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Union Bank TABLE OF CONTENTS

Page No.

Letter To Our Shareholders………………………………………………………...…... 2

Who We Are……………………………………………………………………………. 3

Financial Statements

Financial Highlights…….……………………………………………………………. 4

Balance Sheets…….………………………………………………………………….. 5

Statements of Operations…..………………………………….……………………… 6

Notes to Summary Financial Statements.………………….…………………………. 7-9

Union Bank Executive Officers, Board of Directors, & Corporate Information…..……. 10

Financial Information Annual Shareholders Meeting

A complete 2017 Audited Financial Statement may be The annual meeting of shareholders of Union Bank will obtained by contacting Union Bank. Please request by be held on May 17, 2018 at 10:00 a.m. at the Hilton Inn, contacting Doyle M. Thigpen by mail at Union Bank, 207 SW Greenville Blvd., Greenville, NC 27834. 1011-A Red Banks Road, Greenville, NC 27858, or via our website at www.unionbanknc.com — please remember to give your return address information.

Getting to know you and serving your banking needs, from the Capital to the Coast.

1 Union Bank 2017 Annual Report

http:www.unionbanknc.com

Dear Union Bank Shareholders,

The Union Bank (“Bank”) board of directors and management are pleased to report 2017 results and a sixth consecutive year of record “core” earnings. 2017 was a watershed year for the Bank as the little bank, Inc. completed its acquisition of Union Banc Corp (“UBC”) and renamed the surviving company “Union Bank”. The acquisition was completed in July 2017. Financial results for the year were impacted by significant one-time merger and data processing conversion expenses. In addition, the Bank incurred a large one-time income tax charge related to passage and implementation of the 2017 Tax Cuts and Jobs Act and subsequent revalu-ation of the Bank’s deferred tax asset.

The Bank continues to be in solid financial condition. Capital and liquidity ratios are strong and loan quality indicators are outstanding compared to long term averages. As a result, the Bank continued its strategy of paying semi-annual cash dividends on its common stock. In addition, the Bank paid a 3% stock dividend in November 2017. The Bank paid out $803,000 in cash dividends to shareholders in 2017; the equivalent of $0.173 per share (split adjusted), compared to $0.161 (split adjusted) per share in 2016. Considering both the increase in cash dividend and the 3% stock dividend, shareholders received an increase of 7.5% in total dividends, compared to 2016.

The acquisition of UBC during the third quarter resulted in significant market expansion, as well as increases in the Bank’s total assets, loans and deposits. Total assets increased 94% to $702.5 million at year end. Total net loans increased 108% to $505.0 million net of reserves while total deposits increased 97% to $593.7 million at year end.

Net income for the year decreased 14% to $2,653,000 or $.58 per basic share outstanding for the year, compared to $3,085,000, or $.89 per basic share in the prior year. These results were impacted by merger and data processing conversion expenses of approximately $1.8 million and a one-time charge of $954,000 to income tax expense specifically related to tax reform enacted in December of 2017. Core earnings, a non-GAAP measure, which excludes merger and conversion expenses and the one-time tax expense adjustment related to tax reform, totaled approximately $4,794,000 or $1.04 per basic share outstanding for the twelve months ended December 31, 2017, compared to core earnings of approximately $3,294,000 or $.95 per basic share for the prior year. This represents a 45.5% increase in core earnings and a 9.5% increase in core earnings per basic share outstanding for the year. Highlights include a 58% increase in net interest income, a 38% increase in non-interest income and a 53% increase in core non-interest expense. The Bank’s efficiency ratio (a measurement of expense control based on “core” non-interest expense) was a solid 64.6% for the year.

As we move into 2018, the economic environment will present both opportunities and challenges for the Bank. There is clear improvement in a variety of economic indicators, including consumer confidence, home values and wage improvement. This will be tempered by uncertainty related to the recently enacted tax reform, rising short term interest rates and a generally flattening yield curve, all of which could have a negative impact on bank margins industry wide. Management and board of directors believe the Bank is well positioned for these uncertainties and should benefit from efficiencies resulting from its acquisition of UBC.

We are very pleased with the addition of the UBC family, customers and shareholders and look forward to the anticipated positive results of our Bank over the coming quarters and years. As always we appreciate your support and confidence and look forward to any opportunity to serve your banking needs in the future. Offices are located in Cary, Creedmoor, Goldsboro, Greenville, Henderson, Jacksonville, Kinston, LaGrange, Louisburg, New Bern, Oxford, Raleigh, Roxboro, Wilmington and Youngsville. Union Bank’s common stock is traded on the OTCQX under the symbol UBNC.

Sincerely,

Robert Lee Burrows, Jr. Vincent R. Jones Chairman President & Chief Executive Officer


“It’s our personal service that makes all the difference.”

Founded in November of 1998, Union Bank’s guiding principal is that old fashion personal service is as valuable today as it was 100 years ago. At Union Bank, we do want to know who you are. We pride ourselves at being big enough to handle your needs and small enough to know what your needs are.

Local decision-making has been critical to our success, as has our ability to offer a full array of banking products, providing everything from complicated commercial lending transactions to basic mortgage financing for primary and secondary homes. Through technology, we are able to offer the convenience of online and mobile banking services to our business and consumer customers, and save them time and money through the use of our remote deposit services.

We are active members in our community getting to know our neighbors and helping them meet their financial goals. We are proud of the personalized service we provide to all of our customers. At Union Bank, you’re not just a number.

Convenience Local Decisions Personal Service


Union Bank FINANCIAL HIGHLIGHTS Years Ended December 31, 2017, 2016 and 2015

(Dollars in thousands, except per share data)

Earnings Summary: Net Income

Per Common Share: Net income basic Net income diluted Book value per common share (tangible)

Selected Year-End Balances: Loans, net of unearned income Other interest earning assets Total Assets Deposits Stockholders’ equity Intangible assets Tangible stockholders’ equity

Selected Performance Ratios: Return on average assets Return on average equity Efficiency Ratio

Asset Quality Ratios: Allowance for loan losses to period-end loans Allowance for loan losses to non-acquired

period-end loans Net loan charge-offs to average loans

Capital Ratios: Total risk-based capital Tier 1 risk-based capital Common equity Tier 1 to risk-based capital Tier 1 leverage ratio Equity to assets

Number of Common Shares Outstanding

2017

$ 2,653

$ .58 $ .57 $ 10.21

$ 508,542 120,419 702,528 593,726 73,169 13,805 59,364

.49% 4.77%

72.82%

0.69%

1.12% 0.13%

12.28% 11.60% 11.60% 8.66%

10.42%

5,812,638

2016 2015

$ 3,085 $ 3,122

$ .89 $ .89 $ 10.59

$ .90 $ .89 $ 9.99

$ 246,522 91,814

362,057 300,622 36,598

-

36,598

$ 242,516 98,579

362,127 297,621 34,655

-

34,655

.85% 8.46%

67.20%

.89% 9.20%

65.15%

1.40% 1.44%

1.40% 0.02%

1.44% 0.04%

15.51% 14.26% 14.26% 10.21% 10.11%

14.76% 13.51% 13.51% 9.48% 9.57%

3,456,653 3,467,851


Union Bank BALANCE SHEETS December 31, 2017 and 2016

(Dollars in thousands)

ASSETS

Cash and due from banks Interest-earning deposits with banks Federal funds sold Investment securities available for sale

Loans Allowance for loan losses

NET LOANS

Accrued interest receivable Federal Home Loan Bank stock Bank premises and equipment, net Bank-owned life insurance Goodwill Core deposit intangible Other real estate owned Other assets

TOTAL ASSETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits: Demand Savings Money market and NOW Time

TOTAL DEPOSITS

Federal Home Loan Bank advances Accrued interest payable Accrued expenses and other liabilities

TOTAL LIABILITIES

Stockholders’ Equity: Common stock, no par value, 24,000,000 shares authorized Retained earnings Accumulated other comprehensive loss

TOTAL STOCKHOLDERS’ EQUITY

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

2017 2016

$ 21,427 8,975 2,367

109,077

$ 9,085 8,345 1,645

81,824

508,542 (3,501)

505,041

246,522 (3,444)

243,078

1,945 2,041

17,034 16,004 10,988 2,817

627 4,185

934 1,346 4,464 9,016

-

-

50 2,270

$ 702,528 $ 362,057

$ 243,745 20,303

119,811 209,867

$ 135,203 6,625

53,396 105,398

593,726 300,622

34,000 222

1,411

24,000 98

739

629,359 325,459

69,027 4,643 (501)

31,507 5,544 (453)

73,169 36,598

$ 702,528 $ 362,057


Union Bank STATEMENTS OF OPERATIONS Years Ended December 31, 2017, 2016 and 2015

(Dollars in thousands, except per share data)

INTEREST INCOME Loans Investment securities Federal funds sold Interest-bearing deposits with banks

TOTAL INTEREST INCOME

INTEREST EXPENSE Money market, NOW and savings deposits Time deposits Advances from the Federal Home Loan Bank

TOTAL INTEREST EXPENSE

NET INTEREST INCOME

PROVISION (RECOVERY) FOR LOAN LOSSES

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

NONINTEREST INCOME Service charges and fees on deposit accounts Fees from presold mortgages Other

TOTAL NONINTEREST INCOME

NONINTEREST EXPENSE Salaries and employee benefits Occupancy Data processing Marketing Other

TOTAL NONINTEREST EXPENSE

INCOME BEFORE INCOME TAXES

INCOME TAXES NET INCOME

NET INCOME PER COMMON SHARE Basic Diluted

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic Diluted

2017

$ 19,278 1,938

29 277

21,522

526 1,329

315 2,170

19,352

460

18,892

737 424

1,254 2,415

8,723 1,468 1,991

222 3,447

15,851

5,456

2,803 $ 2,653

$ .58 $ .57

4,609,214 4,641,376

2016 2015

$ 11,521 $ 11,571 1,599 1,325

9 4 112 59

13,241 12,959

242 237 789 823 252 244

1,283 1,304

11,958 11,655

- (100)

11,958 11,755

518 485 344 323 891 755

1,753 1,563

5,338 5,193 901 908

1,029 914 152 175

1,794 1,421 9,214 8,611

4,497 4,707

1,412 1,585 $ 3,085 $ 3,122

$ .89 $ .90 $ .89 $ .89

3,458,549 3,482,984 3,476,539 3,496,803


NOTES TO SUMMARY FINANCIAL STATEMENTS

Organization and Nature of Operations Union Bank (“Bank”), formerly known as the little bank, Inc., was originally incorporated as a North Carolina chartered savings bank on September 16, 1998 and began operations on November 9, 1998. On July 7, 2017, the little bank, Inc. acquired Union Banc Corp. (“UBC”), a North Carolina-based holding company with a single wholly-owned banking subsidiary, Union Bank & Trust Company. Effective with the merger, the little bank, Inc. changed its name to Union Bank, established its headquarters in Greenville, North Carolina, and became a North Carolina chartered commercial bank. The merger expanded the Bank’s North Carolina presence, adding eight branches located in Oxford, Youngsville, Henderson, Louisburg, Roxboro, Cary, Raleigh and Creedmoor. Union Bank has as its principal market area Craven, Franklin, Granville, Lenoir, New Hanover, Onslow, Person, Pitt, Vance, Wake and Wayne Counties. The Bank is engaged in general commercial and retail banking in central and eastern North Carolina and operates under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Banking Commission. The Bank undergoes periodic examinations by those regulatory authorities.

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and other real estate owned.

Business Combinations Business combinations are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations.” Under the acquisition method, the acquiring entity in a business combination recognizes all of the acquired assets and assumed liabilities at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including identified intangible assets, exceeds the purchase price, a bargain purchase gain is recognized. Management makes significant estimates and exercises significant judgment in accounting for business combinations.

Assets acquired and liabilities assumed from contingencies must also be recognized at fair value if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of earnings from the date of acquisition. Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred.

Investment Securities Available-for-sale securities are reported at fair value and consist of bonds and notes not classified as trading securities nor as held-to-maturity securities. Unrealized holding gains and losses on available-for-sale securities are reported as a net amount in other comprehensive income, net of income taxes. Gains and losses on the sale of available-for-sale securities are recorded on the trade date and determined using the specific-identification method. Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.

Real Estate Owned Real estate acquired through, or in lieu of, loan foreclosure is initially recorded at fair value, less estimated selling costs, at the date of foreclosure establishing a new cost basis. After foreclosure, valuations of the property are periodically performed by management and the real estate is carried at fair value minus the estimated cost to sell the property. Revenues and expenses from operations and changes in the valuation allowance are charged to operations.


NOTES TO SUMMARY FINANCIAL STATEMENTS (continued)

Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment to the yield over the lives of the related loans. The recognition of interest income is discontinued when, in management's opinion, the collection of all or a portion of interest becomes doubtful or the loan becomes ninety days delinquent. Loans are returned to accrual status when the factors indicating doubtful collectability cease to exist and the loan has performed in accordance with its terms for a demonstrated period of time. The past due status of loans is based on the contractual payment terms.

A loan is considered impaired when, based on current information or events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. When the ultimate collectability of the impaired loan’s principal is doubtful, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are first recorded as recoveries of any amounts previously charged-off and are then applied to interest income, to the extent that any interest has been foregone.

Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well secured and in the process of collection. Loans that are current or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt (as determined by the contractual terms of the note). Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms.

While a loan (including an impaired loan) is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding. When the future collectability of the recorded loan balance is not in doubt, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged-off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.

Acquired loans are segregated between those considered to be performing (“acquired performing”) and those with evidence of credit deterioration based on such factors as past due status, nonaccrual status and credit risk ratings.

In determining the acquisition date fair value of purchased credit-impaired (“PCI”) loans, and in subsequent accounting, the Bank generally aggregates purchased loans into pools of loans with common risk characteristics. Expected cash flows at the acquisition date in excess of the fair value of loans are referred to as the “accretable yield” and recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows of the pool is reasonably estimable. Subsequent to the acquisition date, significant increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for PCI loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.

The difference between the fair value of an acquired performing loan pool and the contractual amounts due at the acquisition date (the “fair value discount”) is accreted into income over the estimated life of the pool. The Bank’s policy for determining when to continue accruing interest on acquired performing loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans.


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NOTES TO SUMMARY FINANCIAL STATEMENTS (continued)

Allowance for Loan Losses The provision for loan losses is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level. In making the evaluation of the adequacy of the allowance for loan losses, management gives consideration to current and anticipated economic conditions, statutory examinations of the loan portfolio by regulatory agencies, delinquency information and management’s internal review of the loan portfolio. Loans are considered impaired when it is probable that all amounts due under the contractual terms of the loan will not be collected. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, or upon the fair value of the collateral if the loss is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions previously used in making the evaluations. In addition, regulatory examiners may require the Bank to recognize changes to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Historical loss calculations are based on a twelve quarter rolling average loss ratio calculation with the most recent year’s loss history included in the model. The impact is to more quickly recognize and apply the most relevant loss history for the loan portfolio.

Decreases in expected cash flows of PCI loans with an accompanying decrease in the present value of the expected cash flows after the acquisition date are recognized by recording an allowance for credit loss. In pools where impairment has already been recognized, an increase in present values will result in a reversal of prior impairment. Management analyzes these acquired loan pools using various assessments of risk to determine and calculate an expected loss. In addition, the relationship between the change in the unpaid principal balance and change in the fair value mark is assessed to correlate the directional consistency of the expected loss for each pool.

Earnings Per Common Share Basic and diluted earnings per common share have been computed by dividing net income available to common stockholders for each period by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Bank relate solely to outstanding stock options. Diluted earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common stock equivalents and other potentially dilutive securities using the treasury stock method.

Regulatory Matters The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. As of December 31, 2017, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.


Union Bank Leadership Executive Officers

Vincent R. Jones Susan W. Barrett John E. Burns President Executive Vice President Executive Vice President Chief Executive Officer Chief Operations Officer Chief Banking Officer

Anne R. Corey David C. Morgan Doyle M. Thigpen Executive Vice President Executive Vice President Executive Vice President Chief Credit Officer Area Executive Chief Financial Officer & Secretary

Amy F. Watts Executive Vice President Senior Credit Officer

Board of Directors

Robert Lee Burrows, Jr. Vincent R. Jones Dr. Raymond C. Ball, Jr. Chairman of the Board, President and Chief Executive Officer Coastal Carolina Orthodontics Union Bank Union Bank

Marty Beam Joseph E. Blizzard Chandler T. Currin, Jr. President, President and Owner, Farmer W.A. Moore & Co. Contract Flooring & Design

Lawrence Davenport F. Wills Hancock, Jr. James T. Hill, Jr. President, Owner, Century 21 Hancock President, J.P. Davenport & Son, Inc. Properties, Inc. Tull Hill Farms, Inc.

C. Dwight Howard Crawford A. Knott Cameron McRae President, Carolina Greenhouses, Carolina Partner, Holden Moss Knott Clark President, Tands Inc., Bojangles Soil Company, Howard Development Inc. & Copley, P.A., Certified Public Franchisee, President, McRae & East Coast Modular, How Corp, LLC, Accountants Associates, Inc., Management and Eastern Warehouses, LLC Company for the Franchise

Conrad B. Sturges, III David Weil Robert T. Williford, II Attorney/Partner, Davis, Sturges & President, Weil Enterprises, Real Estate Hardware Retailer Tomlinson, PLLC Development & Management

David Womack T. Gray Yancey Stephen K. Zaytoun Retired. Formerly Chairman, Vice President, Yancey Properties, Inc. Owner, Zaytoun & Associates, Inc. Womack Electric Supply Co., Inc. Employee Benefit Insurance Firm

Stock Transfer Agent Market for Common Stock Independent Auditors Broadridge Corporate Issuer Solutions, Inc. Union Bank’s common stock is Dixon Hughes Goodman LLP 51 Mercedes Way traded on the OTCQX under 1003 Red Banks Road Edgewood, NY 11717 the symbol “UBNC.” Greenville, NC 27858


Union Bank We Want to Know rou.

1011 Red Banks Road, Greenville, NC 27858 www.unionbanknc.com

Member FDIC

http:www.unionbanknc.com

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