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2nd Quarter 2016 Shareholder Letter

08-03-16

ugust 3, 2016

Dear Fellow Shareholder:

The second quarter of 2016 marked another quarter of record profitability for Paragon.  Net income for the second quarter increased more than 29% over the first quarter of this year.  Net income was $541,942 compared to net income of $418,835 during the first quarter and a loss of $88,467 during the second quarter of 2015.  Year-to-date through the first six months of 2016, net income was $960,778 compared to a loss of $241,306 during the first six months of 2015.  Compared to the first six months of 2015, 2016 revenue is up 42% while expenses have increased less than 3%.  As you may recall, the losses in 2015 were related to starting up the Small Business Capital Group, which is now paying substantial returns and is expected to continue those returns in the future.

Highlights of the 2nd quarter included:

Income Statement

  • Revenue for the second quarter of 2016 was a record $4.6 million compared to $4.2 million during the first quarter of this year and $3.2 million during the second quarter of 2015. 
  • The net interest margin for the second quarter of 2016 was 4.06% compared to 3.91% during the first quarter excluding a larger interest recovery that was recognized.
  • Noninterest income was almost 29% higher during the second quarter than during the first quarter of 2016.  Noninterest income was more than 106% higher than during the second quarter of 2015 and almost 100% higher during the first six months of 2016 compared to the first six months of 2015. 
  • Over the first six months of this year, core noninterest income was 101% higher than the first six months of 2015.  Revenue from the Small Business Capital Group was up $1.4 million, or 281%, over the first six months of 2015. 
  •  During the second quarter, core income, which excludes security gains and losses, gains and losses on the sale of foreclosed real estate, loan loss provisions, and other nonrecurring income and expenses, increased more than 51% over the first quarter of this year.
  • Noninterest expense for the second quarter increased 4.78% over the second quarter of 2015.  Year-to-date, noninterest expense has increased 2.72% over the prior year. 
  • The efficiency ratio improved from 77.29% during the first quarter of this year and 103.70% during the second quarter of last year to 75.59% during the second quarter. 

Balance Sheet

  • Gross loans increased $10.1 million during the second quarter and have increased $25.6 million through the first six months of 2016.  So far this year, loan growth from the Small Business Capital Group has been $12.1 million, while the remainder of the bank’s loan growth has been $13.5 million.  Year-to-date, loans have increased 10.4%, or 21% on an annualized basis. 
  • Year-to-date, core deposits, which exclude brokered deposits, have increased $11.7 million, or 5.13%.  All of this growth was in our Memphis market, where we continue to grow faster than the overall market. 
  • Demand deposits increased 6.1% during the second quarter and have increased 7.6%, or $4.7 million, year-to-date. 
  • Book value per share has increased from $7.94 at December 31, 2015, to $8.21 at June 30, 2016.  This growth is almost an 8% annualized growth rate and we expect this growth to continue for the remainder of 2016. 

Asset Quality

  • The $1.2 million dollar improvement in earnings over the first six months of this year compared to 2015 was in spite of a $521 thousand loan loss provision this year compared to no loan loss provision during the first six months of 2015.  This increase in the loan loss provision this year was due to the loan growth Paragon has experienced, even as asset quality has continued to improve.
  • The ratio of the allowance for loan losses has increased from 1.17% at December 31, 2015, to 1.37% at June 30, 2016. 
  • The level of nonperforming assets decreased slightly during the second quarter.  The ratio of nonperforming assets to total assets improved from .78% at March 31 to .70% at June 30.  These ratios continue to be indicative of a healthy bank.

We are encouraged with the progress Paragon has made during 2016.    We look forward to reporting the results of the next two quarters and for the full year.  These results reflect the efforts of your entire Paragon team as we work to increase sources of income, improve asset quality, and continue diligent expense control.        

As you may be aware, mortgage interest rates are at historical lows.  Our mortgage department is extremely busy closing loans and has a robust pipeline of future business.  If you have not had a chance to refinance, please consider giving our mortgage team a call at   901.322.0750.

Please know we continue to strive to provide the best customer service experience of any Memphis-area bank, and we want to work with you to meet any banking needs you have. 

 

Respectfully,

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

Chief Executive Officer               President and Chief Operating Officer      Chief Financial Officer 

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