Letter to Our Shareholders

August 29, 2014

Dear Fellow Shareholder:

Momentum at Paragon continues.  Aided by balance-sheet growth and continued improvement in asset quality, net income for the second quarter was 61% higher than income for the first quarter of this year.  Highlights of the second quarter included:

Balance Sheet

  • Total assets increased from $280.6 million at the end of the first quarter to $288.8 million at the end of the second quarter.  Since the end of the second quarter of 2013, total assets have increased $28.5 million, or 11%.
  • Gross loans increased slightly in the second quarter to $210.6 million.  Over the last twelve months, loans have increased $27.5 million, or 15.02%.
  • Demand Deposit Accounts recovered from the first quarter seasonal low by increasing $6.3 million, or 14.4%, during the second quarter.
  • Over the last twelve months, core deposits have increased $10.3 million, or 5.1%, to $211.3 million.
  • Repurchase agreements increased $7.8 million, or 87%, since the end of 2013.  Most of this growth occurred during the latter part of June as a result of a single customer transaction.   
  • Book value per share increased to $7.75 at June 30, 2014, compared to $7.46 at the end of 2013.
  • Capital levels remain some of the highest of our peer group with Total Risk-Based Capital at 15.82% and the Leverage Ratio at 10.70% on June 30.

 

Income Statement

  • In the second quarter, net interest income increased approximately 3% over net interest income in the first quarter adjusted for a large recovery recorded in the first quarter.  Net interest income increased 17.45% during the second quarter of 2013 on a non-adjusted basis. 
  • The net interest margin was 3.64% for the second quarter of 2014 compared to 3.42% during the second quarter of 2013.  The improvement was due to both an increase in the rate on earning assets and a decrease in the cost to fund those earning assets.
  • Non-interest income increased $227 thousand over the first quarter of 2014 but was $246 thousand less than the second quarter of 2013.  This variance was primarily related to dispositions of foreclosed properties and the change in value of our interest-rate caps.  More importantly, core non-interest income increased $85 thousand, or 24.7%, over the first quarter and was $46 thousand or 12.1% higher than the second quarter of 2013.      
  • In the second quarter, non-interest expense was $147.6 thousand less than the first quarter and $15 thousand less than the second quarter of 2013.  The primary driver of this progress was the continued improvement of credit quality.
  • Second quarter pre-tax income increased 55% over the first quarter of 2014, and pre-tax income for the first six months of 2014 was 73% higher than the first six months of 2013. 

Asset Quality

  • The ratio of nonperforming assets to total assets decreased from 2.57% at the end of the first quarter to 2.35% at the end of the second quarter.  At the end of 2013, the ratio was 2.88%.
  • During the first six months of 2014, we have resolved $1.5 million in nonperforming assets with a 78% recovery rate.
  • The allowance for loan losses reserve to gross loans was 1.50% at June 30, 2014.  That ratio is lower than the 1.59% at March 31 but higher than at the end of 2013 when the ratio was 1.47%.
  • As a result of Paragon’s improved asset quality, no provision for loan losses has been needed this year.  

We were pleased recently to announce the addition to the Paragon Team of Richard Harris in Commercial Lending and Mark Winburne in Paragon Wealth Solutions.  Both of these men have had many years of experience and will contribute to Paragon’s plan to increase net interest income through growth of our balance sheet and to increase non-interest income. 

Thank you for voting Paragon Bank as “Best Bank” in the 2014 Memphis Most publication as voted by readers of The Commercial Appeal.  We are grateful for your business and support.

 

Respectfully,

 

Robert S. Shaw, Jr.                          Michael A. Edwards                           Lewis W. Perkins, III
Chief Executive Officer                    President                                            Chief Financial Officer
                                                        Chief Operating Officer

 

Letter to Our Shareholders

We are pleased to report an increase of approximately 61% in pre-tax earnings for 2013, which demonstrates continued progress, especially in light of the challenging economic environment.  The fourth quarter of 2013 marked Paragon’s twelfth consecutive quarter of profitability and the end of the third full year of profitability.  Our improvement over the prior year was primarily due to improved asset quality, balance sheet growth, and expense control.  Some highlights of 2013 and the fourth quarter include:

Asset Quality

  • Nonperforming assets decreased 49% during 2013, from 6.13% of total assets to 2.88% of total assets at December 31, 2013.  During 2013, Paragon resolved $9.3 million in nonperforming assets with an average recovery rate of approximately 91%.
  • Classified assets decreased 25% during 2013.  The ratio of classified assets to capital plus the loan loss allowance decreased from 64.76% at December 31, 2012, to 45.49% at the end of 2013.
  • As we have reported previously, the formal agreement between Paragon and the Comptroller of the Currency was terminated on August 14, 2013.
  • As a result of improved asset quality, the provision expense for expected loan losses decreased from $1,150,000 in 2012 to $33,334 in 2013. 

Balance Sheet

  • Paragon finished 2013 with total assets of $272.7 million compared to $252.0 million at the end of 2012, an 8.21% increase.
  • Total loans at the end of 2013 increased 8.20%, from $182.5 million at the end of 2012 to $197.5 million at the end of 2013.  New loans originated increased substantially during 2013.  Without loan payoffs brought about by our aggressive actions to clean up problem credits, our loan growth would have been approximately 13.23% for the year.
  • During the year, core deposits increased by $14.5 million from $199 million to $213.5 million or 7.3%.   At December 31, 2013, Paragon’s non-interest-bearing demand deposits were 19.83% of total deposits, and they continue to be a real strength when compared to our local peers, whose demand deposits were 12.57% of total deposits.
  • At December 31, 2013, Paragon’s capital ratios remained some of the strongest compared to our peers.  The Leverage Ratio, Tier One Ratio, and Total Risk-Based Capital Ratio were 10.65%, 15.06%, and 16.31%, respectively. 
  • Book value per share increased from $6.83 at the end of 2012 to $7.46 at the end of 2013. Excluding the unrealized loss on the investment portfolio caused by the increase in long-term interest rates, book value would have increased from $6.72 to $7.85 during 2013. 

Income Statement

  • Net income for 2013 was an adjusted $4.6 million.  During the year, we recognized the tax benefit of previously incurred losses.  As a result, income taxes positively affected earnings by $3.5 million. 
  • For the year, net interest income increased $262,228, from $8.33 million to $8.59 million.  Despite the headwinds caused by historically low interest rates, Paragon’s net interest margin for 2013 increased to 3.50% compared to 3.41% for 2012.  While the persistent low-interest-rate environment continued to bring loan yields down, some maturing long-term deposits repriced lower, which helped the margin improve.  Counter to many other banks, Paragon did not experience interest margin compression during the last year.      
  • Non-interest income, excluding investment security gains, decreased 1.93%, from $1.76 million to $1.74 million.  Security gains decreased from $1,173,517 to $43,202.  Investment security gains are not a source of recurring revenue and none are budgeted or expected in 2014.
  • Mortgage banking income decreased $339 thousand from 2012 to 2013.  We had anticipated this slowdown and, as a result of the dramatic drop in refinancing activity, we had forecasted lower revenue.  In spite of this, our mortgage revenue exceeded our forecast for the year.  The reduction in mortgage banking income was nearly offset by an improvement in losses on Other Real Estate Owned (OREO) dispositions, a swing to income on the value of our interest-rate caps and increases in other fee income.
  • Non-interest expense decreased 2%, from $9.4 million to $9.2 million.  There were decreases in many expense categories during 2013 compared to 2012.  The largest reductions were in insurance and in OREO expenses.  Management continues to explore ways Paragon can operate more efficiently and expects to announce a major initiative during the first quarter of 2014.

We are emerging from the greatest banking crisis since the Great Depression with increasing momentum.  We have been severely tested and seasoned.  We are grateful for your support and excited about what the future holds. 

Thank you for your continued support.  Please think of us for all of your banking needs.

Respectfully,

Robert S. Shaw, Jr.                      Michael A. Edwards                       Lewis W. Perkins, III
Chief Executive Officer               President                                       Chief Financial Officer
                                                  Chief Operating Officer