Paragon Banking : Pillar III Disclosures YE 30 September 2022

Paragon Banking Group PLC

Pillar III Disclosures - 30 September 2022

Contents

1.	Introduction	Page 3
2.	Key metrics	Page 7
3.	Risk management	Page 12
4.	Scope of application	Page 23
5.	Own funds	Page 32
6.	Countercyclical capital buffer	Page 39
7.	Leverage ratio	Page 40
8.	Liquidity requirements	Page 44
9.	Exposures to credit risk and credit quality	Page 50
10.	Credit risk mitigation	Page 59
11.	Standardised approach to credit risk	Page 61
12.	Exposures to counterparty credit risk	Page 64
13.	Exposures to securitisation positions	Page 69
14.	Standardised approach and internal model approach for market risk	Page 72
15.	Exposures to interest rate risk positions not held in the trading book	Page 74
16.	Operational risk	Page 78
17.	Remuneration policy	Page 81
18.	Encumbered and unencumbered assets	Page 88
19.	IRB approach for credit risk	Page 93
20.	Glossary	Page 94

Paragon Banking Group PLC

51 Homer Road, Solihull, West Midlands, B91 3QJ

Registered number: 2336032

LEI: 213800S1TDKIB1IUTS72

CAUTIONARY STATEMENT

Sections of this Pillar III disclosure 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 statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as 'anticipate', 'estimate', 'expect', 'intend', 'will', 'project', 'plan', 'believe', 'target' and other words and terms of similar meaning in connection with any discussion of future operating or financial performance but are not the exclusive means of identifying such statements. 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 or revise these forward-looking statements for any reason other than in accordance with its legal or regulatory obligations (including under the UK Market Abuse Regulation, UK Listing Rules and the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority ('FCA')).

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 that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. There are also 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. As a result, you are cautioned not to place reliance on such forward-looking statements as a prediction of actual results or otherwise.

These factors include, but are not limited to: material impacts related to foreign exchange fluctuations; macro-economic activity; the impact of outbreaks, epidemics or pandemics, and the extent of their impact on overall demand for the Group's services and products; potential changes in dividend policy; changes in government policy and regulation (including the monetary, interest rate and other policies of central banks and other regulatory authorities in the principal markets in which the Group operates) and the consequences thereof; actions by the Group's competitors or counterparties; third party, fraud and reputational risks inherent in its operations; the UK's exit from the EU; unstable UK and global economic conditions and market volatility, including currency and interest rate fluctuations and inflation or deflation; the risk of a global economic downturn; acts of terrorism and other acts of hostility or war and responses to, and consequences of those acts; technological changes and risks to the security of IT and operational infrastructure, systems, data and information resulting from increased threat of cyber and other attacks; general changes in government policy that may significantly influence investor decisions (including, without limitation, actions taken in support of managing and mitigating climate change and in supporting the global transition to net zero carbon emissions); societal shifts in customer financing and investment needs; and other risks inherent to the industries in which the Group operates.

Nothing in this Pillar III disclosure should be construed as a profit forecast.

1. Introduction

This section sets out

• An introduction to the Group
• An overview of the disclosure framework under which this document is prepared
• A summary of the Group's Pillar III disclosure policies
• A summary of the scope and basis of preparation for this document
• A summary of changes made since the Group's last Pillar III disclosures
• A summary of the approval process for the document

Paragon Banking Group PLC (the 'Company') is a UK specialist banking group, sourcing funds in the retail deposit market and lending to consumers and smaller corporates. It is subject to banking regulation and therefore is required, under UK banking regulations, to publicly report on risk and governance matters for each financial year. This expands on the disclosures already required to be given in an entity's annual report and accounts.

This document, referred to as a Pillar III report, is intended to satisfy those requirements. An overview of the disclosures given by theme is shown on page 5.

The Group

The Company controls a group of companies (together the 'Group') including a regulated bank, Paragon Bank PLC (the 'Bank'). 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:

• Mortgage Lending, 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

Each division is responsible for the generation of new business with servicing and the majority of other support functions managed on a group-wide basis.

On 18 February 2014 the Bank was authorised by the Prudential Regulation Authority ('PRA') and is regulated by the PRA and the Financial Conduct Authority ('FCA'). The PRA sets requirements for the Bank relating to capital and liquidity adequacy.

Disclosure framework

The Group is regulated for prudential capital purposes under the Basel III regime, the international regime governing capital maintenance in banks, which is supervised by the Basel Committee on Banking Supervision ('BCBS'). In the UK this regime is enforced through the PRA Rulebook (the 'Rulebook'), following the implementation of the Financial Services Act 2021 on 1 January 2022. Formerly these rules were applied on a European Union ('EU') basis through the fourth Capital Requirements Directive ('CRD IV') and the first Capital Requirements Regulation ('CRR') (Regulation 575/2013). Certain aspects of this EU legislation remain applicable in the UK.

The Company has been operating under the Basel III regime since the authorisation of the Bank in 2014.

Page 3

Paragon Banking Group PLC • Pillar III Disclosures - 30 September 2022

The Basel III approach consists of three elements, or 'Pillars', which represent the key principles of the regime:

Pillar I

Pillar II

Pillar III

This covers the minimum capital requirements of Basel III. The calculation is based on a risk based approach. It focuses on credit, operational and market risk in determining the Group's Minimum Capital Requirement ('MCR'), based on a standard 8% of its risk weighted assets.

This requires that the Group conducts an Internal Capital Adequacy Assessment Process ('ICAAP') which is subject to review by the PRA under the Supervisory Review and Evaluation Process ('SREP').

In the ICAAP the Company's Board undertakes an assessment of the key risks facing the Company's business against which capital has not been provided under Pillar I to determine whether additional regulatory capital, over and above the 8% Pillar I requirement, should be held, based on the identified risks and the quality of the risk management processes in place.

A firm's Individual Capital Requirement ('ICR') is set by the PRA based on the ICAAP.

Pillar III complements Pillars I and II and aims to encourage market discipline by setting out disclosure requirements which should allow market participants to assess key pieces of information on a firm's capital, risk exposures, risk management processes and remuneration.

These requirements are set out in the Disclosure (CRR) Part of the Rulebook.

The regulatory approach to Pillar III was changed in the year, with standardised templates set for all disclosure items and included in the Rulebook. The majority of this report comprises these templates, all of which are labelled in accordance with the Rulebook.

The Group has adopted the Standardised Approach ('SA') for credit risk and the Basic Indicator Approach ('BIA') for operational risk. It has submitted an application for authorisation to adopt an Internal Ratings Based ('IRB') approach for credit risk in future periods. These choices impact on which disclosures are required under Pillar III.

Pillar III disclosure policy

The Company's Pillar III disclosures cover the Group as a whole, comprising the Company and all its subsidiary undertakings. They are therefore prepared on the same basis as the Group's consolidated accounts. These bodies are regulated on a consolidated basis and this disclosure treats them as such. References to the Group in this document therefore include the Bank.

The Company's Disclosure Policy for Pillar III is based on its Board of Directors' interpretation of the requirements of the Disclosure (CRR) Part of the Rulebook.

The Group is defined as an 'Other Institution' under these rules (i.e. neither Large nor Small and Simple) having a balance sheet of less than €30.0 billion but greater than €5.0 billion. Its disclosure requirements are therefore set out in Article 433c of the Rulebook. This requires that the Group produces an annual Pillar III report and a summary Pillar III on a half yearly basis.

There are certain disclosures that are only required by the Rulebook where an institution is large or an LREQ firm, as defined by the PRA Rulebook. The Group's balance sheet size is too small to be classified as large or to fall within the LREQ rules on leverage. Therefore these have not been presented for the Group and this is stated under the relevant sections within the report.

The level of disclosure on remuneration matters is subject to proportionality rules set out in PRA SS2/17 'Remuneration'. Institutions are divided between level one, level two or level three based on their total assets, which determines the amount of detail required in these disclosures. The Group is a proportionality level two bank as its average total assets exceed £13 billion but do not exceed £50 billion. A number of templates in the PRA rulebook apply only to proportionality level one banks ('Level 1 banks') and therefore are not applicable to the Group. This is noted under the applicable sections within the report.

The Pillar III disclosures are updated on an annual basis using the Group's year end date of 30 September, following publication of the Annual Report and Accounts. A half-yearly summary using the Group's half-year date of 31 March is also provided. The annual and half- yearly reporting process will include consideration of regulatory changes and developing best practice, to ensure that disclosures remain appropriate. More frequent disclosures will be made if there is a material change in the nature of the Group's risk profile during any particular year.

Pillar III disclosures are prepared with input from the Finance, Risk, Treasury and Human Resources functions, and from regulatory specialists. They are reviewed at senior and executive management level, considered by the Audit Committee and approved by the Board of Directors in the same way as the Group's half-year and Annual Report and Accounts for the year.

Pillar III regulatory capital disclosures are published on the investor relations section of the Group's corporate website www.paragonbankinggroup.co.uk, alongside the Annual Report and Accounts for the year. Both documents are published on the website at approximately the same time, in accordance with the requirement in Article 433 of the Rulebook to publish the Pillar III disclosures in conjunction with the date of publication of the financial statements.

The Company's Pillar III disclosure policy is considered annually to ensure that it remains appropriate in the light of new regulations and emerging best practice.

The Company's Pillar III regulatory capital disclosure policies were approved by the Board of Directors in February 2015 and have been confirmed annually, most recently in December 2022 on the approval of this document.

Page 4

Paragon Banking Group PLC • Pillar III Disclosures - 30 September 2022

Scope and basis of disclosure

This Pillar III disclosure has been drawn up in conjunction with the Annual Report and Accounts of the Group for the year ended 30 September 2022 ('the Group Accounts') and with the Group's regulatory reporting for the year.

The figures in this Pillar III disclosure are consistent with the Group Accounts, but do not form part of the Group Accounts. The disclosures presented have been reviewed internally but have not been externally audited. The disclosures are also consistent, where appropriate, with regulatory disclosures submitted to the regulator.

The Rulebook requires that all disclosures required by the Disclosure (CRR) Part are provided in a single location, therefore requirements may not be addressed by cross-reference to other public documents. This is a change applying for the first time in the current year.

The Group consolidation for regulatory purposes is the same as that used for statutory purposes and hence all subsidiary undertakings within the Group have been consolidated in the Pillar III disclosures. These are listed in section 4 - Scope of Application, template UK LI3.

The Pillar III disclosures have been prepared for the Group as a whole, in accordance with the rules laid out in Articles 431 to 451 of the Disclosure (CRR) Part of the Rulebook and having regard to materiality as described above.

The disclosures provide information on the capital adequacy and risk management processes of the Group. These disclosures have been compiled on the most appropriate basis for this purpose and following the instructions on calculation and classification given in the Rulebook. Therefore they may not agree directly with disclosures addressing similar matters presented in the Group Accounts.

Overview of disclosures

Under the new PRA Rulebook 'Disclosure (CRR)' part, the disclosures are set out in prescribed templates which are required to be presented in their entirety within the Pillar III report. For the purpose of this document these disclosures and their applicable templates have been grouped thematically, as illustrated below.

Pillar III document overview

Pillar III

disclosures

Key Metrics	Risk	Scope of	Risk	Own Funds	Leverage	Remuneration
and Overview	management	Application	categories	Ratio

Section 2	Section 3	Section 4

Section 5

Section 7

Section 17

Liquidity	Credit Risk	Counterparty	Securitisation	Interest rate	Operational	Encumbrance	Countercyclical
risk	credit risk	risk	Risk	buer

Section 8

Section 9

Section 12

Section 13

Section 15

Section 16

Section 18

Section 6

Credit Risk	Standardised	IRB Approach
Mitigation	Approach
Section 10	Section 11	Section 19

Page 5

Paragon Banking Group PLC • Pillar III Disclosures - 30 September 2022