Paragon's operations are organised into three divisions, each with responsibility for delivering asset and profit growth. The Paragon Bank segment includes similar assets to those that appear in the Paragon Mortgages and Idem Capital segments but which are retail deposit funded.

The Group's investments in loans and the amounts invested in the period for each division are summarised below.

PARAGON MORTGAGES

Paragon Mortgages is one of the longest established lending brands in the buy-to-let mortgage market. Alongside its sister brand, Mortgage Trust, Paragon Mortgages maintains a significant presence for the Group in this important sector of the UK mortgage market. Trading activity in the period has been particularly strong, with the segment contributing £44.7 million to underlying Group profit (2015 H1: £44.7 million). Paragon Mortgages' stable profit level resulted from underlying growth from net new lending being broadly counterbalanced by the sale of seasoned assets to Paragon Bank in the period, together with the higher funding costs allotted to the segment following the Group's retail bond issue in August 2015.

Total loan assets of the division at 31 March 2016 were £9,105.3 million, 1.2% higher than the £8,993.5 million a year earlier, of which £8,920.2 million were buy-to-let mortgage assets (31 March 2015: £8,749.2 million).

Buy-to-let

Total Group buy-to-let completions increased by 84.6% to £823.6 million for the period (2015 H1: £446.2 million). Paragon Bank increased its proportion of new business flows and it should be noted that at 31 March 2016 the pipeline at Paragon Bank exceeded that of the Paragon Mortgages division.

Further expansion of the Group's mortgage capacity, supported by the progress made by Paragon Bank in retail markets, facilitated lending growth in the period. This was further boosted towards the end of the half year with the introduction of a 3% Stamp Duty Land Tax ('SDLT') surcharge to landlords accelerating transactions in an effort to beat the deadline. This resulted in March 2016 having the highest number of monthly completions since the Group re-entered the buy-to-let market in 2010.

Market data continues to indicate strong and growing rental demand although UK government policy around the buy-to-let sector has become more complex. Whilst we expect that the disruption caused by the introduction of the SDLT surcharge will be short-lived, we have seen some change in customer behaviour as a result of the changes announced in the 2015 summer budget. In particular, we have experienced a marked increase in applications from incorporated landlords in recent months. This trend, combined with proposals from the Prudential Regulation Authority ('PRA') on buy-to-let underwriting standards, discussed under 'Regulation' below, will, we believe, change the competitive structure of the market going forward. These changes will favour specialist lenders such as the Group where systems, skill sets and experience are already in place to respond to more complex customer needs.

The Group tightened its buy-to-let lending criteria in January, increasing the stressed interest rate in its minimum interest coverage ratio ('ICR') test from 5.00% to 5.35% and embedding forward-looking affordability tests. This represented an early move towards the 5.50% level proposed in the recent consultation paper issued by the PRA. Similar changes by competitor lenders have been noted and more are anticipated over the coming months. The Group's criteria changes led to a depressed level of applications following their introduction which, together with the accelerating effect of the SDLT changes, resulted in the pipeline at the half year falling to £350.6 million (31 March 2015: £701.4 million). This reduced pipeline is expected to result in lower completion levels in the second half year.

The private rented sector remains the second largest form of residential tenure in England according to data in the annual Survey of English Housing for 2014-15, published in February 2016 by the Department of Communities and Local Government. This indicated that the private rented sector, comprising 19% of households, remains larger than the social rented sector (17%) with the level of owner-occupation stable. The Royal Institution of Chartered Surveyors reported that in its survey of members in March 2016, respondents continue to anticipate rents rising at an average rate of 4.5% per annum, driven by strong tenant demand.

This market sentiment has continued to drive demand for buy-to-let mortgages with Council of Mortgage Lenders ('CML') data for the six months ended 31 March 2016 indicating £25.3 billion of gross lending, an increase of 66.4% over the comparable period in the previous year (2015 H1: £15.2 billion). Strong market growth, coupled with the impact of the SDLT changes meant that this was the highest total for any six month period since 2006. Completion levels are, to a degree, exaggerated by the proportion of remortgages, which represented 55.2% of the Group's buy-to-let business in the period (2015 H1: 61.2%) and represented 52.6% of the buy-to-let market in general, according to the CML (2015 H1: 57.9%). Market data indicates that rented properties with a buy-to-let mortgage represent around 30% of property in the private rented sector, a proportion which has been stable since 2008.

The Group has been the beneficiary of growth in the buy-to-let market in recent years and has been able to capitalise on this as a result of its strong relationships in mortgage distribution and its dynamic approach to product development. In offering a comprehensive range of solutions for landlords, including those that choose to hold their properties in a corporate vehicle, we believe the business is well placed in a rapidly changing environment.

The Group's outstanding buy-to-let balances are analysed below.

During the period certain buy-to-let loans were sold from the Paragon Mortgages segment to Paragon Bank, when a securitisation transaction was repaid. This portfolio totalled £110.8 million at the end of March 2016.

At 31 March 2016 the Group's buy-to-let portfolio stood at £9,736.3 million, compared with £8,826.6 million a year earlier. The annualised redemption rate on the overall buy-to-let book, although higher than the 4.4% reported for the first half of 2015, still remains low at 9.2%. This is despite the increasing numbers of post credit crisis accounts included in the portfolio, which would be expected to redeem more quickly than the extant book. The annualised redemption rate on these loans, at 16.0% (2015 H1: 7.3%), is, as expected, approaching the levels seen before the credit crisis as the book matures. The annualised redemption rate on pre-crisis lending, at 6.7%, has increased from the 3.8% seen in the half year ended 31 March 2015. This includes an uplift in March 2016 related to the market disruption from the SDLT changes but remains comparatively low. This performance indicates that the Group's landlord customers continue to display a long-term commitment to property investment.

The Group's approach to underwriting remains robust. The focus on the credit quality and financial capability of our customers is underpinned by a detailed and thorough assessment of the value and suitability of the property as security. This was enhanced in the period by the adoption of the stricter ICR requirements described above. This approach continues to deliver market leading credit performance across historic and current lending.

The quality of new lending remains high, with a good affordability profile, low average loan-to-value ratios and strong customer credit profiles. The credit performance of the portfolio over the period continued to be exemplary, with the percentage of loans three months or more in arrears (note 6) standing at 0.14% at 31 March 2016 (31 March 2015: 0.20%, 30 September 2015: 0.19%). This remains considerably better than the CML's comparable market average of 0.56% at that date (31 March 2015: 0.74%, 30 September 2015: 0.66%).

Security values have also benefitted from the effect of increased house prices. The Nationwide House Price Index showed appreciation in residential property values of 3.1% over the six month period. The indexed loan-to-value ratio of the buy-to-let portfolio at 31 March 2016 was 69.5%, broadly similar to its level at 30 September 2015 (note 6). The Group maintains a specialist team of in-house surveyors to maximise its understanding of particular markets, both from a valuation and lettings standpoint.

The number of properties with an appointed receiver of rent reduced by 13.4% to 1,004 at 31 March 2016 (31 March 2015: 1,159), and 96.9% of the properties available for letting in the receiver of rent portfolio were let at that date (31 March 2015: 96.9%).

Other assets

The Paragon Mortgages division also includes income generated from legacy loan books. These include owner-occupied mortgages, car loans, secured consumer loans and unsecured consumer loans. These assets form a very small part of the division's results, when compared to buy-to-let assets, and performed in line with our expectations.

The values of these legacy portfolios are shown below.

The Group has returned to lending in the car finance and secured loan market through Paragon Bank. This activity is reported with that division's results.

IDEM CAPITAL

Idem Capital is one of the UK's principal consumer debt buyers and is a servicer of loans for third parties and co-investment partners. The strong performance of the division's portfolios in the six month period ended 31 March 2016 saw Idem Capital's underlying profit contribution increase by 8.1% to £25.5 million (31 March 2015: £23.6 million).

The UK debt purchase market continues to provide significant investment opportunities, with UK based financial institutions disposing of both secured and unsecured loan portfolios, either as business-as-usual sales or through deleveraging activity. The latest research by Apex Insight reported the market size in 2015 as £1.0 billion of debt sales, forecast to rise over the next five years to £1.3 billion. Secondary portfolio sales are also now coming to market in greater volumes, as investment funds seek to liquidate assets. Idem Capital continues to be an active panel member for the major UK based debt sellers and intermediaries, ensuring access to all appropriate portfolio disposal processes.

Idem Capital, working in partnership with Paragon Bank, invested £208.8 million in loan portfolio acquisitions in the period to 31 March 2016 (31 March 2015: £20.9 million). This included purchases of loan assets in which Idem Capital had previously had an interest under co-investment arrangements. The table below shows the Group's investments in purchased debt, sourced by Idem Capital, including those funded by Paragon Bank through retail deposits, at 31 March 2016.

During the period balances to the value of £102.0 million were sold by Idem Capital to Paragon Bank and the related funding was repaid.

The outstanding value of the Group's debt purchase investments at 31 March 2016 totalled £593.5 million (31 March 2015: £406.9 million). Of this balance, 64.3% related to loans secured on property.

At the end of March 2016, the 120 month gross estimated remaining collections ('ERC') for the Idem Capital portfolio stood at £509.6 million (31 March 2015: £639.2 million) (note 6). This reduction was primarily attributable to the intra-group sale of assets into Paragon Bank. ERC is a standard measure of scale in the debt purchase industry, reflecting likely future cash flows from acquired portfolios over the next ten years, which reduces over time as balances are collected. At 31 March 2016, cumulative cash receipts across the Group's portfolio acquisitions totalled 108.2% of the values predicted at the point the loans were acquired (31 March 2015: 105.8%).

The acquisition of loan portfolios during the period has resulted in the number of loan assets owned by Idem Capital increasing to 293,024 at 31 March 2016 (31 March 2015: 212,346). After taking into account portfolio run-off, acquired accounts under Idem Capital management increased by 44.8%. Total accounts under Idem Capital management (including third-party serviced assets) increased by 11.1% in the twelve months ended in March 2016.

The division utilises the Group's highly developed loan servicing and collection capability both for its own purchases and for co-invested and third party assets. The Group has invested heavily in its compliance infrastructure and the division's operational activities are regulated through Paragon Finance PLC, which achieved full authorisation from the FCA under the CONC regime in March of this year.

During the period, Idem Capital successfully raised external finance for both its secured and unsecured portfolios, optimising leverage against these portfolios on more favourable terms. In addition, a partial sale of Idem Capital's secured loan portfolio to Paragon Bank contributed to improving the leverage and funding terms across the Group's acquired portfolios. This is discussed further in the funding report below.

PARAGON BANK

The six months to March 2016 represented a period of rapid development for Paragon Bank. In addition to its deposit book more than doubling to just over £1.4 billion, the Bank also broadened its product offerings, acquired loan portfolios and completed the acquisition of Five Arrows Leasing Group, marking its entry into the important asset finance market. The Bank also reported its first underlying profit during the period. The income generated from purchased portfolios progresses the Bank's objective of being viable and sustainable in its own right and also enabled it to acquire assets subsequently approved by the Bank of England for pre-positioning purposes.

Profit before tax of £5.1 million (before costs related to the acquisition of £2.5 million) generated by the asset finance business offset the continuing costs of organic development of the Bank's business. This resulted in the Bank reporting an underlying profit for the period of £1.7 million (2015 H1: £4.4 million loss).

Paragon Bank funds its new lending advances and pipeline though savings deposits. The cost of these funds is discussed further in the funding report below. The Bank's funding position at 31 March 2016 is summarised below.

The scale now achieved by Paragon Bank reduces the inefficiencies seen during its start-up phase, when deposit levels were dictated by pipeline requirements as well as income generating asset balances. This more efficient liquidity profile enhances profitability and creates a more normal relationship between deposit levels and the size of the loan portfolio.

The Group provided capital of £153.0 million to Paragon Bank during the period (2015: £nil), £121.0 million to provide funding for external investment and £32.0 million to support organic growth, and its policy is to provide the Bank with sufficient capital to cover its planned requirements over each twelve month period.

Paragon Bank has invested heavily both in the development of the risk and compliance structure required for regulatory purposes and to nurture organic growth across its business lines. All of these lines remain relatively immature and as they grow the Bank will naturally increase the utilisation of the present fixed cost base improving its overall cost effectiveness.

In addition to Paragon Bank providing a diversified funding base for the Group, its second strategic objective is to diversify the Group's income flows. At 31 March 2016 the Bank financed £638.8 million of assets other than buy-to-let mortgages, representing 44.3% of its balance sheet loan assets (31 March 2015: £23.5 million, 27.5%). An analysis of the Bank's loan portfolio is summarised below:

As well as entering the asset finance market through acquisition, Paragon Bank also launched a development finance offering during the review period. It continues to investigate further opportunities for development, both organically and by acquisition, where these match its risk appetite.

Buy-to-let

Paragon Bank continues to increase its buy-to-let lending, with £344.1 million of advances made (2015 H1: £61.9 million), representing 41.8% of the Group's total buy-to-let advances (2015 H1: 13.9%). At the end of the period its buy-to-let pipeline stood at £199.1 million (31 March 2015: £207.7 million). There have been no accounts over three months in arrears on business written by the Bank up to 31 March 2016 (2015 H1: none). The buy-to-let market is discussed in more detail under 'Paragon Mortgages' above. The products originated by the Bank are complementary to those offered by Paragon Mortgages and are operated across all brands.

In addition to newly originated assets, Paragon Bank acquired the portfolio of loans previously financed in the Group's Paragon Mortgages (No. 17) PLC securitisation. This portfolio, which stood at £110.8 million at 31 March 2016, contained well-seasoned loans which the Bank has pre-positioned with the Bank of England.

Car finance

Car finance volumes have continued to build, with total advances of £41.2 million in the half year (2015 H1: £15.7 million). Paragon Bank's car finance loan book was 69.9% higher than at the start of the period at £73.4 million. The quality of these loans remains high and the percentage of the Bank's car finance accounts which were more than two months in arrears at 31 March 2016 was 0.09% (31 March 2015: none).

Personal finance

The personal finance balances shown below comprise second charge mortgage assets originated by Paragon Bank or purchased by it from third parties or other Group entities:

The second charge mortgage market experienced further growth over the period with new business volumes for the six months ended 31 March 2016 showing a year on year increase by value of 33.4% to £479 million (2015 H1: £359 million) according to Finance and Leasing Association ('FLA') data. At the same time the average value of new second charge mortgage loans continued to rise, reaching £44,500 (2015 H1: £38,000), an increase of 17.1%.

Paragon Bank's advances in the half year were £26.0 million (31 March 2015: £3.8 million), and the pipeline of new business at the period end was £11.5 million (31 March 2015: £1.0 million). The average loan size is just over £53,000 and the average loan to value ratio is 63%. None of the Bank's originated second charge mortgage accounts were in arrears at 31 March 2016 (31 March 2015: none).

Debt purchase opportunities are sourced through the Group's Idem Capital debt purchase operation, where potential asset purchases fit with Paragon Bank's risk appetite and business model, thereby broadening the scope of both parts of the Group. During the period the Bank has also purchased certain personal finance balances, formerly disclosed in the Idem Capital segment. The UK debt purchase market is discussed further under 'Idem Capital' above.

Paragon Bank's purchased second charge mortgage assets were of high quality at the acquisition date and at 31 March 2016 only 4.22% of these accounts were two months or more in arrears, compared to an industry average of 13.4% reported by the FLA.

Second charge mortgages became regulated under the FCA's 'Mortgages: Conduct of Business' ('MCOB') regime on 21 March 2016 with Paragon Personal Finance completing the required systems enhancements, procedural developments and employee training during the period.

Asset finance

The Group acquired its asset finance business on 3 November 2015. This represents a significant strategic broadening of Paragon Bank's scope into the SME asset finance market and provides an attractive opportunity to deliver growth, addressing a different market to its existing offerings. During the period this business has added £5.1 million to the Bank's profits, before acquisition related costs of £2.5 million.

Paragon Bank Asset Finance was formed, as Five Arrows Leasing Group, in 1988 and was owned by Rothschild & Co from 1996 until its sale to the Group. It offers a range of asset finance products through its subsidiaries to UK SMEs, including equipment, vehicle and construction equipment finance and is also a provider of lease servicing.

The FLA reports the total market for asset finance for businesses at 31 March 2016 covered £60.4 billion of outstanding balances, an increase of 10.0% over the preceding twelve months (31 March 2015: £54.9 billion). Advances in that market in the year then ended were £19.4 billion, an increase of 9.0% on the £17.8 billion recorded in the previous year.

The finance lease assets acquired with the business were £209.1 million (note 5b), which had risen to £224.9 million by the period end, an increase of 7.6%, as a result of new advances in the period since acquisition of £57.7 million. The finance lease assets generated interest income of £10.7 million in the period and its operating lease activities generated a further £3.1 million. The asset finance business generates operating lease income from a fleet of vehicles with a book value of £8.8 million at the end of the period (£7.6 million at acquisition), with £1.5 million of new contracts initiated in the period. The number of loan accounts more than two months in arrears at 31 March at 1.23% remained very low (0.94% at acquisition).

The asset finance team is highly regarded, has a strong credit ethos and has a good cultural fit within the Group's wider business. The development of the current team and infrastructure will be supported by Paragon Bank and will provide the building blocks for further SME finance development, organically and, potentially, by further acquisitions. The current product suite addresses several distinct segments of the SME market, including some specialised niches, and has several growth opportunities in adjacent spaces.

Other loan assets

The other loan assets included in the Paragon Bank segment are set out below.

The development finance balance represents the first advances through the Group's new operation to provide funding for small scale developments. The proposition launched during the period and has developed a strong network of relationships within the market that are expected to drive sustained growth, focussed on a robust assessment and credit proposition.

The factoring business supports the current customer base within the asset finance business and is well positioned to continue that support and to expand to new customers. The other loan balances above represent legacy portfolios of the acquired business.

* Factoring balances are agreed on a revolving basis and therefore it is not appropriate to quote an advances figure alongside those for other loan types.

Savings

The UK savings market continues to grow strongly, with household balances (including cash ISAs) reported by the Bank of England increasing by over £24.0 billion to £1,056.3 billion in the six months to 31 March 2016 (30 September 2015: £1,031.8 billion). This strong supply has helped to maintain the recent trend for low savings rates with the average annual interest on two year fixed interest bonds, reported by the Bank of England, having declined from 1.54% in September 2015 to 1.10% in March 2016.

Paragon Bank's retail deposits at 31 March 2016 had reached £1,426.4 million (30 September 2015: £708.7 million). The Bank's savings proposition provides customers with a range of transparent deposit options, offering value for money. This also provides the Bank with a stable funding platform, with a focus on attracting term funding to manage interest rate risk and often limiting product availability for short periods of time.

Our straightforward approach and consistently competitive products have been recognised in the industry and by our customers and Paragon Bank was nominated as a finalist for the Best Online Savings Provider award by Moneyfacts for the second consecutive year in October 2015.

Following the period end the Bank launched its first ISA product, initially to existing customers. This represents a significant broadening of the Group's offering into a key part of the UK savings market, with ISA accounts representing £265.5 billion, or 25.1%, of the savings balances reported in the Bank of England data at 31 March 2016.

In customer feedback 93% of those opening a savings account with Paragon Bank between October 2015 and March 2016, who provided data, rated the overall savings process as 'good' or 'very good', while 85% stated that they would 'probably' or 'definitely' take a second product with the Bank.