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Paragon News

A Letter to Our Shareholders

Memphis, TN - August 08, 2011

We are pleased to report net income of $215 thousand or $.06 per share for the quarter ended June 30, 2011, which compares very favorably to a net loss of $218 thousand or ($.06) per share for the quarter ended June 30, 2010. Net income was $319 thousand for the first half of 2011 or $.09 per share versus a loss of $836 thousand and ($.23) per share during the same period in 2010. The improvement in our performance can be attributed to increasing the core earnings capacity of Paragon by increasing net interest income, increasing fee income, and reducing expenses.

Net interest income increased $162 thousand to $2.2 million for the second quarter of 2011 compared to $2.1 million during the same quarter in 2010.  The increase in net interest income was primarily related to declining interest expense.  Total interest expense was $565 thousand for the latest quarter compared to $918 thousand during the second quarter of 2010, which is a reduction of $353 thousand or 38 percent. The average rate paid for deposits during the second quarter of 2011 was 1.19 percent compared to 1.82 percent during the same quarter of 2010.  The change in the rate paid for deposits helped drive our net interest margin higher, from 3.36 percent during the second quarter of 2010 to 3.70 percent for the same period during 2011.  
  
Total fee income was $218 thousand for the second quarter of 2011 compared to $829 thousand for the prior year period.  The larger figure in 2010 included $444 thousand in gains realized from the disposition of investment securities compared to only $83 thousand during the second quarter of 2011.  Additionally the second quarter of 2011 was impacted by a charge of $123 thousand related to fluctuations in the value of the bank’s interest rate cap, which decreases in value when short-term interest rates decline.  The interest rate cap is used to hedge against rising interest rates and to protect the bank’s net interest income in case of an extreme upward movement in interest rates because of inflation or tightening by the Federal Reserve.  The mortgage division originated $5.0 million in loans and recorded $76 thousand in fee income for the second quarter of 2011.  Service charge income increased 9 percent to $124 thousand for the second quarter of 2011 compared to $114 thousand during the same period in 2010.  
  
For the second quarter of 2011, Paragon’s overhead was $2.2 million, a decline of $172 thousand or 7 percent from the same period in 2010.  The decline was driven primarily by reductions in regulatory assessments and deposit insurance premiums.  This figure totaled $196 thousand during the quarter ended June 30, 2011, versus $327 thousand during the same time in 2011.  Personnel expense remained steady and totaled $1.1 million for the second quarter of 2011.  Occupancy expense, which is our second largest expense category, fell 5 percent to $417 thousand for the second quarter of 2011 compared to $439 thousand for the same period in 2010.   
  
Paragon finished the quarter with total assets of $255.8 million, net loans of $186.3 million, and total deposits of $222.8 million.  Total assets have increased 4 percent or $8.9 million from December 31, 2010.  During the first half of 2011, loans have increased $3.3 million while deposits increased $9.0 million.  The increase in deposits came primarily from stronger levels of non-interest bearing demand deposits and money market accounts. Total non-interest bearing demand deposits totaled $37.9 million at June 30, 2011, compared to $28.4 million at December 31, 2010, an increase of 33 percent. This is another reason our net interest margin and income have expanded to near record levels.        
  
We continue to see improvement in asset quality as non-performing loans and assets decline and the inflow rate of problem loans has stabilized.  Nonperforming assets, which include non-performing loans and foreclosed real estate, totaled $16.3 million, or approximately 6 percent of total assets at June 30, 2011, compared to $18.7 million, or approximately 8 percent of total assets, at December 31, 2010. Non-performing loans totaled $11.2 million at June 30, 2011, compared to $13.2 million at December 31, 2010, and $9.3 million at June 30, 2010. Paragon resolved $638 thousand in non-performing assets during the second quarter of 2011 compared to $5.2 million during the first quarter of 2011.  Since October of 2008, Paragon has resolved over $30.1 million in non-performing assets with a loss ratio of only 14 percent. 
  
It is important to note that approximately $7.1 million or 65 percent of our non-performing loans were not past due but current with payments and contractual terms as of June 30, 2011. Paragon has chosen not to accrue interest on these loans because they are mainly collateral dependent and secured by real estate.  In almost every case, these borrowers are performing, and we anticipate that, with some seasoning, there is potential to upgrade these loans. 
   
During the second quarter approximately 181,700 shares of the bank’s common stock traded for prices ranging from $1.75 to $2.40 per share.  Our tangible book value per share improved to $7.04 per share at June 30, 2011, up $.29 per share from $6.73 at December 31, 2010.  
  
At our recent strategic planning session, the board was extremely pleased with the bank’s progress, and we are enthusiastic about the future and the opportunities we believe will be available to our bank because of our strong capital position, our brand, and our commitment to the community banking model. We are deeply grateful for your involvement with Paragon National Bank. You are our best source of referrals for our products and services. Please continue referring your family, friends, and associates to one of our locations and thus enhance the value of your investment. 
  
  
Respectfully, 
Robert S. Shaw Jr.                                  
President/Chief Executive Officer              
  
  
  
  
Cautionary Statement Regarding Forward-Looking Statements 
  
Certain statements in this letter include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally can be identified by the use of forward-looking terminology, such as "may," "will," "expect," "estimate," "anticipate," "believe," "target," "plan," "project" or "continue" or the negatives thereof or other variations thereon or similar terminology, and are made on the basis of management's plans and current analyses of Paragon National Bank (the "Company"), its business and the industry as a whole. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, economic conditions in the Memphis market, the bank's short operating history, its startup losses, possible borrower credit problems, potential loss of key executives and employees, competition, interest rate sensitivity and exposure to regulatory and legislative changes. The above factors, in some cases, have affected, and in the future could affect the Company's financial performance and could cause actual results for the current fiscal year and beyond to differ materially from those expressed or implied in such forward-looking statements. The Company does not undertake to publicly update or revise its forward-looking statements.

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