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1st Quarter 2017 Shareholder Letter

05-03-17

Dear Fellow Shareholder:

We are pleased with the start of a new year where net income for the first quarter of 2017 was $657,513, which was an increase of 14.3% over the fourth quarter of 2016 and an increase of 57% over the first quarter of 2016.   For the quarter, return on assets was .76% while return on equity was 7.41%. 

Highlights of the 1st quarter of 2017 include:

Balance Sheet

• At quarter end, total assets were little changed from December 31 at $352 million. 
• While new loan production was over $50 million and more than the first quarter of 2016, gross loans decreased slightly during the quarter.  During the first quarter, sales of SBA and mortgage loans, payoffs of residential and specialty lending construction loans,  and pay offs of loans due to the sale of customer businesses and homes exceeded new loan production.  We expect loan growth during the remainder of the year as loan pipelines are strong. 
• During the first quarter, total deposits increased $9.5 million, or 13.6%, on an annualized basis.  Demand deposits increased $1.6 million, which is an annualized growth rate of 9.2%.
• Book value increased 21 cents per share during the fourth quarter to $8.52 per share.    

Income Statement

• Total revenue for the first quarter of 2017 increased 3.5% over the fourth quarter of 2016 and increased 13.4% over the first quarter of 2016. 
• Net interest margin remained strong for the first quarter of 2017 at 4.13% compared to 4.15% for the fourth quarter adjusted for interest recoveries and state income tax credits. 
• For the quarter, core noninterest income increased 12.0% over the fourth quarter of 2016 and 11.9% over the first quarter of 2016.  The largest increase was from the Small Business Capital Group (SBCG), Paragon’s SBA lending group.  SBCG income increased $251 thousand over the fourth quarter of 2016 and $154 thousand over the first quarter of last year. 
• For the first quarter of 2017, noninterest expense increased 9.2% over the first quarter of 2016 and 3.3% over the fourth quarter of 2016.  This increase was primarily related to new business initiatives Paragon launched during 2016 including the Specialty Lending Department and the Oxford Loan Production Office.  Without those initiatives, the increase in noninterest expense would have been less than 3%. 
• Core income, which excludes OREO gains and losses, investment gains and losses, interest recoveries, and the loan loss provision, increased 10.8% over the fourth quarter of 2016 and 46.3% over the first quarter of 2016.    

Asset Quality

• During the first quarter, asset quality continued to improve.  Nonperforming assets decreased 8% to $1.5 million, bringing the ratio of nonperforming assets to total assets down to .44%.  At March 31, 2017, there were no loans past due more than 90 days or on nonaccrual status.
• The percentage of the allowance to gross loans remained relatively stable during the first quarter, increasing from 1.44% at year end to 1.45% at March 31.   

During the first quarter, we were pleased to be named a finalist for the 37th Small Business Awards presented by the Memphis Business Journal.   The winners will be announced on May 18,, 2017. 

We look forward to discussing our 2016 and first quarter 2017 results at our annual shareholders’ meeting to be held at 3:00 pm on May 18, 2017, at our Fountain Place location.  Invitations and proxies have been mailed.

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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