S-1/A 1 pbnc_s1.htm REGISTRATION STATEMENT pbnc_s1.htm


As filed with the Securities and Exchange Commission on June 10, 2016
 
Registration No.  333-211627              
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 

 
PARAGON COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 

 
North Carolina
6022
56-2278662
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
 
3535 Glenwood Avenue
Raleigh, North Carolina 27612
(919) 788-7770
 
     (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 

 
Robert C. Hatley
President and Chief Executive Officer
Paragon Commercial Corporation
3535 Glenwood Avenue
Raleigh, North Carolina 27612
(919) 788-7770
 
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 

 
Copies of all communications to:
Todd H. Eveson, Esq.
Jonathan A. Greene, Esq.
Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina 27607
(919) 781-4000
Jacob A. Lutz, III, Esq.
Mark W. Jones, Esq.
Troutman Sanders LLP
1001 Haxall Point
Richmond, Virginia 23219
(804) 697-1490
 

 
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.


 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
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
  o
Accelerated filer
  o
       
Non-accelerated filer
  o (Do not check if a smaller reporting company)
Smaller reporting company
  x


 
 
 

 
 
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
 
 
 

 
 
SUBJECT TO COMPLETION, DATED JUNE 10, 2016
 
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
 PRELIMINARY PROSPECTUS
 
736,000 Shares

Common Stock
 
This is the initial public offering of Paragon Commercial Corporation, the parent company and registered bank holding company of Paragon Commercial Bank in Raleigh, North Carolina. We are offering 736,000 shares of our common stock.
 
Prior to this offering, our common stock was quoted on the OTCQX marketplace under the symbol “PBNC.” We currently estimate that the initial public offering price per share will be between $33.00 and  $35.00. We have applied to list our common stock on the NASDAQ Capital Market under the symbol “PBNC.”
 
We are an “emerging growth company” as defined under the federal securities laws and are eligible for reduced public company reporting requirements.
 
Investing in our common stock involves risks.  See “Risk Factors” beginning on page 12 for a discussion of certain risks that you should consider before making an investment decision to purchase our common stock.
 
   
Per Share
   
Total
 
Initial public offering price of common stock
  $       $    
Underwriting discounts and commissions(1)
               
Proceeds to us, before expenses
               

 
(1)
See “Underwriting” beginning on page 101 for additional information regarding the underwriting discounts and commissions and certain expenses payable to the underwriters by us.
 
Neither the Securities and Exchange Commission nor any state securities commission or other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The shares of our common stock that you purchase in this offering will not be savings accounts, deposits or other obligations of any of our bank or non-bank subsidiaries and are not insured or guaranteed by the Federal Deposit Insurance Corporation, or FDIC, or any other governmental agency.
 
We have granted the underwriters an option to purchase up to 110,400 additional shares of our common stock at the initial public offering price, less underwriting discounts and commissions, for a period of up to 30 days from the date of this prospectus.
 
 
RAYMOND JAMES
 
SANDLER O'NEILL + PARTNERS, L.P.
 
Prospectus dated               , 2016.
 
 
 

 
 
TABLE OF CONTENTS


 
Page No.
PROSPECTUS SUMMARY
1
THE OFFERING
7
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
9
GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL MEASURES
11
RISK FACTORS
12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
27
USE OF PROCEEDS
28
CAPITALIZATION
29
DILUTION
30
DIVIDEND POLICY
31
MARKET FOR OUR COMMON STOCK
32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
33
BUSINESS
60
MANAGEMENT
70
EXECUTIVE COMPENSATION AND OTHER MATTERS
74
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
81
PRINCIPAL STOCKHOLDERS
82
DESCRIPTION OF OUR SECURITIES
84
SHARES ELIGIBLE FOR FUTURE SALE
87
SUPERVISION AND REGULATION
89
CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
98
UNDERWRITING
101
WHERE YOU CAN FIND MORE INFORMATION
104
LEGAL MATTERS
104
EXPERTS
104
INDEX TO FINANCIAL STATEMENTS
F-1

 
i

 
 
ABOUT THIS PROSPECTUS
 
You should rely only on the information contained in this prospectus. We and the underwriters have not authorized any person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.
 
For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.
 
Unless otherwise indicated or unless the context requires otherwise, all references in this prospectus 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.
 
INDUSTRY AND MARKET DATA
 
Industry and market data used in this prospectus has been obtained from independent industry sources and publications available to the public, sometimes with a subscription fee, as well as from research reports prepared for other purposes. We did not commission the preparation of any of the sources or publications referred to in this prospectus. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. We have not independently verified the data obtained from these sources. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus. Trademarks used in this prospectus are the property of their respective owners, although for presentational convenience we may not use the ® or the ™ symbols to identify such trademarks.
 
IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY
 
As a company with less than $1.0 billion in gross revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of reduced regulatory and reporting requirements that are otherwise generally applicable to public companies. As an emerging growth company:
 
 
we may present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”
 
 
we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley;
 
 
we are permitted to provide less extensive disclosure about our executive compensation arrangements; and
 
 
we are not required to hold non-binding advisory votes on executive compensation or golden parachute arrangements.
 
We may take advantage of these provisions for up to five years unless we earlier cease to be an emerging growth company. We will cease to be an emerging growth company if we have more than $1.0 billion in annual gross revenues, have more than $700.0 million in market value of our common stock held by non-affiliates as of any June 30 before that time, or issue more than $1.0 billion of non-convertible debt in a three-year period. We may choose to take advantage of some but not all of these reduced regulatory and reporting requirements. We have elected in this prospectus to take advantage of scaled disclosure relating to executive compensation arrangements and to present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis and Financial Condition and Results of Operations.”
 
In addition, Section 102(b) of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new and revised accounting standards. An emerging growth company can, therefore, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to "opt out" of that extended transition period and, as a result, we plan to comply with new and revised accounting standards on the relevant dates on which adoption of those standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with the new and revised accounting standards is irrevocable.
 
Following this offering, we may continue to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us as long as we continue to qualify as an emerging growth company. It is possible that some investors could find our common stock less attractive because we may take advantage of these exemptions. If some investors find our common stock less attractive, there may be a less active trading market for our common stock and our stock price may be more volatile.
 
 
ii

 
 
 
PROSPECTUS SUMMARY
 
This summary highlights selected information contained in greater detail elsewhere in this prospectus and does not contain all the information that you need to consider in making your investment decision. You should carefully read this entire prospectus before deciding whether to invest in our common stock. You should pay special attention to, among other things, our consolidated financial statements and the related notes thereto and the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus to determine whether an investment in our common stock is appropriate for you.

A Professional, Profitable Business Strategy

We were formed with the goal of filling what we believe is an unmet demand in our markets: delivering the commercial and private banking expertise and professionalism of a large bank with the responsive, personalized service of a community bank. We offer the client experience of a private bank for businesses and individuals through highly talented and experienced employees at carefully selected, professional office locations. Our combination of efficient staffing and a limited number of professional offices helps us drive profitability and create stockholder value, including by operating more efficiently than many of our peer institutions.

As of March 31, 2016 we had net loans of $1.04 billion, total deposits of $1.05 billion, stockholders’ equity of $100.2 million and total assets of $1.34 billion. For the three months ended March 31, 2016, we generated net income of $2.8 million, earnings per diluted common share of $0.62, a tax equivalent net interest margin of 3.51% and an efficiency ratio of 58.69%. For the year ended December 31, 2015, we generated net income of $11.2 million, earnings per diluted common share of $2.47, a tax equivalent net interest margin of 3.51% and an efficiency ratio of 56.64%.

Our History

We are a North Carolina corporation and bank holding company registered under the Bank Holding Company Act of 1956, as amended, and headquartered in Raleigh, North Carolina.  Founded as North Carolina's sole business-only bank,  we began operations in 1999  as Paragon Commercial Bank to serve the financial needs of commercial clients, professional service firms, their owners and other targeted clients with a superior client experience delivered from a single office. In 2001 we formed Paragon Commercial Corporation as the Bank’s holding company, in 2006 we expanded to the Charlotte, North Carolina market and opened our second office, and in 2014 we opened our third office in Cary, North Carolina. We discuss our markets in more detail below.

Our commitment to our professional, profitable business strategy has driven the development of our strong banking brand in our market areas and supported our increased focus on offering banking products and services to the principals of our core business clients.

Our Strategy

We combine large bank sophistication and relationship banking.

Our target clients value professional delivery of sophisticated banking products and services. We compete in our markets for these target clients with a wide variety of banking organizations. At one end of the marketplace spectrum are large, national and super-regional financial institutions. These organizations provide expertise and consistency of service across geographic markets, but often fall short with their responsiveness and level of personalized service. At the other end of the marketplace spectrum are small, community banks that excel at responsiveness and personalized service, but which lack the resources and expertise of the large national and super-regional banks. Since our founding, our goal has been to provide the best attributes of large and small financial institutions to our target clients.

We target profitable banking clients that value professional, personalized service.

We target clients with significant banking needs that value professionalism and personalized service, including companies with annual revenues from $5 million to $75 million; professional service firms such as attorneys, health care providers, and accountants, trade associations, nonprofit organizations; and high net worth individuals. Our focus on high net worth individuals, including the principals that own or manage our key target business clients, has increased in recent periods. These groups typically have substantial banking needs that are best addressed by the professional and sophisticated approach to banking that larger financial institutions typically offer. However, many of these types of banking clients often prefer the “relationship banking” approach of a community bank. We believe our target clients are underserved by both the national and super-regional financial institutions and the small community banks. Our target clients seek bankers that can serve as their trusted advisors.
 
 
 
1

 
 
 
Our target clients are typically more mature businesses, larger nonprofits, and wealthier individuals. As a community bank operating with a private banking model, we believe that these clients are more profitable than smaller businesses and a mass market retail approach. Our target clients have significant banking needs: larger balances of deposits and / or larger credit needs, which allows us to put greater emphasis on a smaller number of relationships. We also believe that more mature businesses with revenues over $5 million and wealthier individuals present better credit risks than other types of customers

We seek to deliver an “extraordinary client experience” through the ambiance of a private banking environment. We have a committee staffed by a member of every department that collaborates to identify opportunities for Paragon to make our client experience as rewarding and convenient as possible for our clients. We recognize and reward employees of all departments for outstanding service.

We empower our employees to deliver a high quality, high value and efficient banking experience to our clients and to serve as trusted advisors. Our Client Development Officers, or CDOs, are key to our unique model for delivering banking products and services.

We tailor our services to be convenient to and meet the specialized needs of commercial and private banking clients. Our employees are the foundation to our tailored approach. We maintain very good relations with our employees, have experienced very low employee turnover since our founding, and in 2015 the American Banker ranked us number six on its list of “Best Banks to Work For.”

Our Client Development Officers, or CDOs, are talented, experienced bankers responsible for relationships with our clients and are critical to how we deliver banking products and services to our clients. Each of our CDOs develops a “portfolio” of clients and uses their depth of market and banking knowledge to serve as a key point of contact for clients in his or her portfolio. Our CDOs are supported by a team of professionals with account service, credit and treasury expertise. This structure deepens the client relationships and enables each CDO to serve as a trusted advisor to our clients within their portfolios. We believe our clients value this combination of professional expertise and service and a stable banking relationship.

We hire CDOs who are highly talented bankers with significant experience in our markets.

We are highly selective in hiring CDOs and seek to hire CDOs with strong banking skills and the desire to provide extraordinary client service. We identify a large portion of our CDOs by observing talented bankers at other institutions within our markets and attracting them to our organization. We believe these talented and experienced bankers, if they join our banking team as a CDO, will be very effective in serving as their clients’ key point of contact. In addition to market sales and client service experience, our ideal CDO candidates also possess the credit underwriting expertise and business acumen to enable them to serve as advisors to our clients. Our executive management team participates in interviews and hiring decisions for every CDO.

We have developed a strong sales culture throughout our organization and we incentivize employees (including CDOs) to reach banking outcomes that are beneficial for our clients and for us.

We emphasize a strong sales culture throughout our organization and we use a “top-down” approach for demonstrating our commitment to this culture. We provide high quality sales training conducted by leading firms for our CDOs on a regular basis. Members of our board of directors, as well as members of our three local advisory boards, actively develop business and serve as our ambassadors in their communities. Our market presidents serve as the leaders of our sales teams and set goals for loan and deposit growth. Our management measures our performance based on an analysis of referral and sales metrics, which includes an emphasis on internal referrals that encourage our clients to take advantage of all the products and services we offer. We believe that our strong internal referral culture creates an environment rewarding to our employees and a better banking experience for our clients. We incentivize our CDOs through a qualitative and quantitative incentive program by setting high, but attainable production goals, providing significant resources for the CDOs to use in meeting these goals, and appropriately rewarding our CDOs for success. These incentives focus our CDOs on developing strong client relationships and generating business.

We believe we can efficiently execute our strategy and meet the needs of our key banking clients.

We operate as a commercial and private bank, as opposed to a retail bank, with targeted, highly professional offices in our markets, rather than a broad network of branch offices. We do not have drive-through windows or automated teller machines (ATMs). We offer courier services, online banking and remote deposit capture to extend the reach of our offices. We believe that our offices and auxiliary services provide a professional banking experience that is appealing to sophisticated clients, without the costs associated with maintaining the wide branch network that is traditionally associated with community banks of our size. Operating with fewer branches allows us to also operate with fewer employees, which contributes to our efficiency and profitability. At December 31, 2015, we had a ratio of $9.4 million of assets per full-time equivalent employee versus a median ratio of $4.4 million of assets per full-time equivalent employee for peer institutions.1
 

1 As used in this prospectus, “peer institutions” refers to a group of 190 banks and thrifts headquartered in the southeastern United States with total assets ranging from $500 million to $5 billion at December 31, 2015. Please note that this group of peer institutions is different from the “peer group” referenced in Note 10 to our audited consolidated financial statements included with this prospectus.
 
 
 
2

 
 
 
 
We have increased the funding provided by our local deposits.

Our CDOs have significant responsibility for our success in deposit gathering. Some of our CDOs are primarily focused on deposit gathering initiatives and call on clients and potential clients that may not have significant lending needs, but are valuable sources of core deposits. In addition to our commercial, professional, and high net worth clients, we specifically target niche deposit clients including title companies, property management firms, nonprofit organizations, and trade associations. We have increased our focus on local funding in recent years, and we have grown local funding at a rate which has significantly outpaced our strong loan growth. From December 31, 2010 to March 31, 2016 we have grown our local deposits and client repurchase agreements by $506.9 million, or 112.3%, from $451.3 million to $958.3 million.
 
As a result of our strong loan and core deposit growth, we have improved our net interest margin, which has contributed to the increased profitability of our Company. Our net interest margin has increased in each successive year from 2011 to 2015, and we recorded a tax-equivalent net interest margin of 3.51% for the year ended December 31, 2015 versus 2.60% for the year ended December 31, 2011. Our tax-equivalent net interest margin remained at 3.51% for the three months ended March 31, 2016. Peer institutions, on the other hand, have recorded shrinking net interest margins with a median tax-equivalent net interest margin of 3.83% for the year ended December 31, 2011 and 3.73% for the year ended December 31, 2015. For the three months ended March 31, 2016, peer institutions achieved a median tax-equivalent net interest margin of 3.72%.(2)
 
 
We have significant growth opportunities in our current markets.

Our growth strategy centers on growing loans, deposits and banking relationships in our existing markets. Based on deposit market share data as of June 30, 2015 (the most recent date for which such information is available), we maintained market shares of approximately 3.1% and 0.1% in the Raleigh market area and the Charlotte market area, respectively. Based on our market share and other market data, we believe we have substantial opportunities in the Raleigh and Charlotte market areas to grow organically or to grow through targeted expansion of our branch network. We believe that our investments in technology and systems and our highly-skilled employees create a corporate infrastructure with capacity to support continued growth.

We also periodically consider the measured expansion of our franchise through entry into new markets, including through the recruitment of seasoned personnel with ties to their market area or potentially through targeted acquisitions.

We focus on maintaining strong asset quality.

Achieving strong asset quality through our business strategy is one of our most important operating objectives. Our business strategy places an emphasis on larger, more seasoned commercial borrowers, whom we believe present lower risks of default. Our credit approval processes give our CDOs responsibility for the initial underwriting of loans to customers in their portfolio in order to capitalize on our CDOs’ knowledge of their customers’ businesses. Our CDOs do not have authority to make loans over $100,000 without approval, and in order to ensure that the sales teams are not conflicted between growth and profitability, credit administration and executive management are responsible for loan and deposit pricing, respectively. Loan commitments are approved by credit administration which may include loan committees at various levels within our bank, depending on the loan’s size, total relationship exposure and other characteristics. Our credit culture and these processes drive our asset quality success; at March 31, 2016, loans past due 30 days or more totaled $127,000 or 0.01% of loans, nonperforming assets to total assets of 0.43%, and $487,000 of nonperforming loans.

We focus on creating stockholder value.

We believe that our business model allows us to create significant value for our stockholders. We operate with significantly fewer employees and a much smaller branch network than other banks our size (based on total assets), which results in much lower operating expenses. In 2015, our efficiency ratio (total non-interest expense divided by the sum of net interest income and non-interest income) was 56.64%, compared to a median ratio of 70.31% for a group of our peer institutions. That same ratio for the three-month period ended March 31, 2016 was 58.69%. We have used our strong sales culture to capitalize on significant growth opportunities in our existing markets in recent periods. In 2015 we grew loans by $147.8 million, or 17.0%, and sold participations for an additional $29.1 million in loans. We also grew client deposits by $178.3 million, or 26.7%, in 2015. This loan and deposit growth increased our 2015 net income by $3.3 million, or 41.1%, compared to 2014. The combination of lower operating expenses and strong growth drove our 2015 return on assets of 0.87% and return on equity of 12.20%. For the first quarter of 2016 we grew loans by $28.8 million, or an annualized rate of 11.2%. We also grew client deposits by $110.9 million, or an annualized rate of 52.4%, in the same period of 2016. We believe that we will continue to have similar growth opportunities during 2016 and beyond, and we expect that capitalizing on these growth opportunities would increase our profitability and enhance stockholder value. We intend to use a portion of the proceeds of this offering to support our continued growth.
 
Our focus on the Raleigh-Durham and Charlotte market areas creates significant franchise value.
 
We believe that our focus on North Carolina’s two largest banking markets and the consolidation within the North Carolina banking industry creates significant franchise value. We are the only bank that focuses almost solely on the Raleigh-Durham and Charlotte market areas. There has been significant consolidation among banks in North Carolina. As of December 31, 2009, there were 102 banks headquartered in North Carolina, but that number has shrunk to only 62 as of March 31, 2016. We think that the combination of our focus on attractive markets and the relative scarcity of North Carolina-based banks created by consolidation continues to enhance our franchise value.
 

2 Please refer to footnote 1 on page 2 for the definition of “peer institutions.”
 
 
 
3

 
 
Our Challenges

Our ability to execute our strategy, the success of our business, and our ability to achieve further growth is subject to numerous risks and uncertainties. You should carefully consider all of the information set forth in this prospectus and, in particular, the information under the heading “Risk Factors” prior to making an investment in our common stock. These risks include, among others:
 
·
increased loan delinquencies and credit losses;
 
·
an adverse impact on our access to liquidity caused by a decrease in the level of our business activity due to a market downturn, our lack of access to a traditional branch network, the loss of one or more of our larger deposit relationships, and adverse regulatory action against us;
 
·
failure to continue to increase our volume of loans and deposits at acceptable risk levels and upon acceptable terms while managing the costs and implementation risks of our growth strategy;
 
·
loss of customers in the event one of our CDOs with extensive and deep client relationships were to leave our Company;
 
·
changes in the interest rate environment resulting in a reduction in our net interest income;
 
·
a cyber attack or other failure, interruption, or breach in the security or operational integrity of our computer systems and networks; and
 
·
our business concentration in North Carolina, which may magnify the consequences of a local or regional economic downturn.
 
Attractive, Growing Markets
 
We serve the Raleigh, North Carolina market and surrounding areas, including the Research Triangle Park, Durham and Chapel Hill, from our headquarters in Raleigh. In 2006 we expanded to Charlotte, North Carolina and in 2014 we established a full service office in Cary, North Carolina. We believe that these markets have a combination of scale and attractive demographics to provide significant growth opportunities, while being small enough for our 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.
 
According to U.S. Census bureau statistics, the Raleigh MSA had the 2nd highest population growth rate of any of the top 50 MSAs from 2000 to 2010.  Over the next five years, the Raleigh MSA is projected to achieve population growth of 8.2%, the 3rd highest of all MSAs nationwide with a population of at least 1,000,000 and 1st highest of all MSAs in the Southeast with a population of at least 1,000,000. The Raleigh MSA’s projected population growth also compares well to that for the state of North Carolina (4.9%), Southeast (4.5%), and United States (3.7%).  Raleigh’s growth is in part supported by STEM-related job growth (science, technology, engineering and mathematics). According to Forbes, a study by the Praxis Strategy Group concluded that the Raleigh MSA experienced a 39% increase in STEM-related jobs from 2004 to 2014—the fastest growth in the nation. Raleigh has experienced the benefits of such growth in STEM and other sectors with median household income of approximately $65,000 in 2016. This is well above the median household income for the state of North Carolina (~$48,000), Southeast (~$49,000) and United States (~$56,000).
 
Two other specific markets important to our Company’s growth prospects include the Durham-Chapel Hill MSA and the city of Cary, an important Raleigh sub-market.  The Durham-Chapel Hill MSA is adjacent to the Raleigh MSA and part of the greater Raleigh-Durham-Chapel Hill market area. It is projected to achieve population growth of 6.7% over the next five years, and its 2016 median household income is approximately $57,000.  Cary, in which we opened an office in 2014, grew from a population of 21,958 in 1980 to 159,769 in 2015 based on U.S. Census Bureau statistics. This equates to a cumulative annual growth rate of 5.8%, and Cary is now the 7th largest city in the state of North Carolina.
 
Raleigh and the greater Raleigh-Durham-Chapel Hill area have received numerous accolades in recent years, including a consistent ranking among the most educated cities in America. The Raleigh-Durham-Chapel Hill combined statistical area recently ranked number two among cities creating the most tech jobs (Forbes, 2015). Raleigh has also been ranked the number two city for businesses and careers by Forbes (2015). Both Raleigh and Cary have been ranked among the top places to live in the United States by Money magazine. Raleigh was also rated as the top American city to live in by businessweek.com.
 
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. According to the U.S. Census Bureau, Charlotte’s population has increased over 40% since 2000, with the population of Mecklenburg County (the home of Charlotte) increasing by an even greater percentage during the same period. Over the next five years, the Charlotte MSA is projected to achieve population growth of 7.0%, the 9th highest of all MSAs nationwide with a population of at least 1,000,000 and 3rd highest of all MSAs in the Southeast with a population of at least 1,000,000.  2016 median household income for the Charlotte MSA—approximately $55,000—is projected to increase by 9.3% over the next five years. This ranks Charlotte well ahead of the state of North Carolina, Southeast and United States, which have projected median household income growth of 6.2%, 6.1% and 7.8%, respectively. According to the Charlotte Chamber of Commerce, home sales increased 8.8% and the average closing price increased 5.1% in Mecklenburg County during 2015 compared to 2014. Charlotte is home to seven Fortune 500 companies, including the nation’s second largest commercial bank. Charlotte also has concentrations in the transportation, utilities, education, professional services and construction sectors. During 2015, the strongest job growth in Mecklenburg County was achieved by the finance and insurance, professional and technical services, and manufacturing sectors according to the Charlotte Chamber of Commerce. Those three sectors represented approximately 57% of Mecklenburg County’s total job growth in 2015.
 
 
 
4

 
 
 
Charlotte is often included in rankings of metropolitan areas for business, including a number nine ranking by Business Facilities in its list of “Best Business Tax Climate” and in the top 10 for Top Financial Centers, and a number three ranking by Southern Business & Development for “Major Market of the Year”. The Charlotte Chamber of Commerce reports that Charlotte is in one of the fastest growing metro areas by Gross Domestic Product, ranking sixth in its 2015 report.
 
Our Executive Management Team and Banking Officers
 
Our executive management team has significant banking experience in our market areas and has managed our profitable, organic growth. Robert C. Hatley, our President and Chief Executive Officer, and Matthew C. Davis, our Executive Vice President and Chief Operating Officer, have led our organization since our founding and together have 63 years of banking experience between them in our markets. Steven E. Crouse has served as our Executive Vice President and Chief Financial Officer since 2005 and, including his 8 years of experience in public accounting as a financial institution specialist, he has 25 years of banking experience. We believe the continuity of our management team has and will continue to contribute significantly to executing our professional, profitable business strategy, to developing a strong relationship banking culture, to building our banking brand in our markets, and to maximizing our operating efficiency. Further, our management team, in addition to our board of directors and our employees (particularly our CDOs), possesses deep relationships and broad business networks in our market areas on which our relationship banking can capitalize.
 
Our executive management team consists of the following individuals.
 
Robert C. Hatley – President, Chief Executive Officer, and Director
 
Mr. Hatley founded Paragon Bank in August 1998 and has been the President, Chief Executive Officer and a director since this time. He also serves as the President, Chief Executive Officer and a director of the Company. Mr. Hatley began his banking career at Wachovia Bank. Over the course of his fourteen years with Wachovia, Mr. Hatley served as a field representative, a credit manager, a branch manager, and a city executive. From 1994 to 1998, Mr. Hatley was Regional Market Manager for Wake County, RBC Centura (now PNC Bank). Prior to this, during the period from 1989 to 1994, Mr. Hatley was the City Executive for Cary, North Carolina, RBC Centura. Mr. Hatley graduated with a BS in Business Administration from Appalachian State University. We believe Mr. Hatley’s extensive banking experience brings to our board of directors and the board of Paragon Bank important skills and qualify him to serve as one of our directors, as well as a director of Paragon Bank.
 
Steven E. Crouse – Executive Vice President and Chief Financial Officer
 
Mr. Crouse joined Paragon Bank as Executive Vice President and Chief Financial Officer in July 2005. He also serves as Executive Vice President and Chief Financial Officer of the Company. He has extensive financial experience, including Senior Vice President, Finance and Chief Accounting Officer at Capital Bank in Raleigh from 1998 through 2005. Prior to that, Mr. Crouse spent eight years in public accounting at McGladrey & Pullen.  Since 1990, Mr. Crouse has been a North Carolina State Board Certified Public Accountant. Mr. Crouse graduated with a BA in both Accounting and Business Management from North Carolina State University.
 
Matthew C. Davis – Executive Vice President and Chief Operating Officer
 
Mr. Davis currently serves as Executive Vice President and Chief Operating Officer at the Company and Paragon Bank, a position he has held since December 2012. He served as the Company’s Chief Credit Officer from June 2002 to December 2012. Prior to joining the Company, Mr. Davis was Vice President, Commercial Lending from 1996 through 1998 at RBC Centura Bank, which is now PNC Bank, National Association, in Cary, North Carolina. Before PNC Bank, Mr. Davis served as Assistant Vice President, Corporate Banking, from 1994 through 1996 at Wachovia Bank, which is now Wells Fargo & Company, in Charlotte, North Carolina. Mr. Davis graduated with a BA degree in Business Management and an MS in Management from North Carolina State University.
 
In addition to our executive officers, the following individuals serve as officers of the Bank.
 
James M. Fielding – Chief Credit Officer
 
Mr. Fielding has served as Chief Credit Officer and Senior Vice President of Paragon Bank since 2012. Prior to joining the Bank in 2007, Mr. Fielding worked with Seattle Financial Group (Seattle Savings Bank) as its Credit Manager and Assistant Vice President from May 2000 to April 2007. Mr. Fielding majored in Criminal Justice at Central Connecticut State University.
 
 
 
5

 
 
 
Phillip R. JurneyCharlotte Market President
 
Mr. Jurney joined Paragon Bank in September 2007 as its Executive Vice President – Commercial Banking Executive and currently serves as the Bank’s Charlotte Market President. Prior to joining Paragon, Mr. Jurney held the position of Commercial Banking Executive with First Charter Bank from 2004 to 2005. From 1993 to 1999, Mr. Jurney held the position of Senior Vice President – Commercial Development Officer for SouthTrust Corporation in Charlotte, North Carolina. Mr. Jurney received his bachelors in Business Administration from The Citadel Military College and a MBA from the University of North Carolina – Charlotte.
 
Brian K. ReidTriangle Market President
 
Mr. Reid joined Paragon Bank in January 2001 as a commercial banker and currently serves as the Bank’s Triangle Market President. Previously, from May 1999 to November 2000, Mr. Reid was the Vice President, Western Wake County Market Executive, Commercial and Retail Banking, at First Citizens Bank & Trust Co., in Raleigh, North Carolina. Mr. Reid began his career in banking with National City Bank in Cleveland, Ohio. Mr. Reid graduated with a BS in Finance from The Ohio State University and an MBA in Marketing and Finance from Case Western Reserve University.
 
Corporate Information

We conduct all of our business activities through our banking subsidiary, Paragon Commercial Bank, which operates under the trade name “Paragon Bank.” Our principal executive office is located at 3535 Glenwood Avenue, Raleigh, North Carolina 27612 and our telephone number is (919) 788-7770. Our website is www.paragonbank.com. Information contained on our website is not part of this prospectus.
 
 
 
6

 
 
 
 THE OFFERING
 
Common stock offered
     736,000 shares of our common stock.(1)
Option to purchase additional shares
The underwriters will have an option to purchase up to 110,400 additional shares of our common stock in this offering, exercisable within 30 days from the date of this prospectus.
Directed share program
At our request, the underwriters have reserved up to five percent of the shares offered hereby for sale at the initial public offering price to officers, directors, employees and certain other persons associated with us through a directed share program. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. See “Underwriting” beginning on page 101.
Common stock to be outstanding immediately after this offering
5,339,309 shares 5,449,709 shares if the underwriters exercise their option to purchase additional shares in full).
Securities offered as a percentage of outstanding shares of common stock
16%, assuming the underwriters do not exercise their option to purchase additional shares.
Use of proceeds
 
 
 
 
Assuming an initial public offering price of $34.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, we expect to receive net proceeds from this offering of approximately $22.9 million (or $26.5 million if the underwriters exercise their option to purchase additional shares in full), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds of this offering to:
 
· support the continued growth of Paragon Bank;
 
· to retire outstanding debt; and
 
· for general corporate purposes, including for possible acquisitions of, or investments in, bank or permissible non-bank entities, though we do not have any  agreements or understandings presently with respect to any acquisitions or investments.
 
See “Use of Proceeds” on page 28.

(1) Unless expressly indicated or the context otherwise requires, all information in this prospectus:
 
assumes no exercise by the underwriters of their option to purchase up to an additional 110,400 shares of our common stock in this offering;
 
does not include as outstanding 80,500 shares of our common stock issuable upon the exercise of outstanding stock options as of June 6, 2016 at a weighted average exercise price of $ 46.39 per share; and
 
does not include as outstanding 160,189 shares of our common stock reserved for issuance in connection with stock awards available for issuance under our 2006 Omnibus Stock Ownership and Long Term Incentive Plan as of June 6, 2016.
 
 
7

 
 
Dividends
We will pay dividends on our common stock, when, as, and if declared by our board of directors or a duly authorized committee thereof. Our ability to declare and pay dividends is limited by state law and by applicable federal and state regulatory restrictions, including the regulations and guidelines of the Federal Reserve Board of Governors, or the Federal Reserve, applicable to bank holding companies.
 
In addition, because we are a bank holding company, our ability to pay dividends on our common stock will be highly dependent upon the receipt of dividends, fees and other amounts from the Bank, which, in turn, will be highly dependent upon the Bank’s historical and projected results of operations, liquidity, cash flows and financial condition, as well as various legal and regulatory prohibitions and other restrictions on the ability of the Bank to pay dividends, extend credit or otherwise transfer funds to us. For additional information, see “Dividend Policy” on page 31 for additional information.
Listing
We have applied to list our common stock on the NASDAQ Capital Market under the symbol “PBNC.”
Risk factors
Investing in our common stock involves risks. Please see “Risk Factors” beginning on page 12 for a discussion of factors you should consider carefully before making a decision to invest in our common stock.
Transfer agent and registrar
Issuer Direct Corporation, Morrisville, North Carolina.

 
8

 
 
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
 
The table below sets forth selected historical consolidated financial data and other information as of the dates and for the periods presented. We have derived the selected historical consolidated financial data as of and for the years ended December 31, 2015 and 2014 from our audited consolidated financial statements included elsewhere in this prospectus and the selected historical consolidated financial data as of and for the years ended December 31, 2013, 2012 and 2011 from our audited consolidated financial statements for those years, which are not included in this prospectus. The selected historical consolidated financial data as of and for the three-month periods ended March 31, 2016 and 2015 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.
 
 
The selected historical consolidated financial information should be read in conjunction with and is qualified in its entirety by:
 
 
our audited consolidated financial statements as of and for the years ended December 31, 2015 and 2014 and related notes included elsewhere in this prospectus;
 
 
our unaudited consolidated financial statements as of and for the three months ended March 31, 2016 and 2015 and related notes included elsewhere in this prospectus; and
 
 
the sections in this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”
 
The performance, asset quality and capital ratios included herein are unaudited and derived from our audited financial statements as of and for the years presented. Average balances have been calculated using daily averages.
 
   
Three-Month Period
                               
   
Ended March 31,
   
Years Ended December 31,
 
(Dollars in thousands)
 
2016
   
2015
   
2015
   
2014
   
2013
   
2012
   
2011
 
OPERATING DATA:
                                         
Interest income
  $ 12,467     $ 11,320     $ 48,435     $ 42,783     $ 40,601     $ 38,888     $ 44,125  
Interest expense
    1,916       1,868       7,384       8,678       10,518       14,414       19,378  
Net interest income
    10,551       9,452       41,051       34,105       30,083       24,474       24,747  
Provision for loan losses
    -       571       750       538       156       929       2,918  
Net interest income after provision for loan losses
    10,551       8,881       40,301       33,567       29,927       23,545       21,829  
Non-interest income
    266       484       1,454       704       (2,075 )     (706 )     (3,097 )
Non-interest expense
    6,600       5,880       24,760       21,909       20,174       17,909       18,582  
Income before income taxes
    4,217       3,485       16,995       12,362       7,678       4,930       150  
Income tax (benefit) expense
    1,379       1,177       5,761       4,403       2,754       1,756       (447 )
Net income
  $ 2,838     $ 2,308     $ 11,234     $ 7,959     $ 4,924     $ 3,174     $ 597  
                                                         
BALANCE SHEET DATA:
                                                       
Cash and due from banks
  $ 51,559     $ 98,110     $ 55,530     $ 36,395     $ 45,137     $ 18,378     $ 46,081  
Investment securities - available for sale, at fair value
    182,157       154,185       168,896       183,675       147,196       147,974       161,430  
Loans, net
    1,037,050       936,486       1,008,515       861,536       760,453       712,018       673,708  
Premises and equipment, net
    16,281       16,824       16,433       17,071       15,268       13,779       9,450  
Bank owned life insurance
    28,497       27,621       28,274       27,421       26,622       25,775       24,868  
Federal Home Loan Bank stock, at cost
    7,232       8,274       8,061       7,006       6,323       6,396       3,928  
Other real estate owned and repossessed property
    5,228       14,577       5,453       14,991       18,174       18,756       26,132  
Other assets
    13,173       15,100       14,749       17,160       16,598       14,594       20,155  
Total assets
  $ 1,341,177     $ 1,271,177     $ 1,305,911     $ 1,165,255     $ 1,035,771     $ 957,670     $ 965,752  
                                                         
Deposits
  $ 1,047,133     $ 948,085     $ 982,847     $ 883,640     $ 770,152     $ 700,301     $ 744,312  
Repurchase agreements and federal funds purchased
    24,494       33,183       30,580       27,482       28,012       26,303       20,769  
Borrowings
    146,673       176,650       169,800       142,256       124,616       120,000       95,000  
Subordinated debentures
    18,558       18,558       18,558       18,558       30,338       30,338       30,338  
Other liabilities
    4,147       4,677       6,468       5,657       5,050       4,743       4,047  
Total liabilities
    1,241,005       1,181,153       1,208,253       1,077,593       958,168       881,685       894,466  
Stockholders' equity
    100,172       90,024       97,658       87,662       77,603       75,985       71,286  
Total liabilities and stockholders' equity
  $ 1,341,177     $ 1,271,177     $ 1,305,911     $ 1,165,255     $ 1,035,771     $ 957,670     $ 965,752  
 
 
9

 
 
   
Three-Month Period
                               
   
Ended March 31,
   
Years Ended December 31,
 
(Dollars in thousands, except share data)
 
2016
   
2015
   
2015
   
2014
   
2013
   
2012
   
2011
 
SELECTED AVERAGE BALANCES:
                                         
Total assets (1)
  $ 1,323,434     $ 1,221,555     $ 1,297,064     $ 1,104,079     $ 998,519     $ 967,790     $ 1,065,970  
Investment securities - at book value
    177,846       164,853       168,650       164,420       149,834       170,733       179,438  
Loans
    1,019,396       902,518       970,153       807,025       741,208       685,030       765,718  
Deposits
    994,219       879,350       959,515       834,529       744,057       733,814       836,587  
Stockholders' equity (1)
    99,046       88,644       92,073       82,546       76,407       73,767       68,377  
                                                         
PERFORMANCE RATIOS:
                                                       
Return on average assets
    0.86 %     0.76 %     0.87 %     0.72 %     0.49 %     0.33 %     0.06 %
Return on average equity
    11.46 %     10.41 %     12.20 %     9.64 %     6.44 %     4.30 %     0.87 %
Average earning assets to average total assets
    93.34 %     91.64 %     92.26 %     90.78 %     92.13 %     91.75 %     91.26 %
Average loans to deposits
    102.53 %     102.63 %     101.11 %     96.70 %     99.62 %     93.35 %     91.53 %
Average tangible common equity ratio
    7.48 %     7.26 %     7.10 %     7.48 %     7.65 %     7.62 %     6.41 %
Average yield on loans (2)
    4.39 %     4.46 %     4.48 %     4.71 %     4.97 %     5.65 %     6.24 %
Average cost of deposits (2)
    0.57 %     0.72 %     0.63 %     0.90 %     1.13 %     1.91 %     2.28 %
Tax equivalent net interest margin (2)
    3.51 %     3.46 %     3.51 %     3.48 %     3.30 %     2.76 %     2.60 %
Efficiency ratio (3)
    58.69 %     58.33 %     56.64 %     60.16 %     62.99 %     68.58 %     66.99 %
Overhead to average assets (3)
    1.99 %     1.93 %     1.91 %     1.98 %     2.02 %     1.85 %     1.74 %
Full-time equivalent employees at year end
    140       131       139       127       106       88       76  
                                                         
ASSET QUALITY RATIOS:
                                                       
Nonperforming loans and foreclosed assets
  $ 5,715     $ 18,512     $ 5,966     $ 15,411     $ 19,763     $ 34,861     $ 50,558  
Nonperforming assets to total assets - period end
    0.43 %     1.46 %     0.46 %     1.32 %     1.91 %     3.64 %     5.24 %
Nonperforming loans
  $ 487     $ 3,935     $ 513     $ 420     $ 1,589     $ 16,105     $ 24,426  
Nonperforming loans to total loans - period end
    0.05 %     0.42 %     0.05 %     0.05 %     0.21 %     2.23 %     3.56 %
Accruing loans past due 30 days or more
  $ 127     $ 4,122     $ -     $ 256     $ 849     $ 10,617     $ 916  
Accruing loans past due 30 days or more to total loans
    0.01 %     0.44 %     0.00 %     0.03 %     0.11 %     1.47 %     0.13 %
Net (recoveries) charge-offs
  $ (290 )   $ (112 )   $ (22 )   $ 608     $ 3,565     $ 3,850     $ 7,022  
Net (recoveries) charge-offs to average loans
    (0.03 )%     (0.01 )%     0.00 %     0.08 %     0.48 %     0.56 %     0.92 %
Allowance for loan losses as a percentage of total loans
    0.76 %     0.80 %     0.75 %     0.79 %     0.90 %     1.43 %     1.93 %
Allowance for loan losses as a percentage of nonperforming loans
    1628.54 %     191.94 %     1489.47 %     1635.48 %     436.69 %     64.25 %     54.32 %
                                                         
SHARE DATA:
                                                       
Book value per common share (4)
  $ 21.87     $ 19.84     $ 21.32     $ 19.35     $ 17.49     $ 17.20     $ 16.21  
Basic earnings per share
    0.62       0.52       2.49       1.79       1.11       0.72       0.14  
Diluted earnings per share
    0.62       0.51       2.47       1.77       1.11       0.72       0.14  
Period end common shares outstanding
    4,581,334       4,537,595       4,581,334       4,530,000       4,436,500       4,418,500       4,398,500  
Average diluted common shares outstanding
    4,574,455       4,514,111       4,547,906       4,495,013       4,433,875       4,416,000       4,421,750  
 
Notes to Selected Historical Consolidated Financial Data
 
 
(1)
We calculate our average assets and average equity for a year by dividing the sum of our total asset balance or total stockholders’ equity balance, as the case may be, as of the close of business on each day in the relevant year and dividing by the number of days in the year.
 
 
(2)
We calculate average yield on loans by dividing loan interest income by average loans. We calculate average cost of deposits by dividing deposit expense by average total deposits. Net interest margin represents net interest income divided by average interest-earning assets.
 
 
(3)
This measure is not a measure recognized under United States generally accepted accounting principles, or GAAP, and is therefore considered to be a non-GAAP financial measure. Please see “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” on page 11 for a reconciliation of this measure to the most directly comparable GAAP measure.
 
 
(4)
Book value per share equals our total stockholders’ equity as of the date presented divided by the number of shares of our common stock outstanding as of the date presented. The number of shares of our common stock outstanding as of March 31, 2016 and 2015 and December 31, 2015, 2014, 2013, 2012 and 2011 has been presented above.
 
 
10

 
 
 
GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL MEASURES
 
Some of the financial measures included in our selected historical consolidated financial data and elsewhere in this prospectus are not measures of financial performance recognized by GAAP. These non-GAAP financial measures are “tangible stockholders’ equity,” “tangible book value per share,” “tangible average equity to tangible average assets,” "overhead to average assets," and “efficiency ratio.” Our management uses these non-GAAP financial measures in its analysis of our performance and because of market expectations of use of these ratios to evaluate the Company. Management believes each of these non-GAAP financial measures provides useful information about our financial condition and results of operation. As noted below, the efficiency ratio shows the amount of revenue generated for each dollar spent and provides investors with a measure of our productivity. "Overhead to average assets" reflects the amount of non-interest expenses incurred in comparison to the total size of the Company and provides investors with an additional measure of our productivity. We also believe the presentation of tangible stockholders’ equity, tangible book value per share, and tangible average equity to tangible average assets would provide investors with a clear picture of our assets and equity. However, because the Company has not consummated any merger transactions and does not use any derivatives that might give rise to an intangible asset, there is no difference in tangible equity or assets and GAAP equity or assets.
 
  “Efficiency ratio” is defined as total non-interest expense divided by adjusted operating revenue. Adjusted operating revenue is equal to net interest income (taxable equivalent) plus non-interest income, adjusted to exclude the impacts of gains and losses on the sale of securities and gains and losses on the sale or writedown of foreclosed real estate because we believe the timing of the recognition of those items to be discretionary. We believe the efficiency ratio is important as an indicator of productivity because it shows the amount of revenue generated by our operations for each dollar spent. While the efficiency ratio is a measure of productivity, its value reflects the attributes of the business model we employ.
                                     
   
Three-Month Periods
                               
   
Ended March 31,
   
Years Ended December 31,
 
(Dollars in thousands)
 
2016
   
2015
   
2015
   
2014
   
2013
   
2012
   
2011
 
Efficiency Ratio
                                         
Non-interest expense
  $ 6,600     $ 5,880     $ 24,760     $ 21,909     $ 20,174     $ 17,909     $ 18,582  
                                                         
Net interest taxable equivalent income
  $ 10,853     $ 9,683     $ 42,042     $ 34,897     $ 30,368     $ 24,474     $ 25,306  
Non-interest income
    266       484       1,454       704       (2,075 )     (706 )     (3,097 )
Less gain (loss) on investment securities
    85       423       542       87       88       9       (1,231 )
Less loss on sale or writedown of foreclosed real estate
    (212 )     (337 )     (759 )     (903 )     (3,824 )     (2,356 )     (4,300 )
  Adjusted operating revenue
  $ 11,246     $ 10,081     $ 43,713     $ 36,417     $ 32,029     $ 26,115     $ 27,740  
                                                         
Efficiency ratio
    58.69 %     58.33 %     56.64 %     60.16 %     62.99 %     68.58 %     66.99 %
                                                         
  “Overhead to average assets” is defined as non-interest expense divided by total average assets. We believe overhead to average assets is an important indicator of the Company’s level of non-interest expenses relative to the Company’s overall size, which assists in the evaluation of our productivity. While the overhead to average assets ratio is a measure of productivity, its value reflects the attributes of the business model we employ.
                                                         
     
Three-Month Periods
                                         
    Ended March 31, (1)    
Years Ended December 31,
 
(Dollars in thousands)
    2016       2015       2015       2014       2013       2012       2011  
Overhead to Average Assets                                                        
Non-interest expense
  $ 6,600     $ 5,880     $ 24,760     $ 21,909     $ 20,174     $ 17,909     $ 18,582  
Average total assets     1,323,434       1,221,555       1,297,064       1,104,079       998,519       967,790       1,065,970  
Overhead to average assets     1.99 %     1.93 %     1.91 %     1.98 %     2.02 %     1.85 %     1.74 %
 

(1) Non-interest expense totals for the three-month periods ended March 31 have been annualized for purposes of calculating the overhead to average assets ratio
                                                         
 
 
11

 
 
RISK FACTORS
 
An investment in our common stock involves certain risks. You should carefully consider the risks described below, as well as the other information included in this prospectus, before making an investment decision. Our business, financial condition, prospects and results of operations could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus.
 
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.
 
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 March 31, 2016 ranged from $8.0 million to $13.6 million and averaged $9.8 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. At March 31, 2016, our ten largest borrowing relationships represented approximately 9.4% of our total credit exposure.
 
 
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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 March 31, 2016 ranged from $11.7 million to $32.0 million, averaged $20.4 million and made up 19.5% 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.

Challenging market conditions and economic trends have adversely affected 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 constrained. 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 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.
 
At March 31, 2016, approximately 53% of our loan portfolio consisted 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.
 
 
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Any deterioration or downturn in the economies or real estate values in the markets we serve could have a material adverse effect on both 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 non-interest 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 non-interest 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.

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, non-interest income, and results of operations. Further, since 2008 we have operated in a period of historically low market interest rates, but prevailing interest rates have begun to increase and certain financial market measures are indicating the potential for further increases.

We depend primarily on net interest income for our earnings rather than non-interest income.

Net interest income is the most significant component of our operating income. For the year ended December 31, 2015, our net interest income totaled $41.1 million in comparison to our total non-interest income of $1.5 million earned during the same period. For the year ended December 31, 2014, our net interest income totaled $34.1 million in comparison to our total non-interest income of $704,000 earned during the same year. For the three months ended March 31, 2016, our net interest income totaled $10.6 million in comparison to our total non-interest income of $266,000 earned during the same period.  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 non-interest 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 March 31, 2016, the fair value of our investment securities portfolio was approximately $182.2 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.
 
 
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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.

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.
 
 
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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 March 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.

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.
 
 
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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 March 31, 2016, brokered deposits, excluding certain internet and Certificate of Deposit Account Registry Service deposits, or CDARS, comprised approximately 10.3% 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.
 
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.
 
 
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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 such 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.
 
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.
 
 
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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.
 
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.
 
 
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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.
 
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 June 6 , 2016, our directors and executive officers and their related entities currently beneficially own, in the aggregate, approximately  28.1 % of our outstanding common stock. Further, we anticipate that our directors and executive officers and their related entities will beneficially own an aggregate of approximately  24.3 % of our common stock following this offering (without giving effect to the exercise of the overallotment option granted to the underwriters). 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. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, please see “Principal Stockholders” beginning on page 82.
 
 
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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.
 
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 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 new rule applicable to us 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.
 
 
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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.
 
 
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.
 
 
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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 this Offering and our Common Stock
 
An active, liquid, and orderly market for our common stock may not develop and the market price of our common stock may be subject to substantial fluctuations, which  may make it difficult for you to sell your shares at the volume, prices and times desired.
 
Prior to this offering, the market for shares of our common stock has been limited. An active trading market for our common stock might never develop or be sustained, which could depress the market price of our common stock and affect your ability to sell our shares. The initial public offering price was determined through negotiations between us and the representative of the underwriters and might bear no relationship to the price at which our common stock will trade following the completion of this offering. The trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which may be beyond our control. These factors include:
 
 
our operating performance and the operating performance of similar companies;
 
 
the overall performance of the equity markets;
 
 
prevailing interest rates;
 
 
economic, financial, geopolitical, regulatory or judicial events affecting us or the financial markets generally;
 
 
the market for similar securities;
 
 
announcements by us or our competitors of acquisitions, business plans, or commercial relationships;
 
 
threatened or actual litigation;
 
 
any major change in our board of directors or management;
 
 
publication of research reports or news stories about us, our competitors, or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;
 
 
whether we declare dividends on our common stock from time to time;
 
 
our creditworthiness;
 
 
the ratings given to our securities by credit rating agencies, if any;
 
 
large volumes of sales of our shares of common stock by existing stockholders; and
 
 
general political and economic conditions.

In addition, the stock market in general, and the market for banks and financial services companies in particular, has experienced extreme price and volume fluctuations in recent years that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations might be even more pronounced in the trading market for our stock shortly following this offering. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources, and harm our business, operating results, and financial condition.
 
 
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The obligations associated with operating as a public company following the offering will require significant resources and management attention and will cause us to incur additional expenses, which will adversely affect our profitability.
 
Following the offering, our non-interest expenses will increase as a result of the additional accounting, legal and various other additional expenses usually associated with operating as a public company and complying with public company disclosure obligations. As a privately held company, we were not required to comply with certain corporate governance and financial reporting practices and policies required of a publicly traded company. As a publicly traded company, we will incur significant legal, accounting and other expenses that we were not required to incur as a privately held company, particularly after we are no longer an emerging growth company as defined under the JOBS Act. After this offering, we will be required to comply with the requirements of the Securities Exchange Act of 1934, or the Exchange Act, Sarbanes-Oxley, the Dodd-Frank Act, the listing requirements of the NASDAQ Capital Market, and other applicable securities rules and regulations. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results with the SEC. We will also be required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. We expect to incur additional annual expenses related to these steps. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. As a public company, we will, among other things:
 
● 
prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and applicable NASDAQ rules;
 
● 
create or expand the roles and duties of our board of directors and committees of the board;
 
● 
institute more comprehensive financial reporting and disclosure compliance functions;
 
● 
enhance our investor relations function; and
 
● 
establish new internal policies, including those relating to disclosure controls and procedures; and involve and retain to a greater degree outside counsel and accountants in the activities listed above.
 
These changes will require a significant commitment of additional resources. We might not be successful in complying with these obligations and the significant commitment of resources required for complying with them could have a material adverse effect on our business, financial condition, results of operations and cash flows.
 
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.
 
We have broad discretion in the use of the net proceeds from this offering, and our use of those proceeds may not yield a favorable return on your investment.
 
We expect to use the net proceeds of this offering to retire outstanding debt, to support our long-term growth by enhancing our capital ratios to permit continued growth, and for general corporate purposes, including for possible acquisitions of, or investments in, bank or permissible non-bank entities. Our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. In addition, we may not use the proceeds of this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the proceeds, and we cannot predict how long it will take to deploy the proceeds. Investing the offering proceeds in securities until we are able to deploy the proceeds will provide lower margins than we generally earn on loans, potentially adversely affecting our business, results of operations and financial condition.
 
 
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You will experience immediate and substantial dilution.
 
The initial public offering price will be substantially higher than the net tangible book value of each outstanding share of common stock immediately after this offering. If you purchase common stock in this offering, you will suffer immediate and substantial dilution. At the assumed initial public offering price of $34.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus with net proceeds to us of $22.9 million, after deducting underwriting discounts and commissions and estimated offering expenses, investors who purchase shares in this offering from us will have contributed approximately 68 % of the total amount of funding we have received to date, but the shares purchased from us in this offering will represent only approximately 32 % of the total voting rights. The dilution will be $ 10.85 per share in the net tangible book value of the common stock from the assumed initial public offering price. In addition, if outstanding options or warrants to purchase shares of our common stock are exercised, there could be further dilution. For more information refer to “Dilution.”
 
Securities analysts may not initiate or continue coverage on our common stock.
 
The trading market for our common stock will depend 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 analysts 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.
 
Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.
 
Upon completion of this offering, there will be 5,339,309 shares of our common stock outstanding. The 736,000 shares being sold in this offering will be freely tradeable immediately after this offering (except for shares purchased by affiliates) and of the remaining  4,603,309 shares outstanding on a pro forma as adjusted basis as of June 6, 2016 (assuming no exercise of outstanding options after June 6, 2016),  3,065,597 shares may be resold under Rule 144 as of the date of this prospectus, and 1,537,712 shares may be sold upon expiration of lock-up agreements 180 days after the date of this offering (subject in some cases to volume limitations). In addition, as of  June 6, 2016, there were outstanding options to purchase  80,500 shares of our common stock that, if exercised, will result in these additional shares becoming available for sale upon expiration of the lock-up agreements. 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 after this offering could significantly reduce the market price of our common stock. We also intend to register all common stock that we may issue under our stock plans. Effective upon the completion of this offering, an aggregate of  160,189 shares of our common stock will be reserved for future issuance under these plans (assuming no exercise of outstanding options after June 6, 2016). Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.  Please see “Shares Eligible for Future Sale” beginning on page 87 for a more detailed description of sales that may occur in the future.

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 buy shares in this offering if you need dividend income from this 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 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.

 
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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.
 
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 will 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. Please see “Description of Our Securities—Certain Provisions of Our Articles of Incorporation and Bylaws Having Potential Anti-Takeover Effects” beginning on page 85.
 
Shares of our common stock are not insured deposits and may lose value.
 
Shares of our common stock will not be savings accounts, deposits or other obligations of any depository institution and will not be 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 and elsewhere in this prospectus. As a result, if you acquire shares of our common stock, you may lose some or all of your investment.
 
 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Information set forth in this prospectus may contain “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 Exchange Act, which statements represent our judgment concerning the future and are subject to business, economic and other risks and uncertainties, both known and unknown, that could cause our actual operating results and financial position to differ materially from our operating results or financial position expressed in or implied by the forward-looking statements. Such forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” or “continue,” or the negative thereof or other variations thereof or comparable terminology.
 
We caution that any such forward-looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward-looking statements, including, without limitation:
 
 
deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;
 
 
changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities;
 
 
the failure of assumptions underlying the establishment of reserves for possible loan losses;
 
 
changes in loan underwriting, credit review or loss reserve policies associated with economic or market conditions, examination conclusions, or regulatory developments;
 
 
changes in financial market conditions, either internationally, nationally or locally in areas in which we conduct our operations, including, without limitation, reduced rates of business formation and growth, commercial and residential real estate development, sales and vacancy rates, and real estate prices;
 
 
changes in accounting principles, policies, and guidelines applicable to bank holding companies, banks and public companies;
 
 
fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect the availability, market liquidity levels, and pricing of securities, and the value of our securities portfolio;
 
 
changes in minimum capital requirements, adjustments to prompt corrective action thresholds, increased quality of regulatory capital, revised risk-weighting of certain assets, and implementation of a “capital conservation buffer,” all of which were included in the final rule promulgated by the Federal Reserve on July 2, 2013 to implement Basel III capital standards;
 
 
the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;
 
 
governmental monetary and fiscal policies, as well as other legislative and regulatory changes;
 
 
the impact of heightened regulatory scrutiny of financial products, including but not limited to enforcement actions and other initiatives of the CFPB;
 
 
our ability to comply with any requirements imposed on the Company or the Bank by our respective regulators, and the potential negative consequences that may result;
 
 
the effect of any mergers, acquisitions or other transactions, to which we or the Bank may from time to time be a party, including, without limitation, our ability to successfully integrate any businesses that we acquire; and
 
 
the risk factors described under the heading “Risk Factors” in this prospectus.
 
Given these risks, uncertainties and other factors, you should not place undue reliance on any forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date such forward-looking statements are made.
 
You should read carefully this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify all of our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
 
 
27

 
 
USE OF PROCEEDS
 
We estimate that the net proceeds to us from the sale of the shares of common stock offered by us in this public offering will be approximately $ 22.9 million, or $ 26.5 million if the underwriters elect to exercise their option to purchase additional shares in full, based on an assumed initial public offering price of $34.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $34.00  per share would increase (decrease) the net proceeds to us from this offering by $ 0.7 million , or $ 0.8 million  if the underwriters elect to exercise their option to purchase additional shares in full, assuming the number of shares offered by us, as indicated on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
We intend to use the net proceeds of this offering to:
 
support the continued growth of Paragon Bank;
 
to retire our outstanding bank holding company loan, which had a balance of $4.2 million as of March 31, 2016 and bears interest at the prime interest rate plus 0.75% (currently 4.25%) and matures in November 2017; and
 
for general corporate purposes, including for possible acquisitions of, or investments in, bank or permissible non-bank entities, though we do not have any  agreements or understandings presently with respect to any acquisitions or investments.
 
 
28

 
 
CAPITALIZATION
 
The following table sets forth our cash and due from banks and our consolidated capitalization, including regulatory capital ratios, at March 31, 2016 on:
 
 
an actual basis; and
 
 
on an as adjusted basis to give effect to the net proceeds from the sale by us of 736,000 shares of common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares) at an assumed initial public offering price of $34.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
 
 You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto, which are included elsewhere in this prospectus.
 
         
Actual
 
As Adjusted
for the
Offering(1)
   
         
(dollars in thousands, except per share data)
   
                   
Cash and due from banks
        $ 51,559     70,309    
Long term debt
          22,731     18,558    
Stockholders’ equity:
                     
Common stock, $0.008 par value per share, 20,000,000 shares authorized, 4,581,334 shares issued and outstanding, actual; 5,339,309 shares issued and outstanding, as adjusted
          37     43    
Additional paid-in-capital
          53,235     76,152    
Retained earnings
          48,198     48,198    
Accumulated other comprehensive income
          (1,298 )   (1,298 )  
Total stockholders’ equity
          100,172     123,094    
Total capitalization
          122,903     141,652    
Book value per common share
          21.87     23.15    
                       
   
Regulatory Requirement (3)
               
Capital ratios:
                     
                       
Tangible common equity to tangible assets(2)
    --       7.47 %   9.05 %  
Company regulatory capital ratios:
                       
Tier 1 leverage capital
    4.625 %     8.88 %     10.44 %  
CET 1 risk-based capital
    5.125 %     8.91 %   10.76 %  
Tier 1 risk-based capital
    6.625 %     10.50 %   12.32 %  
Total risk-based capital
    8.625 %     11.20 %   13.01 %  
Bank regulatory capital ratios (4):
                       
Tier 1 leverage capital
    5.625 %     9.27 %   10.54 %  
CET 1 risk-based capital
    7.125 %     10.78 %   12.23 %  
Tier 1 risk-based capital
    8.625 %     10.78 %   12.23 %  
Total risk-based capital
    10.625 %     11.48 %   12.92 %  
 
_____________
 
 
(1)
A $1.00 increase (or decrease) in the assumed initial public offering price of $34.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (or decrease), as applicable, our net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, by $ 0.7 million  (assuming no exercise of the underwriters’ option to purchase additional shares and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same). Similarly, an increase or decrease of  73,600 shares of common stock sold in this offering by us would increase or decrease, as applicable, our net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, by $ 2.4 million , based on an assumed initial public offering price of $34.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus. The as-adjusted column includes 736,000 shares of common stock at $34.00 per share, net of the estimated underwriting discount as well as estimated offering expenses of $600,000. As adjusted also assumes net proceeds from the offering are invested in assets with a 100% risk weighting.
 
 
(2)
These measures are not measures recognized under GAAP and are therefore considered to be non-GAAP financial measures. Please see “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” on page 11 for a reconciliation of these measures to their most directly comparable GAAP measures.
 
 
(3)
For the Company, these percentages represent the ratios required by the Federal Reserve's Capital Adequacy Guidelines for Bank Holding Companies. For the Bank, these percentages represent the ratios required for the Bank to be categorized as "well capitalized" under the FDIC's prompt corrective action framework. For both the Company and the Bank, the ratios include the 0.625% capital conservation buffer effective January 1, 2016. For additional information, see "Capital" beginning on page 52.
 
 
(4)
The as adjusted column assumes that $ 18.7 million of net cash proceeds from the offering are transferred from the Company to the Bank as a common equity investment in the Bank by the Company.
 
 
29

 
 
DILUTION
 
If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net book value per share of our common stock after this offering.
 
Net book value per share is equal to the amount of our stockholders’ equity divided by the number of shares of common stock outstanding. The net book value of our common stock at March 31, 2016 was approximately $100.2 million, or $21.87 per share, based on the number of shares of common stock outstanding at March 31, 2016.
 
As adjusted, net book value per share gives effect to the net proceeds from the sale by us of 736,000 shares of common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares) at an assumed initial public offering price of $ 34.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. At March 31, 2016, the as adjusted net book value of our common stock would have been approximately $ 123.1 million, or $ 23.15 per share. This represents an immediate increase in as adjusted net book value of $ 1.28 per share to existing stockholders and an immediate dilution of $ 10.85 per share to new investors, or approximately 32 % of the public offering price of $ 34.00 per share.  Dilution is determined by subtracting as adjusted net book value per share after this offering from the public offering price of $ 34.00 per share. The following table illustrates this per share dilution:
 
Assumed initial public offering price per share
        $ 34.00  
Net book value per share as of March 31, 2016
  $ 21.87          
Increase in net book value per share attributable to new investors in this offering
    1.28          
                 
As adjusted net book value per share
            23.15  
                 
Dilution per share to new investors in this offering
          $ 10.85  
 
Each $1.00 increase (decrease) in the assumed initial public offering price of $34.00 per share would increase (decrease) our as adjusted book value by approximately $ 0.7 million, or approximately $ 0.13 per share, and the dilution per share to new investors in this offering by approximately $ 0.87 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 73,600  in the number of shares offered by us, assuming the assumed initial public offering of $34.00  per share remains the same, would result in as adjusted book value of approximately $ 125.4 million, or $ 23.27 per share, and the dilution per share to new investors in this offering would be $ 10.73 per share. Similarly, a decrease of 73,600  in the number of shares offered by us, assuming the assumed initial public offering price of $34.00  per share remains the same, would result in as adjusted book value of approximately $ 120.7 million, or $ 23.03 per share, and the dilution per share to new investors in this offering would be $ 10.97 per share. The as adjusted information discussed above is illustrative only and will adjust based on the actual public offering price and other terms of this offering determined at pricing.
 
If the underwriters exercise their option to purchase additional shares in full, our as adjusted book value as of March 31, 2016, would have been $ 126.6 million, or $ 23.33   per share, representing an immediate increase in as adjusted book value to our existing stockholders of $ 1.46 per share and immediate dilution to new investors in this offering of $ 10.67 per share.
 
The following table summarizes the total consideration paid to us and the average price paid per share by existing stockholders and new investors purchasing common stock in this offering. This information is presented on an as adjusted basis as of March 31, 2016, after giving effect to our sale of 736,000 shares of common stock in this offering (assuming the underwriters do not exercise their option) at an assumed initial public offering price of $ 34.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus.
 
   
Shares Purchased
   
Total Consideration
   
Average Price
Per Share
 
   
Number
   
Percent
   
Amount
   
Percent
 
Existing stockholders
    4,581,334       86.2 %   $ 53,184,000       68.0 %   $ 11.61  
New investors in this offering
    736,000       13.8       25,024,000       32.0       34.00  
Total
    5,317,334       100.0 %     78,208,000       100.0 %        
 
If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own approximately  84.4 % and our new investors would own approximately 15.6 % of the total number of shares of our common stock outstanding after this offering.
 
The table above excludes 81,500 shares of our common stock issuable upon exercise of outstanding stock options at a weighted-average exercise price of $46.46 per share and 178,344 shares of our common stock reserved for issuance in connection with stock awards available for issuance under our 2006 Omnibus Stock Ownership and Long Term Incentive Plan as of March 31, 2016. To the extent that any of these stock options are exercised, investors participating in the offering will experience further dilution.
 
 
30

 
 
DIVIDEND POLICY
 
We anticipate that our future earnings, if any, will be retained to finance our growth and that we will not pay cash dividends for the foreseeable future.
 
We are organized under the North Carolina Business Corporation Act, which prohibits the payment of a dividend if, after giving it effect, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred stockholders. In addition, because we are a bank holding company, the Federal Reserve may impose restrictions on cash dividends paid by us. 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.
 
Our ability to pay dividends is largely dependent upon the amount of cash dividends that the Bank pays to us, 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 our ability to obtain dividends from the Bank for our cash needs, including payment of dividends to our stockholders and the payment of operating expenses. For additional information on these limitations, please see “ Supervision and Regulation—Payment of Dividends and Other Restrictions” on page 91.
 
Any determination to pay future dividends to stockholders will be dependent upon our operational results, financial condition, capital requirements, business projections, general business conditions, statutory and regulatory restrictions and any other factors deemed appropriate by our board of directors.
 
 
31

 
 
MARKET FOR OUR COMMON STOCK
 
Shares of our common stock are currently quoted on the OTC Markets Group, Inc. OTCQX Marketplace under the symbol “PBNC.” Although our shares are quoted on the OTCQX Marketplace, the prices at which such transactions occurred may not necessarily reflect the price that would be paid for our common stock in a more liquid market. As of June 6, 2016, there were approximately 400 holders of record of our common stock.
 
The following table sets forth the quarterly 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) to December 31, 2015 and through the first and second quarters of 2016 to date. 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.
 
On  June 9,  2016, the last reported sales price for our common stock was $30.50  per share.
 
   
Low
   
High
 
Fiscal Year Ending December 31, 2016
           
Second Quarter through June 9, 2016
  $ 27.00     $ 31.00  
First Quarter
    26.26       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  
 
We anticipate that this offering and the listing of our common stock on the NASDAQ Capital Market will result in a more active trading market for our common stock. However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. See “Underwriting” beginning on page 101 for more information regarding our arrangements with the underwriter.
 
 
32

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial information contained in “ Selected Historical Consolidated Financial Data” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this prospectus, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements.

Executive Overview of Recent Financial Performance

Our Company operates in two very attractive, growing markets, the Triangle and Charlotte regions of North Carolina.  Both have been consistently ranked among the top growth markets in the country. In order to take advantage of these markets, we have expanded our staff of business development and support professionals. Management has added CDOs focusing on private banking relationships with owners of companies, corporate executives and individuals who desire a higher level of professional and personal attention. In 2014, we added two CDOs who focus primarily on commercial lending and two who focus on individual customer relationships. We believe these additional production personnel will continue to help us drive both balance sheet and revenue growth into the future. In addition, in 2014, the Company added a third branch in Cary, North Carolina and moved its operations center out of its headquarters to provide space for additional production personnel.

As a result of our growth in personnel and renewed emphasis on private banking, over the last five years we have experienced a double-digit compound growth rate in loans and significant improvement in net income. Since 2011, the annual compound growth rate in loans was 11.6% and in consolidated net income was 47.7%. We reported net income available to common stockholders of $11.2 million and diluted earnings per share of $2.47 for the year ended December 31, 2015, compared to net income available to common stockholders of $8.0 million and diluted earnings per share of $1.77 for the prior year, representing increases of 41.1% and 39.5%, respectively. In addition, we reported net income available to common stockholders of $2.8 million and diluted earnings per share of $0.62 for the three-month period ended March 31, 2016 compared to net income available to common stockholders of $2.3 million and diluted earnings per share of $0.51 for the same period in the prior year, representing increases of 23.0% and 21.6%, respectively. We experienced strong growth in net interest income as a result of significant growth in both loans and deposits during 2015 and during the first quarter of 2016.  The average loan balance for the first quarter of 2016 was $1.02 billion compared to $970.2 million for the year ended December 31, 2015 and $807.0 million for the year ended December 31, 2014. In both instances, this loan growth was funded by our continued ability to generate strong growth from new relationships in our vibrant markets. We also continue to experience favorable funding of our interest-earning assets with 70.6% of our average deposits for the three months ended March 31, 2016 coming from non-maturity deposits compared to 61.7% and 50.9% for the years ended December 31, 2015 and 2014, respectively. In addition, overall credit quality has significantly improved as a result of an improving economy in our markets and due to our focus on resolving problem assets.  At March 31, 2016, our ratio of nonperforming assets to total assets was 0.43% compared to 1.46% for the same period in the previous year.  At December 31, 2015, our ratio of nonperforming assets to total assets was 0.46% compared to 1.32% for the previous year.  Total nonperforming loans to total loans as of March 31, 2016 was 0.05% compared to 0.42%  as of March 31, 2015.  As of December 31, 2015 and 2014, total nonaccrual loans to total loans was 0.05% for both years. This was below the ratio of nonaccrual loans to total loans for our peer institutions, which was 0.81% as of December 31, 2015 and 1.04% as of December 31, 2014. In addition, the ratio of our allowance for loan losses has fallen to 0.76% of loans as of March 31, 2016 compared to 0.80% as of March 31, 2015.  Those ratios as of December 31, 2015 and 2014 were 0.75% of loans and 0.79% of loans, respectively.
 
Our growth has been accompanied by increased expenses.  For the first three months of 2016, personnel costs were $3.9 million, or $658,000 more than the $3.2 million recorded during the same period in 2015.  In 2015, total personnel costs increased by $1.5 million or 12.7% over 2014. While occupancy costs increased by $548,000 year over year between 2014 and 2015, a large portion of that related to a one-time expense on a subleased property.  We anticipate a decline in occupancy costs in 2016 which is already reflected in the quarter-over-quarter decrease from $349,000 for the first three months of 2015 compared to $344,000 for the first three months of 2016. Overall, we expect increased expenses in 2016. We anticipate that the aggregate of these increased expenses will result in approximately an 8% increase in our operating expenses for 2016 compared to 2015. Such increased operating expenses could adversely impact our net income for fiscal year 2016.
 
 
33

 
 
FINANCIAL CONDITION
MARCH 31, 2016, DECEMBER 31, 2015 AND 2014
 
Overview
 
Total assets at March 31, 2016 were $1.34 billion, an increase of $28.5 million or 2.8% over the balance as of December 31, 2015 of $1.31 billion.  Total assets increased year over year between 2015 and 2014 by $140.7 million or 12.1%.  Interest earning assets at March 31, 2016 totaled $1.26 billion and consisted of $1.04 billion in net loans, $182.2 million in investment securities, $7.2 million in Federal Home Loan Bank of Atlanta stock, and $22.9 million in overnight investments and interest-bearing deposits in other banks.  Interest earning assets at December 31, 2015 totaled $1.21 billion and consisted of $1.01 billion in net loans, $168.9 million in investment securities, $8.1 million in Federal Home Loan Bank of Atlanta stock, and $31.0 million in overnight investments and interest-bearing deposits in other banks. Total deposits and stockholders’ equity at March 31, 2016 were $1.05 billion and $100.2 million, respectively.  Total deposits and stockholders’ equity at December 31, 2015 were $982.8 million and $97.7 million, respectively.
 
Investment Securities
 
Investment securities as of March 31, 2016, December 31, 2015 and December 31, 2014 were $182.2 million, $168.9 million and $183.7 million, respectively.  The Company’s investment portfolio at March 31, 2016 and December 31, 2015, consisted of U.S. government agency obligations, collateralized mortgage obligations, mortgage-backed securities, municipal bonds and other equity investments, and had a weighted average taxable equivalent yields of 2.92% and 2.90% at March 31, 2016 and December 31, 2015, respectively.  The Company also held an investment of $7.2 million and $8.1 million in Federal Home Loan Bank Stock as of March 31, 2016 and December 31, 2015 with a weighted average yield of 4.66% and 4.53% for those periods. The investment portfolio decreased $14.8 million in 2015, the net result of $60.3 million in purchases, $55.0 million in sales, $20.3 million of maturities and prepayments and a decrease of $322,000 in the market value of securities held available for sale.  The increase between December 31, 2015 and March 31, 2016 was primarily the result of purchases of mortgage-backed securities and municipal securities.
 
 
34

 
 
The following is a summary of the securities portfolio by major classification at March 31, 2016 and December 31, 2015, 2014 and 2013.
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
(In thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
March 31, 2016
                       
Available-for-sale:
                       
U.S. Agency obligations
  $ 19,030     $ 322     $ 25     $ 19,327  
Collateralized mortgage obligations
    52,600       595       20       53,175  
Mortgage-backed securities
    44,560       522       137       44,945  
 Municipal bonds
    61,003       1,441       29       62,415  
 Other
    2,676       9       390       2,295  
    $ 179,869     $ 2,889     $ 601     $ 182,157  
                                 
December 31, 2015
                               
Available-for-sale:
                               
U.S. Agency obligations
  $ 19,778     $ 196     $ 73     $ 19,901  
Collateralized mortgage obligations
    60,826       321       206       60,941  
Mortgage-backed securities
    31,074       326       90       31,310  
 Municipal bonds
    53,163       1,346       75       54,434  
 Other
    2,677       10       377       2,310  
    $ 167,518     $ 2,199     $ 821     $ 168,896  
                                 
December 31, 2014
                               
Available-for-sale:
                               
U.S. Agency obligations
  $ 31,710     $ 256     $ 124     $ 31,842  
Collateralized mortgage obligations
    69,519       672       135       70,056  
Mortgage-backed securities
    33,921       627       -       34,548  
 Municipal bonds
    44,511       991       322       45,180  
 Other
    1,351       698       -       2,049  
    $ 181,012     $ 3,244     $ 581     $ 183,675