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2015 Third Quarter Shareholder Letter


November 3, 2015 

Dear Fellow Shareholder:

We are pleased to report a successful 3rd quarter of 2015.  During the quarter the team at Paragon produced a revenue record, the highest total loans in our history, an improved net interest margin, and a 57% drop in nonperforming assets.  Paragon returned to profitability, and with the continued progress of the Small Business Capital Group, we made significant strides toward our goal of sustained above-peer profitability.  Some of the highlights of the 3rd quarter include:      

Balance Sheet

·       On an annualized basis, gross loans increased 9.2%, or $5.4 million, during the quarter to $237.5 million.  During the first nine months of 2015, gross loans increased $22.3 million, or 10.4%.  Loan growth during 2015 has been in several areas of the bank with the Small Business Capital Group providing the largest increase. 

·       Through September 30, as a result of executing our asset-liability plan, the year-to-date average balance of investment securities has dropped 21.3%, from $52.8 million in 2014 to $41.6 million in 2015.  Paragon is forgoing near-term income from investments and continues to keep our investment portfolio at conservative levels.  As a result, through September 30, income from investments is $228 thousand less than the first nine months of 2014.  This will continue for the foreseeable quarters but it should be offset by other sources of revenue.   

·       Over the first nine months of 2015, total deposits have increased 8.0% while core deposits have increased 3.3%.  Paragon has used temporary sources to fund the recent loan growth but anticipates core funding will be used over the long term.  Demand deposits, our least expensive source of funding, have grown 18.7% during 2015.

Income Statement

·       Through the first nine months of 2015, net interest income, adjusted for the one-time $287 thousand recovery that was recognized during the first nine months of 2014, remained relatively flat.  The increase in loan income due to increased loan volume was offset by the reduced income on the investment portfolio. 

·       The net interest margin for the third quarter of 2015 increased to 3.67% from 3.60% during the second quarter of 2015.  The improvement was due to several factors including an increase in loan yield produced by the new volume of Small Business Administration (SBA) loans.

·       Total revenue for the quarter ended September 30, 2015, was a record $3.3 million, an increase of 3.1% over the second quarter and 11.8% over the third quarter of 2014.  Year-to-date revenue through nine months of 2015 has also increased 10% over the same period in 2014.  For the first three quarters of the year, the percentage of revenue from noninterest income increased from 11.7% in 2014 to 22.75% in 2015 

·       Noninterest income for the third quarter of 2015 was 35.8% higher than the third quarter of 2014.  Year-to-date noninterest income through September 30, 2015, was 119.9% higher than the same period in 2014.  For the first three quarters of 2015, core noninterest income, which excludes security gains, OREO (Other Real Estate Owned) income and expense, and trading asset gains and losses, increased 82.3% over the same period in 2014.  All major categories of noninterest income increased including SBA income ($676 thousand), mortgage income ($167 thousand), and solutions product income ($67 thousand).     

·       Based on loans approved by the Small Business Administration, Paragon was the leading SBA lender based in Tennessee for the fiscal year ended September 30, 2015.  Over that period of time, Paragon’s Small Business Capital Group has had $41.9 million in SBA loans approved by the SBA.  They have closed $29.9 million of loans, many of which are still funding as construction projects continue.  We continue to be encouraged by the quality of our team and the loan pipeline, approvals, and closings.  

·       Noninterest expense for the 3rd quarter of 2015 increased 17.5% over the third quarter of 2014, and for the first nine months of this year has increased 30% over the first nine months of 2014.  The vast majority of these increases have been due to the startup of the Small Business Capital Group.  Excluding the expenses of the Small Business Capital Group, noninterest expense would have increased 4.1% over the same quarter of last year and 5.7% over the first nine months of last year.  

Asset Quality

·       Nonperforming assets dropped 57% during the 3rd quarter from $5.7 million to $2.5 million.  Two large relationships were resolved during the quarter with no loss to Paragon.  The ratio of nonperforming assets to total assets dropped from 1.94% at June 30 to 0.84% at September 30.

·       Although asset quality has continued to improve, a provision for loan loss of $82.5 thousand was made due to the increase in loan volume.

As you have read, the third quarter of 2015 was a very strong quarter.  We credit this success to the efforts of our great team of Paragon employees.  We take great pleasure in the satisfaction with our workplace expressed by our team.  Paragon was named a finalist for Memphis Business Journal’s Best Places to Work during the 3rd quarter.  Memphis Business Journal partners with Quantum Workplace, a national research firm, to determine Memphis’ Best Places to Work.  Employees of all nominated companies participated in an anonymous employee engagement survey which included numerous closed- and open-ended questions. 

Memphis Business Journal brought back the Best Places to Work competition this summer.  Previously, the competition was held during 2005-2008.  Paragon is one of two businesses in Memphis that have been finalists in every year the Memphis Business Journal has held this competition.  We are the only business that has won the award three times.  Our corporate philosophy is that our employee-owners are our top priority.  As shareholders, we believe that a healthy workplace attracts talented team members who provide exceptional customer service and long-term profitability for our shareholders.



Robert S. Shaw, Jr.                              Michael A. Edwards                                 Lewis W. Perkins, III

Chief Executive Officer                    President and Chief Operating                    Chief Financial Officer


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