The Group's operations are organised into three divisions, based on product types, origination and servicing capabilities. Customer loan balances at 31 March 2022 and advances in the period for each of those divisions are summarised below:

The half year period has seen a 3.8% growth in the total loan book with an 8.6% year-on-year increase. Excluding legacy first and second mortgage balances the portfolio grew by 17.2%, year-on-year.

The Group's Mortgage Lending division principally provides buy-to-let mortgages secured on UK residential property to specialist landlords. The Group has a wealth of experience in this market, built up over more than a quarter of a century, giving it an unparalleled understanding of both this form of mortgage and the landlord customer base it targets.

During the period the Group also offered loans to non-specialist landlords and limited numbers of owner-occupied first charge mortgages on residential property. However, these form a minor part of its operations. In all its offerings, the Group targets niche markets where its focus on detailed case-by-case underwriting and its robust and informed approach to property risk differentiate it from both mass market lenders and other specialists.

Housing and mortgage market

The UK housing market has continued its strength of recent years through the first six months of the financial year. An increase in the demand for housing and a structural lack of supply means that, house prices have continued upwards, although in the face of lower levels of residential mortgage transactions than seen in previous periods.

House prices continued their post-Covid pattern of strong increases, with the Nationwide House Price Index recording a year-on-year improvement of 14.3% to March 2022, 6.7% in the six month period. Research by Nationwide attributes the continuing increases to supply side issues, with the number of people seeking to move exceeding the number of properties becoming available.

Mortgage approvals reported by the Bank of England were broadly similar to those in the first half of the 2021 financial year. £154.2 billion of new mortgages were approved in the period, compared to £157.7 billion a year earlier. However, the proportion of remortgages increased significantly, representing 37.7% of approvals in the first half of 2022 against 24.9% in the comparable period in 2021, reflecting the fall in house purchase activity.

Across the mortgage market, arrears and possessions reported by UK Finance ('UKF') remained at low levels, with the numbers of customers in arrears reducing in the first quarter of the calendar year. Whilst possessions had increased, this included an element of catch-up following the moratorium during the omicron outbreak. Based on its research, published in May 2022, UKF has concluded, despite potentially adverse economic headwinds, the position on mortgage performance remains positive, with the number of households in arrears 10% less than a year previously and also less than before the outbreak of the pandemic.

The Private Rented Sector ('PRS') and the buy-to-let mortgage market

The Group's target customers in the buy-to-let sector are specialist landlords. Such landlords will typically let out four or more properties, or operate with more complex properties, and will generally run their portfolio as a business and have both a strong understanding of their local lettings market and a high level of personal day-to-day involvement. The Group is amongst a small number of specialist lenders addressing this sector, which is underserved by many of the larger lenders.

The Group considers that this level of experience, the level of the customer's involvement in day-to-day letting activities and the diversification of their income streams across properties make them less vulnerable to cash flow shocks in the event of a downturn and therefore better able to cope when faced with an adverse economic situation.

The PRS continues to provide homes for around 19% of UK households. With supply and pricing issues impacting first-time buyers and the potential for incomes to become more constrained, the sector will continue to be crucial in national housing provision.

The Group has commissioned research on the future of the sector with the Social Market Foundation. This exercise found that, contrary to some widely held beliefs, most people renting their home in the private rented sector are happy with both their property and their landlord, and value the flexibility renting offers to them.

The research also concluded that the attention of policy makers, the media and society more generally, focuses on the minority of PRS tenants who have had particularly bad experiences with renting. However 81% of private renters expressed their contentment with their current property, and 85% say they are satisfied with their landlord.

The full report on this research - "Where Next for the Private Rented Sector?" - is available on the Group's website at www.paragonbankinggroup.co.uk.

Volumes of new buy-to-let mortgages followed the trend in the wider mortgage market, responding to the property market as a whole. New advances reported by UKF, at £23.4 billion for the six months ended 31 March 2022, were broadly similar to those for the previous half year (2021 H2: £23.6 billion), but with a much increased level of remortgage activity. Remortgages comprised 66.2% of new mortgage activity, compared to 55.9% in the six months ended 30 September 2021.

For rental property, RICS, in its March 2022 UK Residential Market Survey, reports increasing levels of tenant demand, putting upward pressure on rents, with an expectation of rents increasing by 4% in the coming year and average increases of 5% per annum over the next five years. This is supported by research from Propertymark, in its March 2022 survey, where 71% of members reported increasing rents. This strength in the market should support both cash flows and affordability for landlord customers, even in the face of interest rate increases and other inflationary pressures.

These national trends are supported by research carried out with the Group's customers and mortgage brokers in the first months of 2022. 62% of landlords reported increased tenant demand, the highest figure reported to date in the Group's research. Landlords also reported rising rents and growing portfolios.

Mortgage intermediaries reported brisk business, with over half operating at or near capacity. Looking forward, strong demand for remortgage products was predicted and over a third of intermediaries had already facilitated green products. Intermediary net confidence for the future of the mortgage market in general was +85%, with confidence in the buy-to-let market at +67%.

The UKF analysis of arrears and possessions published in May 2022 provided analysis of buy-to‑let cases, showing a similar picture to the wider mortgage market, with arrears remaining low and the number of arrears cases 5% less than a year earlier.

Overall, current research shows the buy-to-let market in a healthy state, notwithstanding any longer-term impacts of the pandemic, or other, more recent economic issues.

Mortgage Lending activity

The primary focus of the Group's Mortgage Lending division continues to be the provision of buy-to-let mortgages to specialist landlord customers. The total amounts of the division's lending in the six month period are set out below.

Total lending in the segment increased by 18.0% compared to the same period in the previous financial year, continuing the strong performance seen towards the end of the 2021 financial year.

Buy-to-let

Overall buy-to-let lending continued to increase, building on the momentum established in the second half of 2021. Total completions in the six months were 19.5% higher than in the first half of the 2021 financial year with specialist business up by 22.2%. The pipeline of new business at the period end had increased to £1,337.8 million, 44.4% higher than a year earlier (30 September 2021: £1,008.1 million, 31 March 2021: £926.7 million). Restrictions in lending imposed during the pandemic had all been reversed by the end of the period, with further developments introduced, helping to drive volumes.

The majority of the Group's mortgage lending products offer fixed rates for an initial period, with many customers choosing a new product, either with the Group or elsewhere, at the end of this fixed period. A market shift in 2017 saw five-year fixes become the dominant product and the first tranche of that lending is now coming to the end of the five-year period. The Group has well established retention procedures to address accounts as their fixed rates expire and, in common with the wider market, has also seen a marked shift in new business flows in favour of remortgages. This is in contrast to the emphasis on house purchases seen during 2021, which was partly driven by stamp duty incentives, since withdrawn.

Specialist intermediaries are the principal source of the Group's buy-to-let business, and it continues to develop its service proposition to ensure its business partners receive the service levels that they deserve. The Group continues to monitor satisfaction levels amongst its brokers, with 66% of those surveyed in the period saying that the Group provided better service than other lenders (2021 H1: 66% ,2021 FY: 66%).

This research also showed that 89% of brokers were satisfied with the ease of obtaining a response from the Group (2021 H1: 88%, 2021 FY: 91%), delivering a net promoter score at offer stage of +36 (2021 H1: +46, 2021 FY: +43). The Group was also named 'Best Professional Buy-to-Let Mortgage Lender' at the 2021/22 Your Mortgage Awards, further underlining its customer service credentials.

The Group's long-term programme of reengineering its mortgage business continued through the period. This includes a thorough review of all systems and operational processes to align them with the Group's strategy for the division and the overarching plan of digitalising the business. Initially, particular focus has been on those areas which can deliver immediate impact, such as customer retention, and on enhancing service to mortgage brokers. Improvements which went live in the period are already playing an important role in managing retention risk as five-year fixed rate mortgages start to mature.

The Group continues to expand its range of green buy-to-let mortgages. These products have a maximum 80% loan-to-value ratio and offer lower interest rates for energy efficient properties with Energy Performance Certificate ('EPC') ratings of C or higher. While initially limited to certain property types, this lending was extended to all properties within the Group's lending criteria in October 2021.

The UK Government has identified the provision of more energy efficient housing as a prime objective in its response to climate change, with EPC levels selected as one of the principal benchmarks to be used. It has announced a target of upgrading as many homes as possible in the PRS to an EPC rating of C or higher.

The Group's new lending volumes on green buy-to-let products in the six months ended 31 March 2022, which increased by 38.4% compared to the same period in 2021, are set out below.

The Group's latest analysis identified EPC grades for 90.8% of its mortgage book by value at 31 March 2022 (31 March 2021: 87.6%, 30 September 2021: 88.3%). Of these 98.7% were graded E or higher (31 March 2021: 98.0%, 30 September 2021: 98.4%) with 38.2% rated A, B or C (31 March 2021: 36.8%, 30 September 2021: 37.6%). This steady improvement results from the new lending described above, with 43.2% of new originations in the year having one of the top three grades (99% coverage).

While the Group monitors EPC performance it is also conscious of the need to avoid unintended consequences by focussing lending solely on this. Although upgrading existing properties is beneficial to overall emissions, the demolition and replacement of properties may be less so.

The Group also monitors the potential physical risks to security values arising from climate change. This includes assessing a property's flood risk as part of the underwriting process. At 31 March 2022, approximately 2.5% by number of properties securing the Group's buy-to-let mortgages in England and Wales were considered to be at medium or high risk of flooding from the sea or rivers, based on data from the Environment Agency (31 March 2021: 2.3%, 30 September 2021: 2.5%).

In addition, a more detailed analysis was carried out in the period, using data which was more location specific, and also included risk of flooding from surface water. This showed 3.2% of properties securing buy-to-let mortgages were at higher risk.

The business is currently working to develop products to support existing customers to make their properties more energy efficient. Given that the majority of properties in the PRS require some form of upgrade to meet the Government targets, this kind of support will be vital to achieving net zero.

Other lending

The Group makes only a limited number of owner-occupied mortgage loans, normally as an extension of its relationship with its professional landlord customers. Mass-market mortgage lending does not currently offer the levels of return on capital which would be attractive to the Group. The Group no longer offers second charge mortgages, and all its second charge mortgage books are currently in run‑off.

Performance

The outstanding first and second charge mortgage balances in the segment at 31 March 2022 are set out below, analysed by business line.

Balances within the mortgage portfolio have continued to increase steadily, a result of lending volumes and successfully retaining existing customers. At 31 March 2022 loan balances in the division were 7.8% higher than a year earlier. Within this balance, the overall buy-to‑let portfolio increased 8.5% year-on-year to £11,843.4 million (30 September 2021: £11,424.3 million, 31 March 2021: £10,919.0 million), with post-2010 originated assets representing 67.5% of the total at the end of the period (31 March 2021: 61.4%).

Despite the levels of activity in the mortgage market, the annualised redemption rate on buy-to-let mortgage assets remained stable in the six months to 31 March 2022 at 6.9% (2021 H1: 6.8%, 2021 FY: 6.9%). As the first wave of five-year fixed term mortgage accounts, a product not widely available before 2017, have begun to mature, the Group has put significant effort into managing these customers and ensuring that, as far as possible, an appropriate new product is made available to them. The increase in the scale of product maturities may, however, see higher absolute redemption levels going forward despite the strong retention performance.

Arrears on the buy-to-let book remained low and broadly stable in the six months at 0.15% (30 September 2021: 0.21%, 31 March 2021: 0.22%). The Group's buy-to-let arrears remain very low compared to performance in the national buy-to-let market, as they have been through the life of the product. In comparison, UKF reported arrears of 0.46% across the buy-to-let sector at 31 March 2022 (30 September 2021: 0.47%, 31 March 2021: 0.57%), highlighting the Group's asset quality.

The performance metrics of the buy-to-let portfolio have remained generally strong across the period, despite the economic headwinds generated first by Covid, and then by growing uncertainties in the UK economy. However, the extent to which underlying issues have yet to manifest themselves remains uncertain. No payment holidays were given on mortgage accounts in the period, but while there is no evidence of accounts previously given such holidays performing differently on average to other accounts, there is evidence of more erratic payment profiles, particularly for those who were granted extended relief. The Group therefore continues to monitor these accounts closely.

The Group's approach focusses its underwriting on the credit quality and financial capability of its customers, underpinned by its assessment of the available security. It relies on a detailed and thorough assessment of the value and suitability of the property as security, including the use of a specialist in-house valuation team covering the whole country, and this robust approach to valuation, not just at inception, but through the life of the loan, provides it with significant security even in times of economic stress.

The loan-to-value coverage in the Group's buy-to-let book, at 59.2% (30 September 2021: 61.2%, 31 March 2021: 64.4%) is at the lowest level seen in over a decade, as a result of increasing house prices, which have continued to grow despite Covid. The resilience and value of the collateral underlying the Group's buy-to-let mortgage book, alongside its careful approach to provisioning underpins the strength of the Group balance sheet, and is subjected to a systematic programme of stress testing. The levels of interest cover and stressed affordability in the portfolio suggest that its customers are also well placed to manage Covid-related and other economic impacts on their businesses in the longer-term.

Second charge mortgage arrears increased marginally to 1.50% (31 March 2021: 1.00%, 30 September 2021: 1.18%) as the book continued to season, with performance remaining satisfactory. These metrics remain significantly better than those for the second mortgage market as a whole, reported by the Finance and Leasing Association ('FLA').

The Group continues to operate a receiver of rent process for buy-to-let assets, which helps to reduce the level of loss incurred by both it and, in turn, its landlord customers. This process gives the Group direct access to the rental flows from the underlying properties, while allowing tenants to stay in their homes. At 31 March 2022, 558 properties were managed by a receiver on the customer's behalf, broadly stable year-on-year (31 March 2021: 557 properties). Almost all the current receivership arrangements relate to pre-2010 lending, with cases being resolved on a long-term basis to ensure the best outcome for the Group, its customers and their tenants. There were relatively low numbers of cases entering receivership in the period.

Outlook

The mortgage business is well placed to continue to develop into the future. It has the capacity and the systems to continue to deliver the service which brokers and customers require, and to support landlord customers and the PRS going forward.

The Group's Commercial Lending division includes four key specialist business streams lending to, or through, commercial organisations, mostly on a secured basis. The growth of this division represents a major strategic focus for the Group in the post-Covid environment.

The four major strands of the business comprise:

·    SME lending, providing leasing for business assets and unsecured cash flow lending for professional services firms, amongst other products

·    development finance, funding smaller, mostly residential, property development projects

·    structured lending, providing finance for niche non-bank lenders

·    motor finance, focussed on specialist parts of the market

Within these sectors the Group's strategy is to target niches (either product types or customer groups) where its operating model and capital deployment can combine to optimise the relationship between growth and risk, to deliver long-term sustainable returns.

In each of its markets the division's competitors are principally small banks and similarly sized lenders. They are markets in which the largest lenders have little presence, reducing credit availability for customers and creating significant opportunities for the Group. The division operates through specialist teams in each business area, with a common focus on credit standards, customer service, asset appraisal, and collections and recovery linking the operations strategically.

The SME sector was a particular target of UK Government support during the Covid pandemic, resulting in an increase in cash reserves held in businesses across the sector. This makes it difficult to gauge the extent of Covid-related scarring and the future trajectory of the sector. This is complicated further by recent economic developments with increasing borrowing costs, inflationary pressures and supply chain issues all having potential impacts going forward. The requirement for SMEs to start repaying loans made under the Coronavirus Business Interruption Loan Scheme ('CBILS') and other government-backed loans also has the potential to impact investment appetites.

The Group's ongoing project to enhance digital capabilities across the division has continued in the period, with major investment in both its development finance and SME lending platforms. The Group's agile approach to development has resulted in a number of enhancements going live, including a new broker portal for SME lending, which provides a more streamlined and effective process for business providers, while improving operational efficiency by providing the capability for increased process automation.

The division continues to expand its green initiatives with the motor finance operation launching its electric vehicle proposition in the period and the development finance business incentivising developers to provide more energy-efficient properties. At the same time the division continues to support local authorities in 'greening' their refuse collection operations, with the first contracts signed during the period.

Commercial Lending activity

New business in the sector increased by 57.9%, compared to the same period in 2021, as the UK economy continued to emerge from Covid, with growth across all the division's business lines. Growth compared to the first half of 2021 was particularly marked in motor finance and parts of the SME lending business, where market transactions in the first half of 2021 had been at historically low levels.

New business increased by 11.3% compared with the second half of 2021, where the impact of lockdowns had started to recede, with strong growth in the development finance operation, but a flatter position in SME lending, as the growth in asset leasing and loans to professionals was offset by the decline in CBILS and Recovery Loan Scheme ('RLS') lending.

The new lending activity in the segment during the period is set out below, analysed by principal business line. As the structured lending business comprises revolving credit facilities, the net movement in the period is shown below.

These advances increased the Commercial Lending loan book by 9.6% in the six months, to a total of £1,719.7 million (31 March 2021: £1,427.1 million, 30 September 2021: £1,568.8 million). This is 15.1% larger than the division's £1,494.3 million portfolio at 31 March 2020, before the impact of the pandemic.

Development finance

The growth of the Group's development finance operation had continued throughout the pandemic, laying the foundations for a positive performance in the period, with advances increasing 41.0% compared to the first six months on the 2021 financial year. The UK continues to provide fewer new homes than government forecasts suggest are necessary, offering significant opportunities for the Group's customer base.

The business has now launched its first major green finance option. Projects developing energy-efficient properties, those with an EPC A grade, can receive beneficial funding terms. By 31 March 2022, £23.5 million of new lending facilities had been agreed under the green initiative, with drawings commencing in the period. With a developing pipeline, this will be an area of focus for the Group going forward, as developers increasingly factor these discounts into their project planning.

The regional spread of the Group's lending has broadened, with the proportion of the portfolio located in London and the South-East of England falling to 58.2% from 63.6% at 30 September 2021. Activity increased particularly in the East and West Midlands, with funding provided for a number of flagship projects. The business has also increased the range of specialist developments it has funded, including a heightened focus on the later living sector.

The short-term prospects for future lending in the business remain strong. Undrawn balances on current facilities had increased to £596.4 million, a significant amount of which would be expected to be drawn in the second half of the financial year (31 March 2021: £402.0 million, 30 September 2021: £500.4 million). The new business pipeline stood at £266.7 million (31 March 2021: £318.4 million, 30 September 2021 £366.6 million), with the reduction partly attributable to projects delayed by supply chain issues.

The Group's investment in systems for this business has continued through this period, with enhancements being delivered on a regular basis to improve process efficiency and customer service. This drive towards digitalisation will continue, providing a solid platform for the growth of the business and supporting the transition to an internal ratings based approach to capital management.

The current state of the UK house building market gives a significant opportunity for smaller developers to expand and for the Group to support them. The Group's proposition is strong and attractive and continues to provide healthy returns for the capital invested and opportunities for growth.

SME lending

Compared to the first six months of 2021 new lending in the SME lending business grew by 16.9%. Growth compared to the second half of 2021, after lockdowns had mostly ended, was more modest at 0.2%, but this result includes significantly different performances across product types. In particular, lending backed by Covid-related government guarantees formed a far smaller part of the business' activity in the period. Generally SME businesses have remained cautious on their investment decisions, given the economic uncertainties in the current UK environment, constraining all capital goods related activity.

In the asset leasing business volumes excluding government backed loans, at £90.3 million, were broadly similar to the £91.3 million achieved in the second half of the 2021 financial year (2021 H1: £106.9 million, 2021 FY: £198.2 million). This reflects overall market pressures in the asset finance market with the FLA reporting new business, excluding cars and high value items, in the six months to 31 March 2022 4.1% lower than in the previous six months. The FLA's regular survey of members, carried out in the first quarter of 2022 attributed this partly to supply issues affecting the availability of new equipment for leasing. Investment in operating leases has also continued with £9.7 million of assets being acquired (2021 H1: £4.6 million, 2021 FY: £13.0 million).

The Group continued to provide loans under the UK Government-sponsored British Business Bank's RLS programme to support SMEs potentially affected by the Covid pandemic. Initially these loans had the benefit of an 80% government guarantee (after the proceeds of any business assets are applied for leasing balances), but after 31 December 2021, this was reduced to 70%. The reduction in the guarantee and the general emergence from Covid saw take-up of the new scheme drop off markedly. However, the Group expects to offer these loans to SME customers until the scheme closes. The Group's lending in this area has been primarily focussed on its existing customers, with the majority of its lending on asset-secured products.

The first half of 2022 saw £23.8 million advanced under schemes backed by government guarantees (2021 H1: £26.3 million, 2021 FY: £64.2 million), of which £23.3 million was asset leasing business. The Group continues to closely monitor the portfolio for any adverse indications, particularly as the majority of CBILS and Bounce Back Loan Scheme ('BBLS') customers are now obliged to meet their own interest payments, rather than having them met by the UK Government.

Short-term lending to professional services firms outside the government supported schemes reached £57.1 million in the period, double that in the comparable period in 2021 and 71.0% up on the second half of 2021 (2021 H1: £28.6 million, 2021 FY: £62.0 million). These loans are often used to spread the impact of tax payments, and the availability of tax deferrals, together with the availability of CBILS and similar loans amongst this customer group had seriously depressed demand. However the underlying requirement for this form of finance remains for the longer-term, and performance has continued to move back towards pre-Covid levels.

The division is seeing more green lending propositions over recent months, with many businesses in the transportation field and beyond seeking to reduce their carbon footprints. The division also has a strong presence in waste management, supporting local authorities as they transition to greener refuse collection activities and providing funding for the development of recycling plants. It is a strategic priority of the Group to support UK SMEs, whose journey towards net zero may require significant capital investment over time, and these types of initiatives are expected to increase going forward.

The Group's investment in the technology of its SME lending systems has continued to make significant improvements in internal efficiency and service to brokers and customers. Agile and modular delivery enables individual improvements to go into the live system as they are completed, providing incremental enhancements, rather than waiting for a complex 'big bang'.

At the beginning of the period a new broker portal was rolled out. This was developed based on extensive research amongst the broker community and enables brokers to upload applications and receive rapid feedback on the progress of the potential loan. Take-up has been good with over 60% of standard SME lending applications now being received through the portal. Importantly, this interface is designed as an additional service to brokers, and the division's business support team remains fundamental to ensuring brokers and customers receive the standard of service they deserve.

While the FLA Outlook Survey for the first quarter of the calendar year, conducted in January 2022, presents a more nuanced view of the outlook for the leasing industry than in some recent surveys, with concerns raised about inflation, consumer spending, funding costs and a potential resurgence of Covid, respondents expected the economic position to improve in the longer-term. 86% of firms were expecting lending volumes to increase over a twelve month horizon, with 55% expecting increases of over 10%.

It is clear that the SME lending market continues to offer good growth prospects to a lender which can provide an efficient, streamlined offering focussed on customers and their advisers and the Group continues to focus on meeting that requirement.

Structured lending

Activity in the structured lending business stream has continued its process of post-Covid normalisation. Drawings generally increased and a further facility came on stream, taking the drawn balance to £171.7 million at the end of March. This is the operation's thirteenth facility to date, with five having paid down, and with no losses incurred.

These facilities generally fund non-bank lenders of various kinds, providing the Group with increased product diversification. The facilities are constructed to provide a buffer for the Group in the event of default in the ultimate customer population. This business line is important both as a direct source of lending, but also as a way to explore new markets and routes to market.

The Group has a number of further facilities in the pipeline, broadening the range of products and industries supported. As each of these arrangements is constructed on a bespoke basis, the throughput of the pipeline tends to be slower than for other products, and hence the post-Covid bounce-back cannot be as rapid.

Motor finance

During the first half of the 2021 financial year the Group's motor finance operation was largely suspended, a response to the low levels of automotive transactions through the initial Covid lockdown periods. The business was relaunched in the spring of 2021, and has rebounded significantly since that time. The £75.7 million advanced in the period is over twice the amount loaned in the comparative period in 2021, and 6.0% greater than the value in the second half of 2021 (2021 H1: £28.8 million, 2021 FY: £100.2 million), despite growing economic uncertainties and inflationary pressures impacting consumers.

The half year saw the Group's first loans on static caravans, a product which delivers strong yields and capacity for expansion and fits with the Group's specialist vision for the business.

The Group also launched its first products for financing battery-powered electric vehicles. £2.7 million of such loans were made, reflecting the recent growth in availability of such vehicles, with the pipeline building significantly as the half year closed. The Group is therefore well placed to support the green aspirations of its customers, as electric vehicles become a more widely viable and popular option.

Performance

The loans within the Commercial Lending division, analysed by product type are set out below.

The size of the Commercial Lending book increased by 9.6% in the six months, as activity amongst the Group's SME customer base began to increase following the pandemic.

Credit quality in the development finance book remained excellent. Accounts are regularly monitored for project progress and credit quality and graded on a case-by-case basis by the Credit Risk function. At 31 March 2022 only three accounts were identified as at risk of loss. The average loan to gross development value for the portfolio at the period end, a measure of security cover, was 62.1% (30 September 2021: 61.7%, 31 March 2021: 62.4%). This gives the Group a significant credit buffer if any of the projects encounter issues. No write-offs were recognised in the period.

Arrears in the division's finance leasing portfolios remain stable, even with the cessation of the majority of payment reliefs. Arrears on asset leasing business at 31 March 2022 stood at 0.21% (30 September 2021: 0.27%, 31 March 2021: 0.86%) and those on the motor finance book at 2.20% (30 September 2021: 2.30%, 31 March 2021: 2.25%). Write-offs in SME Lending were limited to a small number of cases where special conditions applied, and which had been provided for at 30 September 2021.

Whilst some lenders have reported issues with their CBILS, BBLS and RLS lending related to either credit quality or fraud, the Group is yet to see any significant impacts, even though the majority of customers are now in a position where they have to fund repayments, rather than these being met by the UK Government. The portfolio at 31 March 2022 contained only £1.4 million Stage 2 accounts at gross carrying value and only £0.4 million of credit impaired cases. The Group has so far had to make claims on £1.8 million of loans, out of the £113.9 million advanced since the schemes began. The majority of the Group's government-backed lending was to its existing customers, which contributed to the credit quality of this lending.

For structured lending accounts, the Group carefully monitors the performance of the underlying asset pool on a monthly basis, to ensure its security is adequate. Performance in the half year has been in line with expectations, with a number of facilities showing improved metrics. Of the two facilities assigned to IFRS 9 Stage 2 at 30 September 2021, one had returned to Stage 1, with the other redeeming at par.

Outlook

Overall the prospects for the Commercial Lending division appear strong, underpinning the Group's diversification strategy. While economic uncertainty is growing, the Group's positioning and sector exposures, coupled with its use of enhanced technology, mean it is well placed to support the aspirations of its customers in the coming periods.

The Idem Capital segment contains the Group's acquired loan portfolios, together with its pre-2010 legacy consumer accounts. These include mostly second charge and unsecured consumer loans. The Group regards the operation as essentially opportunistic, with portfolios acquired only where these fit within its existing capabilities and operations and where the projected return is attractive in comparison to the other opportunities for the deployment of its capital.

After the period end the Group sold the majority of its unsecured portfolios, considerably reducing the size of the Idem Capital division. As a result it is considering whether it is appropriate to report Idem Capital as a separate segment in future. However it will still consider portfolio acquisitions where these meet its strategic requirements.

The Idem Capital back book includes consumer lending portfolios where customers may have historically rescheduled their debt repayments and its processes aim to generate fair outcomes for all customers, recognising any vulnerabilities, which are also considered carefully in any asset disposals. The implementation of the new FCA Consumer Duty in the Group's relationships with all its customers, particularly those who may be vulnerable, is a strategic priority for the division, particularly in light of the mounting financial pressures on UK households.

New business

The UK market for loan portfolio sales in the period remained restrained, with bidding highly competitive for those loan books coming to market. The Group considered a number of opportunities in the mortgage finance, consumer lending and asset finance spaces, but none of these ultimately met its criteria and they were not progressed. Therefore, in the six month period, no new portfolio acquisitions were completed (2021 H1: none).

The main focus of the business throughout the half year was the careful management of its existing loan portfolios and ensuring that appropriate processes and systems were in place to address both the longer-term impacts of the Covid outbreak and the more general impacts of rising living costs on its customers. This is particularly important where those customers might be vulnerable or may develop vulnerabilities as a result of the ongoing situation.

Performance

The values of the loan balances in the segment are set out below, analysed by business line.

With no portfolios acquired in the period, the Idem Capital loan book has continued to decline in the period as a result of customer collections. 120 month Estimated Remaining Collections on the segment's acquired consumer assets, which measures forecast undiscounted receipts, reduced to £209.3 million at 31 March 2022 from £260.1 million a year earlier and payment performance in the segment remained in line with historic experience.

On 8 June 2022, after the end of the period, the Group disposed of unsecured loan assets with a carrying value of £76.8 million at 31 March 2022. A small profit is expected to be realised against these assets, which will be finalised following post-completion procedures and reported with the year end results.

Arrears on the segment's secured lending business continued to move higher as overall numbers of cases declined. Arrears cases represented 25.4% of Idem Capital second charge mortgage assets at 31 March 2022 (30 September 2021: 24.3%, 31 March 2021: 20.2%). However the absolute number of arrears cases reduced by 6.6% to 2,048 from 2,193 at the start of the period (31 March 2021: 1,945). This shows the increase in percentage arrears to be a result of the structure of these portfolios, which include accounts which were making full payments in the period but may have missed payments in the past, remaining in arrears long-term, and the propensity of fully up-to-date accounts to redeem more quickly than these long-term arrears cases.

None of the individual Idem Capital purchased loan portfolios were considered as underperforming in the period. The Group monitors actual cash receipts from acquired portfolios against those forecast in the evaluation which informed the purchase price. Up to 31 March 2022, such collections were 109.7% of those forecast to that point (30 September 2021: 109.8%, 31 March 2021: 110.0%), demonstrating the stability in cash flow from these portfolios.

The Group continues to invest in its systems and people to ensure that these loans are serviced efficiently and effectively, and that appropriate customer outcomes are achieved, particularly for vulnerable customers.

Outlook

The Group continues to view the ability to acquire appropriate loan portfolios on an opportunistic basis as a useful adjunct to its strategic objectives, however this is not a primary strategic focus. The disposal of most of the division's unsecured loan book after the period end will further reduce its contribution to group profit, but the prospects for the remaining income streams remain positive.

The Group will continue to ensure that all Idem Capital customers, including those whose accounts are disposed of, receive appropriate outcomes and fair treatment.