1 the little bank

2016 Annual Report

ANNUAL REPORT

2016

Proudly Serving Eastern NC For Over 18 Years

1 the little bank

2016 Annual Report

the little 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.………………….…………………………. 7-8

the little bank Executive Officers, Board of Directors, Branch & Stock Information……..9-10

Financial Information A complete 2016 Audited Financial Statement may be

obtained by contacting the little bank. Please request by

contacting Doyle M. Thigpen by mail at the little bank,

1011-A Red Banks Road, Greenville, NC 27858, or via

our website at www.thelittlebank.com — please

remember to give your return address information.

Annual Shareholders Meeting The annual meeting of shareholders of the little bank

will be held on May 18, 2017 at 10:00 a.m. at the Spirit

AeroSystems Composite Center of Excellence, 3800

Hwy 58 North, Kinston, NC.

Greenville, NC Branch

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

2 the little bank

2016 Annual Report

Dear little bank shareholders,

The little bank (the "Bank") board of directors and management are pleased to report 2016 results and a fifth consecutive year of

record “core” earnings. Outstanding loan quality, solid net interest margins, increased non-interest income and controlled expenses

were the drivers of our results.

The Bank continues to be in excellent financial condition. Capital and liquidity ratios are strong and our loan quality indicators are

excellent. As a result, the Bank was able to continue its policy of paying semi-annual cash dividends on its common stock. The Bank

paid out $552,000 in cash dividends to shareholders in 2016; the equivalent of $0.17 per share. The Bank also paid shareholders

another 5% stock dividend in 2016. Shareholders received an increase of 10.6% in total cash dividends, compared to 2015. In

addition, the Bank maintained its common stock repurchase program throughout 2016, purchasing 20,155 shares of common stock at

an average price of $12.46. Management and the board of directors will continue the common stock repurchase plan as it deems

beneficial to the Company and the shareholders.

Net income for the year decreased 1.2% to $3,085,000 or $0.92 per basic share. Return on average assets and average equity were

well above peer averages at .85% and 8.46%, respectively, for the year. Net income was impacted by merger related expenses of

$256,000 during the fourth quarter of 2016. Adjusted for merger expenses, “core” earnings for the year were up 5.52% to

$3,294,000. For the purposes of this letter, “core” earnings are defined as net income adjusted for non-recurring merger expenses.

Deposits increased 1.0% to $300.6 million over December 31, 2015 levels. Net interest income was up 2.6% to $11,958,000 while

noninterest income was up 12.2% to $1,753,000. Total noninterest expenses (adjusted for merger expenses) were up 4.0% for the

year. The Bank’s efficiency ratio, adjusted for merger related expense, of 65.3% continues to be among the best in our peer group.

While the beginning of 2017 has produced optimism for the banking industry and the economy in general, a combination of low

interest rates, mixed global economic trends, mixed economic data in our own country, and changing consumer buying patterns

continue to create a challenging environment for businesses to navigate. We are cautiously optimistic about the economy in general;

however, we will continue to maintain a disciplined approach to growth and overall risk management.

In the past we have talked about our industry’s need for consolidation. We have also talked about the fact that our Bank was poised

to take advantage of consolidation opportunities when they are available. In November we announced the acquisition of Oxford, NC

based Union Bank. The combined bank, which will be headquartered in Greenville, NC and operate under the Union Bank brand

name, will have approximately $670 million in total assets, $485 million in total loans, and $548 million in total deposits based on

reported amounts as of December 31, 2016. The combined bank will operate a 15 branch network, including locations in Cary,

Creedmoor, Goldsboro, Greenville, Henderson, Jacksonville, Kinston, LaGrange, Louisburg, New Bern, Oxford, Raleigh, Roxboro,

Wilmington and Youngsville. Although we refer you to the enclosed joint proxy statement / offering circular for details associated

with this proposed merger, the boards of directors and management of both banks are excited about the opportunity created by this

potential business combination.

Our final message is the same as last year in that we continue to believe that the industry is positioned for consolidation. We also

believe this consolidation will create a variety of opportunities which include attracting new customers, strengthening our sales force

and other strategic opportunities, including whole bank or branch acquisitions. The Bank is well positioned to take advantage of

these situations as they present themselves. We continue to be excited about the long-term prospects for community banking and the

markets we serve. The board of directors, management, and all of our associates would like to thank you for your continued support.

Sincerely,

Robert Lee Burrows, Jr. Vincent R. Jones

Chairman President & Chief Executive Officer

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2016 Annual Report

“At the little bank, it’s all about getting to know YOU.”

Founded in November of 1998, the little bank’s guiding principal is that old fashion personal service is as

valuable today as it was 100 years ago. At the little 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 proud of the personalized service we provide to all of our customers.

“The little bank has always been there for me and my business. It’s great to have a relationship with

someone who cares.”

Stephen Howell

Owner, Howell Funeral Home & Crematory, Inc.

“At the little bank, you are treated like their #1 customer.”

Stephen P. Clary

Owner, Spunky McDoogle’s and 37th Street Pizzeria

“The little bank has been instrumental in my business growing over the last year. Wesley Barnes and

his team made my switch to the little bank from another banking institution very seamless. I greatly

appreciate the little bank and look forward to a wonderful relationship with them.”

Brian Corbett

Owner, Flagship Property Management, LLC

Convenience Technology Local Decisions

4 the little bank

2016 Annual Report

the little bank FINANCIAL HIGHLIGHTS Years Ended December 31, 2016, 2015 and 2014 (Dollars in thousands, except per share data)

2016 2015 2014

Earnings Summary:

Net Income $ 3,085 $ 3,122 $ 2,925

Per Common Share:

Net income basic $ .92 $ .92 $ .86

Net income diluted $ .91 $ .92 $ .85

Book value per common share $ 10.91 $ 10.30 $ 9.60

Selected Year-End Balances:

Loans, net of unearned income $246,522 $242,516 $246,147

Other interest earning assets 91,814 98,579 69,323

Total Assets 362,009 362,127 339,048

Deposits 300,574 297,621 277,381

Stockholders’ equity 36,597 34,655 32,533

Selected Performance Ratios:

Return on average assets .85% .89% .88%

Return on average equity 8.46% 9.20% 9.29%

Efficiency Ratio 67.20% 65.15% 63.89%

Asset Quality Ratios:

Allowance for loan losses to period-end loans 1.40% 1.44% 1.50%

Net loan charge-offs to average loans 0.02% 0.04% 0.13%

Capital Ratios:

Total risk-based capital 15.51% 14.76% 13.97%

Tier 1 risk-based capital 14.26% 13.51% 12.71%

Common equity Tier 1 to risk-based capital 14.26% 13.51% N/A

Tier 1 leverage ratio 10.21% 9.48% 9.58%

Equity to assets 10.11% 9.57% 9.60%

Number of Common Shares:

Basic 3,357,815 3,381,538 3,418,317

Diluted 3,375,281 3,394,955 3,431,360

Friendly Local Personal Service

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2016 Annual Report

the little bank BALANCE SHEETS December 31, 2016 and 2015 (Dollars in thousands)

ASSETS 2016 2015

Cash and due from banks $ 9,085 $ 7,842

Interest-earning deposits with banks 8,345 15,661

Federal funds sold 1,645 1,177

Investment securities available for sale 81,824 81,741

Loans 246,522 242,516

Allowance for loan losses (3,444) (3,496)

NET LOANS 243,078 239,020

Accrued interest receivable 934 950

Federal Home Loan Bank stock 1,346 1,623

Bank premises and equipment, net 4,464 4,831

Bank-owned life insurance 9,016 7,730

Other real estate owned 50 -

Other assets 2,222 1,552

TOTAL ASSETS $ 362,009 $ 362,127

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits:

Demand $ 135,203 $ 123,092

Savings 6,625 5,327

Money market and NOW 53,396 54,770

Time 105,350 114,432

TOTAL DEPOSITS 300,574 297,621

Federal Home Loan Bank advances 24,000 29,000

Accrued interest payable 98 103

Accrued expenses and other liabilities 739 748

TOTAL LIABILITIES 325,411 327,472

Stockholders’ Equity:

Common stock, no par value, 24,000,000 shares authorized 31,507 29,590

Retained earnings 5,544 5,068

Accumulated other comprehensive income (loss) (453) (3)

TOTAL STOCKHOLDERS’ EQUITY 36,598 34,655

TOTAL LIABILITIES AND

STOCKHOLDERS’ EQUITY $ 362,009 $ 362,127

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2016 Annual Report

the little bank STATEMENTS OF OPERATIONS Years Ended December 31, 2016, 2015 and 2014 (Dollars in thousands, except per share data)

2016 2015 2014 INTEREST INCOME

Loans $ 11,521 $ 11,571 $ 11,445

Investment securities 1,599 1,325 1,212

Federal funds sold 9 4 4

Interest-bearing deposits with banks 112 59 34

TOTAL INTEREST INCOME 13,241 12,959 12,695

INTEREST EXPENSE

Money market, NOW and savings deposits 242 237 230

Time deposits 789 823 920

Advances from the Federal Home Loan Bank 252 244 202

TOTAL INTEREST EXPENSE 1,283 1,304 1,352

NET INTEREST INCOME 11,958 11,655 11,343

PROVISION (RECOVERY) FOR LOAN LOSSES - (100) 150

NET INTEREST INCOME AFTER

PROVISION FOR LOAN LOSSES 11,958 11,755 11,193

NONINTEREST INCOME

Service charges and fees on deposit accounts 518 485 463

Fees from presold mortgages 344 323 276

Other 891 755 669

TOTAL NONINTEREST INCOME 1,753 1,563 1,408

NONINTEREST EXPENSE

Salaries and employee benefits 5,338 5,193 5,028

Occupancy 901 908 809

Data processing 1,029 914 819

Marketing 152 175 171

Other 1,794 1,421 1,319

TOTAL NONINTEREST EXPENSE 9,214 8,611 8,146

INCOME BEFORE INCOME TAXES 4,497 4,707 4,455

INCOME TAXES 1,412 1,585 1,530

NET INCOME $ 3,085 $ 3,122 $ 2,925

NET INCOME PER COMMON SHARE

Basic $ .92 $ .92 $ .86

Diluted $ .91 $ .92 $ .85

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

Basic 3,357,815 3,381,538 3,418,317

Diluted 3,375,281 3,394,955 3,431,360

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2016 Annual Report

NOTES TO SUMMARY FINANCIAL STATEMENTS Organization and Nature of Operations

the little bank (the “Bank”) was incorporated as a North Carolina char tered savings bank on September 16, 1998 and

began operations on November 9, 1998. The Bank is headquartered in Kinston, North Carolina and has as its principal market

area, Lenoir, Wayne, Onslow, Craven, Pitt and New Hanover Counties. The Bank operates under the 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.

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 held-to-maturity

and 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.

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.

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2016 Annual Report

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.

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.

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, 2016, 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.

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2016 Annual Report

Kinston Branch

1101 W. Vernon Ave., Kinston, NC

252-939-3900

Greenville Branch

1011 Red Banks Road, Greenville, NC

252-215-3030

Goldsboro Branch

2406 E. Ash Street, Goldsboro, NC

919-583-8989

New Bern Branch

531 McCarthy Blvd., New Bern, NC

252-633-3585

La Grange Branch

101 S. Caswell Street, La Grange, NC

252-566-5600

Wilmington Branch

1427 Military Cutoff Rd., Suite 210

Wilmington, NC

910-509-7477

Jacksonville Branch

118 Western Blvd., Jacksonville, NC

910-353-8600

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2016 Annual Report

Executive Officers

Vincent R. Jones Doyle M. Thigpen President Executive Vice President

Chief Executive Officer Chief Financial Officer & Secretary

Anne R. Corey Susan W. Barrett Executive Vice President Executive Vice President

Chief Credit Officer Chief Operations Officer

Board of Directors

Robert Lee Burrows, Jr. C. Dwight Howard David Weil Chairman of the Board, President, Carolina Greenhouses, Carolina President,

the little bank Soil Company, Howard Development, Inc., Weil Enterprises, Real Estate

CEO of Banks Street Partners, LLC East Coast Modular, Inc., How Corp, Development & Management

LLC, and Eastern Warehouses, LLC

Vincent R. Jones Cameron McRae James T. Hill, Jr. President and President, Tands Inc., Bojangles Franchisee President

Chief Executive Officer, President, McRae & Associates, Inc., Tull Hill Farms, Inc.

the little bank Management Company for the Franchise

Dr. Raymond C. Ball, Jr. Marty Beam J.E. Blizzard Coastal Carolina Orthodontics President & Owner, President and Owner,

W.A. Moore & Co. Contract Flooring Design

Lawrence Davenport David Womack President, Chairman,

J.P. Davenport & Son, Inc. Womack Electric Supply Co., Inc.

Stock Transfer Agent

Broadridge Corporate Issuer Solutions, Inc.

51 Mercedes Way

Edgewood, NY 11717

Market for Common Stock

The little bank’s common stock is

traded on the OTCQX under

the symbol “LTLB.”

the little bank Leadership

Independent Auditors

Dixon Hughes Goodman LLP

1003 Red Banks Road

Greenville, NC 27858

PO Box 279, Kinston, NC 28501 www.thelittlebank.com

Member FDIC