May 5, 2016
Dear Fellow Shareholder:
The first quarter of 2016 was the most profitable quarter in Paragon’s history. Net income for the quarter was $418,835, which compares to a loss of $152,839 for the first quarter of 2015 and to an income of $269,147 for the fourth quarter of 2015. For the quarter, return on equity was 4.99% while return on assets was .54%. The improvement in earnings was caused primarily by income from increased loan volume, income from the Paragon Small Business Capital Group, and interest recovered on a previously charged-off loan.
Highlights of the 1st quarter included:
- Paragon had its highest quarterly revenue in our history during the first quarter. Total revenue increased to $4.2 million, which compares to the previous record during the 4th quarter of 2015 of $3.5 million and is an increase of 19%. Revenue was 40.7% higher than the first quarter of 2015.
- The net interest margin for the first quarter of 2016 was 4.13%, which compares to 3.90% for the fourth quarter of 2015 and 3.59% for the first quarter of 2015. Excluding the large interest recovery recognized during the quarter, the net interest margin was 3.91%.
- Noninterest income, which totaled $1.2 million, was 65.4% greater than the 4th quarter of 2015 and 91.8% higher than the first quarter of 2015. Income from the Small Business Capital Group increased to $716 thousand, which was 70.6% higher than the 4th quarter of 2015. Other areas that caused noninterest income to increase during the 1st quarter included a 36.2% increase in mortgage banking income and a 31.5% increase in Solutions Income, which includes Paragon’s wealth insurance, Business Manager, and payroll revenue.
- In addition to stronger-than-budgeted revenue for the first quarter of 2016, the Small Business Capital Group continues to have greater-than-expected loan approvals from the U.S. Small Business Administration (SBA) and pipelines. Both of these metrics point toward very favorable trends for the remainder of 2016. In addition, Paragon recently received approval to participate in the Preferred Lenders Program (PLP) from the SBA. PLP status will expedite loan approval and improve customer service for our small business customers.
- For the first quarter, noninterest expense totaled $3.2 million, which was less than 1%, or just $19 thousand higher than the first quarter of 2015.
- During the first quarter, core income, which excludes security gains and losses, OREO gains and losses, loan loss provisions, and other nonrecurring income and expenses, increased 34% over the fourth quarter of 2015.
- During the first quarter, gross loans increased $15.6 million, or 6.3%, from $245.6 million to $261.1 million. Paragon Small Business Capital Loans increased 70.8%, or $12.5 million.
- Total deposits increased $13.1 million, or 5.2%, during the first quarter from $251.3 million to $264.4 million.
- Due to usual seasonal fluctuations, demand deposits increased only 1.4% during the first quarter, but demand deposits have increased $7.4 million, or 13.3%, over the last twelve months.
- Book value per share increased from $7.94 to $8.09 during the first quarter of 2016. Capital levels remain strong and sufficient to support our growth.
- The ratio of nonperforming assets to total assets was .78% at March 31, 2016, slightly higher than the ratio of .69% at December 31, 2015, but still below the healthy benchmark of 1%. The reason for the slight increase was that one first-mortgage residential loan was placed on nonaccrual during the first quarter.
- At March 31, 2016, the ratio of the allowance for loan losses to gross loans was 1.32%. This ratio increased from 1.17% at December 31, 2015, due to provisions for loan growth and recoveries of previously charged-off loans.
During the first quarter we were pleased to start up a new division, Specialty Lending. This division, headed by veteran banker Thomas “Tee” Shipmon, makes short-term build-out loans to franchises where the borrower has a commitment for permanent SBA financing from another lender.
During 2016 Paragon has added three new members to the Board of Directors: Rudi Scheidt, Jr., Chairman of Bridge Capital Asset Funding; Anita Vaughn, former Chief Executive Officer of Baptist Memorial Hospital for Women; and Steve Bargiacchi, Chief Executive Officer of ProTech Systems Group. Each of these individuals brings added strength to your Board of Directors. Please join us at our annual shareholders’ meeting on May 19, 2016, to meet these new board members and to get an update on our 2015 performance and our first quarter 2016 results.
Robert S. Shaw, Jr. Michael A. Edwards Lewis W. Perkins, III
Chief Executive Officer President and Chief Operating Officer Chief Financial Officer