Total revenue from segments
Unallocated revenue
Total revenue
PAGE 170 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
4.
INTEREST RECEIVABLE
Interest receivable in respect of
Loan accounts
Finance leases
Factoring income
Interest on loans to customers
Other interest receivable
Total interest on financial assets
The above interest arises from:
Financial assets held at amortised cost
Finance leases
2019
IFRS 9
£m
449.3
44.5
3.1
496.9
8.8
505.7
2019
IFRS 9
£m
461.2
44.5
505.7
2018
IAS 39
£m
408.9
34.4
2.2
445.5
6.4
451.9
2018
IAS 39
£m
417.5
34.4
451.9
In 2018, under the requirements of IAS 39, interest receivable on loans to customers included £2.3m charged on accounts where an impairment
provision had been made.
5.
INTEREST PAYABLE AND SIMILAR CHARGES
On retail deposits
On asset backed loan notes
On bank loans and overdrafts
On corporate bonds
On retail bonds
On central bank facilities
Total interest on financial liabilities
On pension scheme deficit
Discounting on contingent consideration
Other finance costs
Note
41
38
2019
£m
114.2
63.4
9.6
10.9
18.6
8.0
224.7
0.5
0.5
1.6
227.3
2018
£m
83.1
60.3
16.5
10.9
18.6
5.2
194.6
0.8
0.5
1.4
197.3
All interest payable on financial liabilities relates to financial liabilities held at amortised cost.
PAGE 171 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
6.
NET OPERATING LEASE INCOME
Income
Operating lease rentals
Maintenance income
Total operating lease income
Costs
Depreciation of lease assets
Maintenance salaries
Other maintenance costs
Total operating lease costs
Net operating lease income
Note
27
10
2019
£m
14.0
4.3
18.3
(7.6)
(1.9)
(5.0)
(14.5)
3.8
2018
£m
11.4
4.9
16.3
(5.9)
(1.5)
(5.1)
(12.5)
3.8
7.
GAIN ON DISPOSAL OF FINANCIAL ASSETS
During the year, on 26 June 2019, the Group disposed of its residual interest in the Paragon Mortgages (No. 12) PLC securitisation transaction
for a cash payment, in order to optimise capital usage. This participation, which exposed the Group to materially all of the credit risk in the
securitised assets and entitled it to any net yield from these assets, was determined to give the Group control of the entity, as defined by IFRS
10. On disposal of the participation, this control ceased and hence the assets and the related external funding were derecognised.
The assets and liabilities derecognised in this transaction are set out below.
Cash
Loans to customers
Derivative financial assets
Other financial assets
Asset backed loan notes
Tax liabilities
Other financial liabilities
Net assets derecognised
Cash consideration received
Net assets derecognised
Transaction costs
Net gain on derecognition
£m
37.7
695.8
93.6
-
827.1
784.1
1.9
1.7
787.7
39.4
49.8
(39.4)
(0.7)
9.7
The cash flow hedge relationship, including the derivatives and asset backed loan notes ceased on their derecognition and consequently an
amount of £0.9m, less related tax of £0.2m, was recycled to profit and loss, and is included in other comprehensive income.
During the year ended 30 September 2018, the Group realised a gain of £28.0m on the disposal of second charge mortgages and unsecured
consumer loans held in its Idem Capital division. The loans were originally acquired from various third parties as part of a number of portfolio
purchases over time.
PAGE 172 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
8.
OTHER INCOME
Loan account fee income
Broker commissions
Third party servicing
Other income
All loan account fee income arises from financial assets held at amortised cost.
9.
OPERATING EXPENSES
Employment costs
Auditor remuneration
Amortisation of intangible assets
Depreciation of operational assets
Operating lease rentals payable
Other administrative costs
10.
EMPLOYEES
2019
£m
7.2
2.2
5.0
1.0
15.4
2019
£m
79.3
1.8
2.4
1.5
2.9
37.3
125.2
2018
£m
9.0
2.1
3.4
1.0
15.5
2018
£m
73.3
1.6
2.1
1.9
2.2
33.1
114.2
Note
10
13
28
27
51
The average number of persons (including directors) employed by the Group during the year was 1,365 (2018: 1,349). The number of employees
at the end of the year was 1,368 (2018: 1,367).
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 employment costs
Of which
Included in operating expenses (note 9)
Included in maintenance costs (note 6)
2018
£m
6.1
57.2
1.2
6.6
1.8
1.9
2019
£m
5.9
62.6
1.0
7.7
1.9
2.1
2019
£m
68.5
8.7
4.0
81.2
79.3
1.9
81.2
2018
£m
63.3
7.8
3.7
74.8
73.3
1.5
74.8
Details of the pension schemes operated by the Group are given in note 41. The Company has no employees. Details of the directors’
remuneration are given in note 11.
PAGE 173 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
11.
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
Annual Report on Remuneration in Section B6.2.2.
Salaries and fees
Cash amount of bonus
Social security costs
Short-term employee benefits
Post-employment benefits
IFRS 2 cost in respect of directors
National Insurance thereon
Share based payment
2019
£m
1.8
1.5
0.5
2.1
0.4
2019
£m
3.8
0.5
2.5
6.8
2018
£m
1.9
1.5
0.5
2.2
0.5
2018
£m
3.9
0.5
2.7
7.1
Post-employment benefits shown above are shown as ‘pension allowance’ in Section B6.2.2. Costs in respect of share awards shown in the
Annual Report on Remuneration are determined on a different basis to the IFRS 2 charge shown above.
Social security costs paid in respect of directors are required to be included in this note by IAS 24, but do not fall within the scope of the
disclosures in the Directors’ Remuneration Report.
12.
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 10.
Further details of share based payment arrangements are given in the Annual Report on Remuneration in Section B6.2.2.
A summary of the number of share awards outstanding under each scheme at 30 September 2019 and at 30 September 2018 is set out below.
Number
2019
2,558,569
4,762,886
730,816
774,046
134,827
Number
2018
3,265,788
4,297,809
549,061
496,762
82,787
8,961,144
8,692,207
(a) Sharesave Plan
(b) Performance Share Plan
(c) Company Share Option Plan
(d) Deferred Bonus Plan
(e) Restricted Stock Units
PAGE 174 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (a)
Sharesave plan
The Group operates an All Employee Share Option (‘Sharesave’) plan. Grants under this scheme vest, in the normal course, 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 Sharesave options over £1 ordinary shares during the year
ended 30 September 2019 and the year ended 30 September 2018 is shown below.
Options outstanding
At 1 October 2018
Granted in the year
Exercised or surrendered in the year
Lapsed during the year
At 30 September 2019
2019
Number
2019
Weighted
average
exercise price
2018
Number
2018
Weighted
average
exercise price
p
281.60
360.16
253.65
361.53
338.06
p
275.56
408.80
335.74
307.04
281.60
3,113,587
464,112
(107,235)
(204,676)
3,265,788
3,265,788
1,147,016
(1,606,849)
(247,386)
2,558,569
Options exercisable
119,846
249.44
21,966
345.68
The weighted average remaining contractual life of options outstanding at 30 September 2019 was 26.1 months (2018: 19.7 months). The
weighted average market price at exercise for share options exercised in the year was 400.88p (2018: 492.50p).
Options are outstanding under the Sharesave plans to purchase ordinary shares as follows:
Grant date
23/12/2013
11/06/2015
11/06/2015
20/06/2016
20/06/2016
28/07/2017
28/07/2017
31/07/2018
31/07/2018
30/07/2019
30/07/2019
Period exercisable
Exercise price
01/02/2019 to 01/08/2019
01/08/2018 to 01/02/2019
01/08/2020 to 01/02/2021
01/08/2019 to 01/02/2020
01/08/2021 to 01/02/2022
01/09/2020 to 01/03/2021
01/09/2022 to 01/03/2023
01/09/2021 to 01/03/2022
01/09/2023 to 01/03/2024
01/09/2022 to 01/03/2023
01/09/2024 to 01/03/2025
276.32p
345.68p
345.68p
249.44p
249.44p
341.76p
341.76p
408.80p
408.80p
360.16p
360.16p
Number
2019
-
-
9,977
119,846
439,425
493,841
44,667
278,873
38,581
1,049,338
84,021
Number
2018
147,415
21,966
10,063
1,593,061
445,077
541,521
52,653
391,019
63,013
-
-
2,558,569
3,265,788
An option holder has the legal right to a payment holiday of up to twelve months without forfeiting their rights. In such cases the exercise period
would be deferred for an equivalent period of time and therefore options might be exercised later than the date shown above.
In the event of the death or redundancy of the employee options may be exercised early and the exercise period may also start or end later than
stated above (options may be exercised up to twelve months after the decease of the holder).
PAGE 175 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The fair value of options granted is determined using a trinomial model. Details of the awards over £1 ordinary shares made in the year ended
30 September 2019 and the year ended 30 September 2018, are shown below.
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
30/07/19
1,058,831
422.0p
3.5
0.51
30/07/19
88,185
422.0p
5.5
0.53
31/07/18
401,099
498.0p
3.5
1.00
31/07/18
63,013
498.0p
5.5
0.91
22.58%
26.44%
28.39%
26.47%
3.48
0.36%
4.95%
5.00%
5.47
0.40%
4.95%
5.00%
3.45
1.23%
3.31%
5.00%
5.44
1.39%
3.31%
5.00%
The expected volatility of the share price used in determining the fair value for the three-year schemes is based on the annualised standard
deviation of daily changes in price over the three years preceding the grant date. The five-year schemes use share price data for the preceding
five years.
(b) Paragon Performance Share Plan (‘PSP’)
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.
Awards are exercisable from the date on which the Remuneration Committee determines the extent to which the performance conditions have
been satisfied to the day before the tenth anniversary of the grant date. Clawback provisions apply to awards granted under the PSP as detailed
in the remuneration policy.
The conditional entitlements outstanding under this scheme at 30 September 2019 and 30 September 2018 were:
Grant date
21/05/2009
04/01/2010
17/12/2010
21/12/2011
28/02/2013
10/12/2013
18/12/2014
22/12/2015
01/12/2016
08/12/2017
14/12/2018
Period exercisable
21/05/2012 to 20/05/2019 †
04/01/2013 to 03/01/2020 †
17/12/2013 to 16/12/2020 †
21/12/2014 to 20/12/2021 †
28/02/2016 to 27/02/2023 †
10/12/2016 to 09/12/2023 †
18/12/2017 to 17/12/2024 †
22/12/2018 to 21/12/2025 ‡
01/12/2019 to 30/11/2026 §
08/12/2020 to 07/12/2027 §
14/12/2018 to 13/12/2028 ◊
Number
2019
-
18,702
12,424
15,335
6,981
76,614
233,550
411,800
1,339,409
1,161,803
1,486,268
Number
2018
15,000
33,664
12,424
15,335
8,824
77,717
243,297
1,384,246
1,342,051
1,165,251
-
4,762,866
4,297,809
†
These awards, which were conditional on the achievement of performance based criteria, have now vested.
‡
§
50% of these awards were subject to a TSR test and 50% were subject to an EPS test. The TSR test compared the rank of the Company’s TSR against a comparator group of companies
comprising the constituents of the FTSE-250. 25% of the TSR-tested awards vest for median performance, increasing on a straight line basis to full vesting for upper quartile performance.
The EPS test provided that 25% of EPS tested awards would vest where EPS growth was equal to the increase in the retail price index plus 3%, increasing on a straight line basis to full
vesting for EPS growth equal to the increase in the retail price index plus 13% or more. For both tests the testing period was the three financial years commencing with the year of grant.
50% of these awards are subject to a TSR test and 25% are subject to an EPS test as described at ‡ above, except that the comparator group for the TSR test is limited to a group of listed
UK financial service entities rather than the entire FTSE-250. This group is determined at the point of each grant. In the EPS test, full vesting of the awards takes place if EPS growth is equal
to the increase in the retail price index plus 7% or more.
The remaining 25% of these awards are subject to a risk performance condition which takes in to account factors deemed appropriate by the Remuneration Committee, who will ultimately
decide the extent to which the risk condition has been satisfied.
Once the outcomes of these tests have been determined, the gross number of awards vesting will be reduced so that the gain to the recipient from the PSP and the CSOP described below
is equal to the gain from the gross PSP vesting.
◊
50% of these awards are subject to a TSR test, 25% to an EPS test and 25% to a risk based test, similar to those described as § above, except that EPS at the end of the test period is
compared to an absolute target, rather than RPI.
PAGE 176 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
On exercise, holders of awards granted in February 2013 and thereafter receive a payment equivalent to the dividends accruing on the vested
shares during the vesting period.
The fair value of awards granted under the PSP 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 2019 and the year ended
30 September 2018 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
14/12/18
1,493,230
401.00p
307.32p
08/12/17
1,177,290
483.20p
338.66p
28.86%
1.20%
28.25%
0.94%
For all of the above grants the contractual life and expected life at grant date is three years and no departures are expected. The expected
volatility is based on the annualised standard deviation of daily changes in price over the three years preceding the grant date.
The effect of the CSOPs is not allowed for in the IFRS 2 market values of the 2016, 2017 and 2018 grants.
(c) Company Share Option Plan (‘CSOP’)
The PSP includes a tax advantaged element under which CSOP options can be granted. The CSOPs may be exercised alongside their
accompanying PSPs based upon the exercise price that was set at the grant date. Each member of staff may be granted up to a maximum total
value of £30,000 of tax benefitted options.
A reconciliation of movements in the number and weighted average exercise price of CSOP options over £1 ordinary shares during the year
ended 30 September 2019 and the year ended 30 September 2018 is shown below.
Options outstanding
At 1 October 2018
Granted in the year
Exercised or surrendered in the year
Lapsed during the year
At 30 September 2019
2019
Number
2019
Weighted
average
exercise price
p
549,061
191,543
-
(9,788)
730,816
399.16
396.04
-
410.72
398.19
2018
Number
2018
Weighted
average exercise
price
p
361.88
477.76
-
378.59
399.16
390,746
179,722
-
(21,407)
549,061
Options exercisable
-
-
-
-
The conditional entitlements outstanding under this scheme at 30 September 2019 and 30 September 2018 were:
Grant date
01/12/2016
08/12/2017
14/12/2018
Period exercisable
Exercise price
01/12/2019 to 30/11/2026 ◊
08/12/2020 to 07/12/2027 ◊
14/12/2021 to 13/12/2028 ◊
361.88p
477.76p
396.04p
Number
2019
370,445
174,049
186,322
730,816
Number
2018
372,426
176,635
-
549,061
◊
66.7% of these awards are subject to a TSR test and 33.3% are subject to an EPS test. These tests operate in the same manner and with the same conditions as those for the PSP grant of
the same date.
To the extent that the CSOP awards vest, the vesting of the PSP award granted at the same time will be abated so that the overall gain to the
grantee is the same as would be received on the related PSP award had the CSOP not been in place.
PAGE 177 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts No separate fair value has been attributed to the CSOP options for IFRS 2 purposes as the IFRS 2 market values for the CSOP and PSP combined
will equate to that calculated for the PSP without allowing for the CSOP. The benefit from the CSOP is in relation to the employees’ tax position,
which does not affect the IFRS 2 charge.
(d) Deferred Bonus awards
Awards under these plans comprise a right to acquire ordinary shares in the Company for nil or nominal payment. The conditional entitlements
outstanding under these plans at 30 September 2019 and 30 September 2018 were:
Grant date
10/12/2013
18/12/2014
22/12/2015
01/12/2016
08/12/2017
14/12/2018
Period exercisable
10/12/2016 to 09/12/2023
18/12/2017 to 17/12/2024
22/12/2018 to 21/12/2025
01/12/2019 to 30/11/2026
08/12/2020 to 07/12/2027
14/12/2021 to 13/12/2028
Number
2019
55,302
79,853
96,559
105,318
102,516
334,498
774,046
Number
2018
55,302
99,102
134,524
105,318
102,516
-
496,762
The Deferred Bonus shares can be exercised from the third anniversary of the award date until the day before the tenth anniversary of the date
of grant.
The Deferred Bonus shares granted in December 2016 and thereafter accrue dividends only over the vesting period, unlike earlier grants
which accrued dividends until the point of exercise. 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 2019 and the year ended
30 September 2018 are shown below.
Grant date
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
14/12/18
334,498
401.00p
401.00p
08/12/17
102,516
483.20p
483.20p
(e) Restricted Stock Units (‘RSUs’)
Since 2016, the Company has permitted certain employees to elect to receive RSU awards instead of PSP awards. RSU awards have vesting
conditions based upon the grantee’s personal performance (including a risk element) rather than conditions in the wider business. These
conditions are determined to be met to the extent to which the Remuneration Committee deems that to be the case.
The conditional entitlements outstanding under this scheme at 30 September 2019 and 30 September 2018 were:
Grant date
01/12/2016
08/12/2017
14/12/2018
Period exercisable
01/12/2019 to 30/11/2026
08/12/2020 to 07/12/2027
14/12/2021 to 13/12/2028
Number
2019
60,115
22,672
52,040
134,827
Number
2018
60,115
22,672
-
82,787
The fair value of RSU 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 2019 and the year ended 30 September 2018 are shown below.
Grant date
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
PAGE 178 • The Accounts
14/12/18
52,040
401.00p
401.00p
08/12/17
22,672
483.20p
483.20p
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 13.
AUDITOR REMUNERATION
The analysis of fees payable to the Company’s auditors (KPMG LLP) and their associates, excluding irrecoverable VAT, required by the
Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 is set out below. This analysis includes
amounts charged to the profit and loss account or included within the issue costs of debt in respect of fees paid to the Group auditors and
their associates.
Audit fee of the company
Other services
Audit of subsidiary undertakings pursuant to legislation
Total audit fees
Audit related assurance services
Interim review
Other
Other assurance services
Total fees
Irrecoverable VAT
Total cost to the Group (note 9)
2019
£000
462
890
1,352
90
22
-
1,464
293
1,757
2018
£000
445
716
1,161
62
20
68
1,311
262
1,573
Fees paid to the auditors and their associates for non-audit services to the Company are not disclosed because the consolidated accounts of
the Group are required to disclose such fees on a consolidated basis.
14.
FAIR VALUE NET (LOSSES) / GAINS
Ineffectiveness of fair value hedges (note 24)
Portfolio hedges of interest rate risk
Deposit hedge
Loan hedge
Ineffectiveness of cash flow hedges
Other hedging movements
Net (losses) / gains on other derivatives
2019
£m
(0.2)
(6.3)
(6.5)
-
(5.8)
(2.8)
(15.1)
2018
£m
0.2
1.1
1.3
-
(0.5)
0.4
1.2
The fair value net (loss) / gain represents the accounting volatility on derivative instruments which are matching risk exposure on an economic
basis generated by the requirements of IAS 39. Some accounting volatility arises on these items due to accounting ineffectiveness on
designated hedges, or because hedge accounting has not been adopted or is not achievable on certain items. The losses and gains are primarily
due to timing differences in income recognition between the derivative instruments and the economically hedged assets and liabilities. Such
differences will reverse over time and have no impact on the cash flows of the Group.
PAGE 179 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
15.
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
2019
£m
36.3
(2.4)
33.9
(2.3)
31.6
2018
£m
38.0
(1.1)
36.9
(1.2)
35.7
The standard rate of corporation tax applicable to the Group for the year ended 30 September 2018 was 19.0%, the rate in the year ended
30 September 2019 was 19.0%, the rate in the year ending 30 September 2020 is expected to be 18.0% and the rate in subsequent years is
expected to be 17.0%, based on currently enacted legislation.
The Bank Corporation Tax Surcharge was introduced with effect from 1 January 2016. This subjects any taxable profits arising in the Group’s
banking subsidiary, Paragon Bank PLC (and no other Group entity), to an additional 8.0% of tax to the extent these profits exceed £25.0m. The
effect of the surcharge shown in note (c) below.
(b) Deferred tax credit for the year
The deferred tax credit 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 (credit) for the year
Prior period adjustment
Deferred tax (credit) (note 26)
2019
2018
£m
0.2
0.3
(2.1)
(0.2)
(1.9)
(3.7)
1.4
(2.3)
£m
(0.9)
0.3
(0.8)
-
(0.7)
(2.1)
0.9
(1.2)
The expected impact on deferred tax balances of the changes in the rate of Corporation Tax to 19.0% and 17.0% described above was initially
accounted when the changes in rate were substantively enacted.
PAGE 180 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (c)
Factors affecting tax charge for the year
Accounting standards require companies to explain the difference between the effective rate of tax in the accounts and the ‘applicable rate’,
generally the domestic rate of tax levied on corporate income in the jurisdiction in which the entity operates.
The Group operates wholly in the UK and all but a nominal amount of the Group’s income arises in UK resident companies. Consequently, it is
appropriate to use the prevailing UK corporation tax rate as the comparator to the effective tax rate. As noted in (b) above, the UK Corporation
tax rate applicable to the Group for the year was 19.0% (2018: 19.0%).
The impact of the Banking Surcharge is shown as a difference between tax at this rate and the actual tax charge in the table below.
Profit on ordinary activities before taxation
Profit on ordinary activities multiplied by the UK standard rate of corporation tax
Effects of:
Permanent differences
- Disallowable acquisition costs
- Income from structured entities
- Recurring disallowable expenditure and similar items
Mismatch in timing differences
Change in rate of taxation on deferred tax assets and liabilities
Bank Corporation Tax Surcharge
Tax losses created with no corresponding deferred tax asset recognised
Prior year (credit)
Tax charge for the year
2019
£m
159.0
30.2
-
-
0.4
0.3
(0.6)
2.1
0.1
(0.9)
31.6
2018
£m
181.5
34.5
0.3
(0.6)
0.1
0.5
0.2
0.9
-
(0.2)
35.7
The timing difference mismatch arises because tax relief for share based payments is given on a different basis from that on which the
accounting charge for the provision of these awards is recognised under IFRS 2.
(d)
Factors affecting future tax charges
Whilst practically all of the Group’s profit is subject to UK corporation tax, its future effective tax rate is expected to be primarily driven by the
proportion of its taxable profit subject to the Bank Surcharge.
The Group includes a leasing business in PAF. Whilst such businesses do not, in general, have significant permanent differences, the taxable
profits in a given accounting period are usually significantly different from the accounting profits due to temporary differences. Consequently,
the operation will have no material impact on the effective tax rate, but may have on the Group’s tax payments.
At the balance sheet date there were no material tax uncertainties and no significant open matters with the UK tax authorities. The Group has
no material exposure to any other tax jurisdiction.
As a wholly UK based business the Group does not expect to be significantly impacted by the OECD project on Base Erosion and Profit
Shifting (‘BEPS’).
16.
PROFIT ATTRIBUTABLE TO MEMBERS OF PARAGON BANKING GROUP PLC
The Company’s profit after tax for the financial year amounted to £9.9m (2018: £43.0m). 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 2019 or 30 September 2018.
PAGE 181 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
17.
EARNINGS PER SHARE
Earnings per ordinary share is calculated as follows:
Profit for the year (£m)
2019
127.4
2018
145.8
Basic weighted average number of ordinary shares ranking for dividend during the year (million)
257.6
260.8
Dilutive effect of the weighted average number of share options and incentive plans in issue during the year (million)
6.7
8.4
Diluted weighted average number of ordinary shares ranking for dividend during the year (million)
264.3
269.2
Earnings per ordinary share
- basic
- diluted
18.
CASH AND CASH EQUIVALENTS
Deposits with the Bank of England
Balances with central banks
Deposits with other banks
Money Market Fund investments
Balances with other banks
Cash and cash equivalents
49.4p
48.2p
55.9p
54.2p
2019
£m
816.4
816.4
409.0
-
409.0
1,225.4
2018
£m
895.9
895.9
393.1
21.6
414.7
1,310.6
2017
£m
615.0
615.0
758.8
123.1
881.9
1,496.9
Only ‘Free Cash’ is unrestrictedly available for the Group’s general purposes. Cash received in respect of loan assets funded through warehouse
facilities and securitisations is not immediately available, due to the terms of those arrangements. This cash is shown as ‘securitisation
cash’ below.
Balances with central banks form part of the liquidity buffer of Paragon Bank PLC and are therefore not available for the Group’s general
purposes. Free cash may also be deposited at the Bank of England.
Cash held by the Trustee of the Group’s employee share ownership plan may only be used to invest in the shares of the Company, pursuant to
the aims of that plan. This is shown as ‘ESOP cash’ below.
The total consolidated ‘Cash and Cash Equivalents’ balance may be analysed as shown below:
Free cash
Securitisation cash
Liquidity buffer
ESOP cash
2019
£m
225.7
353.1
646.4
0.2
2018
£m
238.0
338.8
724.9
8.9
2017
£m
305.5
574.0
615.0
2.4
1,225.4
1,310.6
1,496.9
The ‘Cash and Cash Equivalents’ amount of £14.1m (2018: £24.9m; 2017: £277.6m) shown in the Company balance sheet is included in ‘Free
Cash’. This amount includes £nil of Money Market Fund investments (2018: £150.0m, 2017: £119.5m)
‘Cash and Cash Equivalents’ includes current bank balances, money market placements and fixed rate sterling term deposits with London
banks, and balances with the Bank of England.
Cash and cash equivalents are allocated to Stage 1 assets. The probabilities of default have been assessed to be so low as to require no
significant impairment provision.
PAGE 182 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 19.
SHORT TERM INVESTMENTS
This amount represents fixed rate securities issued by the UK Government for which a liquid market exists, and which are held from time to
time, as part of the liquidity requirement of Paragon Bank PLC.
No such securities were held at either 30 September 2019 or 30 September 2018, but the Group held this type of investment during the year.
20.
LOANS TO CUSTOMERS
Loan accounts
Finance lease receivables
Loans to customers
Fair value adjustments from portfolio hedging
Note
21
22
24
2019
IFRS 9
£m
11,394.3
791.8
12,186.1
64.2
12,250.3
2018
IFRS 9
£m
11,381.5
719.1
12,100.6
(24.1)
12,076.5
2018
IAS 39
£m
11,407.4
720.4
12,127.8
(24.1)
12,103.7
The Group’s loans to customers at 30 September 2019, analysed between the segments described in note 2 are as follows:
2017
IAS 39
£m
10,636.1
488.0
11,124.1
(8.7)
11,115.4
Total
£m
10,172.5
523.9
318.9
492.2
506.5
172.1
Mortgages
Commercial
Lending
£m
10,172.5
171.6
-
-
-
-
£m
-
-
281.3
492.2
506.5
172.1
Idem
Capital
£m
-
352.3
37.6
-
-
-
10,344.1
1,452.1
389.9
12,186.1
10,308.3
141.2
-
-
-
-
10,449.5
10,332.2
141.3
-
-
-
-
10,473.5
-
-
256.4
402.3
352.9
119.7
1,131.3
-
-
256.6
403.4
352.8
120.4
1,133.2
-
447.0
72.8
-
-
-
10,308.3
588.2
329.2
402.3
352.9
119.7
519.8
12,100.6
-
448.3
72.8
-
-
-
10,332.2
589.6
329.4
403.4
352.8
120.4
521.1
12,127.8
At 30 September 2019 (IFRS 9)
First mortgages
Consumer loans
Motor finance
Asset finance
Development finance
Other loans
Loans to customers
At 1 October 2018 (IFRS 9)
First mortgages
Consumer loans
Motor finance
Asset finance
Development finance
Other commercial loans
Loans to customers
At 30 September 2018 (IAS 39)
First mortgages
Consumer loans
Motor finance
Asset finance
Development finance
Other loans
Loans to customers
PAGE 183 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The Group’s purchased loan portfolios are analysed below.
First mortgage loans
Consumer loans
Motor finance loans
2019
IFRS 9
£m
15.7
275.4
37.6
328.7
2018
IFRS 9
£m
11.7
352.0
72.8
436.5
2018
IAS 39
£m
11.7
352.5
72.8
437.0
Information on the ERCs for first mortgages and consumer loans is given in note 57. All other loans above are internally generated or arise from
acquired operations.
21.
LOAN ACCOUNTS
Loan accounts at 30 September 2019, 1 October 2018, 30 September 2018 and 30 September 2017, which are all denominated and payable
in sterling, were:
First mortgage loans
Second charge mortgage loans
Other unsecured consumer loans
Development finance loans
Other secured commercial lending
Other commercial loans
2019
IFRS 9
£m
2018
IFRS 9
£m
2018
IAS 39
£m
10,172.5
10,308.3
10,332.2
389.2
134.7
506.5
125.9
65.5
414.4
173.8
352.9
72.8
59.3
415.9
173.7
352.8
72.9
59.9
2017
IAS 39
£m
9,855.5
490.7
219.1
42.3
17.5
11.0
11,394.3
11,381.5
11,407.4
10,636.1
First mortgages are secured on residential property within the UK; second charge mortgage loans enjoy second charges on residential property.
Other secured commercial lending includes structured lending, aviation mortgages and invoice factoring.
Other commercial loans includes principally professions finance, discounted receivables and other short term commercial balances.
PAGE 184 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The amounts of the loan assets above pledged as collateral under the central bank facilities described in note 36 or under the external funding
arrangements described in notes 32 and 33 are shown below. The table also shows assets prepositioned with the Bank of England for use in
future drawings.
First
Mortgages
£m
Consumer
Finance
£m
Other
£m
4,338.3
948.1
1,734.4
7,020.8
1,873.7
1,278.0
10,172.5
5,037.8
1,023.8
1,670.1
7,731.7
1,171.0
1,405.6
10,308.3
5,052.2
1,030.2
1,670.1
7,752.5
1,171.1
1,408.6
10,332.2
2019
IFRS 9
£m
318.9
472.9
791.8
-
-
-
-
-
-
-
-
-
-
523.9
523.9
697.9
697.9
40.4
-
-
40.4
-
547.8
588.2
40.8
-
-
40.8
-
548.8
589.6
2018
IFRS 9
£m
329.2
389.9
719.1
-
-
-
-
-
485.0
485.0
-
-
-
-
-
485.6
485.6
2018
IAS 39
£m
329.4
391.0
720.4
Total
£m
4,338.3
948.1
1,734.4
7,020.8
1,873.7
2,499.8
11,394.3
5,078.2
1,023.8
1,670.1
7,772.1
1,171.0
2,438.4
11,381.5
5,093.0
1,030.2
1,670.1
7,793.3
1,171.1
2,443.0
11,407.4
2017
IAS 39
£m
163.0
325.0
488.0
30 September 2019 (IFRS 9)
In respect of:
Asset backed loan notes
Warehouse facilities
Central bank facilities
Total pledged as collateral
Prepositioned with Bank of England
Other assets not pledged as collateral
1 October 2018 (IFRS 9)
In respect of:
Asset backed loan notes
Warehouse facilities
Central bank facilities
Total pledged as collateral
Prepositioned with Bank of England
Other assets not pledged as collateral
30 September 2018 (IAS 39)
In respect of:
Asset backed loan notes
Warehouse facilities
Central bank facilities
Total pledged as collateral
Prepositioned with Bank of England
Other assets not pledged as collateral
22.
FINANCE LEASE RECEIVABLES
The Group’s finance leases can be analysed as shown below.
Motor finance
Asset finance
Carrying value
PAGE 185 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
The minimum lease payments due under these loan agreements are:
Amounts receivable
Within one year
Within two to five years
After five years
Less: future finance income
Present value
2019
IFRS 9
£m
292.9
566.7
40.2
897.8
(101.4)
798.4
2018
IFRS 9
£m
258.5
529.4
30.9
818.8
(95.2)
723.6
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
Present value
Allowance for uncollectible amounts
Carrying value
2019
IFRS 9
£m
255.8
506.6
36.0
798.4
(6.6)
791.8
2018
IFRS 9
£m
225.5
470.8
27.3
723.6
(4.5)
719.1
2018
IAS 39
£m
259.5
530.2
30.9
820.6
(95.2)
725.4
2018
IAS 39
£m
226.4
471.7
27.3
725.4
(5.0)
720.4
2017
IAS 39
£m
174.9
357.6
17.8
550.3
(58.3)
492.0
2017
IAS 39
£m
151.9
323.8
16.3
492.0
(4.0)
488.0
None of the Group’s finance lease receivables were pledged as collateral for liabilities at 30 September 2019 or 30 September 2018.
23.
IMPAIRMENT PROVISIONS ON LOANS TO CUSTOMERS
This note sets out information on the Group’s impairment provisioning under IFRS 9 for the loans to customers balances set out in note 20,
including both finance leases, accounted for under IAS 17, and loans held at amortised cost, accounted for under IFRS 9, as both groups of
assets are subject to the IFRS 9 impairment requirements.
The disclosures are set out under the following headings:
• Basis of provision
•
Impairments by stage and division
• Movements in impairment provision in the period
•
Impairments charged to income
• Economic inputs to provision calculations
• Sensitivity analysis
Basis of provision
IFRS 9 requires that impairment is evaluated on an expected credit loss (‘ECL’) basis. ECLs are based on an assessment of the probability of
default (‘PD’) and loss given default (‘LGD’), discounted to give a net present value. The estimation of ECL should be unbiased and probability
weighted, considering all reasonable and supportable information, including forward looking economic assumptions and a range of possible
outcomes. Provision may be based on either twelve month or lifetime ECL, dependant on whether an account has experienced a significant
increase in credit risk (‘SICR’).
PAGE 186 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Calculation of expected credit loss (‘ECL’)
For the majority of the Group’s loan assets, the ECL is generated using statistical models applied to account data to generate PD and
LGD components.
PD on both a twelve month and lifetime basis is estimated based on statistical models for the Group’s most significant asset classes. The PD
calculation is a function of current asset performance, customer information and future economic assumptions. The structure of the models
was derived through analysis of correlation in historic data, which identified which current and historical customer attributes and external
economic variables were predictive of future loss. PD measures are calculated for the full contractual lives of loans with the models deriving
probabilities that, at a given future date, a loan will be in default, performing or closed. The Group utilised all reasonably available information in
its possession for this exercise.
LGD for each account is derived by calculating a value for exposure at the point of default (which will include consideration of future interest,
account charges and receipts) and reducing this for security values, net of likely costs of recovery. These calculations allow for the Group’s
potential case management activities. This evaluation includes the potential impact of economic conditions at the time of any future default or
enforcement. The derivation of the significant assumptions used in these calculations is discussed below.
In certain asset classes a fully modelled approach is not possible. This is generally where there are few assets in the class, where there is
insufficient historical data on which to base an analysis or where certain measures, such as days past due are not useful (e.g. where the loan
agreement does not require regular payments of pre-determined amounts). In these cases, which represent a small proportion of the total
portfolio, alternative approaches are adopted. These rely on internal credit monitoring practices and professional credit judgement.
Notwithstanding the mechanical procedures discussed above, the Group will always consider whether the process generates sufficient
provision for particular loans, especially large exposures, and will provide additional amounts as appropriate.
Significant Increase in Credit Risk (‘SICR’)
Under IFRS 9, SICR is not defined solely by account performance, but on the basis of the customer’s overall credit position, and this evaluation
should include consideration of external data. The Group’s aim is to define SICR to correspond, as closely as possible, to that population of
accounts which are subject to enhanced administrative and monitoring procedures operationally. The Group assesses SICR in its modelled
portfolios primarily on the basis of the relative difference in an account’s lifetime PD between origination and the reporting date. The levels of
difference required to qualify as an SICR may differ between portfolios and will depend, to some extent, on the level of risk originally perceived
and are monitored on an ongoing basis to ensure that this calibrates with actual experience.
It should be noted that the use of the current PD, which includes external factors such as credit bureau data, means that all relevant
information in the Group’s hands concerning the customers present credit position is included in the evaluation, as well as the impact of future
economic expectations.
For non-modelled portfolios, the SICR assessment is based on the credit monitoring position of the account in question and for all portfolios a
number of qualitative indicators which provide evidence of SICR have been considered.
In all cases accounts which are more than one month in arrears, where this is a meaningful measure, are considered to have an SICR. However,
in certain loan portfolios, regular monthly payments of pre-set amounts are not required and hence this criterion cannot be used.
The Group uses arrears multiples as a proxy for days past due, as this measure is commonly used in its arrears reporting. A loan will generally be
one month in arrears from the point it is one day past due until it is thirty days past due.
Definitions of default
As the IFRS 9 definition of ECL is based on PD, default must be defined for this purpose. The Group’s definitions of default for its various
portfolios are aligned to its internal operational procedures and the regulatory definitions of default used internally. In particular, the Group’s
receiver of rent cases are defined as defaulted for modelling purposes as the behaviour of the case after that point is significantly influenced
by internal management decisions.
IFRS 9 provides a rebuttable presumption that an account is in default when it is ninety days overdue and this was used as the basis of the
Group’s definition. A combination of qualitative and quantitative measures were used in developing the definitions. These include account
management activities and internal statuses.
Credit Impaired loans
IFRS 9 defines a credit impaired account as one where an account has suffered one or more events which has had a detrimental effect on future
cash flows. It is thus a backward-looking definition, rather than one based on future expectations.
Credit impaired assets are identified either through quantitative measures or by operational status. Designations of accounts for regulatory
capital purposes are also taken into account. Assets may also be assigned to Stage 3 if they are identified as credit impaired as a result of
management review processes.
All loans which are in the process of enforcement, from the point where this becomes the administration strategy, are classified as
credit impaired.
During the year the Group revised certain of its default definitions for regulatory purposes. Where appropriate, IFRS 9 definitions have been
amended to harmonise with the new definition and hence the staging at 1 October 2018 set out below differs from that presented in the Group’s
transition report.
PAGE 187 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts As a result of this harmonisation all default cases are considered to be credit impaired, including all receiver of rent cases and all cases with
at least one payment more than ninety days overdue, even where such cases are being managed in the expectation of realising all of the
carrying balance. In order to provide better information for users, additional analysis of credit impaired accounts has been presented below
distinguishing between receiver of rent account, accounts subject to realisation / enforcement procedures and long term managed accounts,
all of which are treated as credit impaired.
IFRS 9 Staging
IFRS 9 calculations and related disclosures require loan assets to be divided into three stages, with accounts which were credit impaired on
initial recognition representing a fourth class.
The three classes comprise: those where there has been no SICR since advance or acquisition (Stage 1); those where there has been a SICR
(Stage 2); and loans which are impaired (Stage 3).
•
•
On initial recognition, and for assets where there has not been an SICR, provisions will be made in respect of losses resulting from the level
of credit default events expected in the twelve months following the balance sheet date
Where a loan has experienced an SICR, whether or not the loan is considered to be credit impaired, provisions will be made based on the
ECLs over the full life of the loan
•
For credit impaired assets, provisions will also be made on the basis of lifetime ECLs
For assets which were ‘Purchased or Originated as Credit Impaired’ (‘POCI’) accounts (i.e. considered as credit impaired at the point of first
recognition), such as certain of the Group’s acquired assets in Idem Capital, the carrying valuation is based on expected cash flows discounted
by the EIR determined at the point of acquisition.
Impairments by stage
An analysis of the Group’s loan portfolios between the stages defined above is set out below.
Stage 1
£m
Stage 2*
Stage 3*
£m
£m
9,847.7
1,376.7
158.2
11,382.6
(0.4)
(5.4)
(0.2)
(6.0)
9,847.3
1,371.3
158.0
11,376.6
378.2
64.6
15.7
458.5
(2.0)
(1.3)
(0.4)
(3.7)
376.2
63.3
15.3
454.8
129.3
8.2
30.4
167.9
(24.4)
(4.0)
(3.8)
(32.2)
104.9
4.2
26.6
135.7
-
0.39%
0.13%
0.05%
0.53%
2.01%
2.55%
0.81%
18.87%
48.78%
12.50%
19.18%
30 September 2019
Gross loan book
Mortgages
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgages
Commercial Lending
Idem Capital
Total
Net loan book
Mortgages
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgages
Commercial Lending
Idem Capital
Total
PAGE 188 • The Accounts
POCI
£m
15.7
13.3
190.0
219.0
-
-
-
-
15.7
13.3
190.0
219.0
-
-
-
-
Total
£m
10,370.9
1,462.8
394.3
12,228.0
(26.8)
(10.7)
(4.4)
(41.9)
10,344.1
1,452.1
389.9
12,186.1
0.26%
0.73%
1.12%
0.34%
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 1 October 2018
Gross loan book
Mortgages
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgages
Commercial Lending
Idem Capital
Total
Net loan book
Mortgages
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgages
Commercial Lending
Idem Capital
Total
Stage 1
£m
Stage 2*
Stage 3*
£m
£m
9,961.6
1,106.4
206.1
11,274.1
(0.3)
(4.2)
(0.4)
(4.9)
9,961.3
1,102.2
205.7
11,269.2
-
0.38%
0.19%
0.04%
369.9
8.2
19.7
397.8
(1.7)
(0.4)
(0.5)
(2.6)
368.2
7.8
19.2
395.2
0.46%
4.88%
2.54%
0.65%
142.4
5.8
40.0
188.2
(34.1)
(2.0)
(10.6)
(46.7)
108.3
3.8
29.4
141.5
23.95%
34.48%
26.50%
24.81%
*
Stage 2 and 3 balances are analysed in more detail below.
Finance leases included above, analysed by staging, were:
30 September 2019
Gross loan book
Impairment provision
Net loan book
1 October 2018
Gross loan book
Impairment provision
Net loan book
Stage 1
£m
734.2
(3.2)
731.0
637.5
(2.6)
634.9
Stage 2
£m
Stage 3
£m
21.0
(0.7)
20.3
8.2
(0.3)
7.9
5.7
(2.7)
3.0
5.1
(1.6)
3.5
POCI
£m
11.7
17.5
265.5
294.7
-
-
-
-
11.7
17.5
265.5
294.7
-
-
-
-
POCI
£m
37.5
-
37.5
72.8
-
72.8
Total
£m
10,485.6
1,137.9
531.3
12,154.8
(36.1)
(6.6)
(11.5)
(54.2)
10,449.5
1,131.3
519.8
12,100.6
0.34%
0.58%
2.16%
0.45%
Total
£m
798.4
(6.6)
791.8
723.6
(4.5)
719.1
In terms of the Group’s credit management processes, Stage 1 cases will fall within the appropriate customer servicing functions and Stage 2
cases will be subject to account management arrangements. Stage 3 cases will include both those subject to recovery or similar processes and
those which, though being managed on a long-term basis, are included with defaulted accounts for regulatory purposes. However, these broad
categorisations may vary between different product types.
POCI balances included in the Commercial Lending segment arise principally from acquired businesses, where those assets were identified as
credit impaired at the point of acquisition when the acquired portfolios as a whole were evaluated.
Idem Capital loans include acquired consumer and motor finance loans together with legacy (originated pre-2010) second charge mortgage and
unsecured consumer loans. Legacy assets and acquired loans which were performing on acquisition are included in the staging analysis above.
Acquired portfolios which were largely non-performing at acquisition, and which were purchased at a deep discount to face value are shown
as POCI assets above. Although no provision is shown above for such assets, the effect of the discount on purchase is included in the gross
value ensuring that the carrying value is substantially less than the current balances due from customers and the level of cover is considerable.
PAGE 189 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Analysis of Stage 2 loans
The table below analyses the accounts in Stage 2 between those not more than one month in arrears where an SICR has nonetheless been
identified from other information and accounts more than one month in arrears, which are automatically deemed to have an SICR.
Coverage for Stage 2 cases remains broadly similar year-on-year in both the Mortgages and Idem Capital divisions. Within the Commercial Lending
division, the ‘<1 month’ total in 2019 includes increased balances from the maturing structured lending and development finance portfolios,
where security levels are high and hence provision requirements are generally lower than for other businesses within the division. The ‘>1 month
<=3 months’ total in Commercial Lending includes very few cases and hence the coverage ratio may vary depending on the cases currently
in progress.
< 1 month
arrears
> 1 <= 3 months
arrears
£m
£m
336.3
57.2
7.7
401.2
(1.3)
(1.0)
(0.2)
(2.5)
335.0
56.2
7.5
398.7
0.39%
1.75%
2.60%
0.62%
41.9
7.4
8.0
57.3
(0.7)
(0.3)
(0.2)
(1.2)
41.2
7.1
7.8
56.1
1.67%
4.05%
2.50%
2.09%
Total
£m
378.2
64.6
15.7
458.5
(2.0)
(1.3)
(0.4)
(3.7)
376.2
63.3
15.3
454.8
0.53%
2.01%
2.55%
0.81%
30 September 2019
Gross loan book
Mortgages
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgages
Commercial Lending
Idem Capital
Total
Net loan book
Mortgages
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgages
Commercial Lending
Idem Capital
Total
PAGE 190 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts < 1 month
arrears
> 1 <= 3 months
arrears
£m
£m
306.3
4.0
8.8
319.1
(0.8)
(0.1)
(0.2)
(1.1)
305.5
3.9
8.6
318.0
0.26%
2.50%
2.27%
0.34%
63.6
4.2
10.9
78.7
(0.9)
(0.3)
(0.3)
(1.5)
62.7
3.9
10.6
77.2
1.42%
7.14%
2.75%
1.91%
Total
£m
369.9
8.2
19.7
397.8
(1.7)
(0.4)
(0.5)
(2.6)
368.2
7.8
19.2
395.2
0.46%
4.88%
2.54%
0.65%
1 October 2018
Gross loan book
Mortgages
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgages
Commercial Lending
Idem Capital
Total
Net loan book
Mortgages
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgages
Commercial Lending
Idem Capital
Total
PAGE 191 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Analysis of Stage 3 loans
The table below analyses the accounts in Stage 3 between accounts in the process of enforcement or where full recovery is considered unlikely
(‘Realisations’ in the table), loans being managed on a long term basis where full recovery is possible but which are considered in default for
regulatory purposes and buy-to-let mortgages where a receiver of rent (‘RoR’) has been appointed by the Group to manage the property on the
customer’s behalf. RoR accounts in Stage 3 may be fully up-to-date with full recovery possible. These accounts are included in Stage 3 as they
are classified as defaulted for regulatory purposes.
Coverage for Stage 3 Mortgages has reduced over the year as a number of heavily provided legacy receiver of rent cases have been resolved,
as discussed further below. The coverage ratio for Commercial Lending is subject to large fluctuations, as the number and absolute value of
Stage 3 cases are relatively low and hence the specific details of individual cases will influence the ratio. In Idem Capital, the principal impact on
the values shown below was a major operational review of legacy balances during the year which resulted in a change in the collection strategy
and a consequent writing off of a large proportion of the balances shown at 1 October 2018.
> 3 month
arrears
£m
RoR managed
Realisations
£m
£m
Total
£m
129.3
8.2
30.4
167.9
(24.4)
(4.0)
(3.8)
(32.2)
104.9
4.2
26.6
135.7
14.7
6.5
4.4
25.6
(4.7)
(3.5)
(1.9)
(10.1)
10.0
3.0
2.5
15.5
31.97%
53.85%
43.18%
39.45%
18.87%
48.78%
12.50%
19.18%
8.3
1.7
26.0
36.0
(0.4)
(0.5)
(1.9)
(2.8)
7.9
1.2
24.1
33.2
4.82%
29.41%
7.31%
7.78%
106.3
-
-
106.3
(19.3)
-
-
(19.3)
87.0
-
-
87.0
18.16%
-
-
18.16%
30 September 2019
Gross loan book
Mortgages
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgages
Commercial Lending
Idem Capital
Total
Net loan book
Mortgages
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgages
Commercial Lending
Idem Capital
Total
PAGE 192 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 1 October 2018
Gross loan book
Mortgages
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgages
Commercial Lending
Idem Capital
Total
Net loan book
Mortgages
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgages
Commercial Lending
Idem Capital
Total
> 3 month
arrears
£m
RoR managed
Realisations
£m
£m
5.0
1.1
29.0
35.1
-
(0.4)
(1.7)
(2.1)
5.0
0.7
27.3
33.0
116.3
-
-
116.3
(26.8)
-
-
(26.8)
89.5
-
-
89.5
21.1
4.7
11.0
36.8
(7.3)
(1.6)
(8.9)
(17.8)
13.8
3.1
2.1
19.0
Total
£m
142.4
5.8
40.0
188.2
(34.1)
(2.0)
(10.6)
(46.7)
108.3
3.8
29.4
141.5
-
36.36%
5.86%
5.98%
23.04%
-
-
23.04%
34.60%
34.04%
80.91%
48.37%
23.95%
34.48%
26.50%
24.81%
The security values available to reduce exposure at default in the calculation shown above for stage 3 accounts are set out below. The estimated
value of the security represents, for each account, the lesser of the valuation estimate and the exposure at default in the Central scenario.
Security values are based on the most recent valuation of the relevant asset held by the Group, indexed or depreciated as appropriate.
First mortgages
Second mortgages
Asset finance
Motor finance
2019
IFRS 9
£m
65.7
14.0
2.2
1.0
82.9
2018
IFRS 9
£m
69.6
17.4
1.0
0.9
88.9
The RoR managed accounts are being managed to ensure the optimal resolution for landlords, tenants and lenders and this long-term, stable
situation underpinned their treatment as not impaired under IAS 39, but the existence of the RoR arrangement causes the accounts to be
treated as defaulted for regulatory purposes. The Group’s RoR arrangements are described in more detail below.
Idem Capital balances with over three months arrears comprise principally second charge mortgage accounts originated over ten years ago
which have been over three months in arrears for some time. These accounts are generally making regular payments and have significant
levels of equity in the underlying property which reduces the required provision to the value shown above. It is expected that a high proportion
of these accounts will eventually redeem naturally, either on the sale of the property or by the satisfaction of the amount due through
instalment payments.
PAGE 193 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Buy-to-let receiver of rent cases (Stage 3)
Where a buy-to-let mortgage customer in England or Wales falls into arrears on their account the Group has the power to appoint a receiver of
rent under the Law of Property Act. The receiver will then manage the property on behalf of the customer, collecting rents and remitting them
to make payments on the account. While the receiver has the power to sell the property, in many cases they will operate it as a buy-to-let on at
least a short to medium term basis, potentially longer, depending on the individual circumstances of the case. This causes less disruption to the
tenants and may result in the mortgage account returning to performing status and the property being handed back to the customer.
The following table analyses the number and gross carrying value of RoR managed accounts shown above by the date of the receivers’
appointment, illustrating this position.
30 September 2019
1 October 2018
No.
£m
No.
£m
Managed accounts
Appointment date
2010 and earlier
2011 to 2013
2014 to 2016
2016 and later
Total managed accounts
Accounts in the process of realisation
402
86
31
84
603
80
683
70.5
17.3
4.5
14.0
106.3
11.9
118.2
464
107
40
44
655
115
770
Receiver of rent accounts in the process of realisation at the period end are included under that heading.
Movements in impairment provision by stage
The movements in the impairment provision calculated under IFRS 9, analysed by business segments, are set out below.
At transition – 1 October 2018
Provided in period
Amounts written off
Assets derecognised
At 30 September 2019
Mortgages
Commercial
Lending
Idem
Capital
£m
36.1
1.2
(6.5)
(4.0)
26.8
£m
6.6
7.2
(3.1)
-
10.7
£m
11.5
0.3
(7.4)
-
4.4
83.0
21.8
5.9
5.6
116.3
16.9
133.2
Total
£m
54.2
8.7
(17.0)
(4.0)
41.9
Accounts are considered to be written off for accounting purposes if a balance remains once standard enforcement processes have been
completed, subject to any amount retained in respect of expected salvage receipts. This has no effect on the net carrying value, only on the
amounts reported as gross loan balances and accumulated impairment provisions.
At 30 September 2019 enforceable contractual balances of £9.0m were outstanding on non-POCI assets written off in the period. This will
exclude those accounts where a full and final settlement was agreed and those where the contractual terms do not permit any further action.
Enforceable balances will be kept under review for operational purposes but no amounts will be recognised in respect of such accounts unless
further cash is received or there is a strong expectation that it will be.
PAGE 194 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts A more detailed analysis of these movements by IFRS 9 stage on a consolidated basis for the year ended 30 September 2019 is set out below.
Loss allowance at 1 October 2018
New assets originated or purchased
Changes in loss allowance
Transfer to stage 1
Transfer to stage 2
Transfer to stage 3
Changes due to credit risk
Write offs
Assets derecognised
Changes in models/parameters
Loss allowance at 30 September 2019
Stage 1
Stage 2
Stage 3
£m
4.9
4.4
0.5
(0.3)
(0.5)
(3.1)
-
(0.1)
0.2
6.0
£m
2.6
-
(0.5)
0.4
(0.4)
3.0
-
(1.7)
0.3
3.7
£m
46.7
-
-
(0.1)
0.9
5.2
(17.0)
(2.2)
(1.3)
32.2
POCI
£m
-
-
-
-
-
-
-
-
-
-
Total
£m
54.2
4.4
-
-
-
5.1
(17.0)
(4.0)
(0.8)
41.9
The principal factors generating the reduction in the loss allowance in the period are the derecognition of the PM12 assets, shown above as
‘assets derecognised’, a major account review exercise relating to unsecured legacy assets, resulting in the cessation of collection on a large
number of accounts and a write off of £5.8m, and realisations on RoR cases where provisions of £7.3m were utilised.
The movements in the Loans to Customers balances in respect of which these loss allowances have been made are set out below.
Stage 2
Stage 3
£m
397.8
-
(97.5)
243.4
(18.6)
(30.0)
-
(39.4)
-
2.8
458.5
(3.7)
454.8
£m
188.2
-
(3.3)
(3.4)
45.7
(29.6)
-
(14.1)
(17.0)
1.4
167.9
(32.2)
POCI
£m
294.7
4.1
-
-
-
(110.1)
(2.7)
(14.7)
-
47.7
219.0
-
Total
£m
12,154.8
2,447.3
-
-
-
(1,755.8)
(2.7)
(705.0)
(17.0)
106.4
12,228.0
(41.9)
135.7
219.0
12,186.1
Balances at 1 October 2018
New assets originated or purchased
Changes in staging
Transfer to stage 1
Transfer to stage 2
Transfer to stage 3
Redemptions and repayments
Goodwill adjustment (note 66)
Assets derecognised
Write offs
Other changes
Balance at 30 September 2019
Loss allowance
Carrying value
Stage 1
£m
11,274.1
2,443.2
100.8
(240.0)
(27.1)
(1,586.1)
-
(636.8)
-
54.5
11,382.6
(6.0)
11,376.6
Other changes includes interest and similar charges
PAGE 195 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Impairments charged to income
The amounts charged to the profit and loss account in the period are analysed as follows
Mortgages
Commercial
Lending
Idem Capital
2019
IFRS 9
2018
IAS 39
£m
1.2
(0.2)
1.0
1.0
-
1.0
£m
7.2
-
7.2
2.8
4.4
7.2
£m
0.3
(0.5)
(0.2)
(0.2)
-
(0.2)
£m
8.7
(0.7)
8.0
3.6
4.4
8.0
£m
9.1
(1.7)
7.4
5.6
1.8
7.4
Provided in period
Recovery of written off amounts
Of which
Loan accounts
Finance leases
Economic impacts
Impairment provision under IFRS 9 is calculated on a forward-looking ECL basis, based on expected economic conditions in multiple internally
coherent scenarios. The Group uses four distinct economic scenarios chosen to represent the range of possible outcomes and allow for the
impact of economic asymmetry in the calculations.
As the Group does not have an internal economics function, in developing its economic scenarios it considers analysis from reputable external
sources to form a general market consensus which informs its central scenario. These sources include forecasts produced by the Office of
Budget Responsibility (‘OBR’) and the PRA as well as private sector economic research bodies.
The outlook in the central scenario at 30 September 2019 is broadly similar to that a year earlier, although both the forecast level of bank rates
and consumer lending growth are reduced, reflecting a more pessimistic economic outlook. However, the house price growth forecast over the
five year period is a little stronger.
The central scenario is the economic forecast used within the Group for planning purposes and represents its expectation of the most likely
outcome. The upside and downside scenarios are less likely variants developed from this base case. The final scenario represents a protracted
slump and is derived from the Bank of England’s annual stress testing scenarios. Each scenario comprises a number of economic parameters
and while models for different portfolios may not use all of the variables, the set, as a whole, is defined for the Group and must be consistent.
The Group defines its upside and downside scenarios by reference to the central scenario. It is therefore necessary for management to consider
the relative weightings that should apply to each of these scenarios when ECLs are calculated. At 30 September 2019, the directors considered
the movements already reflected in the scenarios and the levels of uncertainty in the UK political and economic climate more generally and
concluded that, while the central scenario still provided an appropriate basis for planning purposes, the downside risks had increased over the
twelve months. The directors therefore determined that the weighting attributed to the downside scenario should be increased, and that to the
upside scenario reduced.
The economic variables comprising each scenario, and their projected average rates of increase (or decrease) for the first five years of the
forecast period are set out below.
30 September 2019
Weighting applied
Economic driver
Gross Domestic Product (‘GDP’) (increase)
House Price Index (‘HPI’) (increase)
Bank Base Rate (‘BBR’)
Consumer Price Inflation (‘CPI’)
Unemployment (rate)
Secured lending (annual change)
Consumer credit (annual change)
PAGE 196 • The Accounts
Central
scenario
40%
Upside
scenario
20%
Downside
scenario
Severe downside
scenario
35%
5%
1.7%
3.3%
0.8%
2.1%
3.9%
3.6%
6.1%
2.2%
5.5%
1.9%
1.8%
3.5%
4.2%
7.6%
1.0%
(0.1)%
0.5%
2.5%
5.6%
2.7%
3.8%
(0.1)%
(5.3)%
0.0%
3.1%
8.0%
1.4%
0.3%
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 1 October 2018
Weighting applied
Economic driver
Gross Domestic Product (‘GDP’) (increase)
House Price Index (‘HPI’) (increase)
Bank Base Rate (‘BBR’)
Consumer Price Inflation (‘CPI’)
Unemployment (rate)
Secured lending (annual change)
Consumer credit (annual change)
Sensitivity
Central
scenario
40%
Upside
scenario
30%
Downside
scenario
Severe downside
scenario
25%
5%
1.6%
3.0%
1.2%
2.1%
3.9%
3.2%
8.6%
2.0%
5.1%
1.7%
1.8%
3.6%
3.6%
10.5%
0.9%
(0.3)%
0.7%
2.6%
5.7%
2.5%
5.3%
(0.1)%
(5.2)%
0.0%
3.3%
8.3%
1.5%
0.6%
The calculation of impairment provision under IFRS 9 is subject to a variety of uncertainties arising from assumptions, forecasts and expectations
about future events and conditions. To illustrate the impact of these uncertainties, sensitivity calculations have been performed for some of
the most significant.
Economic conditions
If the weightings of the economic scenarios were altered to weight the upside scenario at 10%, the central scenario at 40%, the downside
scenario at 45% and the severe downside at 5%, the effect would be to increase buy-to-let provisions, the most significant part of the
impairment provision, by £0.9m, from £26.5m to £27.4m.
Significant increase in credit risk
The most important driver of SICR is relative PD. If all PDs were increased by 10%, loans with a gross value of £25.8m would transfer from
stage 1 to stage 2, and the total provision would increase by £0.6m from the effects of higher expected losses and the impact of providing for
expected lifetime losses, rather than 12-month losses on the additional stage 2 cases.
Value of security
The principal assumptions impacting on loss given default are the estimated security values. If the rate of growth in house prices assumed by
the model were halved, ignoring any PD effects, then the provision for the Group’s first and second mortgages assets under the central scenario
would increase by £5.5m.
Receiver of rent
The majority of receiver of rent cases, which are included in stage 3, are managed long-term and therefore their assumed realisation date has
an important impact on the provision calculation. If the assumed rate of realisations was increased by 20%, the impairment provision in the
central scenario would increase by £0.7m.
Superseded disclosures
Further information relating to comparative disclosures under IAS 39 which are no longer relevant under IFRS 9 is included in note 54(c).
PAGE 197 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 24.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING
Introduction
The Group uses derivative financial instruments such as interest rate swaps for risk management purposes only. Each such derivative contract
is entered into for economic hedging purposes to manage a particular identified risk (as described in notes 56 to 60) and any gains or losses
arising are incidental to this objective. No trading in derivative financial instruments is undertaken.
Hedge accounting is applied where appropriate, though some derivatives, while forming part of an economic hedge relationship, do not qualify
for this accounting treatment under the IAS 39 rules, particularly where the hedged risk relates to an off balance sheet item. 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 particularly onerous.
The Group’s hedging arrangements can be analysed between:
•
Fair value hedges of portfolio interest rate risk, which are used to manage the interest rate risk inherent in fixed rate lending and
deposit taking
• Cash flow hedges, which are used to manage the foreign exchange and interest rate risk inherent in its currency borrowings
An economic hedge of interest rate risk in fixed rate lending will also address pipeline exposures, where future lending at a given fixed rate is
anticipated. However, such arrangements do not qualify as hedges for accounting purposes.
In addition, the Group utilises currency derivatives to hedge its exposure on the small amount of its lending denominated in foreign currencies.
The analysis below splits derivatives between those accounted for within portfolio fair value hedges, or as cash flow hedges and those which,
despite representing an economic hedge, are not accounted for as hedges. There were no individual interest rate risk hedging arrangements in
place either in the year ended 30 September 2019 or the preceding year.
Derivatives in accounting hedge relationships
Fair value hedges
Interest rate swaps
Fixed to floating
Floating to fixed
Cash flow hedges
Cross-currency basis swaps
Dollar-sterling
Euro-sterling
Total derivatives in hedge accounting relationships
Other derivatives
Interest rate swaps
Currency futures
Total recognised derivative assets/(liabilities)
2019
Assets
£m
2019
Liabilities
£m
2018
Assets
£m
2018
Liabilities
£m
0.2
7.6
7.8
274.6
308.1
582.7
590.5
1.9
-
592.4
(78.3)
(0.2)
(78.5)
-
-
-
(78.5)
(2.0)
-
(80.5)
22.0
1.9
23.9
424.6
405.1
829.7
853.6
2.1
-
855.7
(1.1)
(3.4)
(4.5)
-
-
-
(4.5)
(0.2)
-
(4.7)
The credit risk inherent in the derivative financial assets shown above is discussed in note 57.
PAGE 198 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
a)
Fair value hedges
Background and hedging objectives
The Group’s fair value hedges of portfolios of interest rate risk (‘macro hedges’) arise from its management of the interest rate risk inherent in
its fixed rate lending and deposit taking activities. These activities would expose the Group to movement in market interest rates if not hedged.
This position arises naturally where fixed rate loans are funded with floating or variable rate borrowings, as in the Group’s securitisation
transactions, but may also arise where retail deposit funding is used. Where possible the Group takes advantage of natural hedging between
fixed rate assets and deposits, but it is unlikely that a precise match for value and tenor of the instruments could be achieved leaving unmatched
items on both sides. This is referred to as repricing risk and controlled within limits under the Group’s interest rate risk management process,
described in note 59. In order to manage these exposures, they are hedged with financial derivatives and form part of the Group’s portfolio
hedging arrangements. Repricing risk is monitored regularly to ensure mismatches or gaps remain within limits set by policy.
Responsibility to direct and oversee structural risk management has been delegated by the Board to ALCO. A hedging strategy is developed for
each fixed product considering behavioural characteristics, such as whether a customer is likely to prepay before contractual maturity. This is
reviewed from time to time with any changes agreed with ALCO.
In order to manage potential exposure to increases in interest rates it may be necessary to undertake pre-hedging of fixed rate assets in the
pipeline. Interest rate swaps used to hedge pipeline loan exposures, which are not yet recognised on the balance sheet, can cause unmatched
fair value costs or credits to arise until both sides of the hedge can be recognised within the interest rate portfolio hedging arrangement,
generally a few months after the inception of the derivative contract.
In managing interest rate exposure, Treasury may use interest rate swaps, forward rate agreements, swaptions or interest rate caps and floors.
However, interest rate swaps are the most generally used instruments.
This policy creates two macro hedges:
•
•
The ‘loan hedge’ matching fixed rate buy-to-let mortgage assets with interest rate swaps to convert the interest receivable to a floating rate
The ‘deposit hedge’ matching fixed rate deposits with interest rate swaps which operates in the opposite direction, converting the fixed rate
interest payable to floating rate amounts
The Group is in the process of changing the principal sterling reference rate used in its interest rate risk management framework from LIBOR
to SONIA.
Where fixed rate assets or liabilities have been hedged with interest rate swaps, these currently mostly reference three-month LIBOR. During
the year, the Group entered into SONIA swaps to hedge fixed rate assets funded in PM26, a SONIA-linked securitisation transaction. As the
Group transitions away from LIBOR it is expected that all new hedging will eventually reference SONIA. For existing swaps referencing LIBOR
that have a maturity beyond December 2021 (the date LIBOR is expected to become unavailable), the Group is closely following developments.
The International Swaps and Derivative Association (‘ISDA’), the trade organisation for derivatives, are consulting in developing fall backs
and revisions to documentation that counterparties can sign to transition to SONIA. The proposals are expected to be finalised by calendar
year-end, with implementation in 2020.
The designation of the two macro hedges is updated, on a month by month basis, using software which compares the overall tenor, value and
rate positions to match the expected fair value movement of the swaps with the expected interest rate risk related movement in the fair value
of the relevant assets or liabilities over the designation period as closely as possible. The software applies regression analysis techniques to the
potential impact of changes in expected interest rates over the designation period to maximise expected hedge effectiveness on a prospective
basis. The value of the portfolio of loans or deposits selected is then designated, as a monetary amount of interest rate risk, as the hedged item,
while the portfolio of swaps selected are designated as the hedging instruments.
Any swaps not selected in this process are disclosed as derivatives not in hedging relationships.
At the end of each designation period the Group will assess the effectiveness of each hedge retrospectively, based on fair value movements
(relating to interest rate risk components only) which have actually occurred in the period. Movements are compared to pre-determined test
thresholds, using regression techniques, to determine whether the hedge was effective in the period.
Ineffectiveness
The Group has identified the following possible sources of hedge ineffectiveness in its portfolio hedges of interest rate risk:
•
•
The maturity profile of the hedging instruments may not exactly match that of the hedged items, particularly where hedged items settle
early
The use of derivatives as a hedge of interest rate risk additionally exposes the Group to the derivative counterparties’ credit risk, which is
not matched in the hedged item. This risk is minimised by transacting only with high quality counterparties and through collateralisation
arrangements (as described in note 57).
• The use of different discounting curves in measuring fair value changes in the hedged items and hedging instruments
• Difference in the timing of interest payments on the hedged items and settlements on the hedging instruments
These sources of ineffectiveness are minimised by the portfolio matching process, which seeks to match the terms of the items as closely
as possible.
In addition to the hedging ineffectiveness described above, group profit will also be affected by the fair value movements of interest rate swap
agreements which were entered into as part of the Group’s interest rate risk hedging strategy, but failed to find a match in the hedging portfolio.
PAGE 199 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Hedging Instruments
The hedging portfolios at 30 September 2019 and 30 September 2018 consist of a large number of sterling denominated swaps. Settlement
on all swaps is generally quarterly where:
• One payment is calculated based on a fixed rate of interest and the nominal value of the swap
•
An opposite payment is calculated based on the same nominal value but using a floating interest rate set at a fixed margin over a reference
rate, LIBOR or SONIA
The Group pays fixed rate and receives floating when hedging exposures from fixed rate assets (in the loan hedge). Conversely, the Group pays
floating rate and receives fixed rate when hedging fixed rate deposits, in the deposit hedge.
The principal terms of the hedging instruments are set out below, analysed between the two directions of the swap.
Average fixed notional interest rate
Average notional margin over LIBOR
Average notional margin over SONIA
Notional principal value
LIBOR swaps
SONIA swaps
Maturing
Within one year
Between one and two years
Between two and five years
More than 5 years
2019
2018
Deposit Hedge
Loan Hedge
Deposit Hedge
Loan Hedge
0.83%
1.04%
0.75%
1.00%
-
-
£m
1,619.0
-
1,619.0
805.5
449.5
364.0
-
1,619.0
-
-
£m
4,304.5
486.8
4,791.3
465.4
595.2
3,554.7
176.0
4,791.3
-
-
£m
1,592.5
-
1,592.5
1,412.0
80.5
100.0
-
1,592.5
-
-
£m
3,161.4
-
3,161.4
814.6
218.8
2,128.0
-
3,161.4
Fair value
7.5
(78.2)
(1.5)
20.9
The increased levels of hedging shown above arise from the growth in both the loan and deposit books. The changes in fair value are a result of
moves in market implied interest rates compared to the rates on the fixed legs of the swaps.
PAGE 200 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Accounting impacts
Movements affecting the portfolio fair value hedges during the year are set out below.
Hedging instruments
Interest rate swaps
Included in derivative financial assets
Included in derivative financial liabilities
2019
2018
Deposit Hedge
Loan Hedge
Deposit Hedge
Loan Hedge
£m
£m
£m
£m
7.6
(0.1)
7.5
0.2
(78.4)
(78.2)
1.9
(3.4)
(1.5)
22.0
(1.1)
20.9
Notional principal value
1,619.0
4,791.3
1,592.5
3,161.4
Change in fair value used in calculating hedge ineffectiveness
7.9
(98.5)
(0.4)
15.1
Hedged items
Fixed rate deposits
Monetary amount of risk relating to Retail Deposits
1,473.7
-
1,446.7
-
Fixed rate loans
Monetary amount of risk relating to Loans to Customers
-
4,834.8
-
3,141.3
Accumulated amount of fair value hedge adjustments included on
balance sheet (notes 20 and 31)*
Of which: amounts related to discontinued hedging relationships
being amortised
Change in fair value used in recognising hedge ineffectiveness
(3.9)
-
(8.1)
64.2
(8.8)
92.2
Hedge ineffectiveness recognised
Included in fair value (losses) / gains in the profit and loss account
(0.2)
(6.3)
4.2
-
0.6
0.2
(24.1)
(5.0)
(14.0)
1.1
*
Under the IAS 39 rules relating to fair value hedge accounting for portfolios of interest rate risk, the change in the fair value of the hedged items attributable to the hedged risk is shown as
‘fair value adjustments from portfolio hedging’ next to the carrying value of the hedged assets or liabilities in the appropriate note.
b)
Cash flow hedging
Background and hedging objectives
The Group has entered into cross-currency basis swap agreements which form part of its securitisation arrangements, providing an economic
hedge against financial risks inherent in the deal structures, as described below. Such relationships have been designated as cash flow hedges
for accounting purposes.
In any securitisation where asset backed floating rate notes (‘FRNs’) are issued in currency (US dollars or euros), a currency and interest rate
mismatch between assets and liabilities would exist, exposing the securitisation and the Group to both foreign exchange and interest basis risk.
This would preclude such a deal from attaining a AAA rating for its senior debt. To address that issue, in each deal a bespoke cross-currency
basis swap was written, with the swap being an asset or liability of the relevant SPV company.
The effect of these swaps is to translate the required currency payments, both principal and interest to sterling payments, based on a fixed rate
of exchange. They also translate the reference rate of interest on the notes from a dollar LIBOR or EURIBOR basis to a sterling LIBOR basis. This
effectively eliminates the foreign exchange and interest rate basis risks with respect to these instruments.
In order to achieve a AAA rating for the deal, the swaps must themselves be capable of this level of rating. Therefore, the deal conditions specify
that only high quality counterparties may be used, and that where there is deterioration in credit quality of the counterparty, collateral must be
posted. The collateral requirement is supervised by the independent third-party rating agencies.
PAGE 201 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Hedging instruments
Under these swap agreements
•
•
•
•
The Group will make quarterly payments of principal and floating rate interest in sterling and receive equivalent amounts of principal and
floating rate interest, in currency (either US Dollars or Euros), translated at an exchange rate fixed on inception
Settlement of both the cross-currency basis swaps and the notes to which they relate takes place on the same date. The Group makes a
single payment in sterling to the swap provider who will make the corresponding swap payment in currency to the external principal paying
agent. The principal paying agent will use these funds immediately to make the payments required on the currency notes
The nominal amount of the swaps is adjusted automatically, quarter by quarter, such that it always amortises in line with the quarterly
payments of principal made on the currency notes (a ‘balance guarantee’ feature)
Floating rate interest on the sterling (pay) leg of the swaps is set with reference to three-month sterling LIBOR, with floating rate interest on
the currency (receive) legs set by reference to equivalent currency rates
• The payment and repricing dates are the same (to the day) for the swaps as for their underlying notes
• The swaps must remain in place for as long as the notes are outstanding
The principal terms of the hedging instruments (the cross-currency basis swaps) are summarised below.
Average fixed exchange rate
Average margin over LIBOR on interest payable
Average margin over US dollar LIBOR / EURIBOR on interest receivable
Notional Principal value (£m)
Fair value (£m)
Average remaining term (years)
2019
2018
Swap currency
Swap currency
USD
2.0
0.24%
0.19%
447.5
274.6
21
EUR
1.5
0.49%
0.52%
1,007.4
308.1
22
USD
1.9
0.25%
0.21%
897.3
424.6
20
EUR
1.5
0.52%
0.53%
1,320.6
405.1
21
Although the average remaining contractual term is as shown above, the link between the notional principal of the swaps and the balance
outstanding on the notes means that the life may, in practice, be much shorter.
The absolute value of these swaps is relatively large as the majority of the instruments date from before the 2008 credit crisis, when a major
dislocation in rates occurred, creating significant market value in the instruments. However, economically, this is offset by the corresponding
increase in the carrying value of the currency denominated notes. Legacy assets, those with inception dates in 2008 or earlier, account for
£582.1 million of the cross-currency basis swap balance at 30 September 2019 (2018: £819.5m), with post-2010 assets representing only
£0.6 million (2018: £10.2m).
The decrease in notional principal related to the PM12 disposal, where the hedging arrangement ceased on the derecognition of both the
hedged FRNs and the hedging instruments (note 7), and note repayments in the period.
Sources of potential ineffectiveness
All cross-currency basis swap agreements have been designated as cash flow hedges in line with their economic effect and the critical terms,
such as interest and exchange rates, pricing dates and principal balances of the designated hedging instruments exactly match those of the
hedged currency denominated FRNs. This results in a critical terms match for IAS 39 purposes and hence no ineffectiveness could arise from
sources other than credit risk.
In respect of credit risk the hedging instruments are partially collateralised, with additional collateral conditionally available, as described
in note 57. This generates a small potential credit valuation adjustment associated with the derivative asset representing the credit risk of
the receivable future cash flows that make up the derivative fair value. However, IAS 39 requires that Other Comprehensive Income (‘OCI’)
is adjusted by the lower of the cumulative gain or loss on the derivative or the hedged item (as proxied by a hypothetical derivative). As the
derivative bears credit risk of the counterparty (for the uncollateralised portion) it has a lower fair value than the hypothetical derivative. The
result is that the full fair value of the derivative is taken to OCI as it is the lower of the two amounts and no ineffectiveness arises.
PAGE 202 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Accounting impacts
Movements affecting the cash flow hedge relationships in the year are set out below.
2019
2018
Swap currency
Swap currency
USD
EUR
USD
EUR
Hedging Instruments
Cross-currency basis swaps
Included in derivative financial assets
Included in derivative financial liabilities
Notional principal value
Change in fair value used in calculating hedge ineffectiveness
Hedged Items
Floating rate notes
274.6
-
274.6
447.5
71.3
308.1
-
308.1
1,007.4
(21.2)
Included in Asset Backed Loan Notes
Changes in fair value used in calculating hedge ineffectiveness
Cash flow hedging reserve (before tax)
447.5
1,007.4
71.3
0.8
(21.2)
2.8
424.6
-
424.6
897.3
(55.7)
897.3
55.7
0.9
405.1
-
405.1
1,320.6
8.3
1,320.6
8.3
3.1
The table below summarises the amounts which have affected total comprehensive income as a result of the cash flow hedges
described above.
Change of value in hedging instrument recognised in cash flow hedge reserve
US Dollars swaps
Euro swaps
Amount reclassified from cash flow hedge reserve to profit, recognised as foreign exchange
differences and interest on asset backed loan notes both included within interest payable
US Dollars swaps
Euro swaps
Net amount recognised in Other Comprehensive Income before tax
2019
£m
71.3
(21.2)
50.1
71.1
(21.5)
49.6
0.5
2018
£m
55.7
8.3
64.0
55.5
7.5
63.0
1.0
All amounts reclassified to profit have been transferred because the hedged item has affected profit or loss, or in the case of the PM12 FRNs,
has been derecognised (note 7).
PAGE 203 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
c)
Derivatives not in a hedge accounting relationship
The Group’s other derivatives comprise:
•
•
Interest rate swaps which are economically part of the Group’s portfolio hedging arrangements but failed to find a match in the hedge
designation, including swaps hedging interest rate risk on the new lending pipeline
Currency futures, economically hedging exposures on lending denominated in currency, where hedge accounting has not been adopted due
to the size of the exposure
The principal terms of these derivatives are set out below.
Interest rate swaps
2019
2018
Pay fixed
Pay floating
Pay fixed
Pay floating
0.75%
0.77%
0.92%
0.80%
-
-
£m
315.4
-
315.4
68.4
43.5
92.5
111.0
315.4
1.9
-
-
£m
554.0
8.0
562.0
424.0
95.0
43.0
-
562.0
(2.0)
-
-
£m
441.7
-
441.7
215.0
32.2
189.0
5.5
441.7
1.4
-
-
£m
362.0
8.0
370.0
359.0
11.0
-
-
370.0
0.5
2019
2018
1.22
£m
5.7
5.7
-
-
5.7
-
1.32
£m
5.8
5.8
-
-
5.8
-
Average fixed notional interest rate
Average notional margin over LIBOR
Average notional margin over SONIA
Notional principal value
LIBOR swaps
SONIA swaps
Maturing
Within one year
Between one and two years
Between two and five years
More than 5 years
Fair value
Currency futures
US Dollar futures
Average future exchange rate
Notional principal value
Maturing
Within one year
Between one and two years
Between two and five years
Fair value
PAGE 204 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
25.
SUNDRY ASSETS
(a)
The Group
Current assets
Accrued interest income
Trade receivables
CSA Assets
CRDs
Other receivables
Sundry financial assets
Prepayments
Other tax
Note
67
2019
£m
0.4
3.6
72.2
11.4
2.7
90.3
2.1
0.4
92.8
2018
£m
0.6
2.2
3.8
6.2
2.5
15.3
2.6
1.1
19.0
2017
£m
0.2
4.2
2.0
1.6
1.7
9.7
2.8
0.2
12.7
Cash ratio deposits (‘CRDs’) are non-interest-bearing deposits lodged with the Bank of England, based on the value of the Bank’s eligible
liabilities. These are required to comply with regulatory rules.
Credit Support Annex (‘CSA’) assets are deposits placed with highly rated banks to act as security for the Group’s derivative financial liabilities.
Neither of these balances is accessible by the Group at the balance sheet date. Therefore, they are included in sundry assets rather than
cash balances.
CRD, CSA and accrued interest are considered to be stage 1 assets for IFRS 9 impairment purposes. The probabilities of default of the
obligor institutions (the Bank of England and major banks) has been assessed and is considered to be so low as to require no significant
impairment provision.
(b)
The Company
Current assets
Amounts owed by Group companies
Accrued interest income
2019
£m
106.6
0.7
107.3
2018
£m
216.3
0.7
217.0
2017
£m
40.1
-
40.1
The amounts owed to the Company by other Group entities are considered to be stage 1 balances for IFRS 9 impairment purposes. The
probability of default of the subsidiaries has been assessed in the context of the Group’s overall funding and asset position, and is considered to
be so low as to require no significant impairment provision.
PAGE 205 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 26.
DEFERRED TAX
(a)
The Group
The movements in the net deferred tax asset / (liability) are as follows:
Net liability at 1 October 2018
As previously reported
Change of accounting policy
Restated
Derecognition
Acquisitions
Income statement credit
Credit to equity
Net asset / (liability) at 30 September 2019
Note
62
7
66
15
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 / (liability)
2019
£m
(5.6)
5.0
(0.6)
1.8
0.5
2.3
2.2
6.2
2019
£m
2.3
5.9
(5.3)
0.4
2.9
6.2
2018
£m
(4.8)
-
(4.8)
-
(0.3)
1.2
(1.7)
(5.6)
2018
£m
4.1
3.7
(14.0)
0.2
0.4
(5.6)
2017
£m
(2.0)
-
(2.0)
-
-
2.8
(5.6)
(4.8)
2017
£m
4.0
5.7
(14.9)
0.2
0.2
(4.8)
As stated in note 15 legislation has been introduced to reduce the standard rate of UK corporation tax to 17.0% from 1 April 2020. The temporary
differences have been provided at the rate prevailing when the Group anticipates the temporary difference to reverse. In the event that the
temporary differences actually reverse in different periods, a credit or charge will arise in a future period to reflect the difference. The timing
of reversal of temporary differences will be affected by both matters within the Group’s control (e.g. the timing and nature of the refinancing of
certain portfolios) and matters outside the Group’s control (e.g. the level of redemptions of finance leases).
If temporary differences reverse within Paragon Bank PLC in a period in which it is subject to the banking surcharge, then the impact of the
reversal will be at an effective tax rate that includes the banking surcharge to some extent.
In addition, the Group has tax losses of £2.3m (2018: £1.7m) in entities whose current taxable profits are insufficient to support the recognition
of a deferred tax asset.
(b)
The Company
The movements in the net deferred tax liability are as follows:
Net liability at 1 October 2018
Income statement (credit)
Net liability at 30 September 2019
The net deferred tax liability for which provision has been made is analysed as follows:
Other timing differences
Net deferred tax liability
PAGE 206 • The Accounts
2019
£m
1.8
(0.2)
1.6
2019
£m
1.6
1.6
2018
£m
1.8
-
1.8
2018
£m
1.8
1.8
2017
£m
1.9
(0.1)
1.8
2017
£m
1.8
1.8
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
27.
PROPERTY, PLANT AND EQUIPMENT
(a)
The Group
Cost
At 1 October 2017
Acquisitions
Additions
Disposals
At 30 September 2018
Acquisitions
Additions
Disposals
At 30 September 2019
Accumulated depreciation
At 1 October 2017
Charge for the year
On disposals
At 30 September 2018
Charge for the year
On disposals
At 30 September 2019
Net book value
At 30 September 2019
At 30 September 2018
At 30 September 2017
Leased
assets
£m
30.0
-
19.3
(2.9)
46.4
-
11.6
(5.3)
52.7
6.6
5.9
(1.5)
11.0
7.6
(2.2)
16.4
36.3
35.4
23.4
Land and
buildings
Plant and
machinery
£m
22.8
-
-
-
22.8
-
-
-
22.8
3.0
0.6
-
3.6
0.5
-
4.1
18.7
19.2
19.8
£m
10.9
-
0.8
(1.0)
10.7
-
1.1
(1.2)
10.6
7.9
1.3
(0.7)
8.5
1.0
(1.2)
8.3
2.3
2.2
3.0
Total
£m
63.7
-
20.1
(3.9)
79.9
-
12.7
(6.5)
86.1
17.5
7.8
(2.2)
23.1
9.1
(3.4)
28.8
57.3
56.8
46.2
Plant and machinery shown above is used within the Group’s business. Leased assets includes £25.6m in respect of assets leased under
operating leases (2018: £25.7m) and £10.7m of assets available for hire (2018: £9.7m).
During the year ended 30 September 2018, the Group entered into a transaction with the Paragon Pension Plan, effectively granting a first
charge over its freehold head office building as security for its agreed contributions under the recovery plan. The carrying value of the assets
subject to this charge was £18.0m (2018: £18.3m).
PAGE 207 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (b)
The Company
Cost
At 1 October 2017
Disposals
At 30 September 2018
Disposals
At 30 September 2019
Accumulated depreciation
At 1 October 2017
Charge for the year
On disposals
At 30 September 2018
Charge for the year
On disposals
At 30 September 2019
Net book value
At 30 September 2019
At 30 September 2018
At 30 September 2017
Land and
buildings
£m
19.9
(19.9)
-
-
-
1.3
0.2
(1.5)
-
-
-
-
-
-
18.6
During the year ended 30 September 2018, the Group’s head office building was transferred to a subsidiary entity as part of the arrangements
to establish the effective charge described above.
PAGE 208 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 28.
INTANGIBLE ASSETS
Cost
At 1 October 2017
Acquisitions (note 66)
Additions
At 30 September 2018
Acquisitions (note 66)
Additions
At 30 September 2019
Accumulated amortisation and impairment
At 1 October 2017
Amortisation charge for the year
At 30 September 2018
Amortisation charge for the year
At 30 September 2019
Net book value
At 30 September 2019
At 30 September 2018
At 30 September 2017
Goodwill
(note 29)
£m
104.1
64.1
-
168.2
2.2
-
170.4
6.0
-
6.0
-
6.0
164.4
162.2
98.1
Computer
software
Other intangible
assets
£m
7.9
-
1.5
9.4
-
2.0
11.4
5.9
1.4
7.3
1.7
9.0
2.4
2.1
2.0
£m
9.2
1.4
-
10.6
-
-
10.6
4.9
0.7
5.6
0.7
6.3
4.3
5.0
4.3
Total
£m
121.2
65.5
1.5
188.2
2.2
2.0
192.4
16.8
2.1
18.9
2.4
21.3
171.1
169.3
104.4
Other intangible assets comprise brands and the benefit of business networks recognised on the acquisition of businesses.
29.
GOODWILL
The goodwill carried in the accounts is attributable to three cash generating units, which have not changed in the year. The balance is as
analysed below:
2019
£m
113.0
49.8
1.6
164.4
2018
£m
113.0
47.6
1.6
162.2
Asset finance
Development finance
TBMC
PAGE 209 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (a) Asset finance
The goodwill carried in the accounts relating to the asset finance cash generating unit was recognised on the acquisitions of PAF and Premier
in the year ended 30 September 2016 and Iceberg in the year ended 30 September 2018.
An impairment review undertaken at 30 September 2019 indicated that no write down was required.
The recoverable amount of the asset finance cash generating unit used in this impairment testing is determined on a value in use basis using
pre-tax cash flow projections based on financial budgets approved by the Board covering a five-year period.
The key assumptions underlying the value in use calculation for the asset finance cash generating unit are:
•
Level of business activity, based on management expectations. The forecast assumes a compound annual growth rate (‘CAGR’) for new
business over the five-year period of 12.0%, compared with 12.5% in the year ended 30 September 2019. Cash flows beyond the five-year
budget are extrapolated using a constant growth rate of 1.9% (2018: 2.2%) which does not exceed the long term average growth rates for
the markets in which the business is active
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 third party estimates of the implied industry cost of capital. The pre-tax discount rate applied to the cash
flow projection is 13.2% (2018: 13.4%)
As an illustration of the sensitivity of this impairment test to movements in the key assumptions, the Group has calculated that a 24.0%
reduction in profit levels coupled with a 370 basis point increase in the pre-tax discount rate would eliminate the headroom in the projection.
In the testing carried out at 30 September 2018, a 12.6% reduction in profit levels coupled with a 185 basis point increase in the pre-tax discount
rate would have that effect.
(b) Development finance
The goodwill carried in the accounts relating to the development finance cash generating unit was recognised on the acquisition of Titlestone
for the year ended 30 September 2018 and amended in the current year as described in note 66.
An impairment review undertaken at 30 September 2019 indicated that no write down was required.
The recoverable amount of the development finance cash generating unit used in this impairment testing is determined on a value in use basis
using pre-tax cash flow projections based on financial budgets approved by the Board covering a five-year period.
The key assumptions underlying the value in use calculation for the development finance cash generating unit are:
•
Level of business activity, based on management expectations. The forecast assumes a CAGR for new commitments over the five-year
period of 18.3%, compared with 47.8% in the year ended 30 September 2019. Cash flows beyond the five-year budget are extrapolated
using a constant growth rate of 1.9% (2018: 2.2%) which does not exceed the long-term average growth rate for the UK economy
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 third party estimates of the implied industry cost of capital. The pre-tax discount rate applied to the cash
flow projection is 13.2% (2018: 13.4%)
Management believes any reasonably possible change in the key assumptions above would not cause the recoverable amount of the
development finance cash generating unit to fall below the balance sheet carrying value. This was also the case in the testing carried out at
30 September 2018.
(c)
TBMC
The goodwill carried in the accounts relating to the TBMC cash generating unit was recognised on the acquisition of The Business Mortgage
Company Limited and its subsidiaries (‘TBMC’) in December 2008 and impaired by £6.0m in 2009.
An impairment review was undertaken at 30 September 2019 which indicated no further impairment. The recoverable amount of TBMC used
in this impairment testing is determined on a value in use basis using pre-tax cash flow projections based on financial budgets approved by the
Board covering a five year period. The pre-tax discount rate applied to the cash flow projection is 4.74% (2018: 5.66%) and cash flows beyond
the five year budget are extrapolated using a 1.6% (2018: 2.0%) growth rate, being the average long term growth rate in the UK 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 market rates of interest plus a margin appropriate to the risk profile of the TBMC business as an investment
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.
PAGE 210 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
30.
INVESTMENT IN SUBSIDIARY UNDERTAKINGS
At 1 October 2017
Investments in subsidiaries
Loans advanced
Loans repaid
Provision movements
At 30 September 2018
Investments in subsidiaries
Capital distributions
Loans advanced
Loans repaid
Provision movements
At 30 September 2019
Shares in group
companies
Loans to group
companies
Loans to ESOP
Trusts
£m
759.4
12.5
-
-
(1.2)
770.7
-
(130.0)
-
-
(0.2)
640.5
£m
46.3
-
200.0
(46.3)
-
200.0
-
-
100.0
-
-
300.0
£m
13.4
-
6.5
-
(6.2)
13.7
-
-
5.1
-
(18.6)
0.2
Total
£m
819.1
12.5
206.5
(46.3)
(7.4)
984.4
-
(130.0)
105.1
-
(18.8)
940.7
Investments in subsidiaries represent transactions between the Company and various of its subsidiaries.
During the year ended 30 September 2019, the Group carried out capital reductions in various non-trading subsidiaries. Dividends were paid,
or capital was distributed to the parent and the investments above were written off as a result of the reduction in these entities’ net assets.
During the year ended 30 September 2019 the Company received £44.3m in dividend income from its subsidiaries (2018: £62.0m) and £15.1m
of interest on loans to Group companies (2018: £12.6m).
The Company’s subsidiaries, and the nature of its interest in them, are shown in note 68.
31.
RETAIL DEPOSITS
The Group’s retail deposits, held by Paragon Bank PLC, were received from customers in the UK and are denominated in sterling. The deposits
comprise principally term deposits and 120 day notice accounts. The method of interest calculation on these deposits is analysed as follows:
2017
£m
2,675.9
939.5
3,615.4
2017
%
1.89
1.21
1.71
Fixed rate
Variable rates
2019
£m
4,154.4
2,237.5
6,391.9
2018
£m
3,643.1
1,653.5
5,296.6
The weighted average interest rate on retail deposits at 30 September 2019, analysed by charging method, was:
2019
%
2.02
1.43
1.81
2018
%
1.94
1.36
1.76
Fixed rate
Variable rates
All deposits
PAGE 211 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The contractual maturity of these deposits is analysed below.
Amounts repayable
In less than three months
In more than three months, but not more than one year
In more than one year, but not more than two years
In more than two years, but not more than five years
Total term deposits
Repayable on demand
Fair value adjustments for portfolio hedging (note 24)
2019
£m
466.6
2,088.4
1,158.0
900.9
4,613.9
1,778.0
6,391.9
3.9
6,395.8
2018
£m
256.8
2,024.7
1,010.6
655.3
3,947.4
1,349.2
5,296.6
(4.2)
5,292.4
2017
£m
211.4
1,399.6
770.0
629.7
3,010.7
604.7
3,615.4
(3.5)
3,611.9
32.
ASSET BACKED LOAN NOTES
The Group’s asset backed loan notes (‘Notes’) are secured on portfolios comprising variable and fixed rate mortgages or personal, retail and
car loans. The maturity date of the Notes matches the maturity date of the underlying assets. The Notes can be prepaid in part from time to
time, but such prepayments 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 on the Notes out of general funds. It is likely that a substantial proportion of the Notes will be repaid
within five years.
For its public issues, the Group has an additional option to repay all of the Notes at an earlier date (the ‘call date’), at their outstanding
principal amount.
Interest is payable at a fixed margin above;
• The London Interbank Offered Rate (‘LIBOR’) on notes denominated in sterling, other than notes issued by Paragon Mortgages (No. 26) PLC
• The Sterling Overnight Interbank Average Rate (‘SONIA’) on notes denominated in sterling issued by Paragon Mortgages (No. 26) PLC
• The Euro Interbank Offered Rate (‘EURIBOR’) on notes denominated in euros
• 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.
All of the Notes are rated and publicly listed.
The notes outstanding at 30 September 2019 can be analysed as follows:
Secured on first mortgage assets
Secured on other assets
2019
£m
4,419.4
-
4,419.4
2018
£m
5,521.6
33.1
5,554.7
The Group publishes detailed information on the performance of all of its listed note issues on the Bond Investor Reporting section of its
website at www.paragonbankinggroup.co.uk. A more detailed description of the securitisation structure under which these Notes are issued is
given in note 58.
On 3 July 2019, a Group company, Paragon Mortgages (No. 26) PLC, issued £364.3m of sterling mortgage backed floating rate notes to external
investors at par. All of the notes were class A notes, rated AAA by Fitch and Aaa by Moody’s. The interest rate above SONIA on the notes was
1.05%. The proceeds were used to refinance existing short-term liabilities. The Group retained £273.9m of notes of various classes meaning
that its investment represented 43.0% of the issued notes.
PAGE 212 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Notes in issue at 30 September 2019 and 30 September 2018, net of any held by the Group, were:
Issuer
Maturity date
Call date
Principal
outstanding
Sterling notes
Interest based on LIBOR
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 Mortgages (No. 21) PLC
Paragon Mortgages (No. 22) PLC
Paragon Mortgages (No. 23) PLC
Paragon Mortgages (No. 24) PLC
Paragon Mortgages (No. 25) PLC
First Flexible No. 5 PLC
First Flexible No. 6 PLC
First Flexible (No. 7) PLC
Paragon Secured Finance (No. 1) PLC
Interest based on SONIA
15/05/41
15/06/41
15/10/41
15/11/38
15/01/39
15/09/39
15/12/39
15/06/42
15/09/42
15/01/43
15/07/43
15/05/50
01/06/34
01/12/35
15/09/33
15/11/35
15/05/09
15/12/09
15/04/10
15/08/10
15/10/10
15/03/11
15/06/11
15/12/18
15/06/19
15/10/19
15/04/20
15/05/23
01/07/09
01/03/08
15/03/11
15/11/08
2019
£m
95.2
155.7
237.7
-
443.7
423.8
117.7
-
-
34.5
45.7
2018
£m
102.4
169.5
258.9
100.4
475.8
466.1
128.3
55.2
48.3
55.9
71.5
423.6
435.3
-
47.7
-
-
50.3
52.5
12.4
33.1
Average
interest margin
2019
%
2018
%
0.38
0.52
0.15
-
0.27
0.23
0.30
-
-
1.84
2.85
0.72
-
1.27
-
-
0.38
0.50
0.15
0.41
0.27
0.23
0.30
1.13
1.15
1.56
2.36
0.71
0.99
1.27
0.30
0.98
Paragon Mortgages (No. 26) PLC
15/05/45
15/08/24
364.3
-
1.05
-
US dollar notes
Paragon Mortgages (No. 9) PLC
Paragon Mortgages (No. 12) PLC
Paragon Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) PLC
First Flexible No. 6 PLC
Euro notes
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 Mortgages (No. 22) PLC
Paragon Mortgages (No. 23) PLC
Paragon Mortgages (No. 24) PLC
First Flexible No. 6 PLC
15/05/41
15/11/38
15/01/39
15/09/39
15/12/39
01/12/35
15/05/41
15/06/41
15/10/41
15/11/38
15/01/39
15/09/39
15/12/39
15/09/42
15/01/43
15/07/43
01/12/35
15/05/09
15/08/10
15/10/10
15/03/11
15/06/11
01/03/08
15/05/09
15/12/09
15/04/10
15/08/10
15/10/10
15/03/11
15/06/11
15/06/19
15/10/19
15/04/20
01/03/08
$m
15.5
-
143.4
166.1
552.9
7.5
€m
147.7
247.0
196.1
-
285.9
326.4
248.9
-
2.2
0.6
26.8
$m
16.7
743.8
154.3
185.3
611.2
8.2
€m
158.9
254.1
213.6
326.0
303.8
338.2
254.5
26.3
14.1
16.1
29.6
%
0.36
-
0.18
0.20
0.19
0.56
%
0.56
0.39
0.54
-
0.42
0.48
0.72
-
0.70
1.10
1.05
%
0.36
0.24
0.18
0.20
0.19
0.56
%
0.56
0.39
0.54
0.54
0.42
0.47
0.71
0.50
0.70
1.10
1.05
The details of the assets backing these securities are given in note 21.
PAGE 213 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
During the year, the Group redeemed all of the outstanding notes of the following securitisations at par:
• Paragon Secured Finance (No. 1) PLC on 15 November 2018
•
First Flexible (No. 5) PLC on 3 December 2018
• Paragon Mortgages (No. 21) PLC on 17 December 2018
• Paragon Mortgages (No. 22) PLC on 17 June 2019
•
First Flexible (No. 7) PLC on 17 June 2019
The underlying assets were subsequently funded by other Group companies.
On 25 September 2019, notice was given of the Group’s intention to redeem all of the outstanding notes of Paragon Mortgages (No. 23) PLC at
par, and this took place on 15 October 2019, after the year end.
On 26 June 2019, the Group disposed of its beneficial interest in the Paragon Mortgages (No. 12) PLC securitisation as described in note 7. At
that point, the FRN liabilities were derecognised by the Group, although the notes remain in issue.
33.
BANK BORROWINGS
New first mortgage loans may be financed by a secured bank loan, referred to as a ‘warehouse facility’. These facilities are drawn on the
completion of a mortgage and repayment of the facilities is restricted to the principal cash received in respect of the funded mortgage. Loans
originated in warehouse facilities are refinanced in the mortgage backed securitisation market when conditions are appropriate or through
internal sales to access retail funding. More information on this process is given in note 58 and details of assets held within the warehouse
facilities are given in note 21. Details of the Group’s bank borrowings are set out below.
i) Paragon Second Funding
ii) Paragon Seventh Funding
Principal
value
£m
787.5
-
787.5
2019
Maximum
available
facility
£m
787.5
200.0
987.5
Carrying
value
Principal
value
£m
787.5
-
£m
935.6
-
2018
Maximum
available
facility
£m
935.6
-
Carrying
value
£m
935.6
-
787.5
935.6
935.6
935.6
i)
ii)
The Paragon Second Funding warehouse 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. This loan is a sterling facility provided to Paragon Second Funding Limited by a
consortium of banks and is secured on all the assets of Paragon Second Funding Limited, Paragon Car Finance (1) Limited and Paragon
Personal Finance (1) Limited. Its final repayment date is 28 February 2050, but 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 (2018: 0.675% above LIBOR).
On 26 September 2015, a Group company, Paragon Seventh Funding Limited, entered into an additional £200.0m committed sterling
facility with Bank of America Merrill Lynch International Limited. This facility was secured on all the assets of Paragon Seventh Funding
Limited and was available for drawings and redrawings until 8 October 2017. This facility bore interest at a rate of three month LIBOR plus
1.30%. The facility was not renewed at the end of the commitment period and was repaid during the year ended 30 September 2018.
On 14 November 2018, a new £200.0m warehouse funding facility was agreed between Paragon Seventh Funding Limited and Bank of
America Merrill Lynch. The facility is secured over all of the assets of Paragon Seventh Funding Limited, with a 12 month commitment
period. Interest is payable at 0.95% over three month LIBOR.
The weighted average margin above LIBOR on bank borrowings at 30 September 2019 was 0.675% (2018: 0.675%).
PAGE 214 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
34.
RETAIL BONDS
On 11 February 2013 the Company inaugurated a £1,000.0m Euro Medium Term Note Programme under which it may issue retail bonds, or
other notes, within a twelve-month period. The prospectus has been updated from time to time, most recently renewing the programme for a
further twelve-month period on 15 July 2016, but may be further extended in the future.
The terms of issue for each tranche of notes are separately determined. These bonds are listed on the London Stock Exchange and have a fixed
term, but are callable at the option of the Company. A summary of the retail bonds outstanding under this programme, shown with their principal
values, is set out below.
Maturity date
Interest terms
Issue price
Currency
5 December 2020
30 January 2022
28 August 2024
6.000% p.a. fixed
6.125% p.a. fixed
6.000% p.a. fixed
par
par
par
GBP
GBP
GBP
2019
£m
60.0
125.0
112.5
297.5
2018
£m
60.0
125.0
112.5
297.5
The notes are unsubordinated unsecured liabilities of the Company and the amount included in the accounts of the Group and the Company in
respect of these bonds is £296.5m (2018: £296.1m).
35.
CORPORATE BONDS
On 9 September 2016 the Company issued £150.0m of 7.25% Fixed Rate Reset Callable Subordinated Tier 2 Notes due 2026 at par to provide
long term capital for the Group. These bonds bear interest at a fixed rate of 7.25% per annum until 9 September 2021, after which interest
will be payable at a fixed rate which is 6.731% over the sterling 5-year mid-market swap rate at that time. These bonds are unsecured and
subordinated to any other creditors of the Company. At issue the Notes were rated BB+ by Fitch and this rating was upgraded to BBB- in the
year ended 30 September 2018.
The carrying value of these bonds in the accounts of the Group and the Company at 30 September 2019 was £149.6m (2018: £149.3m).
36. CENTRAL BANK FACILITIES
During the year, the Group has utilised facilities provided by the Bank of England including through its Sterling Monetary Framework. These
facilities enable either funding or off-balance sheet liquidity to be provided to Paragon Bank on the security of designated pools of the Bank’s
first mortgage assets, with the amount available based on the value of the security given, subject to a haircut.
Drawings under the FLS are used to provide off balance sheet liquidity and form part of the Bank’s HQLA. Fees are charged under the FLS at
0.25% of the market value of the liquidity drawn and are repayable in June 2020.
Drawings under the Indexed Long-Term Repo Scheme (‘ILTR’) have a maturity of six months and a rate of interest set in an auction process. At
30 September 2019 the average rate of interest on the Group’s ILTR drawings was 0.90% (2018: 0.90%).
Drawings under the Term Funding Scheme (‘TFS’) have a maturity of four years and bear interest at bank base rate. The average remaining
maturity of the Group’s drawings is 22 months (2018: 34 months). As these drawings are provided at rates below those available commercially,
by a government agency, they are accounted for under IAS 20. The TFS is no longer available for new drawings.
The amounts drawn under these facilities are set out below.
TFS
ILTR
On balance sheet funding
FLS
Total central bank facilities
2019
£m
944.4
50.0
994.4
109.0
1,103.4
2018
£m
944.4
80.0
1,024.4
108.7
1,133.1
Further first mortgage assets of the Bank have been pre-positioned with the Bank of England for future use in such schemes. The assets
pledged in support of these drawings are set out in note 21.
PAGE 215 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The balances arising from the TFS carried in the Group accounts are shown below.
TFS at IAS 20 carrying value
Deferred government assistance
37.
SUNDRY LIABILITIES
(a)
The Group
Current liabilities
Accrued interest
Trade creditors
CSA liabilities (note 57)
Other accruals
Sundry financial liabilities at amortised cost
Contingent consideration (note 38)
Sundry financial liabilities
Deferred income
Conduct (note 39)
Other taxation and social security
Non-current liabilities
Accrued interest
Other accruals
Sundry financial liabilities at amortised cost
Contingent consideration (note 38)
Sundry financial liabilities
Deferred income
Total sundry financial liabilities at amortised cost
Total sundry financial liabilities at fair value
Total other sundry liabilities
Total sundry liabilities
(b)
The Company
Current liabilities
Amounts owed to Group companies
Accrued interest
All of the above balances represent financial liabilities carried at amortised cost.
PAGE 216 • The Accounts
2019
£m
930.5
13.9
944.4
2018
£m
923.5
20.9
944.4
2019
£m
37.4
0.9
-
29.7
68.0
2.2
70.2
1.3
-
2.4
73.9
14.9
0.2
15.1
21.5
36.6
2.2
38.8
83.1
23.7
5.9
112.7
2019
£m
23.8
3.6
27.4
2018
£m
27.5
2.7
10.3
29.7
70.2
-
70.2
0.9
-
2.5
73.6
12.4
0.2
12.6
25.7
38.3
2.5
40.8
82.8
25.7
5.9
114.4
2018
£m
125.7
2.8
128.5
2017
£m
23.6
3.5
-
21.0
48.1
-
48.1
1.1
0.5
1.4
51.1
7.2
0.2
7.4
14.0
21.4
2.1
23.5
55.5
14.0
5.1
74.6
2017
£m
36.5
2.9
39.4
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 38.
CONTINGENT CONSIDERATION
The contingent consideration represents consideration payable in respect of corporate acquisitions which is dependent on the performance of
the acquired businesses. Movements in the balance are set out below.
At 1 October 2018
Acquisitions (note 66)
Payments
Revaluation of liability
Unwind of discounting (note 5)
At 30 September 2019 (note 37)
39.
CONDUCT
2019
£m
25.7
-
(2.5)
-
0.5
23.7
2018
£m
14.0
11.8
-
(0.6)
0.5
25.7
The Group, as a participant in the financial services industry is exposed to a high level of regulatory supervision, which could in the event of
conduct failures expose it to financial liabilities. The Group maintains a strong compliance and conduct culture supervised by the second line
compliance function, to mitigate the risk, although it is impossible to eliminate it entirely.
Over recent years, in common with other financial services firms, the Group has followed guidance issued by the FCA in respect of redress to
customers in respect of the miss-selling of payment protection insurance (‘PPI’), though the sums involved have not been material.
The regulatory environment continues to develop, both in respect of PPI and other matters, through regulatory policies, legislative rules and
court rulings, and while the Group’s assessment is that it currently has no further potential liability for conduct issues, this is based on our
current interpretation of requirements and hence further liabilities may arise as these develop over time.
40.
CURRENT TAX LIABILITIES
Current tax in the Group and the Company represents UK corporation tax owed or recoverable.
41.
RETIREMENT BENEFIT OBLIGATIONS
(a) Defined benefit plan - description
The Group operates a funded defined benefit pension scheme in the UK (the ‘Plan’). The Plan assets are held in a separate fund, administered by
a corporate trustee, to meet long-term pension liabilities to past and present employees. The Trustee of the Plan is required by law to act in the
best interests of the Plan’s beneficiaries and is responsible for the investment policy adopted in respect of the Plan’s assets. The appointment
of directors to the Trustee is determined by the Plan’s trust documentation. The Group has a policy that one third of all directors of the Trustee
should be nominated by active and pensioner members of the Plan.
Employees who are members of the Plan are entitled to receive a pension of 1/60 of their final basic annual salary for every year of eligible
service (to a maximum of 2/3). Dependants of members of the Plan are eligible for a dependant’s pension and the payment of a lump sum in the
event of death in service.
The principal actuarial risks to which the Plan is exposed are:
•
•
•
Investment risk – The present value of the defined benefit liabilities is calculated using a discount rate set by reference to high quality
corporate bond yields. If plan assets underperform corporate bonds, this will increase the deficit. The strategic allocation of assets under
the Plan is currently weighted towards equity assets and diversified growth funds as its liability profile is relatively immature, and it is
expected that these asset classes will, over the long term, outperform gilts and corporate bonds. In consultation with the Company, the
Trustee keeps the allocation of the Plan’s investments under review to manage this risk on a long-term basis.
Interest risk – A fall in corporate bond yields would reduce the discount rate used in valuing the Plan liabilities and increase the value of the
Plan liabilities. The Plan assets would also be expected to increase, to the extent that bond assets are held, but this would not be expected
to fully match the increase in liabilities, given the weighting towards equity assets and diversified growth funds noted above.
Inflation risk – Pensions in payment are increased annually in line with the Retail Price Index (‘RPI’) or the Consumer Price Index (‘CPI’) for
Guaranteed Minimum Pensions built up since 1988. Pensions built up since 5 April 2006 are capped at 2.5% and pensions built up before
6 April 2006 are capped at 5%. For employees who have left the Company but have deferred pensions, these also revalue over the period to
retirement predominantly in line with RPI. Therefore, an increase in inflation would also increase the value of the pension liabilities. The Plan
assets would also be expected to increase, to the extent that they are linked to inflation, but this may not fully match the increase in liabilities.
PAGE 217 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts •
•
Longevity risk – The value of the Plan deficit is calculated by reference to the best estimate of the mortality rate among Plan members both
during and after employment. An increase in the life expectancy of the members would increase the deficit in the Plan.
Salary risk – The valuation of the Plan assumes a level of future salary increases based on a premium over the expected rate of inflation.
Should the salaries of Plan members increase at a higher rate, then the deficit will be higher.
The risks relating to death in service payments are insured with an external insurance company.
As a result of the Plan having been closed to new entrants since February 2002, the service cost as a percentage of pensionable salaries is
expected to increase as the average age of active members rises over time. However, the membership is expected to reduce so that the service
cost in monetary terms will gradually reduce.
The most recent full actuarial valuation of the Plan’s liabilities, obtained by the Trustee, was carried out at 31 March 2016, by Aon Hewitt, the
Plan’s independent actuary. This showed that the value of the Plan’s liabilities on a buy-out basis in accordance with Section 224 of the Pensions
Act 2004 was £214.0m, with a shortfall against the assets of £118.4m. A full actuarial valuation, as at 31 March 2019, is currently in progress and
will be reflected in the 2020 Group accounts.
Following the 2016 actuarial valuation, the Trustee put in place a revised recovery plan. The Trustee’s recovery plan aims to meet the statutory
funding objective within six years and ten months from the date of valuation, that is by 31 January 2023. As part of this recovery plan, the
Group entered into a Pension Funding Partnership (‘PFP’) transaction effectively granting the Plan a first charge over its head office building
as security for payments under the plan (note 27). No amount is included in the Plan assets in respect of the building, which remains within the
Group’s Property, Plant and Equipment balance (note 27) but it provides the Plan with additional security in a stress event.
(b) Defined benefit plan – financial impact
For accounting purposes, the valuation at 31 March 2016 was updated to 30 September 2019 in accordance with the requirements of IAS 19
(revised) by Mercer, the Group’s independent consulting actuary.
The major categories of assets in the Plan at 30 September 2019, 30 September 2018 and 30 September 2017 and their fair values were:
Cash
Equity instruments
Debt instruments
Real estate
Total fair value of Plan assets
Present value of Plan liabilities
(Deficit) in the Plan
2019
£m
7.1
60.7
34.2
10.8
112.8
(147.3)
(34.5)
2018
£m
0.6
61.8
28.4
10.7
101.5
(121.0)
(19.5)
2017
£m
0.9
58.7
28.9
9.8
98.3
(128.1)
(29.8)
At 30 September 2019 the Plan assets were invested in a diversified portfolio that consisted primarily of equity and debt investments. The
majority of the equities held by the Plan are in developed markets. All investments of the Plan are in managed funds for which unit prices are
quoted publicly by the fund managers, however they are not openly traded so are considered to be Level 2 financial instruments as defined
by IFRS 13.
During October 2018, the High Court made a ruling in the Lloyds Banking Group Pension Scheme GMP (Guaranteed Minimum Pension)
equalisation case, which effectively directs defined benefit pension schemes to change their rules to equalise the benefits of male and female
members for the effects of GMPs for employees who were, at one time, contracted out of state schemes. The Court did not specify a single
method which schemes should employ and hence the impact of this on the Plan will not be certain until the Trustee has determined which
method should be adopted and detailed calculations have been performed to evaluate the impact, as the impact on members will vary from
person to person.
The effect of this ruling has been accounted for in the accounts of the Group for the year ended 30 September 2019. The Group’s present
expectation is that the ruling will result in an additional charge to profit of £0.3m before tax and this amount has been included as ‘past service
cost’ below. However, this estimate is based on a preliminary interpretation of the ruling and a high-level calculation and therefore the actual
amount posted may vary due to the Trustee’s response to the ruling, idiosyncratic impacts on individual members and the development of a
wider legal and accounting consensus on the proper interpretation of the courts requirements as the ruling is studied in more detail.
PAGE 218 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The movement in the fair value of the Plan assets during the year was as follows:
At 1 October 2018
Interest on Plan assets
Cash flows
Contributions by Group
Contributions by Plan members
Benefits paid
Administration expenses paid
Remeasurement gain
Return on Plan assets (excluding amounts included in interest)
At 30 September 2019
The actual return on Plan assets in the year ended 30 September 2019 was £9.6m (2018: £3.7m).
The movement in the present value of the Plan liabilities during the year was as follows:
At 1 October 2018
Current service cost
Past service cost
Funding cost
Cash flows
Contributions by Plan members
Benefits paid
Remeasurement loss / (gain)
Arising from demographic assumptions
Arising from financial assumptions
Arising from experience adjustments
At 30 September 2019
2019
£m
101.5
3.0
4.6
0.2
(2.4)
(0.7)
6.6
112.8
2019
£m
121.0
1.6
0.3
3.5
0.2
(2.4)
(1.4)
24.5
-
147.3
2018
£m
98.3
2.6
4.5
0.2
(4.7)
(0.5)
1.1
101.5
2018
£m
128.1
1.8
-
3.4
0.2
(4.7)
(1.8)
(6.0)
-
121.0
PAGE 219 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
The liabilities of the Plan are measured by discounting the best estimate of future cash flows to be paid out by the Plan 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 Plan liabilities 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 next year again allowing for future salary growth. The major weighted average assumptions used by the actuary were (in nominal terms):
30 September 2019
30 September 2018
30 September 2017
In determining net pension cost for the year
Discount rate
Rate of compensation increase
Rate of price inflation
Rate of increase of pensions
In determining benefit obligations
Discount rate
Rate of compensation increase
Rate of price inflation
Rate of increase of pensions
Further life expectancy at age 60
Male member aged 60
Female member aged 60
Male member aged 40
Female member aged 40
2.95%
3.60%
3.10%
2.95%
1.85%
3.20%
2.70%
2.65%
28
29
30
31
2.70%
3.60%
3.10%
2.90%
2.95%
3.60%
3.10%
2.95%
28
29
30
31
2.40%
3.50%
3.00%
2.95%
2.70%
3.60%
3.10%
2.90%
29
30
30
32
The amounts charged in the consolidated income statement in respect of the Plan are:
Note
2019
2018
Current service cost
Past service cost
Total service cost
Administration expenses
Included within operating expenses
Funding cost of Plan liabilities
Interest on Plan assets
Net interest expense
10
5
Components of defined benefit costs recognised in profit or loss
The amounts recognised in the consolidated statement of comprehensive income in respect of the Plan are:
Return on Plan assets (excluding amounts included in interest)
Actuarial gains/(losses)
Arising from demographic assumptions
Arising from financial assumptions
Arising from experience adjustments
Total actuarial (loss)/gain
Tax thereon
Net actuarial (loss)/gain
PAGE 220 • The Accounts
£m
1.6
0.3
1.9
0.7
2.6
3.5
(3.0)
0.5
3.1
2019
£m
6.6
1.4
(24.5)
-
(16.5)
2.4
(14.1)
£m
1.8
-
1.8
0.5
2.3
3.4
(2.6)
0.8
3.1
2018
£m
1.1
1.8
6.0
-
8.9
(1.7)
7.2
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Of the remeasurement movements reflected above:
• The return on plan assets represents better than expected investment performance
•
The change in demographic assumptions reflects the adoption of new mortality assumptions, using the most recent version of the tables
adopted by the Trustee in the triennial valuation, which predict lower life expectancy among members than the previous versions
• The change in financial assumptions reflects principally the impact of increased inflation expectations on discount rates
•
The discount rate assumptions reflect the announcement made by National Statistics in September 2019 regarding its future intention to
rebase its definition of RPI
(c) Defined benefit plan – future cash flows
The sensitivity of the valuation of the defined benefit obligation to the principal assumptions disclosed above at 30 September 2019, calculating
the obligation on the same basis as used in determining the IAS 19 value, is as follows:
Assumption
Discount rate
Rate of inflation*
Rate of salary growth
Rates of mortality
* maintaining a 0.5% assumption for real salary growth
Increase in assumption
Impact on scheme liabilities
0.1% p.a.
0.1% p.a.
0.1% p.a.
1 year of life expectancy
(2.3)%
0.4%
2.3%
2.9%
The sensitivity analysis presented above may not be representative of an actual future change in the defined benefit obligation as it is unlikely
that changes in assumptions would occur in isolation as some of the assumptions will be correlated. There has been no change in the method
of preparing the analysis from that adopted in previous years.
In conjunction with the Trustee, the Group has continued to conduct asset-liability reviews of the Plan. These studies are used to assist the
Trustee 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 Trustee 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. There have been no changes in
the processes by which the Plan manages its risks from previous periods.
The target asset allocations for the year ending 30 September 2020 are 60% growth assets (primarily equities), 30% bonds and 10%
real estate.
The rate of employee contributions to the Plan is 5.0% of pensionable salaries. Since 1 April 2017, following the finalisation of the March 2016
valuation, the agreed rate of employer contributions has been 32.0% of gross salaries. Additional contributions of £2.5m per annum for deficit
reduction, including amounts payable under the PFP, and £0.4m per annum in respect of costs, each payable monthly, were also agreed.
The present best estimate of the contributions to be made to the Plan by the Group in the year ending 30 September 2020 is £4.5m.
The average durations of the benefit obligations in the Plan at the year end are shown in the table below:
Category of member
Active members
Deferred pensioners
Current pensioners
All members
2019
Years
25
24
16
24
2018
Years
24
23
15
22
(d) Defined contribution arrangements
The Group sponsors a defined contribution (Worksave) pension scheme, open to all employees who are not members of the Plan. The Group
successfully completed the auto-enrolment process mandated by the UK Government in November 2013, using this scheme.
The PAF business also sponsors a number of defined contribution pension plans and makes contributions to these schemes in respect
of employees.
The assets of these schemes are not Group assets and are held separately from those of the Group, under the control of independent trustees.
Contributions made by the Group to these schemes in the year ended 30 September 2019, which represent the total cost charged against
income, were £2.1m (2018: £1.9m) (note 10).
PAGE 221 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 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
At 1 October 2018
Shares issued
Shares cancelled
At 30 September 2019
2019
Number
2018
Number
281,596,936
281,489,701
1,606,849
107,235
(21,630,434)
-
261,573,351
281,596,936
During the year the Company issued 1,606,849 shares (2018: 107,235) to satisfy options granted under Sharesave schemes for a consideration
of £4,075,843 (2018: £360,031).
On 31 July 2019, 21,630,434 shares held in treasury were cancelled by the Company.
43.
RESERVES
(a)
The Group
Share premium account
Capital redemption reserve
Merger reserve
Cash flow hedging reserve (note 24)
Profit and loss account
(b)
The Company
Share premium account
Capital redemption reserve
Merger reserve
Profit and loss account
2019
IFRS 9
£m
68.3
50.3
(70.2)
3.0
835.9
887.3
2019
IFRS 9
£m
68.3
50.3
(23.7)
256.3
351.2
2018
IFRS 9
£m
65.8
28.7
(70.2)
3.3
868.3
895.9
2018
IFRS 9
£m
65.8
28.7
(23.7)
390.0
460.8
2018
IAS 39
£m
65.8
28.7
(70.2)
3.3
890.7
918.3
2018
IAS 39
£m
65.8
28.7
(23.7)
390.0
460.8
2017
IAS 39
£m
65.5
28.7
(70.2)
2.5
784.5
811.0
2017
IAS 39
£m
65.5
28.7
(23.7)
384.0
454.5
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.
PAGE 222 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 44.
OWN SHARES
Treasury shares
At 1 October 2018
Shares purchased
Shares cancelled
At 30 September 2019
ESOP shares
At 1 October 2018
Shares purchased
Options exercised
At 30 September 2019
Balance at 30 September 2019
Balance at 1 October 2018
The Group
The Company
2019
£m
91.8
26.7
(95.5)
23.0
12.2
7.6
(2.3)
17.5
40.5
104.0
2018
£m
66.6
25.2
-
91.8
16.5
6.2
(10.5)
12.2
104.0
83.1
2019
£m
91.8
26.7
(95.5)
23.0
-
-
-
-
23.0
91.8
2018
£m
66.6
25.2
-
91.8
-
-
-
-
91.8
66.6
At 30 September 2019 the number of the Company’s own shares held in treasury was 5,218,702 (2018: 20,800,284). These shares had a
nominal value of £5,218,702 (2018: £20,800,284). These shares do not qualify for dividends.
The Employee Share Ownership Plan (‘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 and Deferred Share Bonus Plan. The trustees’ costs are included
in the operating expenses of the Group.
At 30 September 2019, the trust held 3,912,516 ordinary shares (2018: 2,874,825) with a nominal value of £3,912,516 (2018: £2,874,825) and
a market value of £18,873,977 (2018: £13,764,662). Options, or other share-based awards, were outstanding against all of these shares at
30 September 2019 (2018: all). The dividends on all of these shares have been waived (2018: all).
45.
EQUITY DIVIDEND
Amounts recognised as distributions to equity shareholders in the Group and the Company in the period:
Equity dividends on ordinary shares
Final dividend for the year ended 30 September 2018
Interim dividend for the year ended 30 September 2019
Amounts paid and proposed in respect of the year:
Interim dividend for the year ended 30 September 2019
Proposed final dividend for the year ended 30 September 2019
2019
2018
Per share
Per share
13.9p
7.0p
20.9p
11.0p
5.5p
16.5p
2019
2018
Per share
Per share
7.0p
14.2p
21.2p
5.5p
13.9p
19.4p
2019
£m
35.9
18.1
54.0
2019
£m
18.1
35.8
53.9
2018
£m
28.9
14.2
43.1
2018
£m
14.2
35.8
50.0
The proposed final dividend for the year ended 30 September 2019 will be paid on 17 February 2020, subject to approval at the Annual General
Meeting, with a record date of 10 January 2020. The dividend will be recognised in the accounts when it is paid.
PAGE 223 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 46.
NET CASH FLOW FROM OPERATING ACTIVITIES
(a)
The Group
Profit before tax
Non-cash items included in profit and other adjustments:
Depreciation of operating property, plant and equipment
Profit on disposal of operating property, plant and equipment
Amortisation of intangible assets
Foreign exchange movement on borrowings
Other non-cash movements on borrowings
Impairment losses on loans to customers
Charge for share based remuneration
Gain on derecognition
Derecognition of cash flow hedge
Net (increase) / decrease in operating assets:
Operating lease assets
Loans to customers
Derivative financial instruments
Fair value of portfolio hedges
Other receivables
Net increase / (decrease) in operating liabilities:
Retail deposits
Derivative financial instruments
Fair value of portfolio hedges
Other liabilities
Cash generated by operations
Income taxes (paid)
2019
£m
159.0
1.5
-
2.4
(124.8)
3.6
8.0
5.9
(9.7)
(0.9)
(0.9)
(792.0)
169.7
(88.3)
(73.8)
2018
£m
181.5
1.9
(0.2)
2.1
(67.6)
6.0
7.4
6.1
-
-
(12.0)
(781.7)
50.9
15.4
(6.1)
1,095.3
1,681.2
75.8
8.1
(1.6)
437.3
(39.4)
397.9
(2.4)
(0.7)
24.6
1,106.4
(32.0)
1,074.4
Cash flows relating to plant and equipment held for leasing under operating leases are classified as operating cash flows.
PAGE 224 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
(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 provision / (release) on investments in subsidiaries
Charge for share based remuneration
Net decrease / (increase) in operating assets:
Other receivables
Net (decrease) / increase in operating liabilities:
Other liabilities
Cash generated / (utilised) by operations
Income taxes received
2019
£m
6.5
-
0.7
148.8
5.9
2018
£m
39.6
0.2
0.6
7.4
6.1
109.7
(176.9)
(101.1)
89.1
170.5
0.4
170.9
(33.9)
3.4
(30.5)
47.
NET CASH FLOW FROM INVESTING ACTIVITIES
The Group
The Company
2018
£m
0.5
(0.8)
(1.5)
-
-
(281.0)
-
2019
£m
-
-
-
2018
£m
18.4
-
-
(105.1)
(160.2)
-
-
-
-
-
(12.5)
(154.3)
(282.8)
(105.1)
Proceeds from sales of operating property, plant and equipment
Purchases of operating property, plant and equipment
Purchases of intangible assets
Movement in loans to subsidiary undertakings
Residual disposal (note 7)
Acquisitions (note 66)
Investment in subsidiary undertakings
Net cash generated / (utilised) by investing activities
2019
£m
-
(1.1)
(2.0)
-
11.4
-
-
8.3
PAGE 225 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
48.
NET CASH FLOW FROM FINANCING ACTIVITIES
The Group
The Company
Shares issued (note 42)
Dividends paid (note 45)
Issue of asset backed floating rate notes
Repayment of asset backed floating rate notes
Movement on central bank facilities
Movement on other bank facilities
Purchase of shares (note 44)
Net cash (utilised) by financing activities
49.
RECONCILIATION OF NET DEBT
(a) The Group
2019
£m
3.9
(54.0)
362.5
(591.1)
(30.0)
(148.3)
(34.3)
(491.3)
2018
£m
0.4
(43.1)
432.5
(1,289.7)
324.4
(371.1)
(31.8)
(978.4)
2019
£m
4.1
(54.0)
-
-
-
-
(26.7)
(76.6)
Cash flows
Non-cash movements
Other
Acquisition /
Derecognition
Foreign
exchange
Other
Opening
debt
£m
Debt
issued
£m
30 September 2019
Asset backed loan notes
5,554.7
362.5
Bank borrowings
Corporate bonds
Retail bonds
935.6
149.3
296.1
Central bank borrowings
1,024.4
Bank overdrafts
Gross debt
Cash
Net debt
30 September 2018
Asset backed loan notes
Bank borrowings
Corporate bonds
Retail bonds
Central bank borrowings
Bank overdrafts
Gross debt
Cash
Net debt
1.1
7,961.2
(1,310.6)
6,650.6
6,475.8
1,306.0
149.1
295.7
700.0
0.6
8,927.2
(1,496.9)
7,430.3
£m
£m
£m
(591.1)
(148.3)
-
-
(30.0)
(0.1)
(769.5)
447.7
(321.8)
(784.1)
(124.8)
-
-
-
-
-
-
-
-
-
-
(784.1)
(124.8)
-
-
(784.1)
(124.8)
-
-
-
-
-
362.5
(362.5)
-
432.5
(1,289.7)
-
-
-
324.4
-
756.9
(756.9)
-
(371.1)
-
-
-
0.5
(1,660.3)
1,224.1
(436.2)
-
-
-
-
-
-
-
(280.9)
(280.9)
(67.6)
-
-
-
-
-
(67.6)
-
(67.6)
£m
2.2
0.2
0.3
0.4
-
-
3.1
-
3.1
3.7
0.7
0.2
0.4
-
-
5.0
-
5.0
2018
£m
0.4
(43.1)
-
-
-
-
(25.2)
(67.9)
Closing
debt
£m
4,419.4
787.5
149.6
296.5
994.4
1.0
6,648.4
(1,225.4)
5,423.0
5,554.7
935.6
149.3
296.1
1,024.4
1.1
7,961.2
(1,310.6)
6,650.6
Non-cash movements arising from acquisition/derecognition in the year include the derecognition of PM12 asset backed loan notes on the
derecognition of that securitisation (note 7).
Other non-cash changes shown above represent EIR adjustments relating to the spreading of initial costs of the facilities concerned.
PAGE 226 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (b)
The Company
30 September 2019
Corporate bonds
Retail bonds
Gross debt
Cash
Net debt
30 September 2018
Corporate bonds
Retail bonds
Gross debt
Cash
Net debt
Cash flows
Non-cash movements
Opening
debt
£m
Debt
issued
£m
Other
Foreign
exchange
£m
£m
149.3
296.1
445.4
(24.9)
420.5
149.1
295.7
444.8
(277.6)
167.2
-
-
-
-
-
-
-
-
-
-
-
-
-
10.8
10.8
-
-
-
252.7
252.7
-
-
-
-
-
-
-
-
-
-
Other
£m
0.3
0.4
0.7
-
0.7
0.2
0.4
0.6
-
0.6
Closing
debt
£m
149.6
296.5
446.1
(14.1)
432.0
149.3
296.1
445.4
(24.9)
420.5
Other non-cash changes shown above represent EIR adjustments relating to the spreading of initial costs of the bonds.
50.
UNCONSOLIDATED STRUCTURED ENTITIES
Following the Group’s disposal of its residual interest in the Paragon Mortgages (No. 12) PLC securitisation (note 7), it ceased to consolidate the
assets and liabilities of the entity. The external securitisation borrowings remain in place with their terms unchanged and the Group continues
to act as administrator, for which it charges a fee. It has no other exposure to the profitability of the deal, no exposure to credit risk, other than
on the recoverability of its quarterly fee, and no obligation to make further contribution to the entity.
Fee income from servicing arrangements since derecognition of £0.5m is included in third party servicing fees (note 8) and £0.3m is included
in other debtors in respect of unpaid fees at the year end. Outstanding collection monies due to the structured entity of £0.4m are included in
other creditors at 30 September 2019.
51.
OPERATING LEASE ARRANGEMENTS
(a) As Lessor
The Group, through its asset finance business, leases assets under operating leases. In respect of certain of these assets, the Group also
provides maintenance services to the lessee.
Assets subject to these arrangements are shown in note 27 and the income from these activities is shown in note 6.
The future minimum lease payments under these arrangements may be analysed as follows:
The Group
The Company
2019
£m
7.1
12.7
0.5
20.3
2018
£m
2.0
7.2
0.6
9.8
2019
£m
2018
£m
-
-
-
-
-
-
-
-
Amounts falling due:
Within one year
Between two and five years
After more than five years
PAGE 227 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
(b) As Lessee
Minimum lease payments under operating leases recognised in
operating expenses for the year
Office buildings
Motor vehicles
Office equipment
The Group
The Company
2019
£m
1.9
0.9
0.1
2.9
2018
£m
1.8
0.3
0.1
2.2
2019
£m
2018
£m
-
-
-
-
-
-
-
-
At 30 September 2019 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
2019
£m
3.2
5.8
1.7
10.7
2018
£m
2.6
6.8
2.9
12.3
2019
£m
2018
£m
-
-
-
-
-
-
-
-
Operating lease payments represent rents payable by the Group in respect of certain of its office premises and lease payments on company
vehicles and equipment. The average term of the current building leases from inception or acquisition is 7 years (2018: 8 years) with rents
subject to review every five years, while the average term of the vehicle leases and office equipment is 3 years (2018: 3 years).
52.
RELATED PARTY TRANSACTIONS
(a)
The Group
During the year certain of the non-executive directors of the Group were beneficially interested in savings deposits made with Paragon Bank,
on the same terms as were available to members of the public. No such deposits were outstanding at the year end (2018: £250,000), and the
maximum amount outstanding during the year was £250,000 (2018: £250,000).
Mr A K Fletcher, a non-executive director of the Company until 31 December 2018, is a director of Paragon Pension Plan Trustees Limited, which
acts as the corporate trustee of the Plan. In respect of this appointment, he was paid £4,000 in the year ended 30 September 2019 by Paragon
Finance PLC, the sponsoring company of the Plan up to the date of his resignation as a director of the Company (2018: £15,000).
The Plan is a related party of the Group. Transactions with the Plan are described in note 41.
The Group had no other transactions with related parties other than the key management compensation disclosed in note 11.
(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 to employees of subsidiary undertakings under the share
based payment arrangements described in note 12.
Details of the Company’s investments in subsidiaries and the income derived from them are shown in notes 30 and 68.
Outstanding current account balances with subsidiaries are shown in notes 25 and 37.
During the year the Company incurred interest costs of £1.6m in respect of borrowings from its subsidiaries (2018: £1.3m).
PAGE 228 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 53.
COUNTRY-BY-COUNTRY REPORTING
The Capital Requirements (Country-by-Country Reporting) Regulations 2013 came into effect on 1 January 2014 and place certain reporting
obligations on financial institutions that are within the scope of CRD IV. The objective of the country-by-country reporting requirements is to
provide increased transparency regarding the source of the financial institution’s income and the locations of its operations.
Paragon Banking Group PLC is a UK registered entity. Details of its subsidiaries are given in note 68 and the activities of the Group are described
in Section A2.1.
The activities of the Group, described as required by the Regulations for the year ended 30 September 2019 were:
Year ended 30 September 2019
Total operating income
Profit before tax
Corporation tax paid
Public subsidies received
Average number of full time equivalent employees
Year ended 30 September 2018
Total operating income
Profit before tax
Corporation tax paid
Public subsidies received
Average number of full time equivalent employees
The Group’s participation in Bank of England funding schemes is set out in note 36.
United Kingdom
£m
307.3
159.0
39.4
-
1,269
United Kingdom
£m
301.9
181.5
32.0
-
1,103
PAGE 229 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
54.
DISCLOSURES UNDER IAS 39
Certain disclosures made in respect of IAS 39 based amounts are not directly comparable to IFRS 9 disclosures, but still form part of the
comparative financial information. To avoid confusion, these are presented below.
(a) Ageing of IAS 39 exposures (Note 57)
The payment status of the carrying balances of the Group’s live loan assets, before provision for impairment, at 30 September 2018, split
between those accounts considered as performing and those included in the population for impairment testing, is shown below. This disclosure
is not required under IFRS 9, however comparative amounts are still required to be presented. Balances for immaterial asset classes are not
shown. ‘Asset finance loans’ below includes other related loan balances. Fully provided non-live accounts are excluded from the tables below.
Days past due is not a relevant measure for the development finance, structured lending or invoice discounting businesses, due to their
particular contractual arrangements.
2018
£m
10,211.1
101.7
10,312.8
3.0
2.2
5.7
22.1
33.0
10,345.8
(12.7)
(0.9)
10,332.2
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
Total gross balances
Impairment provision on live cases
Timing adjustments
Carrying balance
PAGE 230 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Consumer and asset finance
30 September 2018
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
Specifically impaired asset finance cases
Impairment population
Total gross balances
Impairment provision on live cases
Timing adjustments
Carrying balance
Second charge
mortgage loans
Motor finance
loans
Asset finance
loans
£m
£m
£m
350.7
19.4
370.1
11.0
4.1
3.3
29.9
-
48.3
418.4
(1.5)
(1.0)
415.9
310.8
13.2
324.0
3.2
0.9
0.6
2.1
-
6.8
330.8
(1.7)
0.3
329.4
388.6
13.8
402.4
1.3
0.7
-
0.6
0.5
3.1
405.5
(1.7)
(0.4)
403.4
Total
£m
1,050.1
46.4
1,096.5
15.5
5.7
3.9
32.6
0.5
58.2
1,154.7
(4.9)
(1.1)
1,148.7
Arrears in the tables above are based on the contractual payment status of the customers concerned. Where assets have been purchased by
the Group, customers may already have been in arrears at the time of acquisition and an appropriate adjustment made to the consideration paid.
(b) Analysis of buy-to-let mortgages under IAS 39 (Note 57)
The Group’s outstanding exposure to buy-to-let loans with an appointed receiver at 30 September 2018 calculated on the basis of IAS 39 is set
out below. A different analysis, based on the IFRS 9 staging approach, has been presented in note 23, superseding this disclosure.
Performing loans
Let with less than 3 months arrears
Impaired loans
Let with over 3 months arrears
Vacant or on sale
Impairment population
Total balances
(c)
Security (Note 23)
2018
Gross
£m
106.6
5.9
20.7
26.6
133.2
2018
Provision
£m
(1.1)
(2.5)
(6.4)
(8.9)
(10.0)
2018
Net
£m
105.5
3.4
14.3
17.7
123.2
The estimated value of the security held against those loans and receivables at 30 September 2018 which were considered to be impaired or
past due under IAS 39, representing, for each such account, the lesser of the outstanding balance on the loan and the estimated valuation of
the property was:
First mortgage loans
Second charge mortgage loans
PAGE 231 • The Accounts
2018
£m
23.1
46.2
69.3
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Whilst on motor finance cases the Group has the benefit of the underlying vehicle as security on these loans, no account of this was taken in the
allowance for uncollectible amounts in the Group’s IAS 39 provision methodology.
For the Group’s asset finance loans, estimated valuations of security assets for balances in arrears are undertaken as part of the credit
management process. These exercises suggested that the security value of assets under finance leases which were past due or impaired at
30 September 2018 under IAS 39 was £16.4m.
(d) Movement in impairment provision (Note 23)
The following amounts in respect of impairment provisions under IAS 39, net of allowances for recoveries of written off assets, have been
deducted from the appropriate assets in the balance sheet. This disclosure has been superseded under IFRS 9, but disclosures for comparator
periods are still required.
At 1 October 2017
Amounts provided in the period
Amounts written off
At 30 September 2018
First
mortgages
Other loans and
receivables
Finance
leases
£m
89.1
5.6
(3.7)
91.0
£m
18.3
0.6
(7.6)
11.3
£m
3.2
2.9
(1.0)
5.1
Total
£m
110.6
9.1
(12.3)
107.4
Of the above balances, the following provisions were held in respect of realised losses not charged off, which remain on the balance sheet and
are provided for in full.
At 30 September 2018
First
mortgages
Other loans and
receivables
£m
78.2
£m
-
Finance
leases
£m
0.9
The amounts charged to the profit and loss account, net of recoveries of previously provided amounts are set out below.
Year ended 30 September 2018
Amounts provided in the year
Recovery of amounts previously provided
Net impairment for year
This impairment charge was analysed as set out below
First
mortgages
Other loans and
receivables
Finance
leases
£m
5.6
(0.1)
5.5
£m
0.6
(0.5)
0.1
£m
2.9
(1.1)
1.8
Impairment of financial assets
First mortgage loans
Second charge mortgage loans
Finance lease receivables
Development finance loans
Other loans
PAGE 232 • The Accounts
Total
£m
79.1
Total
£m
9.1
(1.7)
7.4
2018
£m
5.5
(0.5)
1.8
-
0.6
7.4
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (e) Critical accounting estimates (note 65)
The following analysis was prepared at 30 September 2018 to illustrate the variability of the IAS 39 impairment provision. These were
re-calculated by changing one factor in the calculation and keeping all others at their current levels. This exercise indicated that:
•
Adopting a sale strategy for 5% of currently let buy-to-let properties with a receiver of rent in place would increase impairment provisions
by £2.1m
• 5% of receiver of rent properties currently vacant or for sale becoming fully performing would reduce impairment provisions by £0.3m
•
A 10% reduction in house prices would increase impairment provisions across the first mortgage assets by £1.7m, while a 10% increase
would reduce these impairment provisions by £1.5m
• A reduction in cash flows from receiver of rent properties of 10% would increase impairment provisions by £0.1m
It should be noted that all of these changes would, in reality, be interrelated so examining them in isolation may not give reliable guidance as to
future outcomes.
D2.2 NOTES TO THE ACCOUNTS – CAPITAL AND FINANCIAL RISK
For the year ended 30 September 2019
The notes below describe the processes and measurements which the Group and the Company use to manage their capital
position and their exposure to financial risks including credit, liquidity, interest rate and foreign exchange risk. It should be
noted that certain capital measures, which are presented to illustrate the Group’s position, are not subject to audit. Where this
is the case, the relevant disclosures are marked as such.
55.
CAPITAL MANAGEMENT
The Group’s objectives in managing capital are:
• To ensure that the Group has sufficient capital to meet its operational requirements and strategic objectives
•
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
• To provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
• To ensure that sufficient regulatory capital is available to meet any externally imposed requirements
The Group sets its target amount of capital in proportion to risk, availability, regulatory requirements 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 retail or corporate bonds, or sell assets to reduce debt.
The Group is subject to regulatory capital rules imposed by the PRA on a consolidated basis as a group containing an authorised bank. This is
discussed further below.
(a) Dividend policy
The Company is committed to a long-term sustainable dividend policy. Ordinarily, dividends will increase in line with earnings, subject to the
requirements of the business and the availability of cash resources. The Board reviews the policy at least twice a year in advance of announcing
its results, taking into account the Group’s strategy, capital requirements, principal risks and the objective of enhancing shareholder value. In
determining the level of dividend for any year, the Board expects to follow the dividend policy, but will also take into account the level of available
retained earnings in the Company, its cash resources and the cash and capital requirements inherent in its business plans.
The distributable reserves of the Company comprise its profit and loss account balance (note 43) and, other than the requirement for the Bank
to retain an appropriate level of capital, there are no restrictions preventing profits elsewhere in the Group from being distributed to the parent.
Since the year ended 30 September 2018, the Company has adopted a policy of paying out approximately 40% of its basic earnings per
share as dividend (a dividend cover ratio of around 2.5 times), in the absence of any idiosyncratic factors which might make such a dividend
inappropriate. This policy is reviewed by the Board at least annually. The Company considers it has access to sufficient cash resources to pay
dividends at this level and that its distributable reserves are abundant for this purpose.
PAGE 233 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts To provide greater transparency, the Company has also indicated that in future its interim dividend per share will normally be 50% of the
previous final dividend, in the absence of any indicators which might make such a level of payment inappropriate. The interim dividend for the
year ended 30 September 2019 was declared in accordance with the policy.
The most recent policy review, in November 2019, confirmed this policy but concluded that the size and nature of the non-cash fair value losses
in the year, together with the gain arising on the derecognition of PM12, would support a higher pay-out ratio.
For the purposes of dividend policy, the Group defines dividend cover based on basic earnings per share, adjusted where considered appropriate,
and dividend per share. This is the most common measure used by financial analysts.
The derivation of the dividend for the year, which is subject to approval at the forthcoming AGM is set out below.
Earnings per share (p)
Adjustment (p)
Adjusted earnings per share (p)
Dividend cover target (times)
Proposed dividend per share in respect of the year (p)
Note
17
45
2019
49.4
-
49.4
2.33
21.2
2018
55.9
(7.3)
48.6
2.50
19.4
(b) Return on tangible equity (‘RoTE’)
RoTE is a measure of an entity’s profitability used by investors. RoTE is defined by the Group by comparing the profit after tax for the year,
adjusted for amortisation charged on intangible assets, to the average of the opening and closing equity positions, excluding intangible assets
and goodwill.
It effectively reflects a return on equity as if all intangible assets are eliminated immediately against reserves. As this is similar to the approach
used for the capital of financial institutions it is widely used in the sector.
The Group’s consolidated RoTE for the year ended 30 September 2019 is derived as follows:
Profit for the year after tax
Amortisation of intangible assets
Adjusted profit
Divided by
Opening equity
Opening intangible assets
Opening tangible equity
Closing equity
Closing intangible assets
Closing tangible equity
Average tangible equity
Return on Tangible Equity
This table is not subject to audit
(c) Regulatory capital
Note
28
28
28
2019
IFRS 9
£m
127.4
2.4
129.8
1,073.5
(169.3)
904.2
1,108.4
(171.1)
937.3
2018
IAS 39
£m
145.8
2.1
147.9
1,009.4
(104.4)
905.0
1,095.9
(169.3)
926.6
920.7
14.1%
915.8
16.1%
The Group is subject to supervision by the PRA on a consolidated basis, as a group containing an authorised bank. As part of this supervision
the regulator will issue an individual capital requirement setting an amount of regulatory capital, which the Group is required to hold relative to
its total risk exposure in order to safeguard depositors from loss in the event of severe losses being incurred by the Group. This is defined by the
international Basel III rules, set by the Basel Committee on Banking Supervision (‘BCBS’) and currently implemented in UK law by EU Regulation
575/2013, referred to as the Capital Requirements Regulation (‘CRR’).
The Group’s regulatory capital is monitored by the Board, its Risk and Compliance Committee and the Asset and Liability Committee, who
ensure that appropriate action is taken to ensure compliance with the regulator’s requirements. The future regulatory capital requirement is
also considered as part of the Group’s forecasting and strategic planning process.
PAGE 234 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The introduction of IFRS 9 on 1 October 2018 impacted the Group’s regulatory capital position. The principal impacts were:
•
•
•
The reduction in reserves caused by increased provisions, net of associated future tax relief, reduces shareholders equity and hence
regulatory capital
The reduction in loans to customers generates a consequential reduction in risk weighted assets (‘RWA’), the amount of which will vary by
asset type
Collectively assessed emergence provisions under IAS 39 qualified as tier 2 capital, with £4.9m being included in capital at 30 September
2018 in respect of such provisions. No such provisions are made under IFRS 9, therefore total capital is reduced
The Group has elected to take advantage of the transitional arrangements set out in Article 473a of the CRR, which allow the capital impact
of expected credit losses to be phased in over a five-year period. The phase-in factors will allow for a 95% add back to CET1 capital and risk
weighted assets in the financial year ended 30 September 2019, reducing to 85%, 70%, 50% and 25% for the financial years ending in 2020 to
2023, with full recognition of the impact on CET1 capital in the 2024 financial year. Where such relief is taken, firms are also required to disclose
their capital positions calculated as if the relief were not available (the ‘fully loaded’ basis).
The capital position at 1 October 2018, immediately after transition, is set out in the notes below, marked 2018 IFRS 9.
The tables below demonstrate that at 30 September 2019 the Group’s regulatory capital of £1,072.0m (2018: £1,044.8m) was comfortably in
excess of the amounts required by the regulator, including £742.9m in respect of Pillar 1 and Pillar 2a capital (unaudited), which is comprised of
fixed and variable elements. The CRR also requires firms to hold additional capital buffers, including a Capital Conservation Buffer of 2.5% of
risk weighted assets (at 30 September 2019) (2018: 1.875%) and a Counter-Cyclical Buffer, currently 1.0% of risk weighted assets (2018: 0.5%).
Firm specific buffers may also be required.
The Group’s regulatory capital differs from its equity as certain adjustments are required by the regulator. A reconciliation of the Group’s equity
to its regulatory capital determined in accordance with CRD IV at 30 September 2019 is set out below.
Note
30 September 2019
1 October 2018
30 September 2018
Total equity
Deductions
Proposed final dividend
IFRS 9 transitional relief
Intangible assets
Prudent valuation adjustments
Common Equity Tier 1 (‘CET1’) capital
Other Tier 1 capital
Total Tier 1 capital
Corporate bond
Less: amortisation adjustment
Collectively assessed credit impairment allowances
Total Tier 2 capital
45
*
28
◊
35
†
‡
IFRS 9
£m
1,108.4
(35.8)
21.2
(171.1)
(0.7)
922.0
-
922.0
150.0
-
150.0
-
150.0
IFRS 9
£m
1,073.5
(35.8)
21.2
(169.3)
(0.9)
888.7
-
888.7
150.0
-
150.0
-
150.0
IAS 39
£m
1,095.9
(35.8)
-
(169.3)
(0.9)
889.9
-
889.9
150.0
-
150.0
4.9
154.9
Total regulatory capital
1,072.0
1,038.7
1,044.8
*
◊
†
Firms are permitted to phase in the impact of IFRS 9 transition over a five-year period.
For capital purposes, assets and liabilities held at fair value, such as the Group’s derivatives, are required to be valued on a more conservative basis than the market value basis set out in
IFRS 13. This difference is represented by the prudent valuation adjustment above, calculated using the ‘Simplified Approach’ set out in the CRR.
This was first included in the Group’s regulatory capital position in the year and has been included in comparative amounts for consistency.
When tier 2 capital instruments have less than five years to maturity the amount eligible as regulatory capital reduces by 20% per annum. No such adjustment is required in respect of the
Corporate Bond issued in the year ended 30 September 2016, which matures in 2026.
‡
Under IFRS 9 there are no collectively assessed credit impairment allowances which are eligible as tier 2 capital.
PAGE 235 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
The total exposure amount calculated under the CRD IV framework against which this capital is held, and the proportion of these assets it
represents, are calculated as shown below.
30 September 2019
1 October 2018
30 September 2018
Credit risk
Balance sheet assets
Off balance sheet
IFRS 9 transitional relief
Total credit risk
Operational risk
Market risk
Other
Total exposure amount
Solvency ratios
CET1
Total regulatory capital
This table is not subject to Audit
IFRS 9
£m
5,997.2
85.5
10.5
6,093.2
516.6
-
114.0
6,723.8
%
13.7
15.9
IFRS 9
£m
5,756.3
87.8
10.5
5,854.6
485.1
-
105.1
6,444.8
%
13.8
16.2
IAS 39
£m
5,767.3
87.8
-
5,855.1
485.1
-
105.1
6,445.3
%
13.8
16.2
The CRD IV risk weightings for credit risk exposures are calculated using the Standardised Approach. The Basic Indicator Approach is used for
operational risk.
On a fully loaded basis (excluding the effect of IFRS 9 transitional relief) the Group’s capital ratios would be:
30 September 2019
1 October 2018
30 September 2018
CET1 Capital
Add back: IFRS 9 relief
Fully loaded CET1 Capital
TRC
Add back: IFRS 9 relief
Fully loaded TRC
Total risk exposure
Add back: IFRS 9 relief
Fully loaded TRE
Fully loaded Solvency ratios
CET1
Total regulatory capital
This table is not subject to audit
IFRS 9
£m
922.0
(21.2)
900.8
1,072.0
(21.2)
1,050.8
6,723.8
(10.5)
6,713.3
%
13.4
15.7
IFRS 9
£m
888.7
(21.2)
867.5
1,038.7
(21.2)
1,017.5
6,444.8
(10.5)
6,434.3
%
13.5
15.8
IAS 39
£m
889.9
-
889.9
1,044.8
-
1,044.8
6,445.3
-
6,445.3
%
13.8
16.2
The total regulatory capital at 30 September 2019 on the fully loaded basis of £1,050.8m was in excess of the Pillar 1 & 2a requirement of
£741.8m on the same basis (amounts not subject to audit).
PAGE 236 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
The table below shows the calculation of the UK leverage ratio, based on the consolidated balance sheet assets adjusted as shown. The PRA
has proposed a minimum UK leverage ratio of 3.25% for UK firms.
Total balance sheet assets
Add: Credit fair value adjustments on loans to customers
Debit fair value adjustments on retail deposits
Adjusted balance sheet assets
Less: Derivative assets
Central bank deposits
CRDs
Accrued interest on sovereign exposures
On-balance sheet items
Less: Intangible assets
Total on balance sheet exposures
Derivative assets
Potential future exposure on derivatives
Total derivative exposures
Post offer pipeline at gross notional amount
Adjustment to convert to credit equivalent amounts
Off balance sheet items
Note
20
31
24
18
25
28
24
2019
IFRS 9
£m
2018
IFRS 9
£m
2018
IAS 39
£m
14,395.5
14,487.9
14,515.1
-
-
24.1
4.2
24.1
4.2
14,395.5
14,516.2
14,543.4
(592.4)
(816.4)
(11.4)
(0.2)
12,975.1
(171.1)
(855.7)
(895.9)
(6.2)
(0.4)
12,758.0
(169.3)
12,804.0
12,588.7
592.4
120.0
712.4
903.4
(739.2)
164.2
855.7
172.1
1,027.8
817.7
(569.2)
248.5
(855.7)
(895.9)
(6.2)
(0.4)
12,785.2
(169.3)
12,615.9
855.7
172.1
1,027.8
817.7
(569.2)
248.5
Tier 1 capital
922.0
888.7
889.9
Total leverage exposure before IFRS 9 relief
IFRS 9 relief
Total leverage exposure
UK leverage ratio
This table is not subject to audit
The fully loaded leverage ratio is calculated as follows
13,680.6
13,865.0
13,892.2
25.8
25.8
-
13,706.4
13,890.8
13,892.2
6.7%
6.4%
6.4%
Fully loaded Tier 1 capital
Total leverage exposure before IFRS 9 relief
30 September 2019
1 October 2018
30 September 2018
IFRS 9
£m
900.8
13,680.6
IFRS 9
£m
867.5
13,865.0
IAS 39
£m
889.9
13,892.2
Fully loaded UK leverage exposure
6.6%
6.3%
6.4%
This table is not subject to audit
The UK leverage ratio is prescribed by the PRA and differs from the leverage ratio defined by Basel and the CRR due to the exclusion of central
bank balances from exposures.
The regulatory capital disclosures in these financial statements relate only to the consolidated position for the Group. Individual entities within
the Group are also subject to supervision on a standalone basis. All such entities complied with the requirements to which they were subject
during the year.
PAGE 237 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
56.
FINANCIAL RISK MANAGEMENT
The principal risks arising from the Group’s exposure to financial instruments are credit risk, liquidity risk and market risk (particularly, interest
rate risk and currency risk). These risks are discussed in notes 57 to 60 respectively. The Board has a Risk and Compliance Committee,
consisting of the Chairman and the non-executive directors which is responsible for providing oversight and challenge to the Group’s risk
management arrangements. The Credit Committee and ALCO are executive sub-committees of the Risk and Compliance Committee which
monitor performance against the risk appetites set by the Board and make recommendations for changes in risk appetite where appropriate.
They also review and, where authorised to do so, agree or amend policies for managing each of these risks, which are summarised in the
relevant note. The Corporate Governance Statement in Section B3 (which is not subject to audit) provides further detail on the operations of
these committees.
The financial risk management policies have remained unchanged throughout the year and since the year end. The position discussed in notes
57 to 60 is materially similar to that existing throughout the year.
57.
CREDIT RISK
The assets of the Group and the Company which are subject to credit risk are set out below:
Financial assets at amortised cost
Loans to customers
Trade receivables
Amounts owed by Group companies
Cash
CSA assets
CRDs
Accrued interest income
Financial assets at fair value
Derivative financial assets
Maximum exposure to credit risk
Note
The Group
The Company
2019
£m
2018
£m
12,186.1
12,127.8
3.6
-
2.2
-
1,225.4
1,310.6
72.2
11.4
0.4
3.8
6.2
0.6
13,499.1
13,451.2
20
25
25
18
25
25
25
2019
£m
-
-
106.6
14.1
-
-
0.7
121.4
2018
£m
-
-
216.3
24.9
-
-
0.7
241.9
24
592.4
855.7
-
-
14,091.5
14,306.9
121.4
241.9
While this maximum exposure represents the potential loss which might have to be accounted for by the Group, the terms on which a significant
proportion of the Group’s loan assets are funded, described under Liquidity Risk in note 58, limit the amount of principal repayments on the
Group’s securitised and warehouse borrowings in cases of capital losses on assets, considerably reducing the effective shareholder value
at risk.
All financial assets at amortised cost are subject to the requirements of IFRS 9 relating to impairment.
Further information on the Group’s exposure to credit risk by asset type, including the credit quality of assets and any potential concentrations
of credit risk, is set out below for:
•
Loans to customers
• Cash balances (including CSA assets, CRDs and accrued interest)
• Trade receivables
• Derivative financial assets
Loans to customers
The Group’s credit risk is primarily attributable to its loans to customers and its 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 throughout the loan’s life.
Primary responsibility for the management of credit risk relating to lending activities across the Group lies with the Credit Committee. The Credit
Committee is made up of senior employees, drawn from financial and risk functions independent of the underwriting process. It is chaired by the
Chief Risk Officer. 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.
PAGE 238 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 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. In assessing credit risk, even where the Group would have security on a proposed loan, an applicant’s ability and propensity to repay
the loan remain the principal factors in the decision to lend.
In considering whether to acquire pools of loan assets, the Group will undertake a due diligence exercise on the underlying loan accounts. Such
assets are generally not fully performing and are offered at a discount to their current balance. The Group’s procedures may include inspection
of original loan documents, verification of security and the examination of the credit status of borrowers. Current and historic cash flow data
will also be examined. The objective of the exercise is to establish, to a level of confidence similar to that provided by the underwriting process,
that the assets will generate sufficient cash flows to recover the Group’s investment and generate an appropriate return without exposing the
Group to material operational or conduct risks.
This section sets out information relevant to assessing the credit risk inherent in the Group’s loans to customers balances. It is set out in the
following subsections:
• Types of lending and related security
• Overall credit grading
• Credit characteristics of particular portfolios
• Arrears performance
• Acquired assets
Types of lending
The Group’s balance sheet loan assets at 30 September 2019 are analysed as follows:
Buy-to-let mortgages
Owner-occupied mortgages
Total first charge residential mortgages
Second charge mortgage loans
Loans secured on residential property
Development finance
Loans secured on property
Asset finance loans
Motor finance loans
Aircraft mortgages
Structured lending
Invoice finance
Total secured loans
Professions finance
Other unsecured commercial loans
Unsecured consumer loans
2019
IFRS 9
2018
IFRS 9
2018
IAS 39
£m
10,101.9
70.6
10,172.5
389.2
10,561.7
506.5
11,068.2
472.9
318.9
19.3
88.1
18.5
%
82.9%
0.6%
83.5%
3.2%
86.7%
4.1%
90.8%
3.9%
2.6%
0.2%
0.7%
0.1%
£m
10,227.4
80.9
10,308.3
414.4
10,722.7
352.9
11,075.6
389.9
329.2
12.4
38.7
21.7
%
84.5%
0.7%
85.2%
3.4%
88.6%
2.9%
91.5%
3.3%
2.7%
0.1%
0.3%
0.2%
£m
10,261.6
70.6
10,332.2
415.9
10,748.1
352.8
11,100.9
391.0
329.4
12.4
38.7
21.8
%
84.6%
0.6%
85.2%
3.5%
88.7%
2.9%
91.6%
3.2%
2.7%
0.1%
0.3%
0.2%
11,985.9
98.3%
11,867.5
98.1%
11,894.2
98.1%
46.2
19.3
134.7
0.4%
0.2%
1.1%
42.1
17.2
173.8
0.4%
0.1%
1.4%
42.6
17.3
173.7
0.4%
0.1%
1.4%
Total loans to customers
12,186.1
100.0%
12,100.6
100.0%
12,127.8
100.0%
First and second charge mortgages are secured by charges over residential properties in England and Wales, or similar Scottish or Northern
Irish securities.
Development finance loans are secured by a first charge (or similar Scottish security) over the development property and various charges over
the build.
Asset finance loans and motor finance loans are effectively secured by the financed asset, while aircraft mortgages are secured by a charge on
the aircraft funded.
Structured lending and invoice finance balances are effectively secured over the assets of the customer, with security enhanced by maintaining
balances at a level less than the total amount of the security (the advance percentage).
Professions finance are generally short term unsecured loans made to firms of lawyers and accountants for working capital purposes.
PAGE 239 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Other unsecured consumer loans include unsecured loans either advanced by Group companies or acquired from their originators at a discount.
There are no significant concentrations of credit risk to individual counterparties due to the large number of customers included in the
portfolios. All lending is to customers within the UK. The total gross carrying value of the Group’s Loans to Customers due from customers with
total portfolio exposures over £10.0m is analysed below by product type.
Buy-to-let mortgages
Development finance
Structured lending
Asset finance
2019
£m
149.7
212.7
78.8
-
441.2
2018
£m
211.9
166.1
29.3
10.7
418.0
The threshold of £10.0m is used internally for monitoring large exposures.
The fall in large buy-to-let exposures is principally a result of the derecognition of the PM12 assets (note 7) which included elements of several
large portfolios.
Credit grading
An analysis of the Group’s loans to customers by absolute level of credit risk at 30 September 2019 is set out below. The analysed amount
represents gross carrying amount.
30 September 2019
Very low risk
Low risk
Moderate risk
High risk
Very high risk
Not graded
Total gross carrying amount
Impairment
Total loans to customers
Stage 1
£m
8,693.9
1,267.2
781.9
353.2
86.0
200.4
11,382.6
(6.0)
11,376.6
Stage 2
£m
Stage 3
£m
92.8
77.5
75.0
153.0
47.0
13.2
458.5
(3.7)
454.8
26.5
6.7
9.3
67.9
44.0
13.5
167.9
(32.2)
135.7
POCI
£m
49.4
26.5
45.2
48.5
38.7
10.7
219.0
-
219.0
Total
£m
8,862.6
1,377.9
911.4
622.6
215.7
237.8
12,228.0
(41.9)
12,186.1
Gradings above are based on credit scorecards or internally assigned risk ratings as appropriate for the individual asset class. These measures
are calibrated across product types and used internally to monitor the Group’s overall credit risk profile against its risk appetite.
These gradings represent current credit quality on an absolute basis and this may result in assets in higher IFRS 9 stages with low risk grades,
especially where a case qualifies through breaching, for example, an arrears threshold but is making regular payments. This will apply especially
to stage 3 cases reported in note 23, other than those shown as ‘realisations’.
Examples of these cases include fully up-to-date receiver of rent cases, customers who may be up to date on accounts with other lenders and
accounts where the default on the Group’s loan has yet to impact on external credit score.
A small proportion of the loan book (1.9%) is classed as ‘not graded’ above. This rating relates to loans that have been fully underwritten at
origination but where the customer falls outside the automated assessment techniques used post-completion. This disclosure is expected to
be developed further in future.
IFRS 7 does not require a comparative disclosure and it has been determined that the internal management information was insufficiently
mature at 1 October 2018 to produce a reliable comparative.
PAGE 240 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Credit characteristics by portfolio
Loans secured on residential property
First mortgage loans have a contractual term of up to thirty years and second charge mortgage loans up to twenty five 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 on these accounts are
required to make monthly payments.
An analysis of the indexed loan to value ratio (‘LTV’) for those loan accounts secured on residential property by value at 30 September 2019 is
set out below. LTVs for second charge mortgages are calculated allowing for the interest of the first charge holder, based on the most recent
first charge amount held by the Group, while for acquired accounts the effect of any discount on purchase is allowed for.
Loan to value ratio
Less than 70%
70% to 80%
80% to 90%
90% to 100%
Over 100%
Average loan to value ratio
of which
Buy-to-let
Owner-occupied
2019
2019
2018
2018
First
mortgages
Second charge
mortgages
First
mortgages
Second charge
mortgages
%
54.3
36.2
7.2
0.6
1.7
%
66.5
18.5
8.9
2.7
3.4
100.0
100.0
65.7
67.3
67.4
53.2
%
%
66.1
17.4
9.3
3.5
3.7
100.0
65.9
60.6
29.7
7.1
0.8
1.8
100.0
66.0
66.1
51.3
The regionally indexed LTVs shown above are affected by changes in house prices, with the Nationwide house price index, for the UK as a whole,
registering an annual increase of 0.2% in the year ended 30 September 2019 (2018: 2.0%).
The increase in the LTV ratio for the owner-occupied accounts relates to the greater number of new lending accounts, which have higher LTV
levels than legacy cases.
The geographical distribution of the Group’s residential mortgage assets by gross carrying value is set out below.
First Charge
Second Charge
2019
%
3.2
5.3
18.9
3.3
10.1
31.9
8.9
5.1
8.6
95.3
0.1
1.4
3.2
2018
%
3.0
5.2
18.6
3.5
10.2
31.3
9.2
4.8
9.4
95.2
0.1
1.4
3.3
2019
2018
%
3.3
6.3
7.8
4.2
8.0
37.7
7.9
7.6
6.2
89.0
1.9
5.6
3.5
%
3.5
6.5
7.1
4.7
8.5
35.2
8.0
8.0
6.7
88.2
2.1
5.9
3.8
100.0
100.0
100.0
100.0
East Anglia
East Midlands
Greater London
North
North West
South East
South West
West Midlands
Yorkshire and Humberside
Total England
Northern Ireland
Scotland
Wales
PAGE 241 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Development finance
Development finance loans have an average term of 20 months (2018: 21 months). Settlement of principal and accrued interest takes place
once the development is sold or refinanced following its completion and the customer is not normally required to make payments during the
term of the loan. The loans are secured by a legal charge over the site and / or property together with other charges and warranties related to
the build.
As customers are not required to make payments during the life of the loan, arrears and past due measures cannot be used to monitor credit
risk. Instead, cases are monitored on an individual basis by management and Credit Risk. The average loan to gross development value (‘LTGDV’)
ratio for the portfolio at year end, a measure of security cover, is analysed below.
LTGDV
50% or less
50% to 60%
60% to 65%
65% to 70%
70% to 75%
Over 75%
2019
2019
2018
2018
By value
By number
By value
By number
%
8.5
18.2
31.6
32.3
6.8
2.6
%
3.4
15.5
39.1
32.4
8.2
1.4
%
3.4
18.9
63.3
7.1
0.7
6.6
%
4.4
22.8
59.6
9.6
0.7
2.9
100.0
100.0
100.0
100.0
The average LTGDV cover at the year end was 64.8% (2018: 63.2%).
The increase in LTGDV percentages over the year reflects the changing mix in the portfolio between those accounts originated using the initial
cautious underwriting approach of the Group’s in-house operation and those originated though the acquired operation. Following acquisition,
risk appetites were adjusted to reflect the increased experience and maturity of the combined operation.
LTGDV is calculated by comparing the current expected end of term exposure with the latest estimate of the value of the completed development
based on surveyors’ reports.
At 30 September 2019 the development finance portfolio comprised 207 accounts (2018: 136) with a total carrying value of £506.5m
(2018: £352.8m). Of these accounts only six were included in stage 2 at 30 September 2019 (2018 IFRS 9: none). In addition, three accounts
acquired in the Titlestone purchase had been classified as POCI (2018: four). An allowance for these losses was made in the IFRS 3 fair
value calculation.
The geographical distribution of the Group’s development finance loans by gross carrying value is set out below.
2019
%
20.2
3.0
20.9
1.0
0.1
30.8
13.9
7.2
1.5
98.6
-
1.4
-
2018
%
21.6
3.0
28.5
0.7
-
23.0
11.1
8.3
1.2
97.4
-
2.6
-
100.0
100.0
East Anglia
East Midlands
Greater London
North
North West
South East
South West
West Midlands
Yorkshire and Humberside
Total England
Northern Ireland
Scotland
Wales
PAGE 242 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Asset finance and Motor finance
Asset and motor finance lending includes finance lease and hire purchase arrangements, which are accounted for as finance leases under
IAS 17. The average contractual life of the asset finance loans was 56 months (2018: 52 months) while that of the motor finance loans was
57 months (2018: 55 months), but it is likely that a significant proportion of customers will choose to settle their obligations early.
Asset finance customers are generally small or medium sized businesses. The nature of the assets underlying the Group’s asset finance lending
by gross carrying value is set out below.
Commercial vehicles
Construction plant
Technology
Manufacturing
Print and paper
Refuse disposal vehicles
Other vehicles
Agriculture
Other
2019
%
30.3
34.8
7.8
6.1
4.8
5.2
3.0
2.7
5.3
2018
%
22.6
38.9
6.6
5.2
7.1
6.7
4.2
1.2
7.5
100.0
100.0
Motor finance loans are secured over cars, motorhomes and light commercial vehicles and represent exposure to consumers and
small businesses.
Structured lending
The Group’s structured lending division provides revolving loan facilities to support non-bank lending businesses. Loans are made to a Special
Purpose Vehicle (‘SPV’) company controlled by the customer and effectively secured on the loans made by the SPV. Exposure is limited to a
percentage of the underlying assets, providing a buffer against credit loss.
Summary details of the structured lending portfolio are set out below.
Number of transactions
Total facilities (£m)
Carrying value (£m)
2019
8
135.0
88.1
2018
3
52.5
38.7
The maximum advance under these facilities was 80% of the underlying assets.
These accounts do not have a requirement to make regular payments, operating on revolving basis. The performance of each loan is monitored
monthly on a case by case basis by the Group’s Credit Risk function, assessing compliance with covenants relating to both the customer and
the performance and composition of the asset pool. These assessments, which are reported to Credit Committee, are used to inform the
assessment of expected credit loss under IFRS 9.
At 30 September 2019 there were no significant concerns regarding the credit performance of these facilities.
Unsecured consumer loans
Almost all of the Group’s unsecured consumer loan assets are part of purchased debt portfolios where the consideration paid will have
been based on the credit quality and performance of the loans at the point of the transaction. Collections on purchased accounts have been
comfortably in excess of those implicit in the purchase prices.
PAGE 243 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Arrears performance
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 2019 and 30 September 2018, compared to the industry averages at those dates published by UK Finance (‘UKF’) and the
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
UKF data for mortgage 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
All mortgages
Second charge mortgage loans
Accounts more than 2 months in arrears
All accounts
Post-2010 originations
Legacy cases (Pre-2010 originations)
Purchased assets
FLA data for secured loans
Car loans
Accounts more than 2 months in arrears
FLA data for point of sale hire purchase
Asset finance loans
Accounts more than 2 months in arrears
FLA data for business lease / hire purchase loans
2019
%
0.18
0.07
2.44
0.42
0.37
0.81
0.73
14.08
0.38
19.85
16.05
8.70
5.25
2.70
0.43
1.10
2018
%
0.11
0.03
3.15
0.42
0.38
0.88
0.79
13.64
0.21
17.91
14.81
9.40
3.91
2.50
0.78
0.70
No published industry data for asset classes comparable to the Group’s other books has been identified. Where revised data at
30 September 2018 has been published by the FLA or UKF, the comparative industry figures above have been amended.
Arrears information is not given for development finance, structured lending or invoice finance activities as the structure of the products means
that such a measure is not relevant.
The Group calculates its headline arrears measure for buy-to-let mortgages, shown above, based on the numbers of accounts three months
or more in arrears, including purchased Idem Capital assets, but excluding those cases in possession and receiver of rent cases designated for
sale. This is consistent with the methodology used by UKF in compiling its statistics for the buy-to-let mortgage market as a whole.
The number of accounts in arrears will naturally be higher for legacy books, such as the Group’s legacy second charge mortgages and residential
first mortgages, than for comparable active ones, as performing accounts pay off their balances, leaving arrears accounts representing a
greater proportion of the total.
The figures shown above for secured loans incorporate purchased portfolios which generally include a high proportion of cases in arrears at
the time of purchase and where this level of performance is allowed for in the discount to current balance represented by the purchase price.
However, this will lead to higher than average reported arrears.
Acquired assets
Almost all of the Group’s unsecured consumer loan assets are part of purchased debt portfolios where the consideration paid will have been
based on the credit quality and performance of the loans at the point of the transaction. The total amount of undiscounted ECL at initial
recognition on POCI loans to customers initially recognised during the year ended 30 September 2019 was minimal due to the level of purchases.
Collections on purchased accounts have been comfortably in excess of those implicit in the purchase prices.
PAGE 244 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
In the debt purchase industry, Estimated Remaining Collections (‘ERCs’) is commonly used as a measure of the value of a portfolio. This is
defined as the sum of the undiscounted cash flows expected to be received over a specified future period. In the Group’s view, this measure
may be suitable for heavily discounted, unsecured, distressed portfolios, but is less applicable for the types of portfolio in which the Group has
invested, where cash flows are higher on acquisition, loans may be secured on property and customers may not be in default. In such cases, the
IFRS 9 amortised cost balance, at which these assets are carried in the Group balance sheet, provides a better indication of value.
However, to aid comparability, the 84 and 120 month ERC values for the Group’s purchased consumer loan assets, are set out below. These are
derived using the same models and assumptions used in the EIR calculations. ERCs are set out both for all purchased consumer portfolios and
for those classified as POCI under IFRS 9.
All purchased consumer assets
Carrying value
84 month ERC
120 month ERC
POCI assets only
Carrying value
84 month ERC
120 month ERC
2019
£m
291.1
342.3
387.5
168.3
214.1
246.0
2018
£m
364.2
434.9
489.6
204.4
269.9
306.2
2017
£m
503.5
608.9
688.8
302.9
317.2
359.9
Amounts shown above are disclosed as loans to customers (note 20). They include first mortgages, second charge loans and unsecured
consumer loans.
Further information relating to comparative information prepared under IAS 39 is included in note 54(a) and (b).
PAGE 245 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Cash balances
The credit risk inherent in the cash positions of the Group and the Company is controlled by ALCO, which determines with which institutions
deposits may be placed with.
For cash deposits within the Group’s securitisation structures, the scheme documents will set out criteria for allowable investments, including
rating thresholds, which are monitored by the external trustees of each transaction.
The Group’s cash balances are held in sterling at the Bank of England and at highly rated banks in current and call accounts. Cash is also invested
in UK government securities and as short fixed term money market deposits. The Group has a Wholesale Credit Risk Policy including limits on
large exposures to mitigate any concentration risk in respect of its investments.
The carrying value of the Group’s and the Company’s cash balances analysed by their long-term credit rating as determined by Fitch is set
out below.
The Group
Cash with central banks rated:
AA
Cash with retail banks rated:
AA
AA-
A+
A
A-
BBB+
Investments in money market funds rated:
AAA
Total exposure
The Company
Cash with retail banks rated:
AAA
A+
BBB+
2019
£m
2018
£m
816.4
895.9
-
230.5
173.5
-
5.0
-
409.0
-
1,225.4
-
9.1
5.0
14.1
81.3
171.5
97.7
21.7
-
20.9
393.1
21.6
1,310.6
15.0
9.9
-
24.9
CRDs share the central bank rating noted above while CSA assets, placed with retail banks, have similar ratings to those shown above.
Credit risk on all of these balances, and any interest accrued thereon, is considered to be minimal. These balances are considered as Stage 1 for
IFRS 9 impairment purposes with a probability of default such that any provision required would be immaterial.
Trade debtors
The Group’s trade debtors balance represents principally amounts outstanding on unpaid operating lease obligations in the asset finance
business, where similar acceptance criteria to those used for finance lease cases apply.
Financial assets at fair value
The Group’s financial assets held at fair value comprise solely derivate financial instruments used for hedging purposed (note 24)
In order to control credit risk relating to counterparties to the Group’s derivative financial instruments, ALCO 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 derivative positions held within the Group’s securitisation structures, must comply with criteria set out in the
financing arrangements, which are monitored externally.
Where a derivative counterparty to the Group’s cross-currency basis swaps fails to meet the required criteria, they are obliged under the terms
of the instruments to provide a cash collateral deposit. These cash collateral deposits are held in escrow and not recognised as assets of the
Group so do not form part of the Group’s cash position.
PAGE 246 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
The Group uses the International Swaps and Derivatives Association (‘ISDA’) Master Agreement for documenting certain derivative activity.
For certain counterparties a Credit Support Annex (‘CSA’) has been executed in conjunction with the ISDA Master Agreement. Under a CSA,
collateral is passed between counterparties to mitigate the market contingent counterparty risk inherent in the outstanding positions. Collateral
pledged to such counterparties by the Group is shown in note 25, while collateral pledged to the Group is shown in note 37.
The Group’s exposure to credit risk in respect of the counterparties to its derivative financial assets, analysed by their long-term credit rating
as determined by Fitch is set out below.
Carrying value of derivative financial assets
Counterparties rated
AA
AA-
A+
A
A-
BBB+
Gross exposure (note 24)
Collateral amounts posted
Cross-currency basis swap arrangements
CSA collateral amounts (note 37)
Total collateral
Net exposure
2019
£m
7.3
155.6
388.8
5.5
35.2
-
592.4
64.1
-
64.1
2018
£m
7.9
169.7
5.4
630.2
-
42.5
855.7
67.5
10.3
77.8
528.3
777.9
The increase in reported credit quality is due to upgrades in the year to the ratings of two of the Group’s principal counterparties, Barclays
and RBS.
PAGE 247 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
58.
LIQUIDITY RISK
Liquidity risk is the risk that the Group might be unable meet its liabilities as they fall due.
The Group’s principal source of liquidity risk is from its retail deposit funding. Deposit balances raised are typically used to support lending
activities where maturity is over a longer period than that of the deposits. This maturity transformation exposes the Group to liquidity risk.
Further liquidity risk arises:
•
•
In the medium term from the Group’s corporate and retail bonds which are used to support its general operations and from its participation
in central bank funding schemes
From the Group’s derivatives portfolio which gives rise to liquidity risk due to the collateral requirements to cover adverse changes
in valuation
•
From the Group’s participation in the SPVs where sufficient funding must be available
Liquidity is also required to provide capital support for new loans and working capital for the Group.
Where assets are funded by non-recourse arrangements, through the securitisation process, liquidity risk is effectively eliminated.
Set out below is a summary of the contractual cash flows expected to arise from the Group’s financial liabilities, based on the earliest date at
which repayment can be demanded.
30 September 2019
Retail deposits
Borrowings
Total non-derivative liabilities
Derivative liabilities
30 September 2018
Retail deposits
Borrowings
Total non-derivative liabilities
Derivative liabilities
Amounts payable
In one year
or less, or on
demand
In more than
one year, but
not more than
two years
In more than
two years but
not more than
five years
In more than
five years
Total
£m
£m
£m
£m
£m
4,418.0
89.9
4,507.9
(0.1)
1,210.1
794.6
2,004.7
2.9
982.4
551.8
1,534.2
1.8
4,507.8
2,007.6
1,536.0
3,674.8
118.7
3,793.5
(1.9)
3,791.6
1,068.8
44.6
1,113.4
4.7
1,118.1
720.8
1,227.4
1,948.2
22.6
1,970.8
-
171.8
171.8
-
171.8
-
301.9
301.9
(0.4)
301.5
6,610.5
1,608.1
8,218.6
4.6
8,223.2
5,464.4
1,692.6
7,157.0
25.0
7,182.0
Non-recourse balances are payable only to the extent that funds are available, as described further below, and do not expose the Group to any
material liquidity risk. They are therefore not included in the table above.
As the amounts set out above include all expected future cash flows, including principal and interest, they will not agree to amortised cost or fair
value amounts reported in the balance sheet.
Further information on the liquidity exposure arising from the Group’s retail deposits, securitisation and other borrowings is set out below.
The liquidity exposures of the Company arise only from its borrowings, and are set out below.
The responsibility for managing liquidity risk rests with ALCO which makes recommendations for the Group’s liquidity policy for Board approval
and uses detailed cash flow projections to ensure that an adequate level of liquidity is available at all times. The Group’s liquidity position is
managed on a day to day basis by the treasury function, under the supervision of ALCO.
PAGE 248 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Retail deposits
The Group’s retail funding strategy is focussed on building a stable mix of deposit products. A high proportion of balances, 97.8% (2018: 97.9%),
are protected by the Financial Services Compensation Scheme (‘FSCS’) which mitigates against the possibility of a retail run.
The cash outflows, including principal and estimated interest contractually required by the Group’s retail deposit balances, analysed by the
earliest date at which repayment can be demanded are set out below:
Payable on demand
Payable in less than three months
Payable in less than one year but more than three months
Payable in less than one year or on demand
Payable in one to two years
Payable in two to five years
2019
£m
1,783.9
482.7
2,151.4
4,418.0
1,210.1
982.4
6,610.5
2018
£m
1,294.3
281.9
2,098.6
3,674.8
1,068.8
720.8
5,464.4
In order to reduce the liquidity risk inherent in the Group’s retail deposit balances, the PRA requires that the Bank, like other regulated banks,
maintains a buffer of liquid assets to ensure it has sufficient available funds at all times to protect against unforeseen circumstances. The amount
of this buffer is calculated using Individual Liquidity Guidance (‘ILG’) set by the PRA based on the Internal Liquidity Adequacy Assessment
Process (‘ILAAP’) undertaken by the Bank. The ILAAP determines the liquid resources that must be maintained in the Bank to meet its Overall
Liquidity Adequacy Requirement (‘OLAR’) and to ensure that it can meet its liabilities as they fall due. It is based on an analysis of its business as
usual forecast cash requirements but also considers their predicted behaviour in stressed conditions.
At 30 September 2019 the liquidity buffer comprised the following on and off balance sheet assets. All of these assets are held within the Bank
and are readily realisable.
Balances with central banks
Short-term investments
Total on balance sheet liquidity
FLS drawings
Note
18
19
36
2019
£m
646.4
-
646.4
109.0
755.4
2018
£m
724.9
-
724.9
108.7
833.6
The Bank manages its Liquidity Coverage Ratio (‘LCR’), the level of its High Quality Liquid Assets (‘HQLA’) relative to its short term forecast net
cash outflows. A minimum level of LCR, the Liquidity Coverage Requirement is set through regulation for all regulated financial institutions.
As at 30 September 2019, the Bank’s LCR was comfortably above the required minimum regulatory standard. The Bank also monitors its Net
Stable Funding Ratio (‘NSFR’) which measures the stability of the funding profile in relation to the composition of its assets and off-balance
sheet activities.
Liquidity is not regulated at Group level.
PAGE 249 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Borrowings
Set out below is the contractual maturity profile of the Group’s and the Company’s borrowings at 30 September 2019 and 30 September 2018
based on their carrying values. These are analysed between non-recourse (securitisation) and other funding, with the liquidity position arising
principally from the other funding.
Financial liabilities falling due:
In one year
or less, or on
demand
In more than
one year, but
not more than
two years
In more than
two years but
not more than
five years
In more than
five years
Total
£m
£m
£m
£m
£m
The Group
30 September 2019
Secured bank borrowings
Asset backed loan notes
Total non-recourse funding
Bank overdrafts
Retail bonds
Corporate bond
Central bank facilities
30 September 2018
Secured bank borrowings
Asset backed loan notes
Total non-recourse funding
Bank overdrafts
Retail bonds
Corporate bond
Central bank facilities
The Company
30 September 2019
Retail bonds
Corporate bond
30 September 2018
Retail bonds
Corporate bond
-
-
-
1.0
-
-
50.0
51.0
-
-
-
1.1
-
-
80.0
81.1
-
-
-
-
-
-
-
-
-
-
59.9
-
700.0
759.9
-
-
-
-
-
-
-
-
59.9
-
59.9
-
-
-
-
-
-
-
236.6
-
244.4
481.0
-
-
-
-
184.3
-
944.4
1,128.7
236.6
-
236.6
184.3
-
184.3
787.5
4,419.4
5,206.9
-
-
149.6
-
787.5
4,419.4
5,206.9
1.0
296.5
149.6
994.4
5,356.5
6,648.4
935.6
5,554.7
6,490.3
-
111.8
149.3
-
6,751.4
-
149.6
149.6
111.8
149.3
261.1
935.6
5,554.7
6,490.3
1.1
296.1
149.3
1,024.4
7,961.2
296.5
149.6
446.1
296.1
149.3
445.4
IFRS 7 requires the disclosure of future contractual cash flows (including interest) on these borrowings, and these are shown below.
PAGE 250 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Non-recourse funding
The Group has historically used securitisation as a principal source of funding, but currently only accesses this market on a strategic basis.
In a securitisation an SPV company within the Group will issue asset backed loan notes (‘Notes’) secured on a pool of mortgage or other loan
assets beneficially owned by the SPV in a public offer. 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 from 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 matching of the maturities of the assets and the
related funding substantially reduces the Group’s exposure to liquidity risk. Details of Notes in issue are given in note 32 and the assets backing
the Notes are shown in note 21.
In each case the Group provides funding to the SPV at inception, subordinated to the Notes, which means that the primary credit risk on the
pool assets is retained within the Group. The Group 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 from time to time in each SPV is held until the next interest payment date when, following payment of principal, interest and the
associated costs of the SPV, 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 interest and principal payments to be made even if some of the loans default. To
provide further credit enhancement in certain SPVs, specific economic trigger events exist 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 events occurred in the year ended 30 September 2019 or the year ended 30 September 2018. Whether
any such events in any of the Group’s other SPVs arise in the future will depend on the performance of the general economy and its impact
on mortgage and loan arrears in each SPV. However, if all of the remaining trigger events occurred, a total of £55.8m of additional cash would
be retained in the SPV companies (2018: £71.0m). The cash balances of the SPV companies are included within the restricted cash balances
disclosed in note 18 as ‘securitisation cash’.
Newly originated mortgage loans may be initially funded by a revolving loan facility or ‘warehouse’ from the point of their origination until their
inclusion in a securitisation transaction or other refinancing. A warehouse may also be used to hold acquired loans or to refinance Group loans
on a short-term basis. A warehouse company functions in a similar way to an SPV, except that funds are drawn down as advances are made or
loans are sold in, repaid when loans are securitised or refinanced by an internal asset sale and may subsequently be redrawn up to the end of
a commitment period. The Group’s Paragon Second Funding facility was initiated as a warehouse, but is no longer available for new drawings.
Repayment of the principal amount of the facilities is not required unless amounts are realised from the secured assets either through
repayment, securitisation or asset sales, even after the end of the period. There is no further recourse to other assets of the Group in respect of
either interest or principal on the borrowings. The Group has reduced its available warehouse facilities in the period.
As with the SPVs, the Group provides subordinated funding to active warehouse companies and restricted cash balances are held within them.
Contributions to the subordinated funding are made each time a drawing on the facility concerned is made. These amounts provide credit
enhancement to the warehouse and cover certain fees. This funding is repaid when assets are securitised or refinanced by an internal asset
sale. There were no active warehouse companies at 30 September 2019 or 30 September 2018.
Further details of the warehouse facilities are given in note 33 and details of the loan assets within the warehouses are given in note 21.
The final repayment date, for all of the securitisation borrowings and the Paragon Second Funding 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 2019 under the SPV and warehouse arrangements, allowing for the
effect of the cross-currency basis swaps, described under currency risk (note 60), which are net settled with the loan payments, was £4,706.1m
(2018: £5,669.1m). The total sterling amount payable under these arrangements, were these principal amounts to remain outstanding until the
final repayment date, would be £6,267.6m (2018: £8,874.2m). As the principal will, as discussed above, reduce as customers repay or redeem
their accounts, the cash flow will be far less than this amount in practice.
Corporate debt
In February 2013, the Company initiated a Euro Medium Term Note issuance programme, with a maximum issuance of £1,000.0m. The Company
had the ability to issue further notes under the programme and has issued three fixed rate bonds for a total of £297.5m, with interest rates
ranging from 6.000% to 6.125% and maturities ranging from December 2020 to August 2024, the most recent issue of £112.5m being made
in August 2015. This programme offers the Group opportunities to raise further working capital if needed.
The Group also issued £150.0m of tier 2 debt in September 2016 with an optional call date in September 2021 and a final maturity of
September 2026.
The Group’s ability to issue debt is supported by its credit rating issued by Fitch which was increased to BBB from BBB- in the year ended
30 September 2018 and confirmed in March 2019. It was, however, placed on negative watch, due to Brexit related concerns, in common with
other UK bank issuance.
None of the Group’s corporate or retail bond issuance falls due for payment earlier than 2020.
Central bank facilities
The Group has accessed term facilities under the central bank schemes described in note 36. The Group has prepositioned further assets with
the Bank of England which can be used to release more funds for liquidity or other purposes. At 30 September 2019 the amount of drawings
available in respect of prepositioned assets was £1,095.0m (2018: £703.2m).
PAGE 251 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Contractual cash flows
The total undiscounted amounts, inclusive of estimated interest, which would be payable in respect of the non-securitisation borrowings of
the Group and the Company, should those balances remain outstanding until the contracted repayment date, or the earliest date on which
repayment can be required, are set out below.
Contingent
consideration
Corporate
bonds
£m
£m
Retail
bonds
£m
Central bank
facilities
£m
a) The Group
30 September 2019
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 2018
Payable in less than one year
Payable in one to two years
Payable in two to five years
Payable in over five years
b) The Company
30 September 2019
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 2018
Payable in less than one year
Payable in one to two years
Payable in two to five years
Payable in over five years
5.7
6.2
12.7
-
24.6
2.5
5.7
18.9
-
27.1
10.9
10.9
32.6
171.8
226.2
10.9
10.9
32.6
182.6
237.0
18.0
75.3
261.6
-
354.9
18.0
18.0
217.6
119.3
372.9
Corporate
bonds
£m
10.9
10.9
32.6
171.8
226.2
10.9
10.9
32.6
182.6
237.0
Total
£m
89.9
794.6
551.8
171.8
55.3
702.2
244.9
-
1,002.4
1,608.1
87.3
10.0
958.3
-
1,055.6
Retail
bonds
£m
18.0
75.3
261.6
-
354.9
18.0
18.0
217.6
119.3
372.9
118.7
44.6
1,227.4
301.9
1,692.6
Total
£m
28.9
86.2
294.2
171.8
581.1
28.9
28.9
250.2
301.9
609.9
Amounts payable in respect of the ‘other accruals’ and ‘trade creditors’ shown in note 37 fall due within one year. The cash flows described
above will include those for interest on borrowings accrued at 30 September 2019 disclosed in note 37.
PAGE 252 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 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
2019
2018
Total cash
outflow / (inflow)
Total cash
outflow / (inflow)
£m
(0.1)
2.9
1.8
-
4.6
(14.0)
(20.8)
(42.0)
(0.5)
(77.3)
(72.7)
£m
(1.9)
4.7
22.6
(0.4)
25.0
(4.3)
(1.2)
0.2
-
(5.3)
19.7
59.
INTEREST RATE RISK
Interest rate risk is the current or prospective risk to capital or earnings arising from adverse movements in interest rates. The Group’s exposure
to this risk is a natural consequence of its lending, deposit taking and other borrowing activities, as some of its financial assets and liabilities
bear interest at rates which float with various market rates while others are fixed, either for a term or for their whole lives. Such risk is referred
to as Interest Rate Risk in the Banking Book (‘IRRBB’). The Group does not seek to generate income from taking interest rate risk and aims to
minimise exposures that occur as a natural consequence of carrying out its normal business activities.
The principal market-set interest rate used by the Group is the London Interbank Offered Rate (‘LIBOR’) which is used to set rates for certain
loan assets and borrowings. During the year, the Group issued its first debt with interest set by reference to the Sterling Overnight Index Average
(‘SONIA’), which is expected to be used more widely going forward.
The Group’s risk management framework for IRRBB continues to evolve in line with updates in regulatory guidance on methods expected to be
used by banks measuring, managing, monitoring and controlling such risks. The Group will continue to develop these processes as interpretation
of these standards becomes clearer as they become more widely implemented.
IRRBB is managed through Board approved risk appetite limits and policies. The Group seeks to match the structure of assets and liabilities
naturally where possible or by using appropriate financial instruments, such as interest rate swaps. Day to day management of interest rate risk
is the responsibility of the Group’s Treasury function, with control and oversight provided by ALCO.
IRRBB exposures
Risk exposure in the Group’s operations might occur through:
•
•
•
Gap or re-pricing risk. The risk created when interest rates on assets, liabilities and off-balance sheet items reprice at different times
causing them to move by different amounts
Basis risk. The risk arising where assets and liabilities re-price with reference to different reference interest rates, for example, rates set
by the Group and market rates, such as Bank of England base rate, SONIA and LIBOR. Relative changes in the difference between the
reference rates over time may impact earnings
Option or prepayment risk. The risk that settlement of asset and liability balances at different times from those forecast due to economic
conditions or customer behaviour may create a mismatch in future periods
Due to the maturity transformation inherent in the Group’s business model, it is also exposed to the risk that the relationship between the rates
affecting the shorter term funding balance and the rates affecting the longer term lending balance will have altered when the funding has to
be refinanced.
PAGE 253 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
The Group measures these risks through a combination of economic value and earnings-based measures considering prepayment risk:
•
Economic Value (‘EV’) – a range of parallel and non-parallel interest rate stresses are applied to assess the change in market value from
assets, liabilities and off-balance sheet items re-pricing at different times
• Net Interest Income (‘NII’) - impact on earnings from a range of interest rate stresses
Interest rate benchmarks such as LIBOR have been subject to increasing global regulatory scrutiny. In July 2017 the FCA announced that it was
its intention that by the end of 2021 it would no longer compel banks to make submissions to the LIBOR setting process. As a result of this,
LIBOR is expected to be discontinued and alternative reference rates are being developed. For LIBOR, the Bank of England’s Working Group
on Sterling Risk-Free Interest Rates recommended SONIA as that alternative. However, there remains significant uncertainty as to how the
transition from LIBOR and other Interbank Offered Rates to alternative benchmarks will be managed across the banking industry.
LIBOR is used in setting interest rates on significant amounts of the Group’s loan assets and borrowings and the Group has established an
internal working group to identify the impact on the business and ensure an orderly transition from LIBOR to other reference rates.
The Group’s use of financial derivatives for hedging interest rate risk is discussed further in note 24.
Interest rate sensitivity
To provide a broad indication of the Group’s exposure to interest rate movements, the notional impact of a 1.0% change in UK interest rates on
the equity of the Group at 30 September 2019, 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.
As a simplification this calculation assumes that all relevant UK interest rates move by the same amount in parallel and that all repricing takes
place at the balance sheet date.
On this basis, a 1.0% increase in UK interest rates would reduce the Group’s equity at 30 September 2019 by £1.1m (2018: £1.7m) and increase
profit before tax by £10.1m (2018: increase by £19.8m).
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 affect the Group’s business and results.
Although certain of the Group’s borrowings have interest rates dependent 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 1.0% increases
in US or Euro interest rates would be to increase the Group’s equity by £0.4m (2018: £0.6m) and £1.1m (2018: £1.4m) respectively, however, in
reality these movements would be mitigated by movements in UK interest rates and exchange rates.
It should be noted that these sensitivities are illustrative only, and much simplified from those used to manage IRRBB in practice.
The Company
All the borrowings of the Company have fixed interest rates. Its assets and liabilities with other group companies bear interest at floating
rates based on LIBOR which reset within three months of the balance sheet date; all other balances in the Company balance sheet are
non-interest bearing.
60.
CURRENCY RISK
The Group has no appetite for material amounts of exposure to foreign currency movements and applies a hedging strategy for any material
open positions through the use of spot or forward contracts or derivatives.
All of the Group’s significant 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 32. Although IFRS 9 requires that they be accounted for as currency liabilities and valued
at their spot rates, a condition of the issue of these notes was that bespoke interest rate and currency swaps (‘cross-currency basis 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
eliminating currency risk for these exposures. The amount of this effective borrowing, i.e. the amount of the currency borrowing translated at
the exchange rate on inception, is referred to as the ‘equivalent sterling principal’.
The equivalent sterling principal amounts of notes in issue under the arrangements described above, and their carrying values at
30 September 2019 and 30 September 2018 are set out below:
2019
2019
2018
Equivalent
sterling principal
Carrying
value
Equivalent
sterling principal
£m
447.5
1,007.4
1,454.9
£m
721.6
1,314.1
2,035.7
£m
897.3
1,320.5
2,217.8
2018
Carrying
value
£m
1,321.8
1,724.5
3,046.3
US dollar notes
Euro notes
PAGE 254 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The asset finance business has a limited amount of lending denominated in US dollars and may contract to purchase assets for leasing in
currency. These balances are hedged by the purchase of currency derivatives and/or appropriate currency balances.
As a result of these arrangements the Group has no material exposure to foreign currency risk, and no sensitivity analysis is presented for
currency risk.
The Group’s use of financial derivatives to manage currency risk is described further in note 24.
None of the assets or liabilities of the Company are denominated in foreign currencies.
D2.3 NOTES TO THE ACCOUNTS – BASIS OF PREPARATION
For the year ended 30 September 2019
The notes set out below describe the accounting basis on which the Group and the Company prepare their accounts, the
particular accounting policies adopted by the Group and the principal judgements and estimates which were required in the
preparation of the financial statements.
They also include other information describing how the accounts have been prepared required by legislation and accounting
standards.
61.
BASIS OF PREPARATION
The financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the EU.
In the financial years reported upon this means that, in the Group’s circumstances, the financial statements accord also with International
Financial Reporting Standards as approved by the International Accounting Standards Board.
The particular accounting policies adopted have been set out in note 63 and the critical accounting judgements and estimates which have been
required in preparing these financial statements are described in note 64 and 65 respectively.
Adoption of new and revised reporting standards
In the preparation of these financial statements, the following accounting standards are being applied for the first time.
•
•
IFRS 9 – ‘Financial Instruments’ (together with consequential changes to IFRS 7 - ‘Financial Instruments: Disclosures’)
IFRS 15 – ‘Revenue from Contracts with Customers’
The effect on the Group’s and the Company’s accounting of the adoption of these standards is discussed in note 62.
Comparability of information
IFRS 9 does not require that the balance sheet information at 30 September 2017 and 30 September 2018 and the profit and loss information
for the years ended on these dates is restated on the adoption of the Standard. The information presented for those periods in these financial
statements is derived in accordance with IAS 39 – ‘Financial Instruments: Recognition and Measurement’ (‘IAS 39’), and therefore may not be
directly comparable with the balance sheet at 30 September 2019 and the profit and loss account for the year then ended which are prepared
under IFRS 9.
In order to aid users of the accounts additional comparative balance sheet amounts at 1 October 2018, immediately following transition, have
been provided where relevant. These are marked as 2018 IFRS 9.
Standards not yet adopted
At the date of authorisation of these financial statements IFRS 16 – ‘Leases’, which has not been applied in these financial statements, was in
issue but not yet effective.
Other standards and interpretations in issue but not effective do not address matters relevant to the Group’s accounting and reporting.
PAGE 255 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts IFRS 16
IFRS 16 will replace the standards currently governing the accounting for operating and finance leases and will come in to force with effect from
the Group’s financial statements for the year ending 30 September 2020. The Group has not early adopted IFRS 16 and will adopt IFRS 16 for
the year ending 30 September 2020 using the modified retrospective approach.
Lessor accounting
The standard will address accounting by lessees and lessors, but the provisions for lessor accounting are little changed from those in IAS 17 and
so the accounting for the Group’s finance lease receivables will be largely unaffected.
Lessee accounting
Accounting by lessees will change significantly, with a right of use asset recognised on the balance sheet for all leases, representing the right to
use the underlying asset. This includes leases presently treated as operating leases and not recognised on the balance sheet. A corresponding
liability arises representing the present value of future lease commitments.
The Group’s present commitments under such leases are described in note 51(b). Additionally, the Group has undertaken an exercise to identify
potential lease agreements arising from service contracts it holds.
The Group has made use of practical expedients within IFRS 16 when performing its initial impact assessment. These include the right to
exclude contracts that have not previously been classified as leases before the implementation date, and the ability to exclude leases of
low value and those with a short term. A discount rate based on a 5-year corporate bond rate has been used when performing the present
value calculations.
This is expected to result in the recognition of a right of use (‘ROU’) asset of £9.0m and a corresponding liability of £9.0m. Comparative amounts
will not be restated.
There is expected to be no immediate tax impact from transition and the Group’s regulatory capital will be unaffected. Under IFRS 16, the
amount charged to profit and loss will represent depreciation on the ROU asset and a finance charge on the liability instead of rents. While this
is a change of classification, the overall effect on profit is likely to be insignificant. There is no impact on reported cash flows.
62.
CHANGES IN ACCOUNTING STANDARDS
The Group is required to adopt IFRS 9 (and the consequent changes to IFRS 7) and IFRS 15 for the first time in preparing its financial statements
for the year ended 30 September 2019.
IFRS 9 – Overview
IFRS 9 ‘Financial Instruments’ replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’ (‘IAS 39’) and addresses the recognition,
classification and measurement of financial assets and liabilities.
IFRS 9 – Classification
IFRS 9 changes the classification requirements for financial assets and liabilities. In order for financial assets to be carried at amortised cost
under the new standard, they must be carried in a business model whose objective is to collect the contractual cash flows from the assets and
where those cash flows comprise solely payments of principal and interest (‘SPPI’). Further information on this judgement is given in note 64.
In accordance with the new rules:
•
•
•
Cash balances and loans to customers (other than finance leases), which were classified as ‘loans and receivables’ under IAS 39 are
classified as ‘financial assets measured at amortised cost’ under IFRS 9 and continue to be measured on the amortised cost basis
Retail deposits and external borrowings, which were classified as ‘other financial liabilities’ under IAS 39 are classified as ‘financial liabilities
measured at amortised cost’ and continue to be measured on the amortised cost basis
Derivative financial assets and liabilities, which were carried at fair value under IAS 39 are classified as ‘financial assets or liabilities at fair
value through profit and loss’ under IFRS 9 and continue to be measured on the same basis
The amortised cost and fair value measurement methodologies remain broadly the same in IFRS 9 as they were in IAS 39 and no measurement
changes in the accounts of the Group or the Company have arisen as a result of these classification changes.
PAGE 256 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The Group’s financial asset and financial liability balances measured in accordance with IFRS 9 and the preceding standard, IAS 39, at the
transition date (1 October 2018) are set out below:
Financial Assets
Cash – central banks
Cash – retail banks
Loans to customers
Derivative financial assets
Sundry financial assets
Financial Liabilities
Short-term bank borrowings
Retail deposits
Derivative financial liabilities
Asset backed loan notes
Secured bank borrowings
Retail bond issuance
Corporate bond issuance
Central bank facilities
Other financial liabilities
Post-transition
Pre-transition
£m
£m
895.9
414.7
12,100.6
855.7
15.3
895.9
414.7
12,127.8
855.7
15.3
14,282.2
14,309.4
1.1
5,296.6
4.7
5,554.7
935.6
296.1
149.3
1,024.4
82.8
13,345.3
1.1
5,296.6
4.7
5,554.7
935.6
296.1
149.3
1,024.4
82.8
13,345.3
The only changes arising from a change in measurement on transition to IFRS 9 relate to impairment provision on the Group’s loans to customers.
These are discussed further below.
The Company’s financial asset and financial liability balances measured in accordance with IFRS 9 and the preceding standard, IAS 39, at the
transition date (1 October 2018) are set out below:
Post-transition
Pre-transition
£m
24.9
216.3
200.0
0.7
441.9
296.1
149.3
125.7
2.8
573.9
£m
24.9
216.3
200.0
0.7
441.9
296.1
149.3
125.7
2.8
573.9
Financial Assets
Cash – retail banks
Balances owed by Group companies
Loans to Group companies
Sundry financial assets
Financial Liabilities
Retail bond issuance
Corporate bond issuance
Balances owed to Group companies
Sundry financial liabilities
No measurement changes on transition to IFRS 9 arise in the accounts of the Company.
PAGE 257 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts IFRS 9 – Impairment
IFRS 9 changes the basis of impairment provision for all financial assets from an incurred loss to an expected credit loss (‘ECL’) basis. Therefore,
the provisioning is dependent on an assessment of the probability of future default and the loss which might be incurred at that time. This
introduces significant additional areas of estimation to the accounting.
This introduces a number of new concepts and changes to the approach required by IAS 39. ECLs are based on an assessment of the probability
of default (‘PD’) and loss given default (‘LGD’), discounted to give a net present value. The estimation of ECL should be unbiased and probability
weighted, considering all reasonable and supportable information, including forward looking economic assumptions and a range of possible
outcomes. This has the effect of recognising losses on loans earlier than at present, as IAS 39 requires provisions to be made only at the point
where a loss has actually occurred and there is objective evidence of credit impairment.
The Standard also requires that companies calculate impairment under a variety of differing economic scenarios and combine these on a
weighted average basis to arrive at the final provision, rather than base calculations on a central forecast, as is generally the case under IAS 39.
IFRS 9 requires loan assets to be divided into three ‘stages’, with accounts which were credit impaired on initial recognition representing a
fourth class.
The three classes comprise: those where there has been no Significant Increase in Credit Risk (‘SICR’) since advance or acquisition (Stage 1);
those where there has been a SICR (Stage 2); and loans which are credit impaired (Stage 3). It is an important feature of the standard that SICR is
not defined solely by the performance of the account, but also by other information available about the customer both internally and externally,
such as credit bureau information.
•
•
•
•
On initial recognition, and for assets where there has not been an SICR, provisions will be made in respect of losses resulting from the level
of credit default events expected in the twelve months following the balance sheet date. These accounts would be largely unprovided for
under IAS 39, although some cases with adverse qualitative indicators might have been addressed by a collective emergence provision.
Such provisions under IAS 39 were designed to cover assets where a loss event had occurred before the reporting date, but this event had
not yet affected performance
Where a loan has experienced an SICR, whether or not the loan is considered to be credit impaired, provisions will be made based on the
ECLs over the full life of the loan. This is likely to lead to an increase in provision in general, though the IAS 39 emergence provision would
have also addressed some of this risk
For credit impaired assets, provisions will be made on the basis of lifetime expected credit losses, taking account of forward-looking
economic assumptions and a range of possible outcomes. Under IAS 39, provisions were based on the asset’s carrying value and
the present value of the estimated future cash flows. Despite IAS 39 not explicitly taking account of alternative economic scenarios,
where loans had attracted a provision under IAS 39, the IFRS 9 provision on transition was, in most cases, broadly similar to the closing
IAS 39 position
Credit impaired assets are identified either through quantitative measures or by operational status. In determining indicators of credit
impairment regard is also taken of definitions used for regulatory capital purposes. Assets may also be assigned to Stage 3 if they are
identified as credit impaired as a result of management review processes
For assets which were purchased or originated as credit impaired (‘POCI’) accounts (i.e. considered as credit impaired at the point of first
recognition), such as certain of the Group’s acquired assets in Idem Capital, the required treatment is largely similar under IAS 39 and
IFRS 9. This classification also includes credit impaired assets recognised in corporate acquisitions under IFRS 3. Purchased performing
accounts are not classified as POCI, but are first recognised in Stage 1
Under IAS 39 the Group treated all loan accounts as live where they remained open on its administration system. IFRS 9 requires a firm
to consider the prospect of future recovery in its write off approach and the Group has adopted a revised accounting policy for write offs
following transition.
Accounts are now written off for accounting purposes when standard enforcement processes have been completed, subject to any amount
retained in respect of expected salvage receipts. This change has no effect on the net carrying value, only on the amounts reported as gross
loan balances and accumulated impairment provisions, but provides a more informative value for the coverage ratio.
All accounts which would have been written off for accounting purposes prior to the transition date under the new policy have been written off
at transition. All of these cases were fully provided and therefore this has had no impact on reserves.
As disclosed in the transition report, the introduction of IFRS 9 resulted in an increase in the Group’s impairment provision of £27.2m at the
transition date, 1 October 2018. The impacts by business segment are set out below:
IAS 39
£m
10,473.5
1,133.2
521.1
12,127.8
IFRS 9
£m
10,449.5
1,131.3
519.8
12,100.6
Change
£m
(24.0)
(1.9)
(1.3)
(27.2)
Change
%
(0.2) %
(0.2) %
(0.2) %
(0.2) %
Loans to customers
Mortgages
Commercial Lending
Idem Capital
Total
PAGE 258 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
The movement in impairment provisions in the Group’s accounts between the balance disclosed under IAS 39 and the opening balance under
IFRS 9 is set out below.
Loans to customers
At 30 September 2018 under IAS 39
IFRS 9 transition adjustments
Change in write-off definition
At 1 October 2018 under IFRS 9
£m
107.4
27.2
(80.4)
54.2
The reduction due to write off definitions is principally attributable to part redeemed loan balances which remained live on the administration
systems of the Group and were therefore treated as live for accounting purposes. Under IFRS 9 these balances may be defined as written off,
and the Group’s IFRS 9 write off policy considers them to be so, as this provides users with a more useful measure of provision cover.
The increase in impairment on transition will be allowed as a deduction for the purposes of UK Corporation Tax under the Change in Accounting
Practices Regulations. This is spread over the ten years following transition for loan assets and is allowable in the 2019 tax computations for
finance leases. A deferred tax asset of £5.0m has been recognised on transition.
Cash balances, ‘Trade receivables’, and the sundry financial asset balances shown in note 25 are classified as financial assets accounted for at
amortised cost and are therefore subject to the impairment provisions of IFRS 9. However, these assets are principally UK sovereign exposures
(including exposures to the Bank of England) and exposures to highly rated banks. The ECLs on these counterparties are considered to be
minimal. The value, tenor and potential for default of the other exposures is such that any potential IFRS 9 provision is insignificant.
Derivative financial assets are carried at fair value, which includes the consideration of credit risk, as they were under IAS 39.
The introduction of the IFRS 9 impairment regime had no impact on the financial assets of the Company.
IFRS 9 – Hedge accounting
The hedge accounting requirements of IFRS 9 do not specifically address portfolio fair value hedges of interest rate risk (‘macro hedges’) which
IAS 39 deals with directly. A separate financial reporting standard is to be developed in this area. IFRS 9 allows the option to continue to apply
the existing hedge accounting requirements of IAS 39 until this is implemented.
As the Group’s hedging arrangements are either macro hedges, which are not specifically addressed by the new standard, or bespoke cash
flow hedges, which would not be affected by the change of standard, the Group has decided to defer application of these rules until the full new
hedge accounting regime is in place.
It thus continues to apply the hedge accounting requirements of IAS 39 and all hedging arrangements in place at 30 September 2018 continue
to be recognised on 1 October 2018 after IFRS 9 transition.
However, the consequential changes to IFRS 7 (see below) do apply to these financial statements and the Group’s disclosures in respect of
hedge accounting and derivatives have been revised and expanded.
There are no hedge accounting arrangements in the accounts of the Company.
IFRS 7 – Disclosure
At the point of adoption of IFRS 9, entities are also required to adopt amendments to IFRS 7 – ‘Financial Instruments: Disclosures’ made by
IFRS 9 in July 2014. The principal amendments affecting the Group’s accounts are those concerning the reporting of impairment, taking account
of the IFRS 9 measurement requirements for impairment, the reporting of credit risk and the reporting of hedging strategies and outcomes.
This has, therefore, required significant amendments to the disclosures presented as notes 57 (credit risk), 21 to 23 (loans and impairment)
and 24 (derivatives and hedging) in these accounts compared to those presented for the year ended 30 September 2018. When new notes
address impairment, no comparative amounts are required to be disclosed, but for other new requirements, comparative amounts under the
new standard at 30 September 2018 are shown.
IFRS 15 – Impact
IFRS 15 governs the accounting for those of the Group’s income streams which are not within the scope of either IFRS 9 or IAS 17 - ‘Leases’.
These comprise principally third-party servicing income, maintenance income on vehicle leasing, third party commission income and account
fee income. The accounting for most of these flows is unchanged as the amounts are charged on an event-by-event basis.
There is a small balance sheet impact in the Group accounts from the accounting for maintenance agreements, decreasing reserves at
30 September 2018 by £0.2m. In view of the low level of impact comparative amounts have not been restated for this change.
The introduction of IFRS 15 had no impact on the accounts of the Company.
PAGE 259 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Summary
The overall impacts of the changes above on consolidated equity at 30 September 2018 are set out below.
Equity at 30 September 2018
IFRS 9
Impairment
Deferred tax thereon
IFRS 15
Maintenance income
Total adjustments
Equity at 1 October 2018
Note
£m
£m
1,095.9
20
26
(27.2)
5.0
(22.2)
(0.2)
(22.4)
1,073.5
All these amendments impacted retained earnings. None of these changes have any impact on the Group’s cash flow reporting.
There were no impacts on the equity of the Company.
63.
ACCOUNTING POLICIES
The particular policies applied by the Group in preparing these financial statements in accordance with the EU endorsed IFRS regime are
described below.
As comparative financial information relating to the year ended 30 September 2018 and earlier periods has not been restated for IFRS 9, as
permitted by that standard, the accounting policies applied differ to those used in the accounts for the year ended 30 September 2019. Where
this is significant both policies are shown.
(a) Accounting convention
The financial statements have been 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 2019. Subsidiaries
comprise all those entities over which the Group has control, as defined by IFRS 10 – ‘Consolidated Financial Statements’.
In addition to legal subsidiaries, where the Company owns shares in the entity, directly or indirectly, in accordance with IFRS 10, companies
owned by charitable trusts into which loans originated by group companies were sold as part of its warehouse and securitisation funding
arrangements, where the Group enjoys the benefits of ownership and which, therefore, it is considered to control, 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.
A full list of the Group’s subsidiaries is set out in note 68, together with further information on the basis on which they are considered to be
controlled by the Company. The results of businesses acquired are dealt with in the consolidated accounts from the date of acquisition.
(c) Going concern
The consolidated financial statements have been prepared on the going concern basis.
Accounting standards require the directors to assess the Group’s ability to continue to adopt the going concern basis of accounting. In performing
this assessment, the directors consider all available information about the future, the possible outcomes of events and changes in conditions
and the realistically possible responses to such events and conditions that would be available to them, having regard to the ‘Guidance on Risk
Management, Internal Control and Related Financial and Business Reporting’ published by the Financial Reporting Council in September 2014.
In order to assess the appropriateness of the going concern basis the directors considered the Group’s financial position, the cash flow
requirements laid out in its forecasts, its access to funding, the assumptions underlying the forecasts and the potential risks affecting them.
After performing this assessment, the directors concluded that it was appropriate for them to continue to adopt the going concern basis in
preparing the Annual Report and Accounts.
PAGE 260 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (d) Acquisitions and 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.
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.
Contingent consideration arising on acquisitions is first recognised in the accounts at its fair value at the acquisition date and subsequently
revalued at each accounting date until it falls due for payment or the final amount is otherwise determined.
(e) 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.
(f)
Short term investments
Short term investments are held as part of the liquidity requirement of Paragon Bank PLC. As such they are measured at their fair value which
corresponds to their market value at the balance sheet date.
(g)
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.
(h)
Loans to customers
Year ended 30 September 2019 under IFRS 9
Loans to customers includes assets accounted for as financial assets and finance leases. The Group assesses the classification and
measurement of a financial asset based on the contractual cash flow characteristics of the asset and its business model for managing the
asset. The Group has concluded that its business model for its customer loan assets is of the type defined as ‘Held to collect’ by IFRS 9 and the
contractual terms of the asset should give rise to cash flows that are solely payments of principal and interest (‘SPPI’). Such loans 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 EIR method. The loan balances are then reduced where necessary by an impairment provision.
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.
Where financial assets are credit-impaired at initial recognition the EIR is calculated on the basis of expected future cash receipts allowing for
the effect of credit risk. In other cases, the expected contractual cash flows are used.
Year ended 30 September 2018 under IAS 39
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 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.
PAGE 261 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (i)
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 impairment.
Income from finance lease contracts is governed by IAS 17 – ‘Leases’ and accounted for on the actuarial basis.
(j)
Impairment of loans to customers
Year ended 30 September 2019 under IFRS 9
The carrying values of all loans to customers, whether accounted for under IFRS 9 or IAS 17, are reduced by an impairment provision based on
their expected credit loss (‘ECL’), determined in accordance with IFRS 9. These estimates are reviewed throughout the year and at each balance
sheet date.
With the exception of POCI financial assets (which are discussed separately below), all assets are assessed to determine whether there has
been a significant increase in credit risk (‘SICR’) since the point of first recognition (origination or acquisition). Assets are also reviewed to
identify any which are ‘Credit Impaired’. SICR and credit impairment are identified on the basis of pre-determined metrics including qualitative
and quantitative factors relevant to each portfolio, with a management review to ensure appropriate allocation.
Assets which have not experienced an SICR are referred to as ‘Stage 1’ accounts, assets which have experienced an SICR but are not credit
impaired are referred to as ‘Stage 2’ accounts, while credit impaired assets are referred to as ‘Stage 3’ accounts.
An impairment allowance is provided on an account by account basis:
•
•
For Stage 1, at an amount equal to 12-month ECL, i.e. the total expected ECL that results from those default events that are possible within
12 months of the reporting date, weighted by the probability of those events occurring
For Stage 2 and 3 accounts, at an amount equal to lifetime ECL, i.e. the total expected ECL that results from any future default events,
weighted by the probability of those events occurring
In establishing an ECL allowance, the Group assesses its probability of default, loss given default and exposure at default for each reporting
period, discounted to give a net present value. The estimates used in these assessments must be unbiased and take into account reasonable
and supportable information including forward-looking economic inputs.
Within its buy-to-let portfolio the Group utilises a receiver of rent process, whereby the receiver stands between the landlord and tenant and will
determine an appropriate strategy for dealing with any delinquency. This strategy may involve the immediate sale of any underlying security or
the short or long term letting of the property to cover arrears and principal shortfalls. Such cases are automatically considered to have an SICR,
but where a letting strategy is adopted by the receiver and a tenant is in place, arrears may be reduced or cleared. Properties in receivership are
eventually either returned to their landlord owners or sold.
For loan portfolios acquired at a discount, the discounts take account of future expected impairments and such assets are treated as POCI.
For these assets, the Group recognises all changes in future cash flows arising from changes in credit quality since initial recognition as a loss
allowance with any changes recognised in profit or loss.
For financial accounting purposes, provisions for impairments of loans to customers are held in an impairment allowance account from the point
at which they are first recognised. These balances are released to offset against the gross value of the loan when it is written off for accounting
purposes. This occurs when standard enforcement processes have been completed, subject to any amount retained in respect of expected
salvage receipts. Any further gains from post-write off salvage activity are reported as impairment gains.
Year ended 30 September 2018 under IAS 39
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 (a ‘loss event’) 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 (net of sales costs) discounted at the
original EIR.
Within its buy-to-let portfolio the Group utilises a receiver of rent process, whereby the receiver stands between the landlord and tenant and
will determine an appropriate strategy for dealing with any delinquency. This strategy may involve the immediate sale of any underlying security
or the short or long term letting of the property to cover arrears and principal shortfalls. Where a letting strategy is adopted by the receiver, a
tenant is in place and arrears are reduced or cleared, the account will not necessarily attract an impairment provision. Properties in receivership
are eventually either returned to their landlord owners or sold.
Loss events reflect both loans that display delinquency in contractual payments of principal or interest or, for buy-to-let loans in receivership
but up to date at the balance sheet date, properties where the receiver adopts a sale strategy, where a shortfall may or may not arise.
In addition to loans where loss events are evident, loans are also 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.
Collective impairment provisions are calculated for each key portfolio based on recent historical performance, with adjustments for expected
changes in losses based on management’s judgement. In the receiver of rent portfolio, collective provisions are also established for cases
where the present strategy might not be sustainable.
For loan portfolios acquired at a discount, the discounts take account of future expected impairments. An impairment charge is only recognised
in the income statement if the total receipts from an acquired portfolio are below the original purchase price. Changes to expected cash flows
from acquired portfolios are reflected by discounting the future expected cash flows by the original effective interest rate, with any change
from the prevailing carrying value being recognised in the income statement.
PAGE 262 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
For financial accounting purposes provisions for impairments of loans to customers when first recognised in the income statement are held in
an allowance account. These balances are released to offset against the gross value of the loan when it is written off to profit and loss on the
administration system. After this point a salvage balance may be held in respect of any further recoveries expected on the loan.
(k) 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 assets or liabilities at amortised cost, as defined by IFRS 9.
(l)
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation.
Assets held for letting under operating leases are depreciated in equal annual instalments to their estimated residual value over the life of the
related lease. This depreciation is deducted in arriving at net lease income and is shown in note 6.
The assets’ residual values and useful lives are reviewed by management and adjusted, if appropriate, at each balance sheet date.
Depreciation on operating assets 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
2% per annum
Short leasehold premises
over the term of the lease
Computer hardware
25% per annum
Furniture, fixtures and office equipment
15% per annum
Company motor vehicles
25% per annum
(m)
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 determined at the point of acquisition.
(n)
Investments in subsidiaries
The Company’s investments in subsidiary undertakings are valued at cost less provision for impairment.
(o) Own shares
Shares in Paragon Banking Group PLC held in treasury or by the trustee of the Group’s employee share ownership plan are shown on the
balance sheet as a deduction in arriving at total equity. Own shares are stated at cost.
(p) Retail deposits
Retail deposits are carried in the balance sheet on the amortised cost basis. The initial fair value recognised represents the cash amount
received from the customer.
Interest payable to the customer is expensed to the income statement as interest payable over the deposit term on an EIR basis.
PAGE 263 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (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
EIR basis.
(r) Central bank facilities
Where central bank facilities are provided at a below market rate of interest, and therefore fall within the definition of government assistance
as defined by IAS 20 – ‘Accounting for Government Grants and Disclosure of Government Assistance’, the liability is initially recognised at the
value of its expected cash flows discounted at a market rate of interest for a comparable commercial borrowing. Interest is recognised on this
liability on an EIR basis, using the imputed market rate to determine the EIR.
The remaining amount of the advance is recognised as deferred government assistance and released to the profit and loss account through
interest payable over the periods during which the arrangement affects profit.
(s) Derivative financial instruments
All derivative financial instruments 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
IFRS 9 paragraph 7.2.21 permits an entity to elect, as a matter of accounting policy, to continue to apply the hedge accounting requirements of
IAS 39 in place of those set out in Chapter 6 of IFRS 9. The Group has made this election and the accounting policy below has been determined
in accordance with IAS 39.
For all hedges, the Group documents the relationship between the hedging instruments and the hedged items at inception, 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 or retail deposit liabilities) 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 occurs, or is no longer expected to take place.
(u)
Taxation
The charge for taxation represents the expected UK corporation tax (including the Bank Corporation Tax Surcharge where applicable) and
other income taxes arising from the Group’s profit for the year. This consists of the current tax which will be shown in tax returns for the year
and tax deferred because of temporary differences. This, in general, represents the tax impact of items recorded in the current year but which
will impact tax returns for periods other than the one in which they are included in the financial statements.
The Group will hold a provision for any uncertain tax positions at the balance sheet date based on a global assessment of the expected amount
that will ultimately be payable.
Tax relating to items taken directly to equity is also taken directly to equity.
(v) 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.
PAGE 264 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (w) 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 reduced by
the fair value of scheme assets at the balance sheet date.
The expected financing cost of the deficit, as estimated at the beginning of the period, is recognised in the result for the period within interest
payable. Any variances against the estimated amount in the year form part of the actuarial gain or loss.
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.
(x) Revenue
The revenue of the Group comprises interest receivable and similar charges, operating lease income and other income. The accounting policy
for the recognition of each element of revenue is described separately within these accounting policies.
(y) Other income
Other income, which is accounted for in accordance with IFRS 15, includes:
•
•
•
•
•
Event-based administration fees charged to borrowers (other than the initial fees included in amortised cost), 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
Commissions receivable on the sale of insurances, as agent of the third-party insurer, which are taken to profit at the point at which the
Group becomes unconditionally entitled to the income
Maintenance income charged as part of the Group’s contract hire arrangements, which is recognised as the services are provided. Costs of
these services are deducted in other income
Broker fees receivable on the arrangement of loans funded by third parties, on an agency basis, which are taken to profit at the point of
completion of the related loan
(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.
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.
However, such dividends are deducted from regulatory capital from the point at which they are announced, and capital disclosures are prepared
on this basis.
(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 Company and all of the other entities in 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.
PAGE 265 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (cc) Segmental reporting
The accounting policies of the segments are the same as those described above for the Group as a whole. Interest payable by each segment
includes directly attributable funding and the allocated cost of retail deposit funds utilised. Costs attributed to each segment represent the
direct costs incurred by the segment operations.
64.
CRITICAL ACCOUNTING JUDGEMENTS
The most significant judgements which the directors have made in the application of the accounting policies set out in note 63 relate to:
(a)
Significant Increase in Credit Risk (‘SICR’)
Under IFRS 9, the directors are required to assess where a credit obligation has suffered a Significant Increase in Credit Risk (‘SICR’). The
directors’ assessment is based primarily on changes in the calculated probability of default, but also includes consideration of other qualitative
indicators and the adoption of the backstop assumption in the Standard that all cases which are more than 30 days overdue have an SICR, for
account types where days overdue is an appropriate measure.
If additional accounts were determined to have an SICR, these balances would attract additional impairment provision and the overall provision
charge would be higher.
More information on the definition of SICR adopted is given in note 23.
(b) Definition of default
In applying the impairment provisions of IFRS 9, the directors have used models to derive the probabilities of default. In order to derive and apply
such models, it is required to define ‘default’ for this purpose. The Group’s definition of default is aligned to its internal operational procedures.
IFRS 9 provides a rebuttable presumption of default when an account is 90 days overdue and this was used as the starting point for this
exercise. Other factors include account management activities such as appointment of a receiver or enforcement procedures.
A combination of qualitative and quantitative measures was considered in developing the definition of default.
If a different definition of default had been adopted the expected loss amounts derived might differ from those shown in the accounts.
More information on the Group’s definition of default adopted is given in note 23.
(c) Classification of financial assets
The classification of financial assets under IFRS 9 is based on two factors:
• The company’s ‘business model’ – how the it intends to generate cash and profit from the assets; and
• The nature of the contractual cash flows inherent in the assets
Financial assets are classified as held at amortised cost, at fair value through other comprehensive income, or at fair value through profit
and loss.
For an asset to be held at amortised cost, the cash flows received from it must comprise solely payments of principal and interest (‘SPPI’). In
effect, this restricts this classification to ‘normal’ lending activities, excluding arrangements where the lender may have a contingent return or
profit share from the activities funded. The Group has considered its products and concluded that, as standard lending products, they fall within
the SPPI criteria.
This is because all of the Group’s lending arrangements involve the advancing of amounts to customers, either as loans or finance lease products
and the receipt of repayments of principal and charges, where those charges are calculated based on the amount loaned. There are no ‘success
fee’ or other compensation arrangements not linked to the loan principal.
The use of amortised cost accounting is also restricted to assets which a company holds within a business model whose object is to collect cash
flows arising from them, rather than seek to profit by disposing of them (a ‘Held to Collect’ model). The Group’s strategy is to hold loan assets
until they are repaid or written off. Loan disposals are rare, and the Group does not manage its assets in order to generate profits on sale. On this
basis, it has categorised its business model as Held to Collect.
Therefore, the Group has classified its customer loan assets as carried at amortised cost.
(d) Derecognition of financial assets and liabilities
On 26 June 2019, the Group disposed of its residual interest in the Paragon Mortgages (No. 12) PLC securitisation transaction. In order to
determine whether the financial assets and liabilities of the SPV should be derecognised at that point, a management judgement is required.
Following a review of the terms of the sale transaction, it was concluded that the Group was no longer significantly exposed to the risks and
rewards in relation to the cash flows arising from the scheme, and hence the criteria for derecognition were met. More information on this
transaction is given in note 7.
PAGE 266 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 65.
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, applied to the present status, performance and management strategy
for the loans concerned which are used to determine each loan’s PD and LGD.
Internal information used will include number of months arrears, qualitative information, such as possession by a first charge holder on a second
charge mortgage or where a buy-to-let case is under the control of a receiver of rent, the receiver’s present and likely future strategy for the
property (e.g. keeping current tenants in place, refurbish and relet, immediate sale etc).
External information used includes customer specific data, such as credit bureau information, as well as more general economic data.
Key internal assumptions in the models relate to estimates of future cash flows from customers’ accounts, their timing and, for secured
accounts, the expected proceeds from the realisation of the property or other charged assets. These cash flows will include payments received
from the customer, and, for buy-to-let cases where a receiver of rent is appointed, rental receipts from tenants, after allowing for void periods
and running costs. 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 current and expected 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. Similarly, if the account management approach assumed in the modelling cannot be adopted the
provision required may be different.
In order to provide forward looking economic inputs to the modelling of the ECL, the Group must derive a set of scenarios which are internally
coherent. The Group addresses these requirements using four distinct economic scenarios chosen to represent the range of possible outcomes.
The variables are used for two purposes in the IFRS 9 calculations:
•
•
They are applied as inputs in the models which generate PD values, where those found by statistical analysis to have the most predictive
value are used
They are used as part of the calculation where the variable has a direct impact on the expected loss calculation, such as the house
price index
The economic variables will also inform assumptions about the Group’s approach to account management given a particular scenario.
These assumptions are set out in note 23 where the sensitivity of the Group’s modelling to them is also discussed.
(b)
Effective interest rates
In order to determine the EIR applicable to loans and borrowings an estimate must be made of the expected life of each asset or liability
and hence the cash flows relating thereto, including those relating to early redemption charges. For purchased loan accounts this will involve
estimating the likely future credit performance of the accounts at the time of acquisition. These estimates are based on historical data and
reviewed regularly. For purchased accounts historical data obtained from the vendor will be examined. The accuracy of the EIR applied would
therefore be compromised by any differences between actual repayment profiles and those predicted, which in turn would depend directly or
indirectly (in the case of borrowings) on customer behaviour.
To illustrate this, the amortised cost values were recalculated by changing one factor in the EIR calculation and keeping all others at their
current levels. This exercise indicated that:
•
•
•
A reduction of the assumed average lives of loans secured on residential property by three months would reduce balance sheet assets by
£7.2m (2018: £4.0m), while an increase of the assumed asset lives of such assets by three months would increase balance sheet assets by
£6.0m (2018: £4.0m)
An increase of 50% in the number of five year fixed rate buy-to-let loan assets assumed to redeem before the end of the fixed rate period,
generating additional early redemption charges, would increase balance sheet assets by £4.2m
A reduction (or increase) in estimated cash flows from purchased loan assets of 5% would reduce (or increase) balance sheet assets by
£12.5m (2018: £10.3m)
As any of these changes would, in reality, be accompanied by movements in other factors, actual outcomes may differ from these estimates.
PAGE 267 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts (c)
Impairment of goodwill
The carrying value of goodwill recognised on acquisitions is verified by use of an impairment test based on the projected cash flows for the cash
generating unit, based on management forecasts and other assumptions described in note 29, including a discount factor.
The accuracy of this impairment calculation would therefore be compromised by any differences between these forecasts and the levels of
business activity that the cash generating unit is able to achieve in practice. This test will also be affected by the accuracy of the discount
factor used.
The sensitivity of the impairment test to reasonably possible movements in these assumptions is discussed in note 29.
(d) Retirement benefits
The present value of the retirement benefit obligation is derived from an actuarial calculation which rests on a number of assumptions relating
to inflation, long-term return on investments and mortality. These are listed in note 41. Where actual conditions differ from those assumed the
ultimate value of the obligation would be different.
Information on the sensitivity of the valuation to the various assumptions is given in note 41.
66.
ACQUISITIONS
On 3 July 2018 the group acquired the entire share capital of Titlestone Property Finance Limited together with a portfolio of loans held by
companies related to it (together ‘Titlestone’). IFRS disclosures in respect of this acquisition were presented on a provisional basis in note 15 to
the group accounts for the year ended 30 September 2018.
During the year ended 30 September 2019, the circumstances, performance and security value of certain of the Titlestone loans were reviewed
in more detail, providing further information on the value of those assets at the acquisition date. As a result of this exercise, the initial values
of those loans were reduced by £2.7m with a corresponding change in the related deferred tax balances of £0.5m. Consequently, the goodwill
balance was increased by £2.2m (note 29).
67.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES
The Group’s financial assets and financial liabilities are valued on one of two bases, defined by IFRS 9:
•
•
Financial assets and liabilities carried at fair value through profit and loss (‘FVTPL’)
Financial assets and liabilities carried at amortised cost
IFRS 7 – ‘Financial Instruments: Disclosures’ requires that where assets are measured at fair value these measurements should be classified
using the fair value hierarchy set out in IFRS 13 – ‘Fair Value Measurement’. This hierarchy reflects the inputs used, and defines three levels.
•
•
•
Level 1 measurements are unadjusted market prices
Level 2 measurements are derived from directly or indirectly observable data, such as market prices or rates
Level 3 measurements rely on significant inputs which are not derived from observable data
As quoted prices are not available for level 2 and 3 measurements, the valuation is derived from 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.
The Group had no financial assets or liabilities in the year ended 30 September 2019 or the year ended 30 September 2018 carried at fair value
and valued using level 3 measurements, other than contingent consideration amounts (note 38).
The Group has not reclassified any of its measurements during the year.
The methods by which fair value is established for each class of financial assets and liabilities are set out below.
PAGE 268 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts a) Assets and liabilities carried at fair value
The following table summarises the Group’s financial assets and liabilities which are carried at fair value.
Financial assets
Derivative financial assets
Short term investments
Financial liabilities
Derivative financial assets
Contingent consideration
Note
24
19
24
38
2019
£m
592.4
-
592.4
80.5
23.7
104.2
2018
£m
855.7
-
855.7
4.7
25.7
30.4
All of these financial assets and financial liabilities are required to be carried at fair value by IFRS 9, and the introduction of the new standard has
had no impact on their classification, valuation basis or valuations.
The Company has no financial assets or liabilities carried at fair value.
Derivative financial assets and liabilities
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 and SONIA benchmark interest rates for the currencies in which the instruments are
denominated, being 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. However, variability in this
input does not have a significant impact on the valuation, compared to other inputs.
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, such as particular contractual features or the identity of the counterparty. The management
reviews the models used on an ongoing basis to ensure that the valuations produced are reasonable and reflect all relevant factors. These
valuations are based on market information and they are therefore classified as level 2 measurements. Details of these assets are given in
note 24.
Short term investments
The short-term investments described in note 19 are freely traded securities for which a market price quotation is available and are classified
as level 1 measurements.
Contingent consideration
The value of the contingent consideration balances shown in note 38 are required to be stated at fair value in the accounts. These amounts
are valued based on the expected outcomes of the performance tests set out in the respective sale and purchase agreements, discounted
as appropriate. The most significant inputs to these valuations are the Group’s forecasts on future activity relating to business generated by
operational units acquired, business derived as a result of the vendor’s contacts or other goodwill and any other new business flows which are
or might be attributable to the acquisition agreement, which are drawn from the overall Group forecasting model. As such, these are classified
as unobservable inputs and the valuations classified as level 3 measurements.
PAGE 269 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts b) Assets and liabilities carried at amortised cost
The fair values for financial assets and financial liabilities held at amortised cost, determined in accordance with the methodologies set out
below are summarised below.
Note
2019
2019
Carrying
amount
£m
Fair
value
£m
2018
IFRS 9
Carrying
Amount
£m
2018
IAS 39
Carrying
amount
£m
The Group
Financial assets
Cash
Loans to customers
Sundry financial assets
Financial liabilities
Short term bank borrowings
Asset backed loan notes
Secured bank borrowings
Retail deposits
Corporate and retail bonds
Other financial liabilities
The Company
Financial assets
Cash
Loans to group companies
Sundry financial assets
Financial liabilities
Corporate and retail bonds
Amounts owed to group companies
Other financial liabilities
18
20
25
31
37
18
25
25
37
37
1,225.4
1,225.4
12,186.1
12,370.1
90.3
90.3
1,310.6
12,100.6
15.3
13,501.8
13,685.8
13,426.5
1.0
4,419.4
787.5
6,391.9
446.1
83.1
1.0
4,419.4
787.5
6,408.9
474.9
83.1
1.1
5,554.7
935.6
5,296.6
445.4
82.8
12,129.0
12,174.8
12,316.2
14.1
106.6
0.7
121.4
446.1
23.8
3.6
473.5
14.1
106.6
0.7
121.4
474.9
23.8
3.6
502.3
24.9
216.3
0.7
241.9
445.4
125.7
2.8
573.9
1,310.6
12,127.8
15.3
13,453.7
1.1
5,554.7
935.6
5,296.6
445.4
82.8
12,316.2
24.9
216.3
0.7
241.9
445.4
125.7
2.8
573.9
2018
Fair
value
£m
1,310.6
12,222.9
15.3
13,548.8
1.1
5,554.7
935.6
5,301.7
478.3
82.8
12,354.2
24.9
216.3
0.7
241.9
478.3
125.7
2.8
606.8
The fair values of retail deposits and Corporate and retail bonds shown above will include amounts for the related accrued interest.
PAGE 270 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Cash, bank loans and securitisation borrowings
The fair values of cash and cash equivalents, bank loans and overdrafts and asset backed loan notes, which are carried at amortised cost are
considered to be not materially different from their book values. In arriving at that conclusion market inputs have been considered but because
all the assets mature within three months of the year end and the interest rates charged on financial liabilities reset to market rates on a
quarterly basis, little difference arises. This also applies to the parent company’s loans to its subsidiaries.
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.
As these valuation exercises are not wholly market based, they are considered to be level 2 measurements.
Loans to customers
To assess the likely fair value of the Group’s loan assets in the absence of a liquid market, the directors have considered the estimated cash
flows expected to arise from the Group’s investments in its loans to customers based on a mixture of market based inputs, such as rates
and pricing and non-market based inputs such as redemption rates. Given the mixture of observable and non-observable inputs these are
considered to be level 3 measurements.
Corporate debt
The Group’s retail and corporate bonds are listed on the London Stock Exchange and there is presently a reasonably liquid market in the
instruments. It is therefore appropriate to consider that the market price of these borrowings constitutes a fair value. As this valuation is based
on a market price, it is considered to be a level 1 measurement.
Retail deposits
To assess the likely fair value of the Group’s retail deposit liabilities, the directors have considered the estimated cash flows expected to arise
based on a mixture of market based inputs, such as rates and pricing and non-market based inputs such as withdrawal rates. Given the mixture
of observable and non-observable inputs, these are considered to be level 3 measurements.
Sundry assets and liabilities
Fair values of financial assets and liabilities disclosed as sundry assets and sundry liabilities are not considered to be materially different to their
carrying values.
These assets and liabilities are of relatively low value and may be settled at their carrying value at the balance sheet date or shortly thereafter.
PAGE 271 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts 68.
DETAILS OF SUBSIDIARY UNDERTAKINGS
Subsidiary undertakings of the Group at 30 September 2019, where the share capital is held within the Group are shown below. The holdings
shown are those held within the Group. The shareholdings of the Company in the direct subsidiaries listed below are the same as those held by
the Group, except that:
•
•
For the shareholdings marked * the Company holds only 74% of the share capital
For the shareholdings marked † the Company holds only 66.7% of the share capital
In these cases, the remainder is held by other group companies.
The issued share capital of all subsidiaries consists of ordinary share capital, except those companies marked §, which have additional preference
share capital held within the Group.
Company
Holding
Principal activity
Direct subsidiaries of Paragon Banking Group PLC
Paragon Car Finance Limited
Idem Capital Holdings Limited
Moorgate Servicing Limited
Paragon Bank PLC
The Business Mortgage Company Limited
Paragon Fourth Funding Limited
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 Secured Finance (No. 1) PLC
First Flexible (No. 7) PLC
Colonial Finance (UK) Limited
Earlswood Finance Limited
Herbert (1) PLC
Herbert (2) PLC
Herbert (4) PLC
Herbert (5) PLC
Herbert (6) PLC
Herbert (7) PLC
Herbert (8) PLC
Herbert (9) PLC
Herbert (10) PLC
Idem Luxembourg (No. 4) ‡
Idem Luxembourg (No. 9) ‡
Paragon Car Finance (1) Limited
Paragon Dealer Finance Limited
Paragon Loan Finance (No. 1) Limited
Paragon Loan Finance (No. 2) Limited
Paragon Mortgages (No. 5) PLC
Paragon Pension Investments GP Limited
Paragon Pension Plan Trustees Limited
Paragon Personal Finance (1) Limited
Paragon Third Funding Limited
Paragon Vehicle Contracts Limited
Plymouth Funding Limited
PAGE 272 • The Accounts
100%
100%
100%
100%
100%
100%
100% *
100% *
100% *
100% *
100% *
100% *
100% *
100%
100% *
100%
100% *
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100% §
100% §
100%
100%
100%
100%
100%
100%
100%
Vehicle finance
Intermediate holding company
Intermediate holding company
Deposit taking, residential mortgages and loan and
vehicle finance
Mortgage broker
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Loan finance
Residential mortgages
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Company
Holding
Principal activity
Direct subsidiaries of Paragon Banking Group PLC
Paragon Loan Finance (No. 3) Limited
Townend Farm (Easington) Management Company Limited
Universal Credit Limited
Yorkshire Freeholds Limited
Yorkshire Leaseholds Limited
Direct and indirect subsidiaries of Paragon Bank PLC
Paragon Finance PLC
Mortgage Trust Limited
Paragon Mortgages Limited
Paragon Mortgages (2010) Limited
First Flexible No. 6 PLC
Mortgage Trust Services PLC
Paragon Second Funding Limited
Paragon Asset Finance Limited
City Business Finance Limited
Paragon Business Finance PLC
Paragon Commercial Finance Limited
100%
100%
100%
100%
100%
100%
100%
100%
100%
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Residential mortgages and asset administration
Residential mortgages
Residential mortgages
Residential mortgages
100% §
Residential mortgages
100%
100%
100%
100%
100%
80%
Residential mortgages and asset administration
Residential mortgages and loan and vehicle finance
Holding company and portfolio administration
Asset finance
Asset finance
Asset finance
Paragon Development Finance Limited
96.39%
Development Finance
Paragon Development Finance Services Limited
Paragon Technology Finance Limited
Premier Asset Finance Limited
PBAF Acquisitions Limited
PBAF (No. 1) Limited
Specialist Fleet Services Limited
Collett Transport Services Limited
Fineline Holdings Limited
Fineline Media Finance Limited
Homer Management Limited
Lease Portfolio Management Limited
Paragon Options PLC
State Securities Holdings Limited
State Security Limited
Direct and indirect subsidiaries of Idem Capital Holdings Limited
Moorgate Loan Servicing Limited
Idem (No. 3) Limited
Idem Capital Securities Limited
Paragon Personal Finance Limited
Other indirect subsidiary undertakings
Redbrick Survey and Valuation Limited
Buy to Let Direct Limited
TBMC Group Limited
The Business Mortgage Company Services Limited
PAGE 273 • The Accounts
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Development Finance
Asset finance
Asset finance broker
Residential mortgages and loan finance
Intermediate holding company
Asset finance and contract hire
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Asset administration
Asset investment
Asset investment
Consumer loan finance
Surveyors and property consulting
Non-trading
Non-trading
Non-trading
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
The financial year end of all of the Group’s subsidiary companies is 30 September. They are all registered in England and Wales and operate in
the UK except:
• Those entities marked ‡ which are registered in the Grand Duchy of Luxembourg
• Paragon Pension Investments GP Limited, which is registered in Scotland and operates in the UK
20% of the equity of Paragon Commercial Finance Limited is subject to a call option agreed as part of the acquisition of the company by PAF.
No material minority interest attaches to this holding. 3.61% of the nominal value of the share capital of Paragon Development Finance Limited
relates to shares subjects to put and call options issued pursuant to long-term incentive plans. No material minority interest attaches to this
holding.
As part of the Group’s financing arrangements certain mortgage and consumer loans originated by Paragon Mortgages (2010) Limited and
Mortgage Trust Limited or acquired by Idem Capital Securities Limited have been sold to special purpose entity companies, which had raised
non-recourse finance to fund these purchases. The shares of these companies are ultimately beneficially owned through independent trusts,
but they are considered to be controlled by the Group, as defined by IFRS 10, due to the Group’s exposures to the variable returns from the assets
of each entity and its ability to direct their activities, within the constraints imposed by the lending documents. Hence, they are considered to
be subsidiaries of the Group.
The principal companies party to these arrangements at 30 September 2019 comprise:
Company
First Flexible No. 5 PLC
Paragon Fifth Funding Limited
Paragon Sixth Funding Limited
Paragon Seventh Funding Limited
Paragon Mortgages (No. 18) Holdings Limited
Paragon Mortgages (No. 18) PLC
Paragon Mortgages (No. 19) Holdings Limited
Paragon Mortgages (No. 19) PLC
Paragon Mortgages (No. 20) Holdings Limited
Paragon Mortgages (No. 20) PLC
Paragon Mortgages (No. 21) Holdings Limited
Paragon Mortgages (No. 21) PLC
Paragon Mortgages (No. 22) Holdings Limited
Paragon Mortgages (No. 22) PLC
Paragon Mortgages (No. 23) Holdings Limited
Paragon Mortgages (No. 23) PLC
Paragon Mortgages (No. 24) Holdings Limited
Paragon Mortgages (No. 24) PLC
Paragon Mortgages (No. 25) Holdings Limited
Paragon Mortgages (No. 25) PLC
Paragon Mortgages (No. 26) Holdings Limited
Paragon Mortgages (No. 26) PLC
Arianty Holdings Limited
Arianty No. 1 Limited
Principal activity
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Non-trading
All of these companies are registered and operate in the UK.
Earlswood Finance (No. 3) Limited, a company limited by guarantee, is registered in England and Wales and operates in the UK. It is included in
the consolidation as it is ultimately controlled by the parent company.
The Group accounts include the results of two Jersey companies, which are ultimately beneficially owned by a charitable trust, but are considered
to be controlled by the Group, using the definition contained in IFRS 10 ‘Consolidated Financial Statements’. These companies, Idem Jersey
(No. 1) Limited and Idem Jersey (No. 2) Limited are registered in the Bailiwick of Jersey and operate in the UK.
The share capital of Idem Jersey (No. 1) Limited is divided into A shares and B shares. All of the 600 B shares are held by Group companies, 100
by the parent company and 500 by other Group companies.
The Paragon Pension Partnership LP is a limited partnership established under Scots law, in which control is vested in members which are
Group companies. It is therefore considered to be a subsidiary entity. The outside member is the Group’s Pension Plan and the Plan’s rights to
income from the partnership are set out in the partnership agreement. Therefore, no minority interest arises. The partnership is registered in
Scotland and operates in the UK.
PAGE 274 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts The registered office of each of the entities listed in this note is the same as that of the Company (note 1), except that:
•
•
The registered office of The Business Mortgage Company Limited, Buy to Let Direct Limited, TBMC Group Limited, and The Business
Mortgage Company Services Limited is Greenmeadow House, 2 Village Way, Greenmeadow Springs Business Park, Cardiff, CF15 7NE
The registered office of State Security Limited is Burlington House, Botleigh Grange Office Campus, Grange Drive, Hedge End, Southampton,
SO30 2AF
• The registered office of the Scottish companies is Citypoint, 65 Haymarket Terrace, Edinburgh, EH12 5HD
• The office of the Luxembourg entities is 8-10, Avenue de la Gare, L-1610 Luxembourg
• The registered office of the Jersey companies is IFC 5, St Helier, Jersey, JE1 1ST
All of the entities listed above are included in the consolidated accounts of the Group.
The following legal subsidiaries of the Group are currently in liquidation. They do not form part of the consolidation as they are considered to be
controlled by the liquidator.
Company
Holding
Principal activity
Direct subsidiaries of Paragon Banking Group PLC
SPV Securities Limited
Paragon Mortgages (No. 7) PLC
Paragon Mortgages (No. 8) PLC
Paragon Mortgages (No. 16) PLC
Paragon Mortgages (No. 17) PLC
Paragon Personal and Auto Finance (No. 3) PLC
Collateralised Mortgage Securities (No. 12) PLC
Finance for People (No. 3) Limited
Finance for People (No. 4) PLC
Homeloans (No. 4) PLC
Mortgage Funding Corporation PLC
NHL Second Funding Corporation Limited
NHL Third Funding Corporation Limited
Paragon Mortgages (No. 1) PLC
Paragon Mortgages (No. 2) PLC
Paragon Mortgages (No. 4) PLC
Redbrick Real Estate Services Limited
Indirect subsidiaries
Idem First Finance Limited
Idem Capital Limited
100%
100%
100%
100%
100%
100%
100%
100%
100% §
100% §
100%
100%
100%
100% §
100% §
100%
100%
100%
100%
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
The issued share capital of all subsidiaries consists of ordinary share capital, except those companies marked § which have additional preference
share capital held within the Group.
The companies previously controlled by the Group which had been party to the types of financing arrangements described above at
30 September 2019 and which were in liquidation at that date comprise:
Company
First Flexible No. 4 PLC
Arianty Services Limited
First Flexible No. 1 Limited
First Flexible No. 2 Limited
First Flexible No. 3 Limited
Principal activity
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Homeloans (No. 7) LLP and Homeloans (No. 8) LLP are limited liability partnerships, established under English law, in which all of the members
are Group companies. They are currently in liquidation. Both are registered in England and Wales and operate in the UK.
PAGE 275 • The Accounts
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
E.
APPENDICES TO THE
ANNUAL REPORT
Additional financial information supporting amounts shown in the Strategic
Report (Section A), but not forming part of the Statutory Accounts
E1
Appendices to the annual report
A.
UNDERLYING RESULTS
The Group reports underlying profit excluding fair value accounting adjustments arising from its hedging arrangements and certain one-off
items of income and costs relating to asset sales and acquisitions.
The fair value adjustments arise principally as a result of market interest rate movements, outside the Groups control. They are profit neutral
over time and are not included in operating profit for management reporting purposes. They are also disregarded by many external analysts.
Transactions relating to acquisition and disposals include the direct transaction costs of the 2018 acquisitions, the additional net funding costs
of deposits built up over time to satisfy consideration on those acquisitions and the break costs of the Idem Capital facility, in addition to the
gains recognised.
The transactions relating to the asset disposals and acquisitions do not form part of the day-to-day activities of the Group and, therefore, their
removal provides greater clarity on the Group’s operational performance.
This definition of ‘underlying’ has been chosen following consideration of the needs of investors and analysts following the Group’s shares, and
because management feel it better represents the underlying economic performance of the Group’s business.
Profit on ordinary activities before tax
Less: Gain on disposal of financial assets
Add back: Acquisition related funding costs included in net interest
Add back: Overhead costs related to acquisition related funding
Add back: Transaction costs
Add back: Acquisition related costs
Add back: Facility break costs
Add back: Other one-off costs
Add back: Fair value adjustments
Underlying profit
2018
£m
0.7
0.2
1.3
2019
£m
159.0
(9.7)
-
-
-
15.1
164.4
2018
£m
181.5
(28.0)
2.2
1.2
0.8
(1.2)
156.5
Underlying basic earnings per share, calculated on the basis of underlying profit, charged at the overall effective tax rate, is derived as follows.
Underlying profit
Tax at effective rate (note 15)
Underlying earnings
Basic weighted average number of shares (note 17)
Underlying earnings per share
2019
£m
164.4
(32.7)
131.7
257.6
51.1p
2018
£m
156.5
(30.8)
125.7
260.8
48.2p
PAGE 278 • Appendices to the Annual Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
2019
£m
131.7
2.4
134.1
920.7
2018
£m
125.7
2.1
127.8
915.8
14.6%
14.0%
Idem
Capital
£m
519.8
389.9
454.8
54.3
Total
£m
12,100.6
12,186.1
12,143.4
278.4
Underlying return on tangible equity is derived using underlying earnings calculated on the same basis.
Underlying earnings
Amortisation of intangible assets (note 9)
Adjusted underlying earnings
Average tangible equity (note 55(b))
Underlying RoTE
B.
INCOME STATEMENT RATIOS
The average net interest margin is calculated as follows:
Year ended 30 September 2019 (IFRS 9)
Note
Mortgages
Commercial
Lending
Opening loans to customers
Closing loans to customers
Average loans to customers
Net interest
NIM
Impairment provision
Cost of risk
Year ended 30 September 2018 (IAS 39)
20
20
23
£m
10,449.5
10,344.1
10,396.8
177.8
£m
1,131.3
1,452.1
1,291.8
65.0
1.71%
5.03%
11.94%
2.29%
1.0
0.01%
7.2
0.56%
(0.2)
(0.04)%
8.0
0.07%
Note
Mortgages
Commercial
Lending
£m
9,953.9
10,473.5
10,213.7
157.6
£m
558.8
1,133.2
846.0
32.2
Idem
Capital
£m
611.4
521.1
566.3
87.8
Total
£m
11,124.1
12,127.8
11,626.0
254.6
1.54%
3.81%
15.50%
2.19%
5.5
0.05%
2.0
0.24%
(0.1)
(0.02)%
7.4
0.06%
Opening loans to customers
Closing loans to customers
Average loans to customers
Net interest
NIM
Impairment provision
Cost of risk
20
23
PAGE 279 • Appendices to the Annual Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
Net interest margin on an underlying basis is derived as shown below
Net interest (as above)
One off items related to interest
Acquisition funding costs
Facility break costs
Underlying net interest
Average loans to customers (as above)
Underlying net interest margin
C .
COST:INCOME RATIO
Cost:income ratio is derived as follows:
Cost – operating expenses
Total operating income
Cost / Income
Underlying cost:income ratio is derived as follows:
Cost – as above
Acquisition costs expensed
Other one-off costs
Adjusted cost
Income – as above
Gain on disposal of financial asset
Acquisition net funding costs
Facility break costs
Adjusted income
2019
£m
278.4
-
-
278.4
12,143.4
2018
£m
254.6
0.7
1.2
256.5
11,626.0
2.29%
2.21%
Note
9
2019
£m
125.2
307.3
2018
£m
114.2
301.9
40.7%
37.8%
2019
£m
125.2
-
-
125.2
307.3
(9.7)
-
-
297.6
2018
£m
114.2
(1.5)
(0.8)
111.9
301.9
(28.0)
0.7
1.2
275.8
Underlying cost:income ratio
42.1%
40.6%
PAGE 280 • Appendices to the Annual Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
D.
NET ASSET VALUE
Total equity (£m)
Outstanding issued shares (m)
Treasury shares (m)
Shares held by ESOP schemes (m)
Net asset value per £1 ordinary share
Tangible equity (£m)
Tangible net asset value per £1 ordinary share
Note
42
44
44
55
2019
1,108.4
2018
1,095.9
261.6
(5.2)
(3.9)
252.5
£4.39
937.3
£3.71
281.6
(20.8)
(2.9)
257.9
£4.25
926.6
£3.59
PAGE 281 • Appendices to the Annual Report
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
F.
USEFUL
INFORMATION
Information which may be helpful to shareholders and other users of the
Annual Report and Accounts
F1
F2
F3
F4
Glossary
A summary of abbreviations used in the Annual Report and Accounts
Shareholder Information
Information about dividends, meetings and managing shareholdings
Other Public Reporting
Current and future public reporting information for the Group
Contacts
Names and addresses of the Group’s advisers
Page 284
Page 286
Page 288
Page 290
F1
Glossary
AGM
ALCO
AT1
ARLA
B2B
B2C
BBR
BCBS
BEIS
BEPS
BS 18001
CAGR
CCC
CCoB
CCyB
CEO
CET1
CFO
CGU
CIIA
CIPD
CMI
CML
CO2
Annual General Meeting
Asset and Liability Committee
Additional Tier 1
ARLA Propertymark
Business-to-Business
Business-to-Consumer
Bank Base Rate
Basel Committee on Banking Supervision
Department for Business, Energy
and Industrial Strategy
Base Erosion and Profit Shifting
British Standard 18001:2007,
‘Occupational Health and Safety
Management Systems’
Compound Annual Growth Rate
Compliance and Conduct Committee
Capital Conservation Buffer
Counter-Cyclical Buffer
Chief Executive Officer
Core Equity Tier 1
Chief Financial Officer
Cash Generating Unit
Chartered Institute of Internal Audit
Chartered Institute of
Personnel and Development
Chartered Management Institute
Council of Mortgage Lenders
Carbon Dioxide
Compliance Plan
Compliance Monitoring Plan
CPI
CRD IV
CRDs
CRO
CRR
CSA
CSOP
DEFRA
Deloitte
DSBP
EBA
ECL
EIR
EPS
EQA
ERC
Consumer Price Index
The Current EU Capital Requirements
Regulation and Directive regime
Cash Ratio Deposits
Chief Risk Officer
Capital Requirements Regulation
EU Regulation 575/2013
Credit Support Annex
Company Share Option Plan
Department for Environment,
Food and Rural Affairs
Deloitte LLP
Deferred Share Bonus Plan
European Banking Authority
Expected Credit Loss
Effective Interest Rate
Earnings per Share
External Quality Assessment
Estimated Remaining Collections
PAGE 284 • Useful Information
ESOP
ESOS
EU
Employee Share Ownership Plan
Energy Savings and Opportunities Scheme
European Union
EURIBOR
Euro Interbank Offered Rate
EV
FCA
FLA
FLS
FOS
FRC
FRN
FSC
FSCS
FVTPL
GDP
GDPR
GHG
GMP
HA
HMRC
HPI
HQLA
IAS
IASB
ICAAP
IFRS
IIP
ILAAP
ILG
ILTR
IMLA
IRB
IRRBB
ISA
ISDA
Economic Value
Financial Conduct Authority
Finance and Leasing Association
Funding for Lending Scheme
Financial Ombudsman Service
Financial Reporting Council
Floating Rate Note
Forest Stewardship Council
Financial Services Compensation Scheme
Fair Value Through Profit and Loss
Gross Domestic Product
General Data Protection Regulation
Greenhouse Gases
Guaranteed Minimum Pension
Hampton-Alexander
Her Majesty’s Revenue and Customs
House Price Index
High Quality Liquid Assets
International Accounting Standard(s)
International Accounting Standards Board
Internal Capital Adequacy
Assessment Process
International Financial Reporting Standard(s)
Investors in People
Internal Liquidity Adequacy
Assessment Process
Individual Liquidity Guidance
Indexed Long Term Repo Scheme
Intermediary Mortgage Lenders Association
Internal Ratings Based
Interest Rate Risk in the Banking Book
Individual Savings Account
International Swaps and
Derivatives Association
ISO14001:2015
ISO27001:2005
ISO45001:2018
International Organization for
Standardization 14001:2015, ‘Environmental
Management Systems’
International Organization for
Standardization 27001:2005, ‘Information
Security Management Systems’
International Organization for
Standardization 45001:2018, ‘Management
Systems of Occupational Health and Safety’
KPMG
KPMG LLP, the Group’s auditor
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts LCR
LGD
LIBOR
Ltd
LTGDV
LTIP
LTV
M&A
MHCLG
MRC
NI
NII
NIM
Notes
NPS
NSFR
OBR
OCI
OFGEM
OHSMS
OLAR
ORC
PAF
PAYE
PD
PFP
PIDA
PIEs
PLC
PM12
PM26
POCI
PPI
PRA
Liquidity Coverage Ratio
Loss Given Default
London Interbank Offered Rate
Limited (company)
Loan to Gross Development Value
Long-term Incentive Plan
Loan to Value
Mergers and Acquisitions
Ministry of Housing, Communities
and Local Government
Model Risk Committee
National Insurance
Net Interest Income
Net Interest Margin
Asset backed loan notes
Net Promoter Score
Net Stable Funding Ratio
Office of Budget Responsibility
Other Comprehensive Income
Office of Gas and Electricity Markets
Occupational Health and
Safety Management System
Overall Liquidity Adequacy Requirement
Operational Risk Committee
Paragon Asset Finance
Pay As You Earn
Probability of Default
Pension Funding Partnership
Public Interest Disclosure Act 1998
Public Interest Entities
Public Limited Company
Paragon Mortgages (No.12) PLC
Paragon Mortgages (No.26) PLC
Purchased or Originated Credit Impaired
(assets)
Payment Protection Insurance
Prudential Regulation Authority
(of the Bank of England)
Premier
Premier Asset Finance Limited
PRS
PSD2
PSP
PwC
RBS
RICS
RIDDOR
Private Rented Sector
Second Payment Services Directive
Performance Share Plan
PricewaterhouseCoopers
Royal Bank of Scotland
Royal Institution of Chartered Surveyors
Reporting of Incidents, Disease and
Dangerous Occurrences Regulation 2013
PAGE 285 • Useful Information
RoR
RoTE
ROU
RPI
RP
RSUs
RWA
SA
Receiver of Rent
Return on Tangible Equity
Right of Use
Retail Price Index
Recovery Plan
Restricted Stock Units
Risk Weighted Assets
Standardised Approach
Schedule 7
Schedule 7 to the Large and Medium-sized
Companies and Groups (Accounts and
Reports) Regulations 2008
SFS
SICR
Specialist Fleet Service
Significant Increase in Credit Risk
Sharesave
All Employee Share Option scheme
SME
SMCR
SONIA
SPPI
SPV
The 2016 Code
The 2018 Code
TBMC
TFS
The Act
Small and/or Medium-sized Enterprise(s)
Senior Managers and Certification Regime
Sterling Overnight Interbank Average Rate
Solely Payments of Principal and Interest
Special Purpose Vehicle company
UK Corporate Governance Code (2016
version)
UK Corporate Governance Code (2018
version)
The Business Mortgage Company
Term Funding Scheme
The Companies Act 2006
The Articles
The Articles of Association of the Company
The Bank
Paragon Bank PLC
The Company
Paragon Banking Group PLC
The Group
The Order
The Company and all of its
subsidiary undertakings
The Statutory Audit Services for Large
Companies Market Investigation
(Mandatory Use of Competitive Tender
Processes and Audit Committee
Responsibilities) Order 2014
The Plan
The Paragon Pension Plan
TRC
TPF
TSR
UK
UKF
US
Total Regulatory Capital
Titlestone Property Finance Limited
Total Shareholder Return
United Kingdom
UK Finance
United States of America
US Dollar LIBOR
The London Interbank Offered Rate on
balances denominated in US dollars
VAT
WEEE
Value Added Tax
Waste Electrical and Electronic Equipment
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts F2
Shareholder information
Want more information or help?
The Company’s share register is maintained by our Registrars, Computershare, who you should
contact directly if you have questions about your shareholding or wish to update your address details.
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: 0370 707 1244*
and outside the UK +44 (0)370 707 1244
Online: www.investorcentre.co.uk
*Calls are charged at the standard geographic rate and will vary by provider. Calls outside the UK will be charged at the applicable
international rate. Lines are open 8:30am to 5:30pm, Monday to Friday, excluding UK public holidays.
Electronic communications
You can view and manage your shareholding online by registering with Computershare’s Investor Centre
Service. To register:
• Visit www.computershare.com
• Go to ‘Manage my shareholdings’
• Register using your Shareholder Reference Number and your postcode
We actively encourage our shareholders to receive communications via email and view documents
electronically on our website, including our Annual Report and Accounts, as this has significant
environmental and cost benefits. Should you wish to receive electronic documents please contact
Computershare by telephone or online.
Website
You can find further useful information on our website, www.paragonbankinggroup.co.uk, including:
• Regular updates about our business
• Comprehensive share price information
•
Financial results and reports
• Historic dividend dates and amounts
PAGE 286 • Useful Information
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts Shareholder fraud warning
Shareholders are advised to be very wary of any suspicious or unsolicited advice or offers, whether over
the telephone, through the post or by email. If you receive any such unsolicited communication please
check the company or person contacting you is properly authorised by the Financial Conduct Authority
(‘FCA’) before getting involved. You can check at www.fca.org.uk/consumers/protect-yourself and can
report calls from unauthorised firms to the FCA by calling 0800 111 6768.
Duplicate documents and communications
If you receive more than one copy of shareholder documents, it is likely that you have multiple accounts
on the share register, perhaps with a slightly different name or address. To combine your shareholdings,
please contact Computershare and provide your Shareholder Reference Numbers.
Financial calendar
January 2020
Trading update
20 May 2020
Half year results
Dividend calendar
9 January 2020
July / August 2020
Trading update
November 2020
Full year results
2 July 2020
Ex-dividend date for 2019 final dividend
Ex-dividend date for 2020 interim dividend
10 January 2020
3 July 2020
Record date for 2019 final dividend
Record date for 2020 interim dividend
17 February 2020
24 July 2020
Payment date for 2020 final dividend
Payment date for 2020 interim dividend
Annual General Meeting
13 February 2020
To be held at 9:00am at the offices of UBS AG London Branch, 5 Broadgate, London EC2M 2QS
PAGE 287 • Useful Information
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts F3
Other public reporting
In addition to its annual financial reporting the Group has published, or will publish, the following documents in respect of the year ended
30 September 2019, as required by legislation or regulation, relating to the Group or its constituent entities.
• Pillar III disclosures required by Part 8 of the CRR
• Tax Strategy Statement
• Modern Slavery Statement
• Gender pay gap information
These documents are made available on the Group’s website at www.paragonbankinggroup.co.uk.
All of these statements are required to be published annually. In addition, for the year ended 30 September 2019, the Group has had to publish
bi-annual statements on supplier payments under the Reporting on Payment Practices and Performance Regulations 2017. It also made its
third report against its Women in Finance charter commitments in September 2019.
All of this reporting will be continued in the financial year ending 30 September 2020.
PAGE 288 • Useful Information
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts PAGE 289 • Useful Information
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts F4
Contacts
Registered and head office
London office
51 Homer Road
Solihull
West Midlands B91 3QJ
Telephone: 0121 712 2323
Tower 42 Level 12
25 Old Broad Street
London EC2N 1HQ
Telephone: 020 7786 8474
Investor Relations
investor.relations@paragonbank.co.uk
Company Secretariat
company.secretary@paragonbank.co.uk
Internet
Auditor
Solicitors
Registrars
Brokers
www.paragonbankinggroup.co.uk
KPMG LLP
One Snowhill
Snow Hill Queensway
Birmingham B4 6GH
Slaughter and May
One Bunhill Row
London EC1Y 8YY
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: 0370 707 1244
Jefferies International Limited
100 Bishopsgate
London EC2N 4JL
Peel Hunt LLP
Moor House
120 London Wall
London EC2Y 5ET
UBS Limited
5 Broadgate
London EC2M 2QS
Remuneration consultants
Consulting actuaries
Deloitte LLP
Four Brindleyplace
Birmingham B1 2HZ
Mercer Limited
Four Brindleyplace
Birmingham B1 2JQ
PAGE 290 • Useful Information
PARAGON BANKING GROUP PLC • 2019 Annual Report and Accounts
1475-1 (12/2019)
PARAGON BANKING GROUP PLC
51 Homer Road, Solihull, West Midlands B91 3QJ
Telephone: 0345 849 4000
www.paragonbankinggroup.co.uk
Registered No. 2336032