Securitisation residual disposal & share buy-back

This announcement contains inside information

PARAGON BANKING GROUP PLC

Disposal of securitisation residual and share buy-back

Paragon Banking Group PLC ("the Group" or "Paragon") today announces the sale of its residual interest in its Paragon Mortgages (No.12) PLC ("PM12") securitisation. Following the transaction, the Group will be conducting a share buy-back of up to £30 million with the balance of the capital generated being used to support balance sheet growth.

PM12 was launched in July 2006 and as at 31 March 2019 held £707 million of the Group's legacy buy-to-let mortgage assets. The PM12 residual comprises the subordinated loan which established the PM12 First Loss Fund at launch and the right to receive deferred consideration in respect of the mortgages it contains (usually described as "excess spread").  The transaction is equivalent to the sale of the portfolio and repayment of associated liabilities. Consequently, the assets and liabilities of PM12 will be removed from the Group's balance sheet. Paragon will continue to provide administrative services to PM12 for which it will earn a servicing fee in accordance with the PM12 transaction documents.

Economic effects of the transaction

The sale will generate an exceptional gain of approximately £9 million to be recognised during 2019, together with the repayment of Paragon's subordinated loan and other accounting / intercompany balances.

The disposal will also reduce 2019 underlying pre-tax earnings by a little over £2 million and 2020 profits by approximately £6 million. However, it will enhance the Group's net interest margin ("NIM") and the subsequent share buy-back is expected to support earnings per share growth.

The share buy-back programme is the latest in a series which has already returned £190 million to shareholders since 2014.

At 31 March 2019, the balance sheet of PM12 comprised £700 million of loans, £200 million of swap assets and £50 million of cash and other assets.  These balances translate to £413.1 million of risk weighted assets. The Group's pro-forma CET1 level of 13.7% at 31 March would have increased to 14.7% had the deal completed at that date, 14.6% excluding the accounting gain.

Nigel Terrington, Chief Executive said:

"Paragon's first residual sale aligns with our strategy to focus increasingly on specialist lending whilst optimising capital, raising margins and improving returns on equity. We are announcing another share buy-back today to balance near term returns to shareholders whilst driving longer term growth in the business. The gain on the sale from one of our legacy securitisations demonstrates the credit quality of the underlying assets within the securitisation vehicle and our ongoing management of the loans will ensure customers continue to benefit from Paragon's specialist servicing capabilities."

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