Letter to Our Shareholders

Thank you for your continued support of Paragon National Bank. Without the support of our shareholders, we could not be heading in the positive direction we are today.

Daily, media coverage includes various topics of financial interest including debit card fees, enhanced regulatory standards, Occupy Wall Street, and historically low interest rates.  Meanwhile, Paragon continues to concentrate on the needs of our individual and small business customers with our personal service and local knowledge.  In a 2011 study, as a result of that focus, we were named the top small business lender in Memphis by the U.S. Small Business Administration.  To let others know about our commitment to quality customer service, we have begun running two new advertisements in various print media which feature bank customers interacting with a Paragon employee.  We hope that you will see these and continue to spread the word about what it means for Paragon to be your community bank. 
  
We are pleased to report that Ashley Cullum, Paragon’s Assistant Vice President of Business Development, was recently selected as part of the Memphis Business Journal’s 2011 Top 40 Under 40.  We are proud of Ashley.  She exemplifies Paragon’s commitment to our community and our customers.  Paragon has had an employee selected as a part of the Top 40 Under 40 during five of the seven years we have been in business.  We believe that this is additional confirmation of the quality of the team you have at Paragon.   
  
With historically low interest rates reported in the news, we have seen a large increase in mortgage loans enhance our non-interest income.  The increase in mortgage loans is due in large part to refinances to these lower rates.  The effect on Paragon’s net income will be seen in the fourth quarter after the fee income from these transactions is recorded.   If you know of someone who is considering refinancing, please tell them about Paragon’s Mortgage Department with its focus on customer service and great rates. 
  
With these topics in mind, we are pleased to provide you with the following financial highlights in addition to the attached financial statements for the quarter ended September 30, 2011.  Net income for the quarter was $235 thousand or $.06 per share, which compares very favorably to a net loss of $541 thousand or ($.15) per share for the quarter ended September 30, 2010.  Net income was $554 thousand for the nine months ended September 30, 2011, or $.15 per share versus a loss of $1.38 million and ($.38) per share during the same period in 2010.  The improvement in our performance can be attributed to increasing the core earnings capacity of Paragon through increased net interest income, decreased loan loss provision, decreased overhead, and increased fee income.  This improvement can also be attributed to our continued stabilization of the level and number of non-performing assets. 
  
Net interest income for the nine months ended September 30, 2011, increased $510 thousand to $6.6 million compared to $6.1 million during the same period in 2010.  For the nine months ended September 30, 2011, the loan loss provision was $712 thousand versus $1.2 million during the same period in 2010, a decrease of $503 thousand.   Non-interest expense for the nine months ended September 30, 2011, decreased $500 thousand to $6.7 million from $7.2 million.  Our tangible book value per share improved to $7.23 per share at September 30, 2011, up $.48 per share from $6.75 at December 31, 2010.  
  
Your Board of Directors is extremely pleased with the bank’s progress and is enthusiastic about the future and the opportunities we believe will be available to our bank because of our strong capital position, brand, and commitment to our 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.                                  Lewis W. Perkins III                    
President/Chief Executive Officer             EVP/Chief Financial 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.

A Letter to Our Shareholders

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.

Paragon National Bank Announces Results for the Second Quarter 2008

Paragon National Bank announced its second quarter and year-to-date results.

Total assets for the quarter ended June30, 2008, were $354.6million, an increase of $87.5million, or 33%, compared to the second quarter of 2007. Total loans were $231.7million at June 30, 2008, increasing 21%, or $40.1 million compared to the same period one year ago.   

For the six months ended June30, 2008, total deposits grew a robust $40.0million, or 17%, to $276.5 million compared to $236.5 million at December 31, 2007. Non-interest bearing deposits increased by $10.6million, or 54% for the first six months of 2008 compared to a $918,000 increase for the first six months of 2007.  Paragon’s core funding, defined as total deposits, excluding certificates of deposit, totaled $106.1 million at June 30, 2008, compared to $83.6 million for the same period ending during 2007.  This represents a $22.5 million or 27% increase from the same period last year.   Robert S. Shaw, Jr., President and Chief Executive Officer, said, “Paragon’s substantial increase in core deposits represents the outstanding results of a successful calling effort from the bank’s relationship managers and business development officers.  The Memphis community continues to embrace our business plan of local banking from local professionals, and, as a result, Paragon is winning the battle for market share.”

Net interest income for the six months ended June30, 2008, totaled $4.2 million, increasing $136,000 over the same period during 2007.  This increase in net interest income was the result of continued growth in loans and investments over the past twelve months, offset by a decline in net interest margin.  Paragon continues to be directly impacted by the interest-rate reductions initiated by the Federal Reserve and our level of non-performing assets.  Because loans generally reprice more quickly than deposits, the declining interest rate environment has compressed the net interest margin.  Paragon’s net interest margin was 2.68% for the first half of 2008 versus 3.41% during the same period in 2007. This margin should improve in the third quarter as deposits begin to reprice at lower rates.     

The local real estate market continues to experience a downturn, especially as it relates to the acquisition, construction, and development of residential housing.   This downturn has severely impacted the Paragon residential real estate loan portfolio as loan delinquencies have increased during the first half of 2008.  As a result, Paragon has moved to aggressively address this issue by increasing the loan loss provision to $1.8 million for the second quarter of 2008 compared to $124,000 for the same period in 2007.  The increase in the provision for loan losses brings the Paragon allowance for loan losses to 1.96% of loans, versus 1.46% in the first quarter of 2008.  

Non-performing loans increased to $14.9 million or to 6.41% of total loans at June 30, 2008. The increase of approximately $12.0 million during the second quarter is attributable almost exclusively to deterioration in the residential real estate portfolio.  Paragon has specific reserves totaling $1.6 million on this group of non-accrual loans.      

At June 30, 2008, real estate acquired in settlement of loans totaled $3.6 million.  An experienced loan workout consultant was recently engaged to focus on the workout and resolution of non-performing assets. The strategy is to resolve each problem asset individually as soon as possible while minimizing the loss to the bank.  Although future market conditions are uncertain, management does not currently anticipate taking any further write-down on the disposition of these assets.    

Senior Credit Officer Andrew H. Taylor stated, “With respect to residential real estate, the current economic environment remains very challenging.  However, we will continue to address our problem loans aggressively  and liquidate foreclosed real estate as soon as practical.    At June 30, 2008, based on current market conditions, we feel  confident our  loan loss reserve is adequate and will absorb estimated losses. ” 

As a result of the larger loan loss provisions, Paragon reported a net loss of $1.9 million, or $(0.57) per share, for the second quarter of 2008, compared with net earnings of $12,000 in the second quarter of 2007 and $25,000 in the first quarter of 2008.

By maintaining a strong capital position and balance sheet, Paragon  should be able to weather these difficult times.  Paragon’s capital position significantly exceeds all regulatory guidelines for being “well capitalized.” Total risk-based capital and Tier 1 risk-based capital ratios at June 30, 2008, were 11.79% and 10.53%, respectively, compared with minimum regulatory capital requirements of 10% and 6% to be considered “well capitalized.”

About Paragon National Bank

Paragon National Bank is the Memphis region’s most service-oriented and locally focused bank. Paragon provides small and mid-sized businesses, their owners, and employees with a complete package of both business and personal banking solutions delivered online and in person. Paragon stands out in the crowd of Memphis banks with its local ownership and focus, cutting edge technology, and the experienced Paragon team.

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.

Paragon National Bank Reaches Profitability as Scheduled

Paragon National Bank announced earnings for the second quarter of 2007. Net income for the quarter was $12,104 compared with a loss of ($372,195) for the same period in the prior year.

“We are proud to announce we have reached profitability,” said Robert Shaw, Paragon President and Chief Executive Officer.  “We had planned to be profitable during the second quarter of this year and we are pleased to have met our projections.  We knew when we founded Paragon that we could have reached profitability sooner; our Board of Directors wisely chose to build a bigger base from which we can serve the Memphis community.  With the record amount of capital we raised, the team we have assembled, and the technology we purchased, we have established a bank that provides the products and expertise of larger banks with outstanding, personal customer service.”

At June 30, 2007, Paragon’s assets totaled $267.1 million, an increase of 32.2% or $65.0 million for one year earlier and $33.3 million since year-end.  Deposits have increased $45.8 million since year-end and totaled $222.2 million at June 30, 2007.  Loan demand remained steady during the second quarter as loans totaled $191.6 million at June 30, 2007, an increase of $23.3 million since December 31, 2006, and $57.5 million from one year earlier.

Paragon National Bank is one of the Memphis region’s newest full-service banks. Paragon provides small and mid-sized businesses, their owners and executives with a complete package of business banking solutions delivered online and in person. Organizing at a time when large and distant banks have taken over familiar Memphis institutions, Paragon enjoys the distinction of local ownership, authentic community engagement, and a rapidly expanding staff of experienced banking professionals.

Annual Meeting Highlights Paragon’s Growth and Accomplishments

Paragon National Bank held its second annual shareholders’ meeting April 26, 2007, at The Dixon Gallery and Gardens. Shareholders gathered to hear the progress Paragon has made in the past year and plans for 2007.

Robert Shaw, Paragon’s President and CEO, listed the bank’s 2006 accomplishments including the opening of St. Francis Banking Center; the addition of professionals in commercial lending, mortgage lending, cash management, and business development departments; the expansion of Fountain Place office space; awards for the bank’s marketing and advertising campaigns; and the successful completion of Paragon’s secondary stock offering.

Paragon also introduced a new product for its customers, proving that it does not need a banking center on every corner to be convenient. ParaTeller, Paragon’s remote deposit capture product, was introduced to customers in 2006. 

“We could not have enjoyed all of these successes without the hard work of our dedicated employees and board of directors,” said Shaw. “The members of Team Paragon are some of the most talented bankers in the Memphis market. Averaging more than 15 years of experience, they truly understand local banking.”

During 2006, staff members participated in professional development activities, professional organizations, and leadership coaching. Employees have more invested in Paragon than employment, 89% are shareholders owning approximately 15% of the bank.

One of Paragon’s priorities is giving back to the community. Paragon supports a third grade class of students at Hawkins Mill Elementary, granted its second wish for a Make-A-Wish child, and participated in the 2006 Susan G. Komen Race for the Cure. Through financial donations and its employees’ volunteerism, Paragon is proud to support over 65 community foundations and organizations. With the Assisting the Community Through Service (ACTS) program, employees have 40 work hours a year to use to participate in community programs. 

Official business brought before shareholders was the re-election of Dr. James Freeman, Ed Roberson, and Craig Weiss to the Board of Directors and the ratification of Paragon’s independent auditing firm.

During 2006 Paragon’s assets increased 53% from $152.2 million at December 31, 2005 to $233.8 million at December 31, 2006. Paragon’s total assets at March 31, 2007 were $256.4 million. During 2006, loans increased 59%, ending the year at $168.9 million. Deposits increased 63% to $176.4 million. Loans and deposits were at $182.3 million and $202.8 million respectively at March 31, 2007. 

Paragon National Bank is one of the Memphis region’s newest full-service banks. Paragon provides small and mid-sized businesses, their owners and executives with a complete package of business banking solutions delivered online and in person. Organizing at a time when large and distant banks have taken over familiar Memphis institutions, Paragon enjoys the distinction of local ownership, authentic community engagement, and a rapidly expanding staff of experienced banking professionals.

Paragon Board Member Thomas Boggs Takes Emeritus Status

Paragon National Bank announced today that one member of the Board of Directors has accepted emeritus status.

Thomas Boggs, Memphis restaurant mogul and CEO of the popular Huey’s chain, has resigned as an active member of Paragon’s Board of Directors but will retain emeritus status.

Mr. Boggs, in addition to playing a pivotal role in the success of Memphis legend Huey’s, he is also a partner in the Half Shell Restaurants, Tsunami, Folks Folly, and the Prime Cut Shoppe.

Paragon National Bank’s Board of Directors works to set the overall tone and direction of the bank and establish guidelines on the nature and amount of risk the bank may take.  The long-term health of a bank depends on a strong, independent, and attentive board, on which Paragon prides itself.

Paragon Secondary Offering Oversubscribed

Paragon National Bank announced today that it has closed its secondary offering to raise additional capital and that the Bank’s offering was over-subscribed. Paragon completed the sale of 980,000 shares of its common stock at a price of $12.50 per share.

The bank previously announced, on May 12, 2006, that it had filed a registration statement with the Office of the Comptroller of the Currency to seek permission for the secondary stock offering.  The offering was for sale up to 880,000 shares of its common stock, with an option to sell an additional 100,000 shares to cover over-allotments, if any.  The 980,000 shares sold at $12.50 will generate net proceeds of approximately $11.7 million in capital for Paragon.  Shares of Paragon’s stock closed at $13.01 on July 27, 2006. 

Investor meetings were held on July 11 and 13 at the Dixon Gallery and Gardens to provide details of the offering.  Invitations were sent to all shareholders and others who had expressed an interest in investing in additional Paragon stock.  Both sessions were attended by more than 100 people interested in investing.   Robert Shaw, Paragon President and CEO, explained that the proceeds from the stock sale will be used to finance additional growth by increasing the bank’s lending limits, improving capital ratios, and funding operations.  Shaw also introduced Team Paragon members and representatives from Howe Barnes Investments, Inc, the underwriter of the offering on a best efforts basis.  Howe Barnes makes a market in Paragon’s stock. 

Paragon was launched in 2005 with $23.2 million in capital, a record for de novo banks in the Memphis, Shelby County area.  Since its inception, Paragon has experienced rapid growth.  It was the second fastest growing de novo in the U.S. formed during 2005.  Current assets exceed $210 million. 

After the offering was closed, Shaw stated, “Original shareholders should be happy with the 25% increase in value from their initial purchase price. We are gratified by the response to this stock offering.  We believe our growth since the bank opened and the response to this offering are confirmations that the Memphis area needed a locally-owned bank that provides the broad range of products and services and high level of customer service that Paragon provides.  We believe this stock offering will allow us to continue to grow and provide Paragon’s brand of banking to more Memphians.”  Shareholders should find further comfort in their investment because 92% of Paragon employees own stock in the bank including an additional $1.4 million invested by the Directors and employees in the recent offering.

Paragon Plans Second Stock Sale

Paragon National Bank announced today that it has filed a registration statement with the Office of the Comptroller of the Currency for the sale of up to 880,000 shares of its common stock, subject to Paragon’s right to increase the offering by 100,000 shares. Paragon intends to sell the shares for a price of between $12.50 and $13.50 per share. Paragon said that it plans to use the proceeds of the offering to fund future growth and for other general corporate purposes.

Paragon’s shares of common stock are being offered through Howe Barnes Investments, Inc., the underwriter, on a best efforts basis.  A copy of the offering circular relating to the offering may be obtained when available from Howe Barnes at 222 South Riverside Plaza, 7th Floor, Chicago, Illinois 60606, or by contacting Nick Bach at Howe Barnes at (800) 800-4693.

Paragon National Bank is a national banking association chartered by the Office of the Comptroller of the Currency located in Memphis, Tennessee.  Through three branch locations and through remote access, Paragon provides a full line of banking services to its target market of small businesses, business professionals and consumers in the Memphis Metropolitan Statistical Area, with an emphasis on East Memphis, Collierville, Cordova and Germantown, Tennessee.

A registration statement relating to the shares has been filed with the Office of the Comptroller of the Currency but has not yet become effective.  The shares may not be sold, nor may offers to buy them be accepted, prior to the time the registration statement becomes effective.  This press release shall not constitute an offer to sell nor the solicitation of an offer to buy the shares nor shall there be any sale of the shares in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

Certain matters in this press release may constitute forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements. Reference is hereby made to the filings of Paragon National Bank with the Office of the Comptroller of the Currency, including quarterly reports on Form 10-Q, reports on Form 8-K, and its annual report on Form 10-K, particularly including the risk factors contained in the latter filing.