Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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For the fiscal year ended December 31, 2016
or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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For the transition period from
to .
Commission file number: 001-37802
PARAGON COMMERCIAL CORPORATION
(Exact
name of registrant as specified in its charter)
North Carolina
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56-2278662
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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3535 Glenwood Avenue
Raleigh, North Carolina
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27612
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(Address of principal executive offices)
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(Zip Code)
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(919) 788-7770
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name of
each exchange on which registered
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Common Stock, par value $0.008 per share
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The NASDAQ Stock Market LLC
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Securities
registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes ☐
No ☒
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files). Yes ☒ No
☐
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in
definitive proxy information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
Large Accelerated Filer
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Accelerated Filer
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Non-accelerated
Filer
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☒ (Do
not check if smaller reporting company)
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Smaller Reporting Company
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
Yes ☐
No ☒
The
aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant on June 30, 2016 (based on the
closing sale price of $35.00 on that date), was approximately
$146,161,000. Common stock held by each executive officer and
director and by each person known to the registrant who owned 10%
or more of the outstanding common stock have been excluded in that
such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for
other purposes.
As of March 20, 2017, there
were approximately 5,450,700 shares of the registrant’s common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the Annual Report of Paragon Commercial Corporation for the year
ended December 31, 2016 (the "Annual Report"), which will be
included as Appendix A to the Proxy Statement for the 2017 Annual
Meeting of Stockholders, are incorporated by reference into Part II
and included as Exhibit 13.1 to the Form 10-K.
Portions
of the Proxy Statement for the 2017 Annual Meeting of Stockholders
of Paragon Commercial Corporation to be held on May 16, 2017 (the
"Proxy Statement"), are incorporated by reference into Part
III.
PARAGON COMMERCIAL CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
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Page No.
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PART I
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Item 1.
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Business
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1
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Item 1A.
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Risk Factors
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18
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Item 1B.
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Unresolved Staff Comments
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35
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Item 2.
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Properties
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35
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Item 3.
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Legal Proceedings
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35
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Item 4.
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Mine Safety Disclosures
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35
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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36
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Item 6.
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Selected Financial Data
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38
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Item 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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38
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Item 7A.
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Quantitative and Qualitative Disclosures About Market
Risk
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39
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Item 8.
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Financial Statements and Supplementary Data
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39
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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39
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Item 9A.
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Controls and Procedures
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39
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Item 9B.
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Other Information
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39
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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40
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Item 11.
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Executive Compensation
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40
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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40
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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40
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Item 14.
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Principal Accounting Fees and Services
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41
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules
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41
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Signatures
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42
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-i-
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains “forward-looking
statements” that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect,
could cause our results to differ materially from those expressed
or implied by such forward-looking statements. The statements
contained in this Annual Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of
1934, as amended, or the Exchange Act. Such forward-looking
statements include any expectation of earnings, revenue or other
financial items; any statements of the plans, strategies and
objectives of management for future operations; factors that may
affect our operating results; statements about our ability to
retain and hire necessary personnel and appropriately staff our
operations; statements related to future economic conditions or
performance; statements as to industry trends; and other matters
that do not relate strictly to historical facts or statements of
assumptions underlying any of the foregoing. Forward-looking
statements are often identified by the use of words such as, but
not limited to, “anticipate,” “believe,”
“can,” “continue,” “could,”
“estimate,” “expect,” “intend,”
“may,” “might,” “will,”
“plan,” “project,” “seek,”
“should,” “target,” “would,”
and similar expressions or variations intended to identify
forward-looking statements. These statements are based on the
beliefs and assumptions of our management based on information
currently available to management. Such forward-looking statements
are subject to risks, uncertainties and other important factors
that could cause actual results and the timing of certain events to
differ materially from future results expressed or implied by such
forward-looking statements. Factors that could cause or contribute
to such differences include, but are not limited to, those
discussed in the section titled “Risk Factors” included
in Item 1A of Part I of this Annual Report on Form 10-K, and the
risks discussed in our other SEC filings. Furthermore, such
forward-looking statements speak only as of the date of this
report. Except as required by law, we undertake no obligation to
update any forward-looking statements to reflect events or
circumstances after the date of such statements.
Unless
otherwise indicated or unless the context requires otherwise, all
references in this report to “we,” “us,”
“our,” the “Company,” or similar
references, mean Paragon Commercial Corporation and its
subsidiaries on a consolidated basis. References to “Paragon
Bank” or the “Bank” mean our wholly owned banking
subsidiary, Paragon Commercial Bank.
-ii-
PART I
ITEM 1. BUSINESS
General
Paragon
Commercial Corporation (the "Company"), was formed in 2001 to serve
as the holding company for Paragon Commercial Bank (the "Bank").
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve")
under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). The Company's principal source of income is dividends
declared and paid by the Bank on its capital stock, if any. The
Company has no operations and conducts no business of its own other
than owning the Bank and two statutory business trusts, Paragon
Commercial Capital Trust I and II (the “Trusts”).
Accordingly, the discussion of the business which follows concerns
the business conducted by the Bank, unless otherwise indicated. The
Company completed its initial public offering in June
2016.
The
Bank was incorporated on May 4, 1999 and began banking operations
on May 10, 1999. The Bank is engaged in general commercial banking
in Wake and Mecklenburg Counties, NC, operating under the banking
laws of North Carolina and the rules and regulations of the Federal
Deposit Insurance Corporation (the “FDIC”) and the
North Carolina Commissioner of Banks (the
“Commissioner”). The Bank undergoes periodic
examinations by those regulatory authorities. In addition, the
Company undergoes periodic examinations by the Federal
Reserve.
At
December 31, 2016, the Company had total assets of $1.50 billion,
net loans of $1.18 billion, deposits of $1.17 billion, total
securities of $197.4 million, and stockholders' equity of $136.1
million.
The
Bank has a diversified loan portfolio, with no foreign loans and
few agricultural loans. Real estate loans are predominately fixed
rate commercial property loans. Commercial loans are predominately
variable rate loans and are spread throughout a variety of
industries with no one particular industry or group of related
industries accounting for a significant portion of the commercial
loan portfolio. The majority of the Bank's deposit and loan
customers are individuals and small to medium-sized businesses
located in the Bank's market area. Additional discussion of the
Bank's loan portfolio and sources of funds for loans can be found
in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages A-10 through A-38 of the Annual
Report, which is included in this Form 10-K as Exhibit
13.1.
The
operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by
related monetary and fiscal policies of depository institution
regulatory agencies, including the Federal Reserve, the FDIC and
the Commissioner.
The
Company's fiscal year ends December 31. This Form 10-K is also
being used as the Bank's Annual Disclosure Statement under FDIC
Regulations. This Form 10-K has not been reviewed or confirmed for
accuracy or relevance by the FDIC.
At
December 31, 2016, the Company employed 144 full-time employees and
8 part-time employees, which equated to 148 full-time equivalent
employees.
Subsidiaries
The
Bank is a wholly owned subsidiary of the Company. At December 31,
2016, the Bank had two subsidiaries, PCB Trustee, Inc. and Mayberry
Real Estate Holdings, LLC. PCB Trustee, Inc. serves as the
corporate trustee on deeds of trust securing the Bank’s real
estate loans. Mayberry Real Estate Holdings, LLC acquires, manages
and disposes of real property, other collateral and other assets
obtained in the ordinary course of collecting debts previously
contracted.
1
The
Company formed Paragon Commercial Capital Trust I (“Trust
I”) during 2004 in order to facilitate the issuance of trust
preferred securities. Trust I is a statutory business trust formed
under the laws of the state of Delaware, of which all common
securities are owned by the Company. The Company formed Paragon
Commercial Capital Trust II (“Trust II”) during 2006 to
serve the same purpose. The junior subordinated debentures issued
by the Company to the trusts are classified as debt and the
Company’s equity interest in the trusts are included in other
assets.
The
trust preferred securities presently qualify as Tier 1 regulatory
capital and are reported in Federal Reserve regulatory reports as
minority interests in unconsolidated subsidiaries. The junior
subordinated debentures do not qualify as Tier 1 regulatory
capital.
Market Area
The
Company serves the Raleigh, North Carolina market and surrounding
areas, including the Research Triangle Park, Durham and Chapel
Hill, from its headquarters in Raleigh. In 2006, the Company
expanded to Charlotte, North Carolina and in 2014 established a
full-service office in Cary, North Carolina. Management believes
that these markets have a combination of scale and attractive
demographics to provide significant growth opportunities, while
being small enough for the Company to establish a well-known
brand.
The
Raleigh-Durham market area is composed of two metropolitan
statistical areas, or MSAs, the Raleigh MSA and the Durham-Chapel
Hill MSA, with a combined population of over 2.0 million. Raleigh
is the capital of North Carolina and the market area is home to
numerous universities and colleges, including the University of
North Carolina at Chapel Hill, North Carolina State University and
Duke University. This market area has a diverse economy centered on
state government, education, the technology industry, the medical
and pharmaceuticals sectors, professional service firms and the
many businesses that support these enterprises.
Charlotte
is the largest city in North or South Carolina and anchors a
metropolitan statistical area with a total population in excess of
2.4 million. The Charlotte area is home to seven Fortune 500
companies, including one of the nation’s largest commercial
banks. Charlotte also has concentrations in the transportation,
utilities, education, professional services and construction
sectors.
Competition
Commercial
banking in North Carolina is extremely competitive due in large
part to the early adoption of statewide branching. As of June 30,
2016, data provided by the FDIC Deposit Market Share Report
indicated that within the Company’s market areas, there were
40 different commercial and savings institutions operating a total
of 492 offices (254 in Wake County and 238 in Mecklenburg County).
The Bank competes in its market area with large regional and
nationwide banking organizations, other federally and state
chartered financial institutions such as savings and loan
institutions and credit unions, mortgage companies and other
lenders engaged in the business of extending commercial credit.
Many of its competitors have broader geographic markets and higher
lending limits than the Bank and are also able to provide more
services and make greater use of media advertising. All of the
markets in which the Bank has an office are also served by branches
of the largest banks in the Southeast, some of which are among the
largest institutions in the United States.
The
enactment of legislation authorizing interstate banking has led to
increases in the size and financial resources of some of the
Company’s competitors. In addition, as a result of interstate
banking, out-of-state commercial banks have acquired North Carolina
banks and heightened the competition among banks in North Carolina.
The Bank competes by offering customers modern banking services in
a highly responsive private bank environment. It provides
personalized services and attracts customers by being sensitive to
their individualized needs. The Bank also relies on targeted
marketing to attract new customers. To enhance a positive image in
the communities that it serves, the Company supports and
participates in local events and its officers and directors are
active in supporting local civic and charitable
organizations.
2
Lending Activities
General. We
provide a wide range of short- to medium-term commercial,
construction, mortgage, and personal loans, both secured and
unsecured. In general, our loans are secured by
collateral located in one of our markets with borrower equity and
terms structured to match the purpose of the loan proceeds and the
frequency of the primary source of repayment of the
borrowers. As of December 31, 2016, 97.7% of our overall
loan portfolio was secured by collateral. Management focuses
on the borrower’s ability to repay, normally measured as the
cash flow generated from the borrower’s
operations. In underwriting credits, management views
collateral as a secondary or tertiary source of
repayment. Variable rate loans accounted for 28.7% of
the Bank’s loan balances outstanding as of December 31, 2016
while fixed rate loans accounted for 71.3% of the
balances.
Our loan policies and procedures establish the basic guidelines
governing our lending operations. Generally, these
guidelines address the types of loans that we seek, target markets,
underwriting and collateral requirements, loan
terms and compliance with laws and
regulations. All loans or credit lines are subject to
approval procedures and amount limitations. These
limitations apply to the borrower’s total outstanding
indebtedness to us, including that of any
guarantors. The policies are reviewed and approved at
least annually by the Bank’s board of
directors. We supplement our own supervision of the loan
underwriting and approval process with periodic loan audits by
internal personnel and outside professionals experienced in loan
review work.
Commercial Loans. Commercial business lending is a
primary focus of our lending activities. As of December 31, 2016,
our commercial loan portfolio totaled $170.7 million. Commercial
loans include secured loans for working capital, expansion and
other business purposes. Short-term working capital
loans generally are secured by accounts receivable, inventory
and/or equipment. Our underwriting requirements for
operating loans focus primarily on the conversion of the
borrower’s working capital assets to cash and secondarily on
the cash flow generated from operations. Loan amounts
are determined through industry-accepted margins on the
borrower’s working capital assets and the length of payment
recovery in the borrower’s business cycle. We
require personal guarantees and secondary sources of repayment for
commercial loans.
We also finance the intermediate assets of most
businesses. Terms for loans of this nature are matched
with the useful economic life of the asset. Advance
rates are based on industry accepted collateral margins and are
normally 50% to 85% of purchase cost or appraised
value.
Commercial Real Estate Loans. Aggregate commercial real estate loan
balances outstanding as of December 31, 2016 equaled $641.7
million, or 53.9% of our total loan portfolio. Loan
amounts within this category average approximately $1.01
million. This lending involves loans secured by
multifamily residential units, income-producing properties,
owner-occupied commercial properties and land loans where the
global cash flow of the principals is sufficient to service the
credits. Loan amounts generally conform to the
regulatory loan-to-value guidelines and amortizations match the
economic life of the collateral.
Loans secured by income-producing properties generally contain more
risk than owner-occupied real estate, including one-to-four family
residences. We normally view real estate as the
secondary source of repayment; however, an income-producing
property’s value is reliant on the cash flow it
generates. We perform an analysis of the cash flow
generated by a project or underlying business to determine if net
operating income for such project exceeds a minimum of 1.20 times
the debt payments. The Bank’s underwriting policy
requires sufficient borrower equity, pre-sale and pre-lease
requirements along with personal guarantees of the
principals. Additional underwriting includes sensitivity
analysis on rental, vacancy and interest rates.
Due to the changing nature of the real estate markets, the Bank
monitors its exposure by requiring annual reviews of certain loans
and also periodic reviews of the various real estate market
conditions. On a quarterly basis the Bank’s board
of directors is presented with portfolio stratification reports by
risk grades and product types that include market data for the
purpose of monitoring and maintaining the proper levels of
diversification. The Bank has established concentration
guidelines that are also reviewed and changed as deemed
necessary.
3
Construction and Land Development Loans. Another lending focus for us is
construction and development lending. The balances of
construction loans outstanding as of December 31, 2016 totaled
$79.7 million. Loan amounts for these types of loans average
approximately $580,000. We originate one-to-four family
residential construction loans for the construction of custom homes
and provide financing to builders and consumers for the
construction of new homes. While we finance non-presold
homes, we place restrictions on the aggregate number and dollar
amounts of such loans to any one builder. Our construction
borrowers are local, well-established builders and not large,
national tract builders. These builders have demonstrated a
favorable record of performance, profitability and adequate levels
of liquidity. We limit risk through established
underwriting guidelines to determine the level of exposure for each
builder and limit the risk on individual projects through an
inspection process. We also may finance a limited amount
of small tract developments and subdivisions. We require
principal guarantees with all construction
loans.
Residential Real Estate Loans. We make residential real estate loans
to borrowers to purchase and refinance one-to-four family
properties as well as home equity loans on one-to-four family
properties. These services are offered as an adjunct to
our private bank clients as a matter of convenience. We
provide customers access to long-term conventional real estate
loans through our mortgage loan department, which underwrites loans
for origination by unaffiliated third-party brokers in the
secondary market. We receive fees in connection with the
origination of mortgage loans, with such fees aggregating $172,000
for the year ended December 31, 2016 and $197,000 for the year
ended December 31, 2015. In addition to non-interest
income generated by the origination of mortgage loans, we believe
that offering such loans allows us to serve the convenience and
needs of our customers while also affording an opportunity to
cross-market our other loan and deposit
products.
Loans to Individuals. Our loans to individuals
include lines of credit, loans secured by titled automobiles,
equipment and miscellaneous secured and unsecured personal
loans. We also offer credit cards as an accommodation to
our customers. As of December 31, 2016, our consumer
loan portfolio totaled $11.5 million. In underwriting
such loans, we focus on the borrower’s past credit history
and ability to repay the loan. In most cases, we
calculate a borrower’s repayment ability through gross debt
to income benchmarks with the repayment ability of some business
owners calculated through a global cash flow analysis based on the
borrower’s tax return. Default rates are higher in
these categories and we are diligent in valuing highly depreciable
collateral such as automobiles and equipment. We
structure the loan terms to match the loan purpose and advance on
industry-accepted margins for the collateral securing the
loan.
Loan Approval, Credit Administration and Loan
Review. Certain
credit risks are inherent in making loans. These risks
include repayment risks, risks resulting from uncertainties in the
future value of collateral, risks resulting from changes in
economic and industry conditions, and risks inherent in dealing
with borrowers. We attempt to mitigate repayment risks
by adhering to internal credit limits, a multi-layered approval
process, documentation examination, and follow-up
procedures.
We emphasize a strong credit culture based on traditional credit
measures and our knowledge of our markets through experienced
client development officers. Our credit culture begins
with our client development officers, or CDOs, each of whom is
required to have excellent credit skills. The CDOs work
closely with the credit department to underwrite loans and to
present the loans to our credit administration department to
complete the underwriting and approval process. Our credit
administration department facilitates the approval process, which
may include presentation to a loan committee depending on the total
credit exposure. CDOs do not have individual loan authority in
excess of $100,000.
We also engage an outside loan review firm annually to provide
extensive reviews of our commercial and consumer loan
portfolios. External loan review findings are
reported to the President/CEO, the Director’s Loan Committee
and the Audit Committee. The scope and size of
each external loan review engagement varies depending upon the
economic, market, and internal circumstances facing the Bank at the
time of the review.
4
Our credit administration processes are managed by our Chief Credit
Officer who has spent the past nine years with Paragon Bank, and
has more than nineteen years of experience working in banking and
finance overall. Our credit administration group consists of four
experienced credit administrators with an average of more than
twenty years of credit experience. Our credit administration,
credit review and loan operation systems focus on approving sound
credits while meeting numerous regulatory requirements including
compliance regulations.
At December 31, 2016, nonperforming loans were $968,000 or 0.08% of
our total loan portfolio. Nonperforming assets,
including OREO, as a percent of total assets were 0.38% as of
December 31, 2016.
Loan Participations. From time to time we sell loan
participations to other banks within and outside our market
area. The sale of participations in larger loans to
other financial institutions allows us to manage the risk involved
in these credits while meeting the lending needs of customers that
require extensions of credit in excess of our internal lending
limits. On rare occasions, the Bank has purchased loan
participations from other financial institutions. All
loan participations purchased are underwritten using our standard
and customary underwriting criteria.
Courier Services
We offer courier services to our business customers as a
demonstration of our commitment to superior customer
service. Our couriers travel to the
customer’s location, pick-up non-cash deposits from the
customer and deliver those deposits to the Bank. We feel our
couriers serve as ambassadors for our Bank and enhance our presence
in the markets we serve.
Banking Technology
We offer a full array of technology to our
customers. Our customers have the ability through online
banking to pay bills, request check copies, reorder checks and make
certain transfers. We provide our customers with imaged
check statements, which eliminate the cost of returning checks to
customers and the clutter of canceled checks. We also
offer remote deposit capture, which allows customers to submit
check images for deposit without leaving their
offices. This remote capture service augments our
courier services, giving our customers the choice of either for
more prompt deposit collection and crediting. These
services give us the ability to offer superior service and
convenience to customers in each of our market areas from our
efficient single-office business platform.
Supervision and Regulation
Bank
holding companies and state commercial banks are extensively
regulated under both federal and state law. The following is a
brief summary of certain statutes, rules and regulations that
affect or may affect the Company and Paragon Bank. This summary
contains what management believes to be the material information
related to the supervision and regulation of the Company and
Paragon Bank but is not intended to be an exhaustive description of
the statutes or regulations applicable to their respective
businesses, or to bank holding companies or banks generally.
Supervision, regulation and examination of the Company and Paragon
Bank by the regulatory agencies are intended primarily for the
protection of depositors, the Deposit Insurance Fund, or DIF, of
the FDIC and the financial system rather than stockholders of the
Company and Paragon Bank. We cannot predict whether or in what form
any proposed statute or regulation will be adopted or the extent to
which the business of the Company and Paragon Bank may be affected
by a statute or regulation. Changes in such laws and regulations
may have a material effect on our business and
prospects.
5
Regulation of the Company
As a
registered bank holding company, the Company is subject to
regulation under the BHCA and to the supervision, examination and
reporting requirements of the Board of Governors of the Federal
Reserve System, or the Federal Reserve. Pursuant to the BHCA, the
Federal Reserve has the power to order any bank holding company or
its subsidiaries to terminate any activity or to terminate its
ownership or control of any subsidiary when the Federal Reserve
Board has reasonable grounds to believe that continuation of such
activity or ownership constitutes a serious risk to the financial
soundness, safety or stability of any bank subsidiary of the bank
holding company. The Federal Reserve Board and the FDIC have
adopted guidelines and released interpretative materials that
establish operational and managerial standards to promote the safe
and sound operation of banks and bank holding companies. These
standards relate to the institution’s key operating
functions, including but not limited to capital management,
internal controls, internal audit system, information systems and
data and cybersecurity, loan documentation, credit underwriting,
interest rate exposure and risk management, vendor management,
executive management and its compensation, asset growth, asset
quality, earnings, liquidity and risk management.
The
BHCA generally prohibits a bank holding company from retaining
direct or indirect ownership or control of more than five percent
of the voting shares of any company which is not a bank or bank
holding company or engaging in activities other than banking,
managing or controlling banks or other permissible subsidiaries and
acquiring or retaining direct or indirect control of any company
engaged in any activities other than activities closely related to
banking or managing or controlling banks. In determining whether a
particular activity is permissible, the Federal Reserve considers
whether performing the activity can be expected to produce benefits
to the public that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices. The Federal
Reserve has the power to order a bank holding company or its
subsidiaries to terminate any activity or control of any subsidiary
when the continuation of the activity or control constitutes a
serious risk to the financial safety, soundness or stability of any
bank subsidiary of that bank holding company.
Under
Federal Reserve policy and as codified by the Wall Street Reform
and Consumer Protection Act of 2010, or the Dodd-Frank Act, the
Company is expected to act as a source of financial strength for
Paragon Bank and to commit resources to support the Bank. This
support may be required at times when the Company might not be
inclined to provide it or it might not be in the Company’s
best interests or the best interests of its stockholders. In
addition, any capital loans made by the Company to Paragon Bank
will be repaid only after the Bank’s deposits and various
other obligations are repaid in full.
Acquiring Control of a Bank Holding Company
The
Federal Reserve Board has jurisdiction under the BHCA to approve
any bank or non-bank acquisition, merger or consolidation proposed
by a bank holding company. The BHCA requires every bank holding
company to obtain the prior approval of the Federal Reserve
before:
●
it may acquire
direct or indirect ownership or control of any voting shares of any
bank if, after the acquisition, the bank holding company will
directly or indirectly own or control more than 5% of the voting
shares of the bank;
●
it or any of its
subsidiaries, other than a bank, may acquire all or substantially
all of the assets of any bank; or
●
it may merge or
consolidate with any other bank holding company.
The
BHCA further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or that would
substantially lessen competition in the banking business, unless
the public interest in meeting the needs of the communities to be
served outweighs the anti-competitive effects. The Federal Reserve
is also required to consider the financial and managerial resources
and future prospects of the bank holding companies and banks
involved and the convenience and needs of the communities to be
served. Consideration of financial resources generally focuses on
capital adequacy, and consideration of convenience and needs issues
focuses, in part, on the performance under the Community
Reinvestment Act of 1977, both of which are discussed elsewhere in
more detail.
6
Subject
to various exceptions, the BHCA and the Change in Bank Control Act,
together with related regulations, require Federal Reserve approval
prior to any person or company acquiring “control” of a
bank holding company. Control is conclusively presumed to exist if
an individual or company acquires 25% or more of any class of
voting securities of a bank holding company. Control is also
presumed to exist, although rebuttable, if a person or company
acquires 10% or more, but less than 25%, of any class of voting
securities and either:
●
the bank holding
company has registered securities under Section 12 of the
Securities Exchange Act of 1934, as amended, or the Exchange Act;
or
●
no other person
owns a greater percentage of that class of voting securities
immediately after the transaction.
The
Company’s common stock is registered under Section 12 of
the Exchange Act. The regulations provide a procedure for
challenging rebuttable presumptions of control.
Regulation of Paragon Bank
Paragon
Bank has a North Carolina state commercial bank charter and is
subject to regulation, supervision and examination by the FDIC and
the Commissioner.
Paragon
Bank is also subject to numerous state and federal statutes and
regulations that affect its business, activities and operations and
is supervised and examined by state and federal bank regulatory
agencies. The FDIC and the Commissioner regularly examine the
operations of Paragon Bank and are given the authority to approve
or disapprove mergers, consolidations, the establishment of
branches and similar corporate actions. These agencies also have
the power to prevent the continuance or development of unsafe or
unsound banking practices or other violations of law. Each of
Paragon Bank’s depository accounts is insured by the FDIC
against loss to the depositor to the maximum extent permitted by
applicable law, and federal law and regulatory policy impose a
number of obligations and restrictions on the Company and Paragon
Bank to reduce potential loss exposure to depositors and to the
DIF.
The
Federal Deposit Insurance Act, or the FDIA, provides that amounts
received from the liquidation or other resolution of any insured
depository institution must be distributed, after payment of
secured claims, to pay the deposit liabilities of the institution
before payment of any other general creditor or stockholder of that
institution – including that institution’s parent
holding company. This provision would give depositors a preference
over general and subordinated creditors and stockholders if a
receiver is appointed to distribute the assets of a
bank.
Bank Merger Act
Section 18(c)
of the Federal Deposit Insurance Act, popularly known as the
“Bank Merger Act,” requires the prior written approval
of appropriate federal bank regulatory agencies before any bank may
(i) merge or consolidate with, (ii) purchase or otherwise
acquire the assets of, or (iii) assume the deposit liabilities
of, another bank if the resulting institution is to be a state
nonmember bank.
The
Bank Merger Act prohibits the applicable federal bank regulatory
agency from approving any proposed merger transaction that would
result in a monopoly, or would further a combination or conspiracy
to monopolize or to attempt to monopolize the business of banking
in any part of the United States. Similarly, the Bank Merger Act
prohibits the applicable federal bank regulatory agency from
approving a proposed merger transaction whose effect in any section
of the country may be substantially to lessen competition, or to
tend to create a monopoly, or which in any other manner would be in
restraint of trade. An exception may be made in the case of a
merger transaction whose effect would be to substantially lessen
competition, tend to create a monopoly, or otherwise restrain
trade, if the applicable federal bank regulatory agency finds that
the anticompetitive effects of the proposed transaction are clearly
outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the community
to be served.
7
In
every proposed merger transaction, the applicable federal bank
regulatory agency must also consider the financial and managerial
resources and future prospects of the existing and proposed
institutions, the convenience and needs of the community to be
served, and the effectiveness of each insured depository
institution involved in the proposed merger transaction in
combating money-laundering activities.
State Regulation of the Company and the Bank
Paragon
Bank is subject to extensive supervision and regulation by the
Commissioner. The Commissioner oversees state laws that set
specific requirements for bank capital and that regulate deposits
in, and loans and investments by, banks, including the amounts,
types, and in some cases, rates. The Commissioner supervises and
performs periodic examinations of North Carolina-chartered banks to
assure compliance with state banking statutes and regulations, and
banks are required to make regular reports to the Commissioner
describing in detail their resources, assets, liabilities, and
financial condition. Among other things, the Commissioner regulates
mergers and consolidations of state-chartered banks, capital
requirements for banks, loans to officers and directors, record
keeping, types and amounts of loans and investments, and the
establishment of branches.
The
Commissioner has extensive enforcement authority over North
Carolina banks. Such authority includes the ability to issue cease
and desist orders and to seek civil money penalties. The
Commissioner may also take possession of a North Carolina bank in
various circumstances, including for a violation of its charter or
of applicable laws, operating in an unsafe and unsound manner, or
as a result of an impairment of its capital, and may appoint a
receiver.
The
Commissioner also regulates the Company pursuant to Chapters 53 and
53C of the North Carolina General Statutes. These laws require bank
holding companies to register with the Commissioner and grant the
Commissioner broad supervisory and enforcement authority in
connection with formation, merger and change in control
transactions involving North Carolina bank holding companies and
their nonbank subsidiaries. These laws also grant the Commissioner
the ability to issue cease and desist orders and to seek civil
money penalties.
Payment of Dividends and Other Restrictions
The
Company is a legal entity separate and distinct from the Bank.
While there are various legal and regulatory limitations under
federal and state law on the extent to which banks can pay
dividends or otherwise supply funds to holding companies, the
principal source of cash revenues for the Company is dividends from
the Bank, if any. The relevant federal and state regulatory
agencies have authority to prohibit a state bank or bank holding
company, which would include the Bank and the Company, from
engaging in what, in the opinion of such regulatory body,
constitutes an unsafe or unsound practice in conducting its
business. The payment of dividends could, depending upon the
financial condition of a bank, be deemed to constitute an unsafe or
unsound practice in conducting its business.
North
Carolina commercial banks, such as Paragon Bank, are subject to
legal limitations on the amounts of dividends they are permitted to
pay. Specifically, an insured depository institution, such as
Paragon Bank, is prohibited from making capital distributions,
including the payment of dividends, if, after making such
distribution, the institution would become
“undercapitalized” (as such term is defined in the
applicable law and regulations).
The
Federal Reserve has issued a policy statement on the payment of
cash dividends by bank holding companies, which expresses the
Federal Reserve’s view that a bank holding company should pay
cash dividends only to the extent that the holding company’s
net income for the past four quarters is sufficient to cover both
the cash dividends and a rate of earnings retention that is
consistent with the holding company’s capital needs, asset
quality and overall financial condition. The Federal Reserve also
indicated that it would be inappropriate for a holding company
experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve, the Federal Reserve may
prohibit a bank holding company from paying any dividends if any of
the holding company’s bank subsidiaries are classified as
undercapitalized.
8
A bank
holding company is required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding
equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration paid for all
such purchases or redemptions during the preceding 12 months, is
equal to 10% or more of its consolidated net worth. The Federal
Reserve may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe or unsound
practice or would violate any law, regulation, Federal Reserve
order or any condition imposed by, or written agreement with, the
Federal Reserve.
Capital Adequacy
The
Company must comply with the Federal Reserve’s established
capital adequacy standards, and Paragon Bank is required to comply
with the capital adequacy standards established by the FDIC. The
Federal Reserve has promulgated two basic measures of capital
adequacy for bank holding companies: a risk-based measure and a
leverage measure. A bank holding company must satisfy all
applicable capital standards to be considered in
compliance.
The
risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for
off-balance-sheet exposure and minimize disincentives for holding
liquid assets.
Assets
and off-balance-sheet items are assigned to broad risk categories,
each with designated weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and
off-balance-sheet items. Under applicable capital standards, the
minimum risk-based capital ratios are a common equity Tier 1
capital to risk-weighted assets ratio of 4.5%, a Tier 1 capital to
risk-weighted assets ratio of 6%, and a total capital to
risk-weighted assets ratio of 8%. In addition, to avoid
restrictions on capital distributions and discretionary bonus
payments, the Company and the Bank are required to meet a capital
conservation buffer of common equity Tier 1 capital in addition to
the minimum common equity Tier 1 capital ratio. The capital
conservation buffer will be phased in over the period from January
1, 2016 until January 1, 2019, at which point it will be set at
2.5% common equity Tier 1 capital to risk-weighted assets, which
sits “on top” of the 4.5% minimum common equity Tier 1
to risk-weighted assets ratio. Common equity Tier 1 capital is
predominantly comprised of retained earnings and common stock
instruments (that meet strict delineated criteria), net of treasury
stock, and after making necessary capital deductions and
adjustments. Tier 1 capital is comprised of common equity Tier 1
capital plus Additional Tier 1 capital, which consists of
noncumulative perpetual preferred stock and similar instruments
meeting specified eligibility criteria. Total capital is comprised
of Tier 1 capital plus Tier 2 capital, which consists of
subordinated debt with a minimum original maturity of at least five
years and a limited amount of loan loss reserves.
At
December 31, 2016, Paragon Bank’s risk-based capital
ratios, as calculated under the applicable capital standards, were
12.14% common equity Tier 1 capital to risk weighted assets, 12.36
% Tier 1 capital to risk weighted assets, and 12.99 % total capital
to risk weighted assets. At December 31, 2015, these ratios were
10.90%, 10.90% and 11.59%, respectively.
In
addition, the Federal Reserve has established minimum leverage
ratio guidelines for bank holding companies. These guidelines
provide for a minimum ratio of Tier 1 capital to average total
on-balance sheet assets, less goodwill and certain other intangible
assets, of 4% for bank holding companies. The Company’s
leverage ratio was 10.05% at December 31, 2016 and 8.66% and 9.02%
at December 31, 2015 and 2014, respectively. The guidelines
also provide that bank holding companies experiencing internal
growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory
levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve has indicated that it will
consider a “tangible Tier 1 Capital leverage ratio” and
other indications of capital strength in evaluating proposals for
expansion or new activities.
9
Failure
to meet capital guidelines could subject a bank to a variety of
enforcement actions, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on
taking brokered deposits and certain other restrictions on its
business. As described below, the FDIC can impose substantial
additional restrictions upon FDIC-insured depository institutions
that fail to meet applicable capital requirements.
The
Federal Deposit Insurance Act, or FDI Act, requires the federal
regulatory agencies to take “prompt corrective action”
if a depository institution does not meet minimum capital
requirements. The FDI Act establishes five capital tiers:
“well capitalized,” “adequately
capitalized,” “undercapitalized,”
“significantly undercapitalized” and “critically
undercapitalized.” A depository institution’s capital
category will depend upon how its capital levels compare to various
relevant capital measures and certain other factors, as established
by regulation.
The
federal bank regulatory agencies have adopted regulations
establishing relevant capital measures and relevant capital levels
applicable to FDIC-insured banks. The relevant capital measures are
the Total Risk-Based Capital ratio, Tier 1 Risk-Based Capital
ratio, Common Equity Tier 1 Capital ratio and the leverage ratio.
Under the current regulatory framework, an FDIC-insured bank
is:
●
“well
capitalized” if it has a Total Risk-Based Capital ratio of
10% or greater, a Tier 1 Risk-Based Capital ratio of 8% or greater,
a Common Equity Tier 1 Capital ratio of 6.5% or greater and a
leverage ratio of 5% or greater and is not subject to any order or
written directive by the appropriate regulatory authority to meet
and maintain a specific capital level for any capital
measure;
●
“adequately
capitalized” if it has a Total Risk-Based Capital ratio of 8%
or greater, a Tier 1 Risk-Based Capital ratio of 6% or greater, a
Common Equity Tier 1 Capital ratio of 4.5% or greater and a
leverage ratio of 4% or greater and is not “well
capitalized”;
●
“undercapitalized”
if it has a Total Risk-Based Capital ratio of less than 8%, a Tier
1 Risk-Based Capital ratio of less than 6%, a Common Equity Tier 1
Capital ratio of less than 4% or a leverage ratio of less than
4%;
●
“significantly
undercapitalized” if it has a Total Risk-Based Capital ratio
of less than 6%, a Tier 1 Risk-Based Capital ratio of less than 4%,
a Common Equity Tier 1 Capital ratio of less than 3% or a leverage
ratio of less than 3%; and
●
“critically
undercapitalized” if its tangible equity is equal to or less
than 2% of average quarterly tangible assets.
An
institution may be downgraded to, or deemed to be in, a capital
category that is lower than is indicated by its capital ratios if
it is determined to be in an unsafe or unsound condition or if it
receives an unsatisfactory examination rating with respect to
certain matters. As of December 31, 2016, Paragon Bank had
capital levels that qualify as “well capitalized” under
applicable regulations.
The FDI
Act generally prohibits an FDIC-insured bank from making a capital
distribution (including payment of a dividend) or paying any
management fee to its holding company if the bank is or would
thereafter be “undercapitalized.”
“Undercapitalized” banks are subject to growth
limitations and are required to submit a capital restoration plan.
The federal regulators may not accept a capital plan without
determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the
bank’s capital. In addition, for a capital restoration plan
to be acceptable, the bank’s parent holding company must
guarantee that the institution will comply with such capital
restoration plan until the institution has been adequately
capitalized on average during each of four consecutive calendar
quarters. The aggregate liability of the parent holding company
under such guarantee is limited to the lesser of: (i) an
amount equal to 5% of the bank’s total assets at the time it
became “undercapitalized”; and (ii) the amount
which is necessary (or would have been necessary) to bring the
institution into compliance with all capital standards applicable
with respect to such institution as of the time it fails to comply
with the plan. If a bank fails to submit an acceptable plan, it is
treated as if it is “significantly
undercapitalized.”
10
“Significantly
undercapitalized” insured banks may be subject to a number of
requirements and restrictions, including orders to sell sufficient
voting stock to become “adequately capitalized,”
requirements to reduce total assets and the cessation of receipt of
deposits from correspondent banks. “Critically
undercapitalized” institutions are subject to the appointment
of a receiver or conservator. A bank that is not “well
capitalized” is also subject to certain limitations relating
to brokered deposits.
The
regulatory capital framework under which the Company and Paragon
Bank operate has changed significantly in recent years as a result
of the Dodd-Frank Act, which was enacted in July 2010, and other
regulations, including the separate regulatory capital requirements
put forth by the Basel Committee on Banking Supervision, commonly
known “Basel III.”
In
July 2013, the Federal Reserve, FDIC and Office of the
Comptroller of the Currency approved final rules that established
an integrated regulatory capital framework that addressed
shortcomings in certain capital requirements. The rules implemented
in the United States the Basel III regulatory capital reforms from
the Basel Committee on Banking Supervision and certain changes
required by the Dodd-Frank Act. The rules began to apply to the
Company and the Bank beginning January 1, 2015.
The
major provisions of the rules applicable to the Company and the
Bank are:
●
The rules implement
higher minimum capital requirements described above in this
section, including a new common equity Tier 1 capital requirement
and capital conservation buffer, and establish criteria that
instruments must meet in order to be considered common equity Tier
1 capital, additional Tier 1 capital, or Tier 2 capital. Among the
most important changes are stricter eligibility criteria for
regulatory capital instruments that would disallow the inclusion of
instruments such as trust preferred securities in Tier 1 capital
going forward, and new constraints on the inclusion of minority
interests, mortgage-servicing assets (MSAs), deferred tax assets
(DTAs), and certain investments in the capital of unconsolidated
financial institutions. These enhancements both improve the quality
and increase the quantity of capital required to be held by banking
organizations compared to the previous capital rules, better
equipping the U.S. banking system to deal with adverse economic
conditions.
●
The rules also
affect the inclusion of mortgage servicing assets, or MSAs, as an
element of capital. Specifically, MSAs are limited to 10% of a
bank’s common equity Tier 1 capital and the combined balance
of MSAs, deferred tax assets, and investments in the common stock
of unconsolidated financial institutions is limited to 15% of a
bank’s common equity Tier 1 capital. These combined assets
must be deducted from common equity to the extent that they exceed
the 15% threshold. Any portion of a bank’s MSAs that are not
deducted from the calculation of common equity Tier 1 will be
subject to a 100% risk weight that will increase to 250% in
2018.
●
The rules also
increase the risk weights for past-due loans, certain commercial
real estate loans, and some equity exposures, and make selected
other changes in risk weights and credit conversion
factors.
Continued
compliance by the Company and Paragon Bank with these capital
requirements will likely affect their respective
operations.
The Volcker Rule
Under
provisions of the Dodd-Frank Act referred to as the “Volcker
Rule,” and related rules adopted by the federal bank
regulatory agencies, the SEC and the Commodity Futures Trading
Commission, certain limitations are placed on the ability of
insured depository institutions and their affiliates to engage in
sponsoring, investing in and transacting with certain investment
funds, including hedge funds and private equity funds. The Volcker
Rule also places restrictions on proprietary trading, which could
impact certain hedging activities. The Volcker Rule became fully
effective in July 2015, and banking entities had until July 2016 to
divest certain legacy investments in covered funds. The Volcker
Rule is not expected to have a material impact on the operations of
the Company or the Bank.
11
Real Estate Lending Evaluations
The
federal regulators have adopted uniform standards for evaluations
of loans secured by real estate or made to finance improvements to
real estate. Banks are required to establish and maintain written
internal real estate lending policies consistent with safe and
sound banking practices and appropriate to the size of the
institution and the nature and scope of its operations. The
regulations establish loan to value ratio limitations on real
estate loans. Paragon Bank’s respective loan policies
establish limits on loan to value ratios that are equal to or less
than those established in such regulations.
Commercial Real Estate Concentrations
Lending
operations of commercial banks may be subject to enhanced scrutiny
by federal banking regulators based on a bank’s concentration
of commercial real estate, or CRE, loans. The federal banking
regulators have issued final guidance to remind financial
institutions of the risk posed by CRE, lending concentrations. CRE
loans generally include land development, construction loans, and
loans secured by multifamily property, and nonfarm, nonresidential
real property where the primary source of repayment is derived from
rental income associated with the property. The guidance prescribes
the following guidelines for regulatory examiners to help identify
institutions that are potentially exposed to significant CRE risk
and may warrant greater supervisory scrutiny:
●
total reported
loans for construction, land development and other land, or
C&D, represent 100% or more of the institution’s total
capital; or
●
total CRE loans
represent 300% or more of the institution’s total capital,
and the outstanding balance of the institution’s CRE loan
portfolio has increased over 50% or more during the prior 36
months.
As of
December 31, 2016, the Bank’s C&D concentration as a
percentage of bank capital totaled 49.2% and its CRE concentration,
net of owner-occupied loans, as a percentage of capital totaled
329.5%.
Limits on Loans to One Borrower
The
Bank generally is subject to both FDIC regulations and North
Carolina law regarding loans to any one borrower, including related
entities. Under applicable law, with certain limited exceptions,
loans and extensions of credit by a state chartered nonmember bank
to a person outstanding at one time and not fully secured by
collateral having a market value at least equal to the amount of
the loan or extension of credit may not exceed 15% of Total
Risk-Based Capital of the Bank. Loans and extensions of credit
fully secured by readily marketable collateral having a market
value at least equal to the amount of the loan or extension of
credit may not exceed an additional 10% of Total Risk-Based Capital
of the Bank. The Bank’s legal lending limit for loans to one
borrower was approximately $24.31 million at December 31, 2016. At
that date, the Bank had no lending relationships in excess of the
loans-to-one-borrower limit. The Bank has imposed an internal
lending limit and maximum relationship exposure of approximately
$10 million for new extensions of credit, with exceptions approved
by a committee of the Bank’s board of directors.
Restrictions on Affiliate Transactions
Sections
23A and 23B of the Federal Reserve Act establish parameters for a
bank to conduct “covered transactions” with its
affiliates, with the objective of limiting risk to the insured
bank. Generally, Sections 23A and 23B (i) limit the extent to which
the bank or its subsidiaries may engage in “covered
transactions” with any one affiliate to an amount equal to
10% of such bank’s capital stock and surplus, and limit the
aggregate of all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require
that all such transactions be on terms substantially the same, or
at least as favorable, to the bank or subsidiary as those that
would be provided to a non-affiliate. The term “covered
transaction” includes the making of loans to the affiliate,
purchase of assets from the affiliate, issuance of a guarantee on
behalf of the affiliate and several other types of
transactions.
12
The
Dodd-Frank Act imposed additional restrictions on transactions
between affiliates by amending these two sections of the Federal
Reserve Act. Under the Dodd-Frank Act, restrictions on transactions
with affiliates are enhanced by (i) including among “covered
transactions” transactions between bank and affiliate-advised
investment funds; (ii) including among “covered
transactions” transactions between a bank and an affiliate
with respect to securities repurchase agreements and derivatives
transactions; (iii) adopting stricter collateral rules; and (iv)
imposing tighter restrictions on transactions between banks and
their financial subsidiaries.
Liquidity Requirements
FDIC
policy requires that banks maintain an average daily balance of
liquid assets (cash, certain time deposits, mortgage-backed
securities, loans available for sale and specified United States
government, state, or federal agency obligations) in an amount
which it deems adequate to protect the safety and soundness of the
bank. The FDIC currently has no specific level which it
requires. The Bank maintains its liquidity position under policy
guidelines based on liquid assets in relationship to total
assets. Based on its policy calculation guidelines, the
Bank’s calculated liquidity ratio was 12.10% of total assets
at December 31, 2016, which management believes is
adequate.
Regulatory Restrictions on Acquisitions
The
Company must comply with numerous laws related to any potential
acquisition activity. As described above, a bank holding company
may not directly or indirectly acquire ownership or control of more
than 5% of the voting shares or substantially all of the assets of
any bank or merge or consolidate with another bank holding company
without the prior approval of the Federal Reserve. The
Company’s acquisition of non-banking companies is also
regulated by the Federal Reserve. Current federal law authorizes
interstate acquisitions of banks and bank holding companies without
geographic limitation, subject to Federal Reserve approval and
certain other conditions and concentration limits. Additionally,
the Dodd-Frank Act amended federal law to permit banks to establish
a de novo branch in any state if that state would permit a bank
organized in that state to open a branch.
FDIC Insurance Assessments
The
assessment rate paid by each DIF member institution is based on its
relative risks of default as measured by regulatory capital ratios
and other factors. Specifically, the assessment rate is based on
the institution’s capitalization risk category and
supervisory subgroup category. An institution’s
capitalization risk category is based on the FDIC’s
determination of whether the institution is well capitalized,
adequately capitalized or less than adequately capitalized. Paragon
Bank’s insurance assessments during 2016 and 2015 were
$595,000 and $836,000, respectively. The FDIC may also require
special assessments if conditions warrant. An institution’s
supervisory subgroup category is based on the FDIC’s
assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will
be required. The FDIC may terminate insurance of deposits upon a
finding that an institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC.
The
Dodd-Frank Act expanded the base for FDIC insurance assessments,
requiring that assessments be based on the average consolidated
total assets less tangible equity capital of a financial
institution. On February 7, 2011, the FDIC approved a final
rule to implement the foregoing provision of the Dodd-Frank Act.
Among other things, the final rule revised the assessment rate
schedule to provide initial base assessment rates ranging from 5 to
35 basis points, subject to adjustments which can increase or
decrease the total base assessment rates. The FDIC has three
possible adjustments to an institution’s initial base
assessment rate: (1) a decrease of up to five basis points (or
50% of the initial base assessment rate) for long-term unsecured
debt, including senior unsecured debt (other than debt guaranteed
under the Temporary Liquidity Guarantee Program) and subordinated
debt; (2) an increase for holding long-term unsecured or
subordinated debt issued by other insured depository institutions
known as the Depository Institution Debt Adjustment; and
(3) for institutions not well rated and well capitalized, an
increase not to exceed 10 basis points for brokered deposits in
excess of 10 percent of domestic deposits.
13
The law
also gave the FDIC enhanced discretion to set assessment rate
levels.
The
FDIC also collects a deposit-based assessment from insured
financial institutions on behalf of the Financing Corporation, or
the FICO. The funds from these assessments are used to service debt
issued by FICO in its capacity as a financial vehicle for the
Federal Savings & Loan Insurance Corporation. The FICO
assessment rate is set quarterly and in 2016 ranged from 58 basis
points in the first quarter to 56 basis points in the fourth
quarter per $100 of assessable deposits. These assessments will
continue until the debt matures in 2017 through 2019.
Community Reinvestment Act
The
Community Reinvestment Act requires federal bank regulatory
agencies to encourage financial institutions to meet the credit
needs of low and moderate-income borrowers in their local
communities. An institution’s size and business strategy
determines the type of examination that it will receive. Large,
retail-oriented institutions are examined using a performance-based
lending, investment and service test. Small institutions are
examined using a streamlined approach. All institutions may opt to
be evaluated under a strategic plan formulated with community input
and pre-approved by the bank regulatory agency.
The
Community Reinvestment Act regulations provide for certain
disclosure obligations. Each institution must post a notice
advising the public of its right to comment to the institution and
its regulator on the institution’s Community Reinvestment Act
performance and to review the institution’s Community
Reinvestment Act public file. Each lending institution must
maintain for public inspection a file that includes a listing of
branch locations and services, a summary of lending activity, a map
of its communities and any written comments from the public on its
performance in meeting community credit needs. The Community
Reinvestment Act requires public disclosure of the
regulators’ written Community Reinvestment Act evaluations of
financial institutions. This promotes enforcement of Community
Reinvestment Act requirements by providing the public with the
status of a particular institution’s community reinvestment
record.
The
Gramm-Leach-Bliley Act made various changes to the Community
Reinvestment Act. Among other changes, Community Reinvestment Act
agreements with private parties must be disclosed and annual
Community Reinvestment Act reports relating to such agreements must
be made available to a bank’s primary federal regulator. A
bank holding company will not be permitted to become a financial
holding company and no new activities authorized under the
Gramm-Leach-Bliley Act may be commenced by a holding company or by
a bank financial subsidiary if any of its bank subsidiaries
received less than a satisfactory Community Reinvestment Act rating
in its latest Community Reinvestment Act examination. Paragon Bank
received a “Satisfactory” rating in its last CRA
examination, which was conducted as of January 19,
2016.
Additional Legislative and Regulatory Matters
The
Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001, or the
USA PATRIOT Act, requires each financial institution: (i) to
establish an anti-money laundering program; (ii) to establish
due diligence policies, procedures and controls with respect to its
private banking accounts involving foreign individuals and certain
foreign banks; and (iii) to avoid establishing, maintaining,
administering or managing correspondent accounts in the United
States for, or on behalf of, foreign banks that do not have a
physical presence in any country. The USA PATRIOT Act also requires
the Secretary of the Treasury to prescribe by regulation minimum
standards that financial institutions must follow to verify the
identity of customers, both foreign and domestic, when a customer
opens an account. In addition, the USA PATRIOT Act contains a
provision encouraging cooperation among financial institutions,
regulatory authorities and law enforcement authorities with respect
to individuals, entities and organizations engaged in, or
reasonably suspected of engaging in, terrorist acts or money
laundering activities. The USA PATRIOT ACT also contained the
International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001, which sets forth anti-money laundering
measures affecting insured depository institutions, broker-dealers
and other financial institutions. The act requires U.S. financial
institutions to adopt new policies and procedures to combat money
laundering and grants the Secretary of the Treasury broad authority
to establish regulations and to impose requirements and
restrictions on the operations of financial
institutions.
14
The
United States has imposed economic sanctions that affect
transactions with designated foreign countries, nationals and
others. These are typically known as the OFAC rules based on their
administration by the U.S. Treasury’s Office of Foreign
Assets Control. The OFAC-administered sanctions targeting countries
take many different forms. Generally, however, they contain one or
more of the following elements: (i) restrictions on trade with
or investment in a sanctioned country, including prohibitions
against direct or indirect imports from and exports to a sanctioned
country and prohibitions on “U.S. persons” engaging in
financial transactions relating to making investments in, or
providing investment-related advice or assistance to, a sanctioned
country; and (ii) a blocking of assets in which the government
or specially designated nationals of the sanctioned country have an
interest, by prohibiting transfers of property subject to U.S.
jurisdiction (including property in the possession or control of
U.S. persons). Blocked assets (e.g., property and bank deposits)
cannot be paid out, withdrawn, set off or transferred in any manner
without a license from OFAC. Failure of a financial institution to
comply with these sanctions could result in legal consequences for
the institution.
The
Sarbanes-Oxley Act of 2002 applies to public companies a variety of
requirements to address corporate and accounting fraud and protect
investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. Sarbanes-Oxley imposes
higher standards for auditor independence and restricts the
provision of consulting services by auditing firms to companies
they audit and requires that certain audit partners be rotated
periodically. It also requires chief executive officers and chief
financial officers, or their equivalents, to certify the accuracy
of periodic reports filed with the SEC, subject to civil and
criminal penalties if they knowingly or willfully violate this
certification requirement, and increases the oversight and
authority of audit committees of publicly traded
companies.
Fiscal and Monetary Policy
Banking
is a business which depends on interest rate differentials for
success. In general, the difference between the interest paid by a
bank on its deposits and its other borrowings, and the interest
received by a bank on its loans and securities holdings,
constitutes a significant portion of a bank’s earnings. Thus,
the Company’s earnings and growth will be subject to the
influence of economic conditions generally, both domestic and
foreign, and also to the monetary and fiscal policies of the United
States and its agencies, particularly the Federal Reserve. The
Federal Reserve regulates the supply of money through various
means, including open market dealings in United States government
securities, the discount rate at which banks may borrow from the
Federal Reserve and the reserve requirements on deposits. The
nature and timing of any changes in such policies and their effect
on the Company’s business and results of operations cannot be
predicted.
Current
and future legislation and the policies established by federal and
state regulatory authorities will affect the Company’s future
operations. Banking legislation and regulations may limit the
Company’s growth and the return to its investors by
restricting certain of its activities.
In
addition, capital requirements could be changed and have the effect
of restricting the activities of the Company or requiring
additional capital to be maintained. Management cannot predict with
certainty what changes, if any, will be made to existing federal
and state legislation and regulations or the effect that such
changes may have on the Company’s business and results of
operations.
Limitations on Incentive Compensation
In June
2010, the Federal Reserve, the FDIC and the Office of the
Comptroller of the Currency issued incentive compensation guidance
that covers all employees that have the ability to materially
affect the risk profile of an organization, either individually or
as part of a group. This guidance is based upon the key principles
that a banking organization’s incentive compensation
arrangements should (i) provide employees incentives that
appropriately balance risk and reward and, thus, do not encourage
risk-taking beyond the organization’s ability to effectively
identify and manage risks, (ii) be compatible with effective
internal controls and risk management, and (iii) be supported
by strong corporate governance, including active and effective
oversight by the organization’s board of directors. Any
deficiencies in compensation practices that are identified may be
incorporated into the organization’s supervisory ratings,
which can affect its ability to make acquisitions or perform other
actions. The guidance provides that enforcement actions may be
taken against a banking organization if its incentive compensation
arrangements or related risk-management control or governance
processes pose a risk to the organization’s safety and
soundness and the organization is not taking prompt and effective
measures to correct the deficiencies.
15
As
required by the Dodd-Frank Act, in March 2011 the SEC and the
federal bank regulatory agencies (including the Federal Reserve and
the FDIC) proposed regulations that would prohibit financial
institutions with assets of at least $1 billion from maintaining
executive compensation arrangements that encourage inappropriate
risk taking by providing excessive compensation or that could lead
to material financial loss. These proposed regulations incorporate
the principles discussed in the Federal Reserve’s June 2010
incentive compensation guidance. In May 2016, the federal bank
regulatory agencies replaced the regulations proposed in 2011 with
a new proposal. If the regulations are adopted in the form
initially proposed, they will impose limitations on the manner in
which the Company may structure compensation for its executives.
The comment period for these proposed regulations has closed and a
final rule has not been published.
Financial Holding Company Status
Under
the BHCA, a bank holding company may file an election with the
Federal Reserve to be treated as a financial holding company and
engage in an expanded list of financial activities. The election
must be accompanied by a certification that all of the
company’s insured depository institution subsidiaries are
“well capitalized” and “well managed.”
Additionally, the Community Reinvestment Act of 1977 rating of each
subsidiary bank must be satisfactory or better. If, after becoming
a financial holding company and undertaking activities not
permissible for a bank holding company, the company fails to
continue to meet any of the prerequisites for financial holding
company status, the company must enter into an agreement with the
Federal Reserve to comply with all applicable capital and
management requirements. If the company does not return to
compliance within 180 days, the Federal Reserve may order the
company to divest its subsidiary banks or the company may
discontinue or divest investments in companies engaged in
activities permissible only for a bank holding company that has
elected to be treated as a financial holding company. The Company
is not a financial holding company and qualification as such by
other bank holding companies has not had a material effect on the
Company’s or the Bank’s business.
Economic Environment
The
policies of regulatory authorities, including the monetary policy
of the Federal Reserve, have a significant effect on the operating
results of bank holding companies and their subsidiaries. Among the
means available to the Federal Reserve to affect the money supply
are open market operations in U.S. government securities, changes
in the discount rate on member bank borrowings and changes in
reserve requirements against member bank deposits. These means are
used in varying combinations to influence overall economic growth
and may affect interest rates, and thus may impact the distribution
of bank loans, investments and deposits, and interest rates that
banks charge on loans or pay on deposits. The Federal
Reserve’s monetary policies have materially affected the
operating results of commercial banks in the past and are expected
to continue to do so in the future. The nature of future monetary
policies and the effect of these policies on the Company’s
business and earnings cannot be predicted.
Evolving Legislation and Regulatory Action
The
Company and the Bank continue to experience a period of rapidly
changing regulations and an environment of constant regulatory
reform. The most significant regulatory reform in recent years, the
Dodd-Frank Act, was signed into law in 2010 and implements many
changes to how financial and banking operations are regulated in
the United States, including through the creation of a new
resolution authority, mandating higher capital and liquidity
requirements, requiring banks to pay increased fees to regulatory
agencies and numerous other provisions intended to strengthen the
financial services sector. Pursuant to the Dodd-Frank Act, the
Financial Stability Oversight Council, or the FSOC, was created and
is charged with overseeing and coordinating the efforts of the
primary U.S. financial regulatory agencies (including the Federal
Reserve, the FDIC and the SEC) in establishing regulations to
address systemic financial stability concerns. Under the Dodd-Frank
Act the Consumer Financial Protection Bureau, or CFPB, was also
created as a new consumer financial services regulator. The CFPB is
authorized to prevent unfair, deceptive and abusive practices and
ensure that consumers have access to markets for consumer financial
products and services and that such markets are fair, transparent
and competitive.
16
Legislative
and regulatory initiatives are periodically introduced in the U.S.
Congress and state legislatures, as well as by regulatory agencies.
Such initiatives may include proposals to expand or contract the
powers of bank holding companies and depository institutions, and
could change banking statutes and regulations or the operating
environment of the Company and Paragon Bank in substantial and
unpredictable ways. Management cannot predict whether any new
legislation or regulations will be adopted or any other such
initiatives will be commenced and, if adopted or commenced, the
effect that it would have on the financial condition or results of
operations of the Company or Paragon Bank.
February 3, 2017, Executive Order
On
February 3, 2017, President Trump signed an executive order calling
for the administration to review existing U.S. financial laws and
regulations, including the Dodd-Frank Act, in order to determine
their consistency with a set of “core principles” of
financial policy. The core financial principles identified in the
executive order include the following: empowering Americans to make
independent financial decisions and informed choices in the
marketplace, save for retirement, and build individual wealth;
preventing taxpayerfunded bailouts; fostering economic growth and
vibrant financial markets through more rigorous regulatory impact
analysis that addresses systemic risk and market failures, such as
moral hazard and information asymmetry; enabling American companies
to be competitive with foreign firms in domestic and foreign
markets; advancing American interests in international financial
regulatory negotiations and meetings; and restoring public
accountability within federal financial regulatory agencies and
“rationalizing” the federal financial regulatory
framework.
Although
the order does not specifically identify any existing laws or
regulations that the administration considers to be inconsistent
with the core principles, areas that may be identified for reform
include the Volcker Rule; any “fiduciary” standard
applicable to investment advisers and broker-dealers; and the
powers, structure and funding arrangements of the Financial
Stability Oversight Council, the Office of
Financial
Research, the prudential bank regulators, the SEC, CFTC, and
Consumer Financial Protection Bureau. While some changes can be
implemented by the regulatory agencies themselves, implementing
much of the anticipated agenda of changes would require legislation
from Congress.
Available Information
The
Company makes its Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to those
reports available free of charge on its internet website
www.paragonbank.com as soon as
reasonably practicable after the reports are electronically filed
with the SEC. The Company's Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q are also available on its internet
website in interactive data format using the eXtensible Business
Reporting Language (XBRL), which allows financial statement
information to be downloaded directly into spreadsheets, analyzed
in a variety of ways using commercial off-the-shelf software and
used within investment models in other software formats. Any
materials that the Company files with the SEC may be read and/or
copied at the SEC's Public Reference Room at 100 F Street, NE,
Washington, DC 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. These filings are also accessible on the SEC's
website at www.sec.gov.
Additionally,
the Company's corporate governance policies, including the charters
of the Audit, Compensation, and Nominating and Corporate Governance
Committees, Code of Ethics and Business Conduct and Whistle Blower
Policy may also be found the Company's website (www.paragonbank.com).
A written copy of the foregoing corporate governance policies is
available upon written request to the Company.
17
ITEM 1A. RISK FACTORS
The
following are potential risks that management considers material
and that could affect the future operating results and financial
condition of the Company and the Bank. These do not necessarily
include all the risks that we may face. Additional risks and
uncertainties that are not currently known or that management does
not currently deem material could also have a material adverse
impact on our business, results of our operations and financial
condition.
If any
of the following risks actually occur, the Company’s
financial condition and results of operations could be materially
and adversely affected. If this were to happen, the value of the
Company’s common stock could decline significantly, and you
could lose all or part of your investment.
Risks Related to Our Business
We may experience increased delinquencies and credit losses, which
could have a material adverse effect on our capital, financial
condition, and results of operations.
Like
other lenders, we face the risk that our customers will not repay
their loans. A customer’s failure to repay us is usually
preceded by missed monthly payments. In some instances, however, a
customer may declare bankruptcy prior to missing payments, and,
following a borrower filing bankruptcy, a lender’s recovery
of the credit extended is often limited. Since many of our loans
are secured by collateral, we may attempt to seize the collateral
if and when a customer defaults on a loan. However, the value of
the collateral may not equal the amount of the unpaid loan, and we
may be unsuccessful in recovering the remaining balance from our
customer. The resolution of nonperforming assets, including the
initiation of foreclosure proceedings, requires significant
commitments of time from management, which can be detrimental to
the performance of their other responsibilities, and exposes us to
additional legal costs. Elevated levels of loan delinquencies and
bankruptcies in our market area generally and among our customers
specifically, can be precursors of future charge-offs and may
require us to increase our allowance for loan losses, or ALL.
Higher charge-off rates, delays in the foreclosure process or in
obtaining judgments against defaulting borrowers or an increase in
our ALL may hurt our overall financial performance if we are unable
to increase revenue to compensate for these losses, may increase
our cost of funds, and could materially adversely affect our
business, results of operations and financial
condition.
Our allowance for loan losses may prove to be insufficient to cover
actual loan losses, which could have a material adverse effect on
our financial condition and results of operations.
Our
future success depends to a significant extent upon the quality of
our assets, particularly loans. In originating loans, there is a
substantial likelihood that we will experience credit
losses. The risk of loss will vary with, among other things,
general economic conditions, including the current economic
environment and real estate market, the type of loan, the
creditworthiness of the borrower over the term of the loan, and, in
the case of a collateralized loan, the quality of the collateral
for the loan.
Our
loan customers may not repay their loans according to the terms of
these loans, and the collateral securing the payment of these loans
may be insufficient to assure repayment. As a result, we may
experience significant loan losses, which could have a material
adverse effect on our operating results. Our management makes
various assumptions and judgments about the collectability of our
loan portfolio, including the creditworthiness of our borrowers and
the value of the real estate and other assets serving as collateral
for the repayment of many of our loans. We maintain an
allowance for loan losses in an attempt to cover any loan losses
that may occur. In determining the size of the allowance, we rely
on an analysis of our loan portfolio based on historical loss
experience, volume and types of loans, trends in classification,
volume and trends in delinquencies and non-accruals, national and
local economic conditions, and other pertinent
information.
18
If our
assumptions are wrong, our current allowance may not be sufficient
to cover future loan losses, and we may need to make adjustments to
allow for different economic conditions or adverse developments in
our loan portfolio. Material additions to our allowance in the
form of provisions for loan losses would materially decrease our
net income. We expect our allowance to continue to fluctuate;
however, given current and future market conditions, our allowance
may not be adequate to cover future loan losses.
In
addition, federal and state regulators periodically review our
allowance for loan losses and may require us to increase our
provision for loan losses or recognize further loan charge-offs,
based on judgments different than those of our management. Any
increase in our allowance for loan losses or loan charge-offs as
required by these regulators could have a negative effect on our
operating results and could materially adversely affect our
business, results of operations and financial
condition.
We maintain a number of large borrowing relationships, any of which
could have a material adverse effect on our results of operations
if they were not to perform according to their terms.
We
maintain a number of large borrowing relationships. Our ten largest
borrowing relationships (which could include multiple loans) at
December 31, 2016 range from $8.8 million to $17.5 million and
averaged $11.0 million. The deterioration of one or more of these
relationships could result in a significant increase in our
non-performing loans and our provision for loan losses, which would
negatively impact our results of operations and the value of our
common stock. Our ten largest borrowing relationships represent
approximately 8.2% of our total credit exposure.
We maintain a number of large deposit relationships, the loss of
which could have a material adverse effect on our results of
operations.
We
maintain a number of large deposit relationships. Our ten largest
deposit relationships at December 31, 2016 range from $50.5 million
to $13.3 million, averaged $24.8 million and made up 21.1% of our
total deposits. The ability to attract these types of deposit
relationships has a positive impact on our net interest margin
since they provide a relatively low cost of funds compared to
certificates of deposit or borrowing advances. If these depositors
were to withdraw these funds and we were not able to replace them
with similar types of deposits, the cost of funds would increase
and our results of operations would be negatively
impacted.
We are subject to liquidity risk in our operations.
Liquidity
risk is the possibility of being unable, at a reasonable cost and
within acceptable risk tolerances, to pay obligations as they come
due, to capitalize on growth opportunities as they arise, or to pay
regular dividends because of an inability to liquidate assets or
obtain adequate funding on a timely basis. Liquidity is required to
fund various obligations, including credit obligations to
borrowers, loan originations, withdrawals by depositors, repayment
of debt, dividends to stockholders, operating expenses, and capital
expenditures. Our liquidity is derived primarily from customer
deposits, principal and interest payments on loans and investment
securities, net cash provided from operations, and access to other
funding sources. Our largest customer deposit relationships
comprise a large portion of our deposit base and the loss of any
one of these relationships could adversely affect the Bank’s
liquidity position. Our access to funding sources in amounts
adequate to finance our activities or at a reasonable cost could be
impaired by factors that affect us specifically or the financial
services industry in general. Factors that could adversely affect
our access to liquidity sources include a decrease in the level of
our business activity due to a market downturn, our lack of access
to a traditional branch banking network designed to generate core
deposits, the loss of one or more of our larger deposit
relationships and adverse regulatory action against us. Our ability
to borrow could also be impaired by factors that are not specific
to us, such as a severe disruption in the financial markets or
negative views and expectations about the prospects for the
financial services industry as a whole. Our access to borrowed
funds could become limited in the future, and we may be required to
pay above market rates for additional borrowed funds, if we are
able to obtain them at all, which may adversely affect our
business, results of operations and financial
condition.
19
Challenging market conditions and economic trends historically had
an adverse effect on the banking industry and could adversely
affect our business, financial condition and results of
operations.
We are
a business operating in the challenging and uncertain financial
services environment. The success of our business and operations is
sensitive to general business and economic conditions in the U.S.
and locally in our industry and market. If the U.S. economy weakens
and a lack of growth in population, income levels, deposits and
business investment in our local markets occurs, our growth and
profitability from our lending and deposit services could be
adversely affected. Although economic conditions have improved in
recent years, financial institutions continue to be affected by
volatility in the real estate market in some parts of the country
and also by uncertain regulatory and interest rate conditions. We
retain direct exposure to the residential and commercial real
estate market in North Carolina, particularly in the Raleigh and
Charlotte metropolitan areas, and are affected by these
events.
Uncertain
market and economic conditions can make our ability to assess the
creditworthiness of customers and estimate the losses in our loan
portfolio more complex. Another national economic recession or
continued deterioration of conditions in our market could drive
losses beyond that which is provided for in our allowance for loan
losses and result in the following consequences, any of which could
have a material adverse effect on our business:
●
loan delinquencies
may rise;
●
nonperforming
assets and foreclosures may increase;
●
demand for our
products and services may decline; and
●
collateral securing
our loans, especially real estate, may decline in value, which
could reduce customers’ borrowing power and repayment
ability.
Our loan portfolio mix, which includes income producing commercial
real estate loans, could result in increased credit risk in a
challenging economy.
Approximately
53.9% of our loan portfolio consists of income producing commercial
real estate and owner-occupied commercial business loans. These
types of loans generally are viewed as carrying more risk of
default than residential real estate loans or certain other types
of loans or investments. In fact, the FDIC has issued
pronouncements alerting banks of its concern about heavy loan
concentrations in certain types of commercial real estate loans,
including acquisition, construction and development loans, and
heavy loan concentrations in certain geographic segments. Because a
portion of our loan portfolio is composed of these types of
higher-risk loans, we face an increased risk of nonperforming loans
that could result in a loss of earnings from these loans, an
increase in the provision for loan losses, or an increase in loan
charge-offs, any of which could have a material adverse impact on
our business, results of operations and financial
condition.
Any
deterioration or downturn in the economies or real estate values in
the markets we serve could have a material adverse effect on
borrowers’ ability to repay their loans and the value of the
real property securing those loans. Our ability to recover on
defaulted loans would then be diminished, and we would be more
likely to suffer losses on defaulted loans. Any of these
developments could materially adversely affect our business,
financial condition, results of operations and
prospects.
Changes in the interest rate environment could reduce our net
interest income, which could reduce our profitability.
As a
financial institution, our earnings depend on our net interest
income, which is the difference between the interest income that we
earn on interest-earning assets, such as investment securities and
loans, and the interest expense that we pay on interest-bearing
liabilities, such as deposits and borrowings. Additionally, changes
in interest rates affect our ability to fund our operations with
customer deposits, and the fair value of securities in our
investment portfolio. Therefore, any change in general market
interest rates affects us more than non-financial companies and can
have a significant effect on our net interest income and results of
operations. Further, because we have little noninterest income, any
change in general market interest rates may affect our net income
and results of operation more significantly than other financial
institutions with higher amounts of noninterest income. Market
interest rates are sensitive to factors that are beyond our
control, including general economic conditions and the policies of
various governmental and regulatory agencies, including the Federal
Reserve’s policies that are implemented through open market
operations and regulation of the discount rate and reserve
requirements.
20
Our
assets and liabilities may react differently to changes in overall
market rates or conditions because there may be mismatches between
the repricing or maturity characteristics of the assets and
liabilities. In a rising interest rate environment, potential
borrowers could seek to defer loans as they wait for interest rates
to settle, borrowers of variable rate loans may be subject to
increased interest rates, which could result in a greater rate of
default, and we may have to pay higher interest on deposits before
interest earned on our assets increases. Rising interest rates may
also present additional challenges to our business that we have not
anticipated. As a result, an increase or decrease in market
interest rates could have material adverse effects on our net
interest margin, noninterest income, and results of
operations.
We depend primarily on net interest income for our earnings rather
than noninterest income.
Net
interest income is the most significant component of our operating
income. For the year ended December 31, 2016, our net interest
income totaled $46.0 million in comparison to our total noninterest
income of $1.3 million earned during the same period. For the year
ended December 31, 2015, our net interest income totaled $41.1
million in comparison to our total noninterest income of $1.5
million earned during the same year. We do not rely on
nontraditional sources of fee income utilized by some community
banks, such as fees from sales of insurance, securities or
investment advisory products or services. The amount of our net
interest income is influenced by the overall interest rate
environment, competition, and the amount of interest-earning assets
relative to the amount of interest-bearing liabilities. In the
event that one or more of these factors were to result in a
decrease in our net interest income, we have limited sources of
noninterest income to offset any decrease in our net interest
income
The fair value of our investment securities can fluctuate due to
factors outside of our control.
As of
December 31, 2016, the fair value of our investment securities
portfolio was approximately $197.4 million. Factors beyond our
control can significantly influence the fair value of securities in
our portfolio and can cause potential adverse changes to the fair
value of these securities. These factors include, but are not
limited to, rating agency actions in respect of the securities,
defaults by the issuer or with respect to the underlying
securities, and changes in market interest rates and instability in
the capital markets. Any of these factors, among others, could
cause other-than-temporary impairments and realized or unrealized
losses in future periods and declines in other comprehensive
income, which could materially and adversely affect our business,
results of operations, financial condition and prospects, as well
as the value of our common stock. The process for determining
whether impairment of a security is other-than-temporary usually
requires complex, subjective judgments about the future financial
performance and liquidity of the issuer and any collateral
underlying the security in order to assess the probability of
receiving all contractual principal and interest payments on the
security. Our inability to accurately predict the future
performance of an issuer or to efficiently respond to changing
market conditions could result in a decline in the value of our
investment securities portfolio, which could have a material and
adverse effect on our business, results of operations and financial
condition.
We rely heavily on our management team and the unexpected loss of
any of those personnel could adversely affect our
operations.
We are
a customer-focused and relationship-driven organization. We expect
our future growth to be driven in a large part by the relationships
maintained with our customers by our president and chief executive
officer, and other senior officers. The unexpected loss of any of
our key employees could have an adverse effect on our business,
results of operations and financial condition.
Our CDOs are responsible for extensive client relationships, the
loss of which could adversely affect our operations.
Our
CDOs have developed extensive and deep relationships with our
clients. If one or more of our CDOs who manages a large portfolio
of business were to leave our employ, we may also lose the client
relationships managed by that CDO. The resulting loss of loan or
deposit relationships could have an adverse effect on our business,
results of operations and financial condition.
21
If we are not successful in addressing management succession issues
and attracting and retaining qualified personnel, our business and
operating results could be materially and adversely
affected.
Our
future success will depend, to a significant extent, on the ability
of our management to operate effectively, both individually and as
a group. We must successfully manage transition and replacement
issues that may result from the departure or retirement of members
of our executive management. Changes of management personnel in the
future could cause disruption to our operations or customer
relationships or a decline in our operating results.
We are
also dependent on our ability to retain and motivate our existing
highly qualified personnel, including Robert C. Hatley, our
President and Chief Executive Officer. These personnel may
terminate employment with us at any time with no advance notice.
The replacement of Mr. Hatley likely would involve significant time
and costs, and the loss of his services may significantly delay or
prevent the achievement of our business objectives.
Competition
for highly skilled personnel in our market areas is frequently
intense. We may not be successful in attracting qualified personnel
to fulfill our current or future needs. The loss of the services of
any of our key personnel, the inability to attract or retain highly
qualified personnel in the future or delays in hiring such
personnel, particularly senior management, could materially and
adversely affect our business and operating results.
Our business reputation is important and any damage to it could
have a material adverse effect on our business.
Our
reputation is very important to sustain our business, as we rely on
our relationships with our current, former and potential clients
and stockholders, and the industries and communities that we serve.
We have set ourselves apart from our competitors by building strong
personal and professional relationships with our customers and
being active members of the communities we serve. As such, we
strive to enhance our reputation by recruiting, hiring and
retaining employees who share our core values of being an integral
part of the communities we serve and delivering superior service to
our customers. Any damage to our reputation or negative public
opinion, whether arising from legal, regulatory, supervisory or
enforcement actions, matters affecting our financial reporting or
compliance with SEC and exchange listing requirements, negative
publicity, the conduct of our business or otherwise could have a
material adverse effect on our business.
Cyber-attacks or other security breaches could have a material
adverse effect on our business.
As a
financial institution, our operations rely heavily on the secure
data processing, storage and transmission of confidential and other
information on our computer systems and networks. Any failure,
interruption or breach in security or operational integrity of
these systems could result in failures or disruptions in our online
banking system, customer relationship management, general ledger,
deposit and loan servicing and other systems. The security and
integrity of our systems and the technology we use could be
threatened by a variety of interruptions or information security
breaches, including those caused by computer hacking,
cyber-attacks, electronic fraudulent activity or attempted theft of
financial assets. We may fail to promptly identify or adequately
address any such failures, interruptions or security breaches if
they do occur. While we have certain protective policies and
procedures in place, the nature and sophistication of the threats
continue to evolve. We may be required to expend significant
additional resources in the future to modify and enhance our
protective measures.
The
nature of our business may make it an attractive target and
potentially vulnerable to cyber-attacks, computer viruses, physical
or electronic break-ins or similar disruptions. The
technology-based platform we use processes sensitive data from our
borrowers and investors. While we have taken steps to protect
confidential information that we have access to, our security
measures and the security measures employed by the owners of the
technology in the platform that we use could be breached. Any
accidental or willful security breaches or other unauthorized
access to our systems could cause confidential customer, borrower
and investor information to be stolen and used for criminal
purposes. Security breaches or unauthorized access to confidential
information could also expose us to liability related to the loss
of the information, time-consuming and expensive litigation and
negative publicity. If security measures are breached because of
third-party action, employee error, malfeasance or otherwise, or if
design flaws in the technology-based platform that we use are
exposed and exploited, our relationships with borrowers and
investors could be severely damaged, and we could incur significant
liability.
22
Because
techniques used to sabotage or obtain unauthorized access to
systems change frequently and generally are not recognized until
they are launched against a target, we and our collaborators may be
unable to anticipate these techniques or to implement adequate
preventative measures. In addition, federal regulators and many
federal and state laws and regulations require companies to notify
individuals of data security breaches involving their personal
data. These mandatory disclosures regarding a security breach are
costly to implement and often lead to widespread negative
publicity, which may cause customers, borrowers and investors to
lose confidence in the effectiveness of our data security measures.
Any security breach, whether actual or perceived, would harm our
reputation and could cause us to lose customers, borrowers,
investors and partners and adversely affect our business and
operations.
Our business relies heavily on information technology and
telecommunications systems; the failure of these systems could have
a material adverse effect on our business.
Our
business is dependent on the successful and uninterrupted
functioning of our information technology and telecommunications
systems and third-party providers. The failure of these systems, or
the termination of a third-party software license or service
agreement on which any of these systems is based, could interrupt
our operations. Because our information technology and
telecommunications systems interface with and depend on third-party
systems, we could experience service denials if demand for such
services exceeds capacity or such third-party systems fail or
experience interruptions. If significant, sustained or repeated, a
system failure or service denial could compromise our ability to
operate effectively, damage our reputation, result in a loss of
customer business, and/or subject us to additional regulatory
scrutiny and possible financial liability, any of which could
materially adversely affect our business, financial condition,
results of operations and prospects, as well as the value of our
common stock.
A failure in or breach of the operational or security systems of
our third-party service providers could disrupt our business,
result in unintentional disclosure or misuse of confidential or
proprietary information, damage our reputation, increase our costs
and cause losses.
We
depend on a number of relationships with third-party service
providers. We face the risk of operational disruption, failure,
termination or capacity constraints of any of the third parties
that facilitate our business activities, including exchanges,
clearing agents, clearing houses or other financial intermediaries.
Such parties could also be the source of an attack on, or breach
of, our operational systems. Any failures, interruptions or
security breaches in our information systems could damage our
reputation, result in a loss of customer business, result in a
violation of privacy or other laws, or expose us to civil
litigation, regulatory fines or losses not covered by
insurance.
Our business concentration in North Carolina, specifically in the
Raleigh and Charlotte metropolitan areas, imposes risks and may
magnify the consequences of any regional or local economic downturn
affecting North Carolina.
We
conduct our operations almost exclusively in the Raleigh and
Charlotte metropolitan areas. As of December 31, 2016, the
substantial majority of the loans in our loan portfolio were made
to borrowers who live and/or conduct business in North Carolina,
and specifically, in these metropolitan areas, and the substantial
majority of our secured loans were secured by collateral located in
these metropolitan areas. Accordingly, we are exposed to risks
associated with a lack of geographic diversification. The economic
conditions in North Carolina, and specifically in the Raleigh and
Charlotte metropolitan areas, are dependent on the life sciences,
information technology, and financial services sectors, among
others. Any downturn or adverse development in these sectors could
have a material adverse impact on our business, financial condition
and results of operations, and future prospects. Adverse economic
developments, among other things, could negatively affect the
volume of loan originations, increase the level of non-performing
assets, increase the rate of foreclosure losses on loans and reduce
the value of our loans. Any regional or local economic downturn
that affects North Carolina, our existing or prospective borrowers
or property values in our market area may affect us and our
profitability more significantly and more adversely than those of
our competitors, who may have larger operations that are less
geographically focused on our market area.
23
The amount of other real estate owned, or OREO, may increase
significantly, resulting in additional losses, and costs and
expenses that will negatively affect our operations.
In
connection with our banking business, we take title to real estate
collateral from time to time through foreclosure or otherwise in
connection with efforts to collect debts previously contracted.
Such real estate is referred to as other real estate owned, or
OREO. As the amount of OREO increases, our losses, and the costs
and expenses to maintain the real estate, likewise increase. The
amount of OREO we hold may increase due to various economic
conditions or other factors. Any additional increase in losses and
maintenance costs and expenses due to OREO may have material
adverse effects on our business, financial condition, and results
of operations. Such effects may be particularly pronounced in a
market of reduced real estate values and excess inventory, which
may make the disposition of OREO properties more difficult,
increase maintenance costs and expenses, and reduce our ultimate
realization from any OREO sales. In addition, at the time of
acquisition of the OREO we are required to reflect its fair market
value in our financial statements. If the OREO declines in value
subsequent to its acquisition but prior to its disposition, we are
required to recognize a loss. As a result, declines in the value of
our OREO will have a negative effect on our business, results of
operations and financial condition.
Our utilization of time deposits, including out-of-market and
brokered certificates of deposit, as a source of funds for loans
and our other liquidity needs could have an adverse effect on our
operating results.
We rely primarily on deposits for funds to make loans and provide
for our other liquidity needs, including time deposits and brokered
certificates of deposit. As of December 31, 2016, brokered
deposits, excluding certain Certificate of Deposit Account
Registry Service deposits, or CDARS, comprised approximately 6.5% of our total deposits. Such deposits may not be as
stable as other types of deposits and, in the future, depositors
may not renew those time deposits when they mature, or we may have
to pay a higher rate of interest to attract or keep them or to
replace them with other deposits or with funds from other sources.
Not being able to attract those deposits or to keep or replace them
as they mature would adversely affect our liquidity. Additionally,
we are regulated by the FDIC, which requires us to maintain certain
capital levels to be considered “well capitalized.” If
we fail to maintain these capital levels, we could lose our ability
to obtain funding through brokered deposits. In addition, we may
also be restricted from paying higher deposit rates to attract,
keep or replace those deposits, which could have a negative effect
on our operating results and the value of our common
stock.
We may not be able to maintain and manage our growth, which may
adversely affect our results of operations and financial
condition.
Our
strategy has been to increase the size of our company by pursuing
business development opportunities. We can provide no assurance
that we will continue to be successful in increasing the volume of
loans and deposits at acceptable risk levels and upon acceptable
terms while managing the costs and implementation risks associated
with our growth strategy. Our inability to increase our volume of
loans and deposits at acceptable risk levels, if at all, could have
a material adverse effect on the value of our common stock.
Furthermore, we may be required to curtail our future growth in
order to comply with regulatory restrictions imposed by banking
regulators. Our inability to sustain our historical rate of growth
could have a material adverse effect on our results of operations
and on the value of our common stock.
We are subject to environmental liability risk associated with our
lending activities.
A
significant portion of our loan portfolio is secured by real
property. During the ordinary course of business, we may foreclose
on and take title to properties securing certain loans. In doing
so, there is a risk that hazardous or toxic substances could be
found on these properties. If hazardous or toxic substances are
found, we may be liable for remediation costs, as well as for
personal injury and property damage. Environmental laws may require
us to incur substantial expenses and may materially reduce the
affected property’s value or limit our ability to use or sell
the affected property. In addition, future laws or more stringent
interpretations or enforcement policies with respect to existing
laws may increase our exposure to environmental liability. The
remediation costs and any other financial liabilities associated
with an environmental hazard could have a material adverse effect
on our business, results of operations and financial
condition.
24
Our use of appraisals in deciding whether to make a loan secured by
real property or how to value the loan in the future may not
accurately describe the net value of the collateral that we can
realize.
In
considering whether to make a loan secured by real property, we
generally require an appraisal of the property. However, an
appraisal is only an estimate of the value of the property at the
time the appraisal is made, and, as real estate values may
experience changes in value in relatively short periods of time,
especially given heightened economic uncertainty, this estimate
might not accurately describe the net value of the real property
collateral after the loan has been closed. If the appraisal does
not reflect the amount that may be obtained upon any sale or
foreclosure of the property, we may not realize an amount equal to
the indebtedness secured by the property. In addition, we rely on
appraisals and other valuation techniques to establish the value of
our OREO and to determine certain loan impairments. If any of these
valuations are inaccurate, our consolidated financial statements
may not reflect the correct value of OREO, and our ALL may not
reflect accurate loan impairments. The valuation of the properties
securing the loans in our portfolio may negatively impact the
continuing value of those loans and could materially adversely
affect our business, results of operations and financial
condition.
We could be subject to losses, regulatory action or reputational
harm due to fraudulent and negligent acts on the part of loan
applicants, our borrowers, our employees and vendors.
In
deciding whether to extend credit or enter into other transactions
with clients and counterparties, we may rely on information
furnished by or on behalf of clients and counterparties, including
financial statements, property appraisals, title information,
employment and income documentation, account information and other
financial information. We may also rely on representations of
clients and counterparties as to the accuracy and completeness of
such information and, with respect to financial statements, on
reports of independent auditors. Any misrepresentation or incorrect
or incomplete information may not be detected prior to funding a
loan or during our ongoing monitoring of outstanding loans. In
addition, one or more of our employees or vendors could cause a
significant operational breakdown or failure, either as a result of
human error or where an individual purposefully sabotages or
fraudulently manipulates our loan documentation, operations or
systems. Any of these developments could have a material adverse
effect on our business, results of operations and financial
condition.
We face strong competition from larger, more established
competitors.
The
banking business in North Carolina in general, and in our market
areas of Raleigh, Charlotte and Cary in particular, is highly
competitive. Many of our competitors are larger and have greater
resources than we do and have been in existence a longer period of
time. We compete with these institutions both in attracting
deposits and originating loans. We may not be able to attract
customers away from our competition. We compete for loans and
deposits with the following types of institutions:
● other
commercial banks
● savings
banks
● thrifts
● trust
companies
● credit
unions
|
● securities
brokerage firms
● mortgage
brokers
● insurance
companies
● mutual
funds
● industrial
loan companies
|
Competitors
that are not depository institutions are generally not regulated as
extensively as we are and, therefore, may have greater flexibility
in competing for business. Other competitors are subject to similar
regulation but have the advantages of larger established customer
bases, higher lending limits, extensive branch networks, greater
advertising-marketing budgets or other factors.
25
We
compete with these institutions both in attracting deposits and in
making loans, primarily on the basis of the interest rates we pay
and yield on these products. Many of our competitors are
well-established, much larger financial institutions that already
serve many of our targeted customers. While we believe we can
and do successfully compete with these other financial
institutions, we may face a competitive disadvantage as a result of
our smaller size. In addition, many of our non-bank competitors
have fewer regulatory constraints and may have lower cost
structures. We expect competition to continue to intensify due to
financial institution consolidation, legislative, regulatory and
technological changes, and the emergence of alternative banking
sources.
Our
ability to compete successfully will depend on a number of factors,
including, among other things:
●
our ability to
build and maintain long-term customer relationships while ensuring
high ethical standards and safe and sound banking
practices;
●
the scope,
relevance and pricing of products and services that we
offer;
●
customer
satisfaction with our products and services;
●
industry and
general economic trends; and
●
our ability to keep
pace with technological advances and to invest in new
technology.
Increased
competition could require us to increase the rates we pay on
deposits or lower the rates we offer on loans, which could reduce
our profitability. Our failure to compete effectively in our
primary markets could cause us to lose market share and could have
a material adverse effect our business, results of operations and
financial condition.
We are limited in the amount we can lend to one
borrower.
Our
legal lending limit is determined by law and is 15% of our
permitted capital accounts with an additional 10% available for
certain loans meeting heightened collateral requirements. This
means that the size of loans which we can offer our customers is
smaller than the size of loans that our larger competitors are able
to offer. Furthermore, we generally impose an internal limit that
is more conservative than the legal maximum. This limit may affect,
to some degree, our success in establishing relationships with the
larger businesses in our market. We satisfy loan requests in excess
of our lending limit through the sale of participations in such
loans to other banks. However, we cannot assure you that we will be
able to attract or maintain customers seeking larger loans or that
we will be able to sell participations in such loans on terms we
consider favorable. Our inability to attract and maintain these
customers or our inability to sell loan participations on favorable
terms could adversely impact our business, financial condition,
results of operation, and the value of our common
stock.
Our loan portfolio may be affected by deterioration in real estate
markets, including declines in the performance of
loans.
Deterioration
in real estate markets could result in declining prices and excess
inventories. As a result, developers may experience financial
deterioration and banking institutions may experience declines in
the performance of construction, development and commercial loans.
We make credit and reserve decisions based on the current
conditions of borrowers or projects combined with our expectations
for the future. If conditions are worse than forecast, we could
experience higher charge-offs and delinquencies than is provided in
the allowance for loan losses, which could materially adversely
affect our business, results of operations and financial
condition.
26
Deterioration in the fiscal position of the U.S. federal government
and downgrades in U.S. Treasury and federal agency securities could
adversely affect us and our subsidiary’s banking
operations.
The
long-term outlook for the fiscal position of the U.S. federal
government is uncertain, as illustrated by the 2011 downgrade by
certain rating agencies of the credit rating of the U.S. government
and federal agencies. In addition to causing economic and financial
market disruptions, any future downgrade, failure to raise the U.S.
statutory debt limit, or deterioration in the fiscal outlook of the
U.S. federal government, could, among other things, materially
adversely affect the market value of the U.S. government and
federal agency securities that we hold, the availability of those
securities as collateral for borrowing, and our ability to access
capital markets on favorable terms. In particular, it could
increase interest rates and disrupt payment systems, money markets,
and long-term or short-term fixed income markets, adversely
affecting the cost and availability of funding, which could
negatively affect our profitability. Also, the adverse consequences
could extend to those to whom we extend credit and could adversely
affect their ability to repay their loans. Any of these
developments could materially adversely affect our business,
results of operations and financial condition.
Deterioration in the commercial soundness of our counterparties
could adversely affect us.
Our
ability to engage in routine funding transactions could be
adversely affected by the actions and commercial soundness of other
financial institutions. Financial services institutions are
interrelated as a result of trading, clearing, counterparty or
other relationships, and we routinely execute transactions with
counterparties in the financial industry. As a result, defaults by,
or even rumors or questions about, one or more financial services
institutions, or the financial services industry generally, could
create another market-wide liquidity crisis similar to that
experienced in late 2008 and early 2009 and could lead to losses or
defaults by us or by other institutions. The deterioration or
failure of our counterparties would have a material adverse effect
on our business, results of operations and financial
condition.
We have different lending risks than larger, more diversified
banks.
Our
ability to diversify our economic risks is limited and we may,
therefore, be exposed to greater lending risks than those of banks
lending to larger, better-capitalized businesses with longer
operating histories. Our middle market and small business customers
generally have fewer financial resources in terms of capital or
borrowing capacity than larger entities and may have limited
operating histories.
We
attempt to manage our credit exposure through careful monitoring of
loan applicants and through loan approval and review
procedures. We have established an evaluation process designed
to determine the adequacy of our allowance for loan
losses. While this evaluation process uses historical and
other objective information, the classification of loans and the
establishment of loan losses is an estimate based on experience,
judgment and expectations regarding our borrowers, and the
economies in which we and our borrowers operate, as well as the
judgment of our regulators. This is an inherently uncertain
process, and our loan loss reserves may not be sufficient to absorb
future loan losses or prevent a material adverse effect on our
business, results of operations and financial
condition.
We have a continuing need for technological change, and we may not
have the resources to effectively implement new technology, or we
may experience operational challenges when implementing new
technology.
The
financial services industry is changing rapidly, and to remain
competitive, we must continue to enhance and improve the
functionality and features of our products, services and
technologies. In addition to better serving customers, the
effective use of technology increases efficiency and enables
financial institutions to reduce costs. Our future success will
depend, at least in part, upon our ability to respond to future
technological changes and the ability to address the needs of our
customers by using technology to provide products and services that
will satisfy customer demands for convenience as well as to create
additional efficiencies in our operations as we continue to grow
and expand our products and service offerings. We may experience
operational challenges as we implement these new technology
enhancements or products, which could result in us not fully
realizing the anticipated benefits from such new technology or
require us to incur significant costs to remedy any such challenges
in a timely manner.
27
These
changes may be more difficult or expensive than we anticipate. Many
of our larger competitors have substantially greater resources to
invest in technological improvements. As a result, they may be able
to offer additional or superior products to those that we will be
able to provide, which would put us at a competitive disadvantage.
Accordingly, we may not be able to effectively implement new
technology-driven products and services or be successful in
marketing such products and services to our customers.
We are dependent upon the use of intellectual property owned by
third parties, and any change in our ability to use, or the terms
upon which we may use, this intellectual property could have a
material adverse effect on our business.
We rely
extensively on technology licensed from third-party vendors. We can
offer no assurance that we will be able to renew or maintain such
licenses on terms that are acceptable or at all. Termination of
licenses or the reduction or elimination of our licensed rights may
result in our having to negotiate new licenses with less favorable
terms, or the inability to obtain access to such licensed
technology at all. If we were to lose access to technology we
require to operate our business, or were only able to access the
technology on less favorable terms, we would not be able to offer
our customers the services they seek from us and our business would
be materially and adversely affected.
Our risk management framework may not be effective in mitigating
risks and/or losses to us.
We have
implemented a risk management framework to manage our risk
exposure. This framework is comprised of various processes, systems
and strategies, and is designed to manage the types of risk to
which we are subject, including, among others, credit, market,
liquidity, interest rate and compliance. Our framework also
includes financial and other modeling methodologies which involve
management assumptions and judgment. Our risk management framework
may not be effective under all circumstances and it may fail to
adequately mitigate risk or loss to us. If our framework is not
effective, we could suffer unexpected losses and be subject to
potentially adverse regulatory consequences, and our business,
results of operations and financial condition could be materially
and adversely affected.
If we fail to maintain an effective system of internal control over
financial reporting, we may not be able to accurately report our
financial results. As a result, current and potential stockholders
could lose confidence in our financial reporting which would harm
our business and the trading price of our securities.
If we
identify material weaknesses in our internal control over financial
reporting or are otherwise required to restate our financial
statements, we could be required to implement expensive and
time-consuming remedial measures and could lose investor confidence
in the accuracy and completeness of our financial reports. We may
also face regulatory enforcement or other actions, including the
potential delisting of our securities from NASDAQ. This could have
an adverse effect on our business, financial condition and results
of operations, and could subject us to litigation.
Changes in accounting standards and management’s selection of
accounting methods, including assumptions and estimates, could
materially impact our financial statements.
From
time to time the SEC and the Financial Accounting Standards Board,
or FASB, change the financial accounting and reporting standards
that govern the preparation of our financial statements. These
changes can be hard to predict and can materially impact how we
record and report our financial condition and results of
operations. In some cases, we could be required to apply a new or
revised standard retroactively, resulting in changes to previously
reported financial results, or a cumulative charge to retained
earnings. In addition, management is required to use certain
assumptions and estimates in preparing our financial statements,
including determining the fair value of certain assets and
liabilities, among other items. If the assumptions or estimates are
incorrect, we may experience unexpected material adverse
consequences that could negatively affect our business, results of
operations and financial condition.
28
Insiders have substantial control over us, and this control may
limit our stockholders’ ability to influence corporate
matters and may delay or prevent a third party from acquiring
control over us.
As of
December 31, 2016, our directors and executive officers and their
related entities currently beneficially own, in the aggregate,
approximately 24.6% of our outstanding common stock. The
significant concentration of stock ownership may adversely affect
the trading price of our common stock due to investors’
perception that conflicts of interest may exist or arise. In
addition, these stockholders will be able to exercise influence
over all matters requiring stockholder approval, including the
election of directors and approval of corporate transactions, such
as a merger or other sale of our company or its assets. This
concentration of ownership could limit your ability to influence
corporate matters and may have the effect of delaying or preventing
a change in control, including a merger, consolidation or other
business combination involving us, or discouraging a potential
acquirer from making a tender offer or otherwise attempting to
obtain control, even if that change in control would benefit our
other stockholders.
Fulfilling our public company financial reporting and other
regulatory obligations is expensive and time-consuming and may
strain our resources.
As a public company, we are subject to the reporting requirements
of the Exchange Act, and are required to implement specific
corporate governance practices and adhere to a variety of reporting
requirements under the rules and regulations of the SEC as well as
the rules of Nasdaq. The Exchange Act requires us to file annual,
quarterly and current reports with respect to our business and
financial condition. Compliance with these requirements is
time-consuming and expensive and may strain our
resources.
Risks Related to Our Regulatory Environment
Our business, financial condition, results of operations and future
prospects could be adversely affected by the highly regulated
environment and the laws and regulations that govern our
operations, or changes in any of them.
We
operate in a highly regulated industry and are subject to
examination, supervision, and comprehensive regulation by various
federal and state regulatory agencies. Our compliance with these
regulations is costly and restricts certain of our activities,
including the declaration and payment of cash dividends to
stockholders, mergers and acquisitions, investments, loans and
interest rates charged, interest rates paid on deposits, and
locations of offices. We are also subject to capitalization
guidelines established by our regulators, which require us to
maintain adequate capital to support our growth and operations.
Should we fail to comply with these regulatory requirements,
federal and state regulators could impose additional restrictions
on the activities of the Company and the Bank, which could
adversely affect our business, results of operations and financial
condition.
The
laws and regulations applicable to the banking industry have
recently changed and may continue to change, and we cannot predict
the effects of these changes on our business and profitability.
Because government regulation greatly affects the business and
financial results of all commercial banks and bank holding
companies, our cost of compliance could adversely affect our
business, results of operations and financial
condition.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act, or the
Dodd-Frank Act, was enacted on July 21, 2010. The provisions
of the Dodd-Frank Act, and its implementing regulations may
materially and adversely affect our business, results of operations
and financial condition. Some or all of the changes, including the
broad rulemaking authority granted to the Consumer Financial
Protection Bureau, or the CFPB, may result in greater liability,
reporting requirements, assessment fees, operational restrictions,
capital requirements, and other regulatory burdens applicable to
us, and many of our non-bank competitors may remain free from such
limitations. Institutions with over $10 billion in assets, unlike
us, will also be subject to the CFPB’s supervisory and
examination authority. The changes arising out of the Dodd-Frank
Act could adversely affect our ability to attract and maintain
depositors, to offer competitive products and services, and to
expand our business.
29
Congress
may consider additional proposals to change substantially the
financial institution regulatory system and to expand or contract
the powers of banking institutions and bank holding companies. Such
legislation may change existing banking statutes and regulations,
as well as our current operating environment significantly. If
enacted, such legislation could increase or decrease the cost of
doing business, limit or expand our permissible activities, or
affect the competitive balance among banks, savings associations,
credit unions, and other financial institutions. We cannot predict
whether new legislation will be enacted and, if enacted, the effect
that it, or any regulations, would have on our business, financial
condition, or results of operations.
Our
financial condition and results of operations are affected by
credit policies of monetary authorities, particularly the Federal
Reserve. Actions by monetary and fiscal authorities, including the
Federal Reserve, could have an adverse effect on our deposit
levels, loan demand, or business and earnings, as well as the value
of the common stock.
We may be required to raise additional capital in the future,
including to comply with new increased minimum capital thresholds
established by our regulators as part of their implementation of
Basel III, but that capital may not be available when it is needed
and could be dilutive to our existing stockholders, which could
adversely affect our financial condition and results of
operations.
In
July 2013, the Federal Reserve, FDIC and Office of the
Comptroller of the Currency approved final rules that establish an
integrated regulatory capital framework that addresses perceived
shortcomings in certain capital requirements. The rules implement
in the United States the Basel III regulatory capital reforms from
the Basel Committee on Banking Supervision and certain changes
required by the Dodd-Frank Act.
The
major provisions of the rule applicable to the Company and the Bank
are:
●
The rules implement
higher minimum capital requirements, including a new common equity
Tier 1 capital requirement, and establish criteria that instruments
must meet in order to be considered common equity Tier 1 capital,
additional Tier 1 capital, or Tier 2 capital. These enhancements
both improve the quality and increase the quantity of capital
required to be held by banking organizations, better equipping the
U.S. banking system to deal with adverse economic conditions. The
new minimum capital to risk-weighted assets, or RWA, requirements
are a common equity Tier 1 capital ratio of 4.5% and a Tier 1
capital ratio of 6.0%, which is an increase from 4.0 %, and a total
capital ratio that remains at 8.0 %. The minimum leverage ratio
(Tier 1 capital to total consolidated assets) is 4.0%. The new
rules maintain the general structure of the current prompt
corrective action, or PCA, framework while incorporating increased
minimum requirements.
●
Among the most
important changes to the definition of capital are stricter
eligibility criteria for regulatory capital instruments that
disallow the inclusion of instruments such as trust preferred
securities in Tier 1 capital going forward, and new constraints on
the inclusion of minority interests, deferred tax assets, or DTAs,
mortgage-servicing assets, or MSAs and certain investments in the
capital of unconsolidated financial institutions. The new rules
also affect the inclusion of mortgage servicing assets, or MSAs, as
an element of capital. Specifically, MSAs are limited to 10% of a
bank’s common equity Tier 1 capital and the combined balance
of MSAs, deferred tax assets, and investments in the common stock
of unconsolidated financial institutions is limited to 15% of a
bank’s common equity Tier 1 capital. These combined assets
must be deducted from common equity to the extent that they exceed
the 15% threshold. Any portion of a bank’s MSAs that are not
deducted from the calculation of common equity Tier 1 will be
subject to a 100% risk weight that will increase to 250% in 2018.
In addition, the new rules require that most regulatory capital
deductions be made from common equity Tier 1 capital.
30
●
Under the rules, in
order to avoid limitations on capital distributions, including
dividend payments and certain discretionary bonus payments to
executive officers, a banking organization must hold a capital
conservation buffer composed of common equity Tier 1 capital above
its minimum risk-based capital requirements. This buffer will help
to ensure that banking organizations conserve capital when it is
most needed, allowing them to better weather periods of economic
stress. The buffer is measured relative to RWA. Phase-in of the
capital conservation buffer requirements, and corresponding limits
on capital distributions and discretionary bonus payments, began on
January 1, 2016. After the capital conservation buffer is
fully phased in, a banking organization with a buffer greater than
2.5% would not be subject to limits on capital distributions or
discretionary bonus payments; however, a banking organization with
a buffer of less than 2.5% would be subject to increasingly
stringent limitations as the buffer approaches zero. When the
capital conservation buffer is fully phased in, it would prohibit a
banking organization from making distributions or discretionary
bonus payments during any quarter if its eligible retained income
is negative in that quarter and its capital conservation buffer
ratio was less than 2.5% at the beginning of the quarter. When the
capital conservation buffer is fully phased in, the minimum capital
requirements plus the capital conservation buffer will exceed the
PCA well-capitalized thresholds.
●
The rules also
increase the risk weights for past-due loans, certain commercial
real estate loans, and some equity exposures, and make selected
other changes in risk weights and credit conversion
factors.
We and
the Bank were required to comply with the new capital rules
beginning on January 1, 2015.
In
order to support the operations at the Bank, we may need to raise
capital in the future. Our ability to raise capital, if needed,
will depend in part on conditions in the capital markets at that
time, which are outside our control.
Accordingly,
we may be unable to raise capital, if needed, on terms acceptable
to us if at all. If we cannot raise capital when needed, our
ability to operate or further expand our operations could be
materially impaired. In addition, if we decide to raise equity
capital under such conditions, the interests of our stockholders
could be diluted.
Our deposit operations are subject to extensive regulation and we
expect additional regulatory requirements to be implemented in the
future.
We are
subject to significant anti-money laundering, “know your
customer” and other regulations under applicable law,
including the Bank Secrecy Act and the USA Patriot Act, and we
could become subject in the future to additional regulatory
requirements beyond those that are currently adopted, proposed or
contemplated. We expect that federal and state bank regulators will
increase their oversight, inspection and investigatory role over
our deposit operations and the financial services industry
generally. Furthermore, we intend to increase our deposit product
offerings and grow our customer deposit portfolio in the future
and, as a result, we are, and will continue to be, subject to
heightened compliance and operating costs that could adversely
affect our business, results of operations and financial condition.
In addition, legal and regulatory proceedings and other
contingencies will arise from time to time that may have an adverse
effect on our business practices and results of
operations.
The FDIC Deposit Insurance assessments that we are required to pay
may increase in the future, which would have an adverse effect on
our earnings.
As a
member institution of the FDIC, we are assessed a quarterly deposit
insurance premium. Failed banks nationwide, particularly between
2008 and 2010, have significantly depleted the insurance fund and
reduced the ratio of reserves to insured deposits. On
October 19, 2010, the FDIC adopted a Deposit Insurance Fund,
or DIF, Restoration Plan, which requires the DIF to attain a 1.35%
reserve ratio by September 30, 2020. The Dodd-Frank Act
directs the FDIC to “offset the effect” of the
increased reserve ratio for insured depository institutions with
total consolidated assets of less than $10 billion. In addition,
the FDIC modified the method by which assessments are determined
and updated assessment rates, which range from 2.5 to 45 basis
points (annualized), subject to adjustments for unsecured debt and,
in the case of small institutions outside the lowest risk category
and certain large and highly complex institutions, brokered
deposits. Further increased FDIC assessment premiums, due to our
risk classification, emergency assessments, or implementation of
the modified DIF reserve ratio, could have a material adverse
effect on our business, results of operations and financial
condition.
31
The Federal Reserve may require us to commit capital resources to
support the Bank.
A bank
holding company is required to act as a source of financial and
managerial strength to its subsidiary banks and to commit resources
to support its subsidiary banks. The Federal Reserve may require a
bank holding company to make capital injections into a troubled
subsidiary bank and may charge the bank holding company with
engaging in unsafe and unsound practices for failure to commit
resources to such a subsidiary bank. Under these requirements, in
the future, we could be required to provide financial assistance to
the Bank if it experiences financial distress.
A
capital injection may be required at times when our resources are
limited and we may be required to borrow the funds to make the
required capital injection. In the event of a bank holding
company’s bankruptcy, the bankruptcy trustee will assume any
commitment by the holding company to a federal bank regulatory
agency to maintain the capital of a subsidiary bank. Moreover,
bankruptcy law provides that claims based on any such commitment
will be entitled to a priority of payment over the claims of the
holding company’s general unsecured creditors, including the
holders of any note obligations. Thus, any borrowing that must be
done by the holding company in order to make the required capital
injection becomes more difficult and expensive and will adversely
impact the holding company’s business, financial condition
and results of operations.
Risks Related to our Common Stock
The low trading volume in our common stock may adversely affect
your ability to resell shares at prices that you find attractive or
at all.
Our common stock is listed for quotation on the Nasdaq Capital
Market under the ticker symbol “PBNC”. The average
daily trading volume for our common stock is less than that of
larger financial institutions. From June 16, 2016, to March
20, 2017, the average daily
trading volume for our common stock was approximately
8,350 shares. Due to its relatively low trading volume,
sales of our common stock may place significant downward pressure
on the market price of our common stock. Furthermore, it may be
difficult for holders to resell their shares at prices they find
attractive, or at all.
Future sales of shares of our common stock by existing stockholders
could depress the market price of our common stock.
We had 5,450,713 shares of common stock outstanding at March
20, 2017, none of which remain
subject to post-initial public offering lock-up agreements. In
addition, as of March 20, 2017,
there were outstanding options to purchase 44,875
shares of our common stock that, if
exercised, will result in these additional shares becoming
available for sale. A large portion of these shares and options are
held by a small number of persons. Sales by these stockholders or
option holders of a substantial number of shares could
significantly reduce the market price of our common
stock.
We are an “emerging growth company,” and the reduced
reporting requirements applicable to emerging growth companies may
make our common stock less attractive to investors.
We are
an “emerging growth company,” as defined in the federal
securities laws. For as long as we continue to be an emerging
growth company, we may take advantage of exemptions from various
reporting requirements that are applicable to other public
companies that are not emerging growth companies, including reduced
disclosure obligations regarding executive compensation in our
periodic reports and proxy statements and exemptions from the
requirements of holding a nonbinding advisory vote on executive
compensation and stockholder approval of any golden parachute
payments not previously approved. We could be an emerging growth
company for up to five years, although we could lose that status
sooner if our gross revenues exceed $1.0 billion, if we issue more
than $1.0 billion in non-convertible debt in a three-year period,
or if the market value of our common stock held by non-affiliates
exceeds $700 million as of any June 30 before that time, in
which case we would no longer be an emerging growth company as of
the following December 31. We cannot predict if investors will
find our common stock less attractive because we may rely on these
exemptions, or if we choose to rely on additional exemptions in the
future. If some investors find our common stock less attractive as
a result, there may be a less active trading market for our common
stock and our stock price may be more volatile.
32
Securities analysts may not initiate or continue coverage on our
common stock.
The
trading market for our common stock depends in part on the research
and reports that securities analysts publish about us and our
business. We do not have any control over these securities
analysts, and they may not cover our common stock. If securities
analysts do not cover our common stock, the lack of research
coverage may adversely affect its market price. If we are covered
by securities analysts, and our common stock is the subject of an
unfavorable report, the price of our common stock may decline. If
one or more of these analyst cease to cover us or fail to publish
regular reports on us, we could lose visibility in the financial
markets, which could cause the price or trading volume of our
common stock to decline.
We do not plan to pay cash dividends for the foreseeable
future.
We do
not expect to pay cash dividends on our common stock in the
foreseeable future, as we intend to retain any earnings to provide
the capital necessary to fund our growth strategy. You should not
invest in shares of our common stock if you need dividend income
from your investment. Our ability to declare and pay cash dividends
will be dependent upon, among other things, restrictions imposed by
the reserve and capital requirements of North Carolina and federal
banking regulations, our income and financial condition, tax
considerations, Paragon Bank’s ability to declare and pay
dividends and general business conditions. Investors should not
purchase shares of our common stock with a view for a current
return on their investment in the form of cash
dividends.
Additional issuances of common stock or securities convertible into
common stock may dilute holders of our common stock.
We may,
in the future, determine that it is advisable, or we may encounter
circumstances where we determine it is necessary, to issue
additional shares of common stock, securities convertible into,
exchangeable for or that represent an interest in common stock, or
common stock-equivalent securities to fund strategic initiatives or
other business needs or to build additional capital. Our board of
directors is authorized to cause us to issue additional shares of
common stock from time to time for adequate consideration without
any additional action on the part of our stockholders. The market
price of our common stock could decline as a result of other
offerings, as well as other sales of a large block of common stock
or the perception that such sales could occur.
We may issue shares of preferred stock in the future, which could
make it difficult for another company to acquire us or could
otherwise adversely affect the rights of the holders of our common
stock, which could depress the price of our common
stock.
Our
articles of incorporation, as amended, authorize us to issue up to
1,000,000 shares of one or more series of preferred stock. Our
board of directors, in its sole discretion, has the authority to
determine the preferences, limitations and relative rights of
shares of preferred stock and to fix the number of shares
constituting any series, the designation of such series, and the
dividend rate for each series, without any further vote or action
by our stockholders. Our preferred stock may be issued with voting,
liquidation, dividend and other rights superior to the rights of
our common stock. The potential issuance of preferred stock may
delay or prevent a change in control of us, discouraging bids for
our common stock at a premium over the market price, and materially
adversely affect the market price and the voting and other rights
of the holders of our common stock.
33
We are subject to extensive regulation, and ownership of the common
stock may have regulatory implications for holders
thereof.
We are
subject to extensive federal and state banking laws, including the
Bank Holding Company Act of 1956, as amended, or BHCA, and federal
and state banking regulations, that will impact the rights and
obligations of owners of our common stock, including, for example,
our ability to declare and pay dividends on our common stock.
Shares of our common stock are voting securities for purposes of
the BHCA and any bank holding company or foreign bank that is
subject to the BHCA may need approval to acquire or retain more
than 5% of the then outstanding shares of our common stock, and any
holder (or group of holders deemed to be acting in concert) may
need regulatory approval to acquire or retain 10% or more of the
shares of our common stock. A holder or group of holders may also
be deemed to control us if they own 25% or more of our total
equity. Under certain limited circumstances, a holder or group of
holders acting in concert may exceed the 25% percent threshold and
not be deemed to control us until they own 33% percent or more of
our total equity. The amount of total equity owned by a holder or
group of holders acting in concert is calculated by aggregating all
shares held by the holder or group, whether as a combination of
voting or non-voting shares or through other positions treated as
equity for regulatory or accounting purposes and meeting certain
other conditions. Holders of our common stock should consult their
own counsel with regard to regulatory implications.
Holders should not expect us to redeem or repurchase outstanding
shares of our common stock.
Our
common stock is a perpetual equity security. This means that it has
no maturity or mandatory redemption date and will not be redeemable
at the option of the holders. Any decision we may make at any time
to propose the repurchase or redemption of shares of our common
stock will depend upon, among other things, our evaluation of our
capital position, the composition of our stockholders’
equity, general market conditions at that time and other factors we
deem relevant. Our ability to redeem shares of our common stock is
subject to regulatory restrictions and limitations, including those
of the Federal Reserve Board of Governors.
Our common stock is equity and is therefore subordinate to our
outstanding indebtedness.
Shares
of our common stock are equity interests in the Company and do not
constitute indebtedness. As such, shares of our common stock rank
junior to our outstanding trust preferred securities and
subordinated notes
Offerings of debt, which would rank senior to our common stock upon
liquidation, may adversely affect the market price of our common
stock.
We may
attempt to increase our capital resources or, if our or the
Bank’s regulatory capital ratios fall below the required
minimums, we or the Bank could be forced to raise additional
capital by making additional offerings of debt or equity
securities, senior or subordinated notes, preferred stock and
common stock. Upon liquidation, holders of our debt securities and
lenders with respect to other borrowings will receive distributions
of our available assets prior to the holders of our common
stock.
Anti-takeover provisions could adversely affect our
stockholders.
In some
cases, stockholders would receive a premium for their shares if we
were acquired by another company. However, state and federal law
and our articles of incorporation and bylaws make it difficult for
anyone to acquire us without approval of our board of directors.
For example, our articles of incorporation require a supermajority
vote of two-thirds of our outstanding common stock in order to
effect a sale or merger of the company in certain circumstances.
Consequently, a takeover attempt may prove difficult, and
stockholders may not realize the highest possible price for their
securities.
34
Shares of our common stock are not insured deposits and may lose
value.
Shares
of our common stock are not savings accounts, deposits or other
obligations of any depository institution and are not insured or
guaranteed by the FDIC or any other governmental agency or
instrumentality, any other deposit insurance fund or by any other
public or private entity. An investment in our common stock is
inherently risky for the reasons described in this “Risk
Factors” section. As a result, if you acquire shares of our
common stock, you may lose some or all of your
investment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The
following table sets forth the locations of the Company’s
main office, as well as additional offices and certain information
relating to the facilities.
Office
|
|
Address
|
|
Year Opened
|
|
Approximate Square Footage
|
|
Owned or Leased
|
Corporate Headquarters and Banking Office
|
|
3535 Glenwood Avenue
Raleigh, NC 27612
|
|
2007
|
|
43,000
|
|
Building Owned, Ground Leased
|
Charlotte Office
|
|
6337 Morrison Boulevard
Charlotte, NC 28211
|
|
2014
|
|
16,000
|
|
Owned
|
Cary
Office
|
|
5000 Valleystone Drive
Suite 110
Cary, NC 27519
|
|
2014
|
|
2,700
|
|
Leased
|
Operations
Center
|
|
3301 Benson Drive
Suite 545 Raleigh, NC 27609
|
|
2014
|
|
11,600
|
|
Leased
|
Management
believes that the Company’s properties are maintained in good
operating condition and are suitable and adequate for its
operational needs.
ITEM 3. LEGAL PROCEEDINGS
In the
ordinary course of operations, the Company and the Bank are at
times involved in legal proceedings. As of the date of this filing,
management is not aware of any threatened or pending material legal
proceedings against the Company or the Bank.
ITEM 4. MINE SAFETY DISCLOSURE
Not
applicable.
35
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information for Common Stock
The
Company’s common stock is listed on the NASDAQ Capital
Market, under the symbol “PBNC.”
The
closing market price for the Company's common stock was $53.85 on
March 20, 2017.
The
following table presents certain market information for the last
two fiscal years. Over-the-counter quotations reflect inter-dealer
prices, without retail mark-up, mark down or commission and may not
necessarily represent actual transactions.
|
Low
|
High
|
Fiscal
Year Ending December 31, 2016
|
|
|
Fourth
Quarter
|
$35.99
|
$44.30
|
Third
Quarter
|
34.50
|
39.99
|
Second
Quarter
|
26.97*
|
36.00
|
First
Quarter
|
26.25*
|
27.39*
|
|
|
|
|
|
|
Fiscal
Year Ending December 31, 2015
|
|
|
Fourth
Quarter
|
$24.20*
|
$28.50*
|
Third
Quarter
|
21.00*
|
25.00*
|
Second Quarter
beginning April 16, 2015
|
22.50*
|
25.00*
|
*
Based on high and
low reported sales prices for our common stock from April 16, 2015
(the date our common stock began trading on the OTCQX Marketplace)
through the listing on Nasdaq on June 16, 2016. These reported
sales prices represent trades that were either quoted on the OTCQX
Marketplace or reported to the Company’s stock transfer
agent, and do not include retail markups, markdowns or commissions,
and do not necessarily reflect actual transactions.
Dividend Policy
The
Company anticipates that future earnings, if any, will be retained
to finance the Company’s growth and that we will not pay cash
dividends for the foreseeable future.
The
Company is organized under the North Carolina Business Corporation
Act, which prohibits the payment of a dividend if, after giving it
effect, the Company would not be able to pay its debts as they
become due in the usual course of business or its total assets
would be less than the sum of its total liabilities plus the amount
that would be needed, if the Company were to be dissolved, to
satisfy the preferential rights upon dissolution of any preferred
stock holders. In addition, because the Company is a bank holding
company, the Federal Reserve may impose restrictions on cash
dividends paid by it. The Federal Reserve has issued a policy
statement on the payment of cash dividends by bank holding
companies, which expresses the Federal Reserve’s view that a
bank holding company should pay cash dividends only to the extent
that the holding company’s net income for the past four
quarters, net of any dividends previously paid during that period,
is sufficient to cover both the cash dividends and a rate of
earnings retention that is consistent with the bank holding
company’s capital needs, asset quality and overall financial
condition. The Federal Reserve also indicated that it would be
inappropriate for a bank holding company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore,
under the prompt corrective action regulations adopted by the
Federal Reserve, the Federal Reserve may prohibit a bank holding
company from paying any dividends if any of the holding
company’s bank subsidiaries are classified as
undercapitalized.
36
The
Company’s ability to pay dividends is largely dependent upon
the amount of cash dividends that the Bank pays to the Company,
which distributions are restricted under North Carolina banking
laws and regulations. The Bank may make distributions only to the
extent that the Bank remains adequately capitalized. In addition,
regulatory authorities may limit payment of dividends by any bank
when it is determined that such a limitation is in the public
interest and is necessary to ensure financial soundness of the
bank. The Office of the North Carolina Commissioner of Banks and
the FDIC also are authorized to prohibit the payment of dividends
by a bank under certain circumstances. Such requirements and
policies may limit the Company’s ability to obtain dividends
from the Bank for its cash needs, including payment of dividends to
stockholders and the payment of operating expenses. For additional
information on these limitations, please see “Supervision and
Regulation” under Item 1. Business.
Any
determination to pay future dividends to stockholders will be
dependent upon the Company’s operational results, financial
condition, capital requirements, business projections, general
business conditions, statutory and regulatory restrictions and
other factors deemed appropriate by the Company’s board of
directors.
Holders of Record
As of
March 20, 2017, the Company had 281 stockholders of record, not
including the number of persons or entities whose stock is held in
nominee or street name through various brokerage firms
or
banks.
Stock Performance Graph
The
following shall not be deemed “filed” for purposes of
Section 18 of the Exchange Act, or incorporated by reference into
any of our other filings under the Exchange Act or the Securities
Act of 1933, as amended, except to the extent we specifically
incorporate it by reference into such filing.
The
following table and graph compare the cumulative total shareholder
return on our common stock for the period beginning at the close of
trading on June 16, 2016 (the end of the first day of trading of
our common stock on the NASDAQ Capital Market) through the close of
trading on each of June 30, 2016, September 30, 2016, and December
30, 2016, with the cumulative total return of the S&P 500 Total
Return Index and the NASDAQ Bank Index, and assumes the
reinvestment of dividends, if any. The historical stock price
performance for our common stock shown on the graph below is not
necessarily indicative of future stock performance.
|
June 16,
2016
|
June 30,
2016
|
September 30,
2016
|
December 30,
2016
|
Paragon Commercial
Corporation
|
$100.00
|
$101.16
|
$104.86
|
$126.36
|
S&P
500
|
100.00
|
101.05
|
104.94
|
108.96
|
NASDAQ
Bank
|
100.00
|
100.22
|
109.97
|
141.22
|
37
Equity Compensation Plan Information
The
information required by Item 201(d) concerning securities
authorized for issuance under equity compensation plans is set
forth in Item 12 hereof and incorporated by reference
herein.
Issuer Purchases of Securities
None.
Securities Authorized for Issuance under Equity Compensation
Plans
The
information required by Part II, Item 5 of Form 10-K regarding
equity compensation plans is incorporated herein by reference to
“Part III, Item 12. Security Ownership of Certain Beneficial
Ownership and Management and Related Stockholder
Matters.”
Use of Proceeds from Public Offering of Common Stock
On June
15, 2016, our Registration Statement on Form S-1, (File No.
333-211627) was declared effective in connection with our initial
public offering, pursuant to which 846,400 shares of common stock
were registered, including the exercise of the underwriters’
over-allotment option. Of the shares registered, we sold 845,588
shares of common stock at a price to the public of $34.00 per share
for an aggregate price of $28,749,992. The offering closed on June
21, 2016, and, as a result, we received net proceeds of
approximately $26.4 million (after underwriters’ discounts
and commissions of approximately $1.7 million and additional
offering related costs of $615,000). Raymond James &
Associates, Inc. acted as the book-running manager for the Offering
and Sandler O’Neill & Partners, L.P. acted as
co-manager.
There
was no material change in the use of proceeds from our initial
public offering as described in our final prospectus filed pursuant
to Rule 424(b) of the Securities Act with the SEC on June 17, 2016.
From the effective date of the registration statement through
December 31, 2016, we have used the net proceeds from our initial
public offering to support the continued growth of Paragon Bank, to
retire a bank holding company loan, and for general corporate
purposes.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
The
information required by this Item is set forth in the section
captioned "Selected Historical Consolidated Financial Data" on page
A-5 of the Annual Report, which Annual Report is included in this
Form 10-K as Exhibit 13.1. The section captioned "Selected
Historical Consolidated Financial Data" on page A-5 of the Annual
Report is incorporated herein by reference.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
information required by this Item is set forth in the section
captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages A-10 through A-38 of
the Annual Report, which section is included in this Form 10-K as
Exhibit 13.1. The section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
on pages A-10 through
A-38 of the Annual Report is incorporated herein by
reference.
38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
information required by this Item is set forth in the section
captioned "Quantitative and Qualitative Disclosures About Market
Risk" on page A-37 of the Annual Report, which Annual Report is
included in this Form 10-K as Exhibit 13.1. The section captioned
"Quantitative and Qualitative Disclosures About Market Risk" on
page A- 37 of the Annual Report is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
consolidated financial statements of the Company and supplementary
data are set forth on pages A- 39 through A- 91 of the Annual
Report, which Annual Report is included in this Form 10-K as
Exhibit 13.1. The consolidated
financial statements of the Company and supplementary data set
forth on pages A- 39 through A- 91 of the Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An
evaluation of the Company’s disclosure controls and
procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), was carried out under the supervision and with the
participation of the Company’s Chief Executive Officer and
Chief Financial Officer as of December 31, 2016, the last day of
the period covered by this Annual Report. The Company’s Chief
Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective as of December
31, 2016 in ensuring that the information required to be disclosed
in the reports the Company files or submits under the Exchange Act
is (i) accumulated and communicated to management (including the
Company’s Chief Executive Officer and Chief Financial
Officer) in a timely manner, and (ii) recorded, processed,
summarized, and reported within the time periods specified in the
SEC’s rules and forms.
Management’s Report on Internal Control over Financial
Reporting
This
Annual Report on Form 10-K does not include a report of
management’s assessment regarding internal control over
financial reporting or an attestation report of our registered
public accounting firm due to a transition period established by
the rules of the SEC for newly public companies.
Changes in Internal Control over Financial Reporting
Management
has not evaluated any changes in the Company’s internal
control over financial reporting that occurred during the annual
period ended December 31, 2016, due to a transition period
established by the rules of the Securities and Exchange Commission
for newly public companies.
ITEM 9B. OTHER INFORMATION
None.
39
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
information required by this Item is set forth under the sections
captioned "2017 Director Nominees," "Executive Officers,"
"Beneficial Ownership of Our Common Stock,” "Section 16(a)
Beneficial Ownership Reporting Compliance," "Code of Ethics," and
"Committees of the Board of Directors" contained in the Proxy
Statement, which sections are incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The
information required by this Item is set forth under the sections
captioned "Summary Compensation Table," "Outstanding Equity Awards
at Fiscal Year End, "Executive Compensation and Other Matters,"
"Director Compensation," and "Compensation Committee Interlocks and
Insider Participation" contained in the Proxy Statement, which
sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
For the
information required by this Item see the section captioned
"Beneficial Ownership of Our Common Stock" contained in the Proxy
Statement, which section is incorporated herein by
reference.
Securities Authorized for Issuance under Equity Compensation
Plans
The
following table sets forth information with respect to the
Company’s equity compensation plans at December 31,
2016.
Plan Category
|
Number of securities
to be issued
upon exercise of outstanding options, warrants and
rights
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column(a)) (1)
|
|
(a)
|
(b)
|
(c)
|
Equity compensation plans approved by security holders
|
|
|
|
2006
Omnibus Stock Ownership and Long Term Incentive Plan
|
61,125
|
$45.63
|
-0-
|
Employee Stock Purchase Plan (2)
|
--
|
--
|
97,199
|
Equity compensation plans not approved by security
holders
|
--
|
--
|
--
|
Total
|
61,125
|
$45.63
|
97,199
|
(1)
The 2006 Omnibus
Stock Ownership and Long Term Incentive Plan expired in
2016.
(2)
Under the Employee
Stock Purchase Plan, eligible employees may purchase shares of
common stock at a purchase price equal to 95% of the fair market
value of the common stock on the purchase date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
See the
sections captioned "Indebtedness of and Transactions with
Management," "Board Leadership Structure,”
“Board’s Role in Risk Oversight," and “Director
Independence” contained in the Proxy Statement, which
sections are incorporated herein by reference.
40
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
See the
section captioned "Proposal 3 - Ratification of Independent
Auditors" contained in the Proxy Statement, which section is
incorporated herein by reference.
PART
IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
15(a)(1)
Consolidated Financial Statements (contained in the Annual Report
attached hereto as Exhibit 13.1 and incorporated herein by
reference)
(a)
Report of Independent Registered Public Accounting
Firm
(b)
Consolidated Balance Sheets as of December 31, 2016 and
2015
(c)
Consolidated Statements of Income for the Years Ended December 31,
2016, 2015 and 2014
(d)
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2016, 2015 and 2014
(e)
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2016, 2015 and 2014
(f)
Consolidated Statements of Cash Flows for the Years Ended December
31, 2016, 2015 and 2014
(g)
Notes to Consolidated Financial Statements
15(a)(2)
Consolidated Financial Statement Schedules
All
schedules have been omitted, as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
15(a)(3)
Exhibits
The
exhibits listed in the accompanying Exhibit Index are filed as part
of this Annual Report on Form 10-K.
41
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
PARAGON COMMERCIAL
CORPORATION (Registrant)
|
|
|
|
|
|
|
Date: March 21, 2017
|
By:
|
/s/
Robert
C. Hatley
|
|
|
|
Robert C.
Hatley
|
|
|
|
President and Chief
Executive Officer
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated:
Signature
|
Title
|
Date
|
|
|
|
/s/
Robert C. Hatley
|
President, Chief
Executive Officer and Director
(Principal Executive Officer)
|
|
Robert
C. Hatley
|
March
21, 2017
|
|
|
|
|
/s/
Steven E. Crouse
|
Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
Steven
E. Crouse
|
March
21, 2017
|
|
|
|
|
/s/
Howard Jung
|
Chairman of the
Board of Directors
|
|
Howard
Jung
|
March
21, 2017
|
|
|
|
|
/s/
Curtis C. Brewer III
|
Director
|
March
21, 2017
|
Curtis
C. Brewer III
|
||
|
||
/s/ Roy
L. Harmon, Jr.
|
Director
|
|
Roy L.
Harmon, Jr.
|
March
21, 2017
|
|
|
|
|
/s/ K.
Wesley M. Jones
|
Director
|
|
K.
Wesley M. Jones
|
March
21, 2017
|
|
|
|
|
/s/
Thomas B. Oxholm
|
Director
|
|
Thomas
B. Oxholm
|
March
21, 2017
|
|
|
|
|
/s/ F.
Alton Russell
|
Director
|
|
F.
Alton Russell
|
March
21, 2017
|
42
EXHIBIT INDEX
|
|
|
|
Incorporated
by Reference (Unless Otherwise Indicated)
|
||||||
Exhibit Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing Date
|
|
|
|
|
|
|
|
|
|
|
|
3.1.1
|
|
Articles
of Incorporation of Paragon Commercial Corporation
|
|
S-1
|
|
333-211627
|
|
3.1.1
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
3.1.2
|
|
Articles
of Amendment of Paragon Commercial Corporation effective June 30,
2008
|
|
S-1
|
|
333-211627
|
|
3.1.2
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
3.1.3
|
|
Articles
of Amendment of Paragon Commercial Corporation effective February
5, 2009
|
|
S-1
|
|
333-211627
|
|
3.1.3
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
3.1.4
|
|
Articles
of Amendment of Paragon Commercial Corporation effective May 29,
2014
|
|
S-1
|
|
333-211627
|
|
3.1.4
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
3.1.5
|
|
Articles
of Amendment of Paragon Commercial Corporation effective June 23,
2014
|
|
S-1
|
|
333-211627
|
|
3.1.5
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Bylaws
of Paragon Commercial Corporation, as amended
|
|
S-1
|
|
333-211627
|
|
3.2
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Form of
Common Stock Certificate
|
|
S-1
|
|
333-211627
|
|
4.1
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.1*
|
|
Paragon
Commercial Corporation 2006 Omnibus Stock Ownership and Long Term
Incentive Plan
|
|
S-1
|
|
333-211627
|
|
10.1
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.2*
|
|
Paragon
Commercial Corporation Employee Stock Purchase Plan
|
|
S-1
|
|
333-211627
|
|
10.2
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.3.1*
|
|
Employment
Agreement with Robert C. Hatley effective September 1,
2013
|
|
S-1
|
|
333-211627
|
|
10.3.1
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.3.2*
|
|
First
Amendment to Employment Agreement with Robert C. Hatley effective
October 27, 2015
|
|
S-1
|
|
333-211627
|
|
10.3.2
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.3.3*
|
|
Second
Amendment to Employment Agreement with Robert C. Hatley, effective
December 29, 2016
|
|
8-K
|
|
—
|
|
10.1
|
|
January
5, 2017
|
43
10.4.1*
|
|
Change
in Control Agreement with Steven E. Crouse effective March 28,
2013
|
|
S-1
|
|
333-211627
|
|
10.4.1
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.4.2*
|
|
Amendment
of the Change in Control Agreement with Steven E. Crouse effective
May 20, 2014
|
|
S-1
|
|
333-211627
|
|
10.4.2
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.5.1*
|
|
Change
in Control Agreement with Matthew C. Davis effective March 28,
2013
|
|
S-1
|
|
333-211627
|
|
10.5.1
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.5.2*
|
|
Amendment
of the Change in Control Agreement with Matthew C. Davis effective
May 20, 2014
|
|
S-1
|
|
333-211627
|
|
10.5.2
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.6*
|
|
Restated
Salary Continuation Agreement with Robert C. Hatley, effective
January 1, 2017
|
|
8-K
|
|
—
|
|
10.2
|
|
January
5, 2017
|
|
|
|
|
|
|
|
|
|
|
|
10.7.1*
|
|
Restated
Salary Continuation Agreement with Matthew C. Davis, effective
January 1, 2017
|
|
8-K
|
|
—
|
|
10.3
|
|
January
5, 2017
|
|
|
|
|
|
|
|
|
|
|
|
10.7.2*
|
|
Salary
Continuation Agreement with Matthew C. Davis, effective January 1,
2017
|
|
8-K
|
|
—
|
|
10.4
|
|
January
5, 2017
|
|
|
|
|
|
|
|
|
|
|
|
10.8*
|
|
Restated
Salary Continuation Agreement with Steven E. Crouse, effective
January 1, 2017
|
|
8-K
|
|
—
|
|
10.5
|
|
January
5, 2017
|
|
|
|
|
|
|
|
|
|
|
|
10.9*
|
|
Endorsement
Split-Dollar Agreement with Robert C. Hatley
|
|
S-1
|
|
333-211627
|
|
10.9
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.10*
|
|
Endorsement
Split-Dollar Agreement with Matthew C. Davis
|
|
S-1
|
|
333-211627
|
|
10.10
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.11*
|
|
Endorsement
Split-Dollar Agreement with Steven E. Crouse
|
|
S-1
|
|
333-211627
|
|
10.11
|
|
May 26,
2016
|
|
|
|
|
|
|
|
|
|
|
|
10.12
|
|
Tax
Sharing Agreement, effective as of March 8, 2016, between Paragon
Commercial Corporation and Paragon Commercial Bank
|
|
S-1
|
|
333-211627
|
|
10.12
|
|
May 26,
2016
|
44
10.13
|
|
Indenture,
dated as of May 18, 2004, between Paragon Commercial Corporation
and JPMorgan Chase Bank
|
|
S-1/A
|
|
333-211627
|
|
10.13
|
|
June
10, 2016
|
|
|
|
|
|
|
|
|
|
|
|
10.14
|
|
Amended
and Restated Declaration of Trust of Paragon Commercial Capital
Trust I, dated as of May 18, 2004
|
|
S-1/A
|
|
333-211627
|
|
10.14
|
|
June
10, 2016
|
|
|
|
|
|
|
|
|
|
|
|
10.15
|
|
Guarantee
Agreement, dated as of May 18, 2004, between Paragon Commercial
Corporation and JPMorgan Chase Bank
|
|
S-1/A
|
|
333-211627
|
|
10.15
|
|
June
10, 2016
|
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Junior
Subordinated Indenture, dated as of May 30, 2006, between Paragon
Commercial Corporation and Wilmington Trust Company
|
|
S-1/A
|
|
333-211627
|
|
10.16
|
|
June
10, 2016
|
|
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Amended
and Restated Trust Agreement, dated as of May 30, 2006, between
Paragon Commercial Corporation, Wilmington Trust Company, and the
Administrative Trustees Named Therein
|
|
S-1/A
|
|
333-211627
|
|
10.17
|
|
June
10, 2016
|
|
|
|
|
|
|
|
|
|
|
|
10.18
|
|
Guarantee
Agreement, dated as of May 30, 2006, between Paragon Commercial
Corporation and Wilmington Trust Company
|
|
S-1/A
|
|
333-211627
|
|
10.18
|
|
June
10, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
Regarding Computation of Per
Share Earnings
|
|
—
|
|
—
|
|
—
|
|
Filed
herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
Regarding Computation of Ratios
|
|
—
|
|
—
|
|
—
|
|
Filed
herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
Annual Report of Paragon Commercial Corporation
|
|
—
|
|
—
|
|
—
|
|
Filed
herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
List of
Subsidiaries
|
|
—
|
|
—
|
|
—
|
|
Filed
herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consent
of Elliott Davis Decosimo PLLC
|
|
—
|
|
—
|
|
—
|
|
Filed
herewith
|
45
|
Certification
of the Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
—
|
|
—
|
|
—
|
|
Filed
herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certification
of the Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
—
|
|
—
|
|
—
|
|
Filed
herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certification
of the Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
—
|
|
—
|
|
—
|
|
Furnished
herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certification
of the Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
—
|
|
—
|
|
—
|
|
Furnished
herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Interactive
data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated
Balance Sheets as of December 31, 2016 and 2015; (ii) Consolidated
Statements of Income for the Years Ended December 31, 2016, 2015
and 2014; (iii) Consolidated Statements of Comprehensive Income for
the Years Ended December 31, 2016, 2015 and 2014; (iv) Consolidated
Statements of Changes in Stockholders’ Equity for the Years
Ended December 31 2016, 2015 and 2014; (v) Consolidated Statements
of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014;
and (vi) Notes to Consolidated Financial Statements
|
|
—
|
|
—
|
|
—
|
|
Filed
herewith
|
____________________
*
Management contract or compensatory plan
46