2017 Annual Report

Annual Report

Financial Information

A complete 2017 Audited Financial Statement may be obtained by contacting Union Bank. Please request by contacting Doyle M. Thigpen by mail at Union Bank, 1011-A Red Banks Road, Greenville, NC 27858, or via our website at www.unionbanknc.com — please remember to give your return address information.

Annual Shareholders Meeting

The annual meeting of shareholders of Union Bank will be held on May 17, 2018 at 10:00 a.m. at the Hilton Inn, 207 SW Greenville Blvd., Greenville, NC 27834.

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


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 revaluation 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.
Chairman
Vincent R. Jones
President & Chief Executive Officer

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

Smiling people signing papers.
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.

 

 

Banker smiling while man signs papers.
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.

 

Two men standing and talking in a store.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)

2017 2016 2015
Earnings Summary:
     Net Income $2,653 $3,085  $3,122
Per Common Share:
     Net income basic $0.58 $0.89 $0.90
     Net income diluted $0.57 $0.89 $0.89
     Book value per common share $10.21 $10.59 $9.99
Selected Year-End Balances:
     Loans, net of unearned income $508,542 $246,522 $242,516
     Other interest earning assets 120,419 91,814 98,579
     Total Assets 702,528 362,057 362,127
     Deposits 593,726 300,622 297,621
     Stockholders’ equity 73,169 36,598 34,655
     Intangible assets 13,805
     Tangible stockholders’ equity 59,364 36,598 34,655
Selected Performance Ratios:
     Return on average assets 0.49% 0.85% 0.89%
     Return on average equity 4.77% 8.46% 9.20%
     Efficiency Ratio 72.82% 67.20% 65.15%
Asset Quality Ratios:
     Allowance for loan losses to period-end loans 0.69% 1.40% 1.44%
     Allowance for loan losses to non-acquired period-end loans 1.12% 1.40% 1.44%
     Net loan charge-offs to average loans 0.13% 0.02% 0.04%
Capital Ratios:
    Total risk-based capital 12.28% 15.51% 14.76%
     Tier 1 risk-based capital 11.60% 14.26% 13.51%
     Common equity Tier 1 to risk-based capital 11.60% 14.26% 13.51%
     Tier 1 leverage ratio 8.66% 10.21% 9.48%
     Equity to assets 10.42% 10.11% 9.57%
Number of Common Shares Outstanding 5,812,638 3,456,653 3,467,851

Three images featuring people smiling while completing bank paperwork.

 

Union Bank
Balance Sheets

December 31, 2017 and 2016 (Dollars in thousands)

ASSETS 2017 2016
Cash and due from banks  $21,427 $9,085
Interest-earning deposits with banks 8,975   8,345
Federal funds sold  2,367  1,645
Investment securities available for sale  109,077 81,824
Loans  508,542 246,522
Allowance for loan losses  (3,501) (3,444)
NET LOANS  505,041  243,078
Accrued interest receivable  1,945  934
Federal Home Loan Bank stock  2,041 1,346
Bank premises and equipment, net  17,034 4,464
Bank-owned life insurance  16,004 9,016
Goodwill  10,988
Core deposit intangible  2,817
Other real estate owned  627 50
Other assets  4,185 2,270
TOTAL ASSETS 702,528 362,057
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
     Demand $243,745 $135,203
     Savings 20,303 6,625
     Money market and NOW 119,811 53,396
     Time 209,867 105,398
TOTAL DEPOSITS 593,726 300,622
Federal Home Loan Bank advances 34,000 24,000
Accrued interest payable 222 98
Accrued expenses and other liabilities 1,411 739
TOTAL LIABILITIES 629,359 325,459
Stockholders’ Equity:
     Common stock, no par value, 24,000,000 shares authorized 69,027 31,507
     Retained Earning 4,643 5,544
     Accumulated other comprehensive income (loss) (501) (453)
TOTAL STOCKHOLDERS’ EQUITY 73,169 36,598
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $702,528 $362,057

Union Bank
Statements of Operations

Years Ended December 31, 2017, 2016 and 2015  (Dollars in thousands, except per share data)

2017 2016 2015
INTEREST INCOME
     Loans $19,278 $11,521 $11,571
     Investment securities 1,938 1,599 1,325
     Federal funds sold 29 9 4
     Interest-bearing deposits with banks 277 112 59
    TOTAL INTEREST INCOME 21,522 13,241 12,959
INTEREST EXPENSE
     Money market, NOW and savings deposits 526 242 237
     Time deposits 1,329 789 823
     Advances from the Federal Home Loan Bank 315 252 244
    TOTAL INTEREST EXPENSE 2,170 1,283 1,304
    NET INTEREST INCOME 19,352 11,958 11,655
PROVISION (RECOVERY) FOR LOAN LOSSES 460 (100)
    NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 18,892 11,958 11,755
NONINTEREST INCOME
     Service charges and fees on deposit accounts 737 518 485
     Fees from presold mortgages 424 344 323
     Other 1,254 891 755
    TOTAL NONINTEREST INCOME 2,415 1,753 1,563
NONINTEREST EXPENSE
     Salaries and employee benefits 8,723 5,338 5,193
     Occupancy 1,468 901 908
     Data Processing 1,991 1,029 914
     Marketing 222 152 175
     Other 3,447 1,794 1,421
    TOTAL NONINTEREST EXPENSE 15,851 9,241 8.611
    INCOME BEFORE INCOME TAXES 5,456 4,497 4,707
INCOME TAXES 2,803 1,412 1,585
         NET INCOME $2,653 $3,085 $3,122
NET INCOME PER COMMON SHARE
     Basic $0.58 $0.89 $0.90
     Diluted $0.57 $0.89 $0.89
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
     Basic 4,609,214 3,458,549 3,482,984
     Diluted 4,641,376 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.

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.

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.

Map of Union Bank locations

Union Bank Leadership

Executive Officers

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

Anne R. Corey

Executive Vice President
Chief Credit Officer

David C. Morgan

Executive Vice President
Area Executive

Doyle M. Thigpen

Executive Vice President
Chief Financial Officer & Secretary

Amy F. Watts

Executive Vice President
Senior Credit Officer

Board of Directors

Robert Lee Burrows, Jr.
Chairman of the Board,
Union Bank

Vincent R. Jones
President and Chief Executive Officer
Union Bank
Dr. Raymond C. Ball, Jr.
Coastal Carolina Orthodontics
Marty Beam
President
W.A. Moore & Co.

Joseph E. Blizzard
President and Owner,
Contract Flooring & Design
Chandler T. Currin, Jr.
Farmer

Lawrence Davenport

President
J.P. Davenport & Son, Inc.

F. Wills Hancock, Jr.
Owner, Century 21 Hancock
Properties, Inc.

James T. Hill, Jr.

President,
Tull Hill Farms, Inc.

C. Dwight Howard

President, Carolina Greenhouses, Carolina
Soil Company, Howard Development Inc.
East Coast Modular, How Corp, LLC,
and Eastern Warehouse, LLC
Crawford A. Knott
Partner, Holden Moss Knott Clark
& Copley, P.A., Certified Public
Accountants

Cameron McRae

President, Tands, Inc., Bojangles
Franchisee, President, McRae &
Associates, Inc., Management
Company for the Franchise

Conrad B. Sturges, III

Attorney/Partner, Davis, Sturges &
Tomlinson, PLLC

David Weil

President, Weil Enterprises, Real Estate
Development & Management
Robert T. Williford, II
Hardware Retailer

David Womack

Retired. Formerly Chairman,
Womack Electric Supply Co., Inc.
T. Gray Yancey
Vice President, Yancey Properties, Inc.

Stephen K. Zaytoun

Owner, Zaytoun & Associates, Inc.
Employee Benefit Insurance Firm

Stock Transfer Agent

Broadridge Corporate Issuer Solutions, Inc.
51 Mercedes Way
Edgewood, NY 11717

Market for Common Stock

Union Bank’s common stock is traded on
the OTCQX under the symbol “UBNC.”

Independent Auditors

Dixon Hughes Goodman LLP
1003 Red Banks Road
Greenville, NC 27858

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