THE MERGER
The descriptions
of the terms and conditions of the merger, the merger agreement, and any related documents in this joint proxy statement/prospectus
are qualified in their entirety by reference to the copy of the merger agreement attached as Annex A to this joint proxy
statement/prospectus, to the registration statement, of which this joint proxy statement/prospectus is a part, and to the
exhibits to the registration statement.
General
The Carolina
Financial board of directors is using this joint proxy statement/prospectus to solicit proxies from the holders of Carolina Financial
common stock for use at the Carolina Financial special stockholders’ meeting. At the same time, the First South board of
directors is using this joint proxy statement/prospectus to solicit proxies from the holders of First South common stock for use
at the First South special stockholders’ meeting.
At the Carolina
Financial special stockholders’ meeting and the First South special stockholders’ meeting, holders of Carolina Financial
common stock and holders of First South common stock, respectively, will be asked to vote upon the adoption of the merger
agreement, among other things. The merger will not be completed unless Carolina Financial’s stockholders and First
South’s stockholders adopt the merger agreement and, by doing so, approve the proposed merger.
Effects of the Merger
At the effective
time of the merger, First South will merge with and into Carolina Financial. Carolina Financial will be the surviving entity
following the merger.
In the merger,
each outstanding share of First South common stock will be converted into the right to receive 0.5200 shares of Carolina Financial
common stock, together with cash paid in lieu of any fractional share of Carolina Financial common stock. If the closing price
of Carolina Financial common stock is greater than $35.14 just prior to closing of the merger and it has outperformed the NASDAQ
Bank Index by 15% or more between signing and closing, the exchange ratio will be decreased automatically based upon the change
in the NASDAQ Bank Index. If the closing price of Carolina Financial common stock is less than $25.98 just prior to closing and
it has underperformed the NASDAQ Bank Index by 15% or more between signing and closing, First South can terminate the merger
agreement unless Carolina Financial elects to increase the exchange ratio or add cash consideration to make up the difference,
based upon the change in the NASDAQ Bank Index. Carolina Financial stockholders will continue to hold their existing Carolina
Financial shares.
Background of the Merger
As
part of the ongoing oversight and management of their respective companies, the Carolina Financial board of directors and the
First South board of directors each regularly review and assess their respective companies’ long-term strategic goals and
opportunities, and consider ways to enhance their respective company’s performance and prospects in light of competitive
and other relevant developments, all with the goal of enhancing stockholder value. For each company, these reviews have included
periodic discussions with respect to strategic alternatives, including potential business combinations, acquisitions and dispositions.
Members
of First South’s senior management team have regularly met with representatives of various investment banking firms experienced
in the banking industry to discuss market conditions, current industry trends, First South’s performance, and potential
transaction opportunities. In June 2016, First South engaged Sandler O’Neill & Partners, L.P., or Sandler, to conduct
a strategic review and to determine an approximate valuation of First South. The First South board decided to engage Sandler following
a series of events beginning in December 2015. On December 18, 2015, First South received a letter from a stockholder dated December
16, 2015 requesting that First South include in its proxy statement for its 2016 annual meeting of stockholders a proposal for
a stockholder resolution recommending that the First South board take the necessary steps to achieve a sale, merger, or other
disposition of First South. The First South board opposed the proposal and recommended that stockholders vote against it at the
2016 annual meeting held on May 26, 2016. The proposal was defeated. Although the First South board did not believe the time was
appropriate to pursue a strategic transaction in the spring of 2016, it thought it prudent to obtain an independent review and
valuation in light of the stockholder proposal and its potential impact in the market. The First South board wished to be prepared
in the event it was approached to consider merger discussions in the wake of the defeated stockholder proposal. Representatives
of Sandler presented and discussed their completed strategic review and valuation with the First South board at a meeting on July
11, 2016. Following this meeting, First South’s management and board determined that the appropriate course of action was
to take steps to improve First South’s financial results while remaining open to discussions with potential strategic partners
should such opportunities arise.
On September 30, 2016, First South’s
President and Chief Executive Officer, Bruce W. Elder, spoke with a representative of another financial institution, which
we refer to as Bank A. At the time, Bank A was actively involved in acquiring another financial institution, but indicated it
had an interest in acquiring First South and expected to be able to entertain more serious discussions in the first quarter of
2017. On October 5, 2016, another representative of Bank A indicated to a representative of Raymond James that Bank A would
be willing to offer consideration equivalent to $12.00 per common share of First South.
On the morning of October 13, 2016,
representatives of another financial institution, which we refer to as Bank B, contacted Mr. Elder and requested a meeting that
afternoon. At this meeting, the representatives of Bank B delivered a written indication of interest outlining Bank B’s
desire to acquire First South for $11.50 per share in cash or a combination of cash and preferred stock of Bank B. Mr. Elder informed
the chairman of the First South board, Frederick N. Holscher, of this development on the evening of October 13, 2016. On October
14, 2016, Mr. Elder spoke by telephone with a representative of Bank B. Mr. Elder informed Bank B that the First South board would
consider Bank B’s indication of interest at a special meeting to be held on October 17, 2016. However, based on the recently
completed valuation analysis, Mr. Elder indicated that the consideration offered by Bank B was not likely to be sufficient. The
representative of Bank B verbally increased the offer to $12.50 per share in cash or a combination of cash and preferred stock
in Bank B. Bank B requested a response from First South no later than October 27, 2016.
The First South board held a special
meeting on October 17, 2016. Representatives of Raymond James and of Wyrick Robbins Yates & Ponton LLP, or Wyrick Robbins,
First South’s outside legal counsel, were also in attendance. The First South board considered and discussed the preliminary
offers of Bank A and Bank B. In light of these offers, the First South board directed Raymond James to perform a thorough market
analysis using financial data as of September 30, 2016, with the goal of providing the First South board with an up-to-date estimate
of how First South might be valued in a merger or acquisition situation. Mr. Elder requested that Bank B extend its deadline for
a response from First South beyond the October 27 date previously indicated by Bank B. Bank B agreed to extend the deadline to
November 15, 2016. The First South board agreed to reconvene on November 14, 2016 to review Raymond James’s analysis and
formulate a response to Bank B. On November 2, 2016, First South formally engaged Raymond James to perform the requested analysis
and to serve as First South’s financial advisor in connection with any strategic transaction involving First South.
The First South board held a special
meeting on November 14, 2016. Representatives of Raymond James attended the meeting in order to present the results of their market
analysis of First South and its potential valuation in a merger or acquisition transaction. In the opinion of Raymond James, First
South’s value in a potential merger or acquisition transaction was between $13.00 and $15.50 per share. Following discussion
and based on the valuation analysis, the First South board elected not to pursue any further discussions with Bank B at the price
level proposed by Bank B in its October 13, 2016 communication with Mr. Elder. The First South board indicated to Bank B that
it would reconsider its strategic alternatives after First South’s 2016 financial results were available.
Given that (1) the First South board
believed that an offer of a combination of cash and preferred stock was not in the best interest of stockholders and (2) that
the First South board believed Bank B was likely to make additional overtures in the first quarter of 2017, the First South board
also decided to explore opportunities with other financial institutions in an effort to maximize stockholder value. Specifically,
the First South board instructed Raymond James to contact Carolina Financial and arrange a meeting between Mr. Elder and representatives
of Carolina Financial’s management team. As part of its analysis, Raymond James had identified Carolina Financial as an
emerging acquirer and potential merger partner for First South. Raymond James believed Carolina Financial would be able to offer
consideration on the higher end of the valuation range of $13.00 to $15.50 per share.
In early November 2016, an electronic
data room was established by Raymond James for the purpose of housing certain information regarding First South to be used by
potential merger partners in their due diligence investigations of First South.
The First South board also discussed
Bank A at its November 14, 2016, meeting. The analysis prepared by Raymond James indicated that Bank A had the ability to pay
a per share acquisition price in the lower half of the valuation range. After discussion, the First South board decided to pursue
discussions with Carolina Financial prior to re-engaging with Bank A. At this point in time, the First South board’s goal
was to explore an all-stock alternative to a potential future offer that Bank B might make of cash or mixed stock and cash consideration.
Since the analysis indicated Carolina Financial had the most capacity to pay, the First South board decided to explore that opportunity,
while leaving open the option of renewing contact with Bank A.
On November 18, 2016, First South
entered into a confidentiality agreement with a third financial institution, which we refer to as Bank C. Under the terms of the
confidentiality agreement, Bank C agreed to not to disclose First South’s confidential information and also agreed not to
solicit to employ any of First South’s employees for a period of one year from the date of the agreement. The confidentiality
agreement also contained a “standstill” provision whereby Bank C agreed that for a period of one year from the date
of the agreement, it would not, without First South’s prior written consent, (i) either in its own capacity or as part of
a group, acquire, offer to acquire, or agree to acquire more than 5% of the outstanding shares of First South’s common stock
or securities exercisable for more than 5% of the outstanding shares of First South’s common stock; (ii) make a stockholder
proposal or participate in any solicitation of proxies to vote any of First South’s voting securities against any proposal
supported by First South’s management; (iii) seek to “control” (as defined in federal banking regulations) the
management, board of directors, or policies of First South; (iv) seek or propose any merger, consolidation, business combination,
sale or purchase of assets or securities, or similar transaction of or involving First South or any of its subsidiaries; (v) have
any discussions or enter into any arrangements, understandings, or agreements (whether written or oral) with, or advise, finance,
assist or encourage any other persons in connection with any of the foregoing, or make any investment in any other person that
engages, or offers or proposes to engage, in any of the foregoing; (vi) make any publicly disclosed proposal regarding any of
the foregoing; or (vii) assist any other party, directly or indirectly, in taking any action which would be prohibited by the
foregoing provisions.
On December 14, 2016, First South
received a letter from a stockholder, dated December 14, 2016, requesting that First South include in its proxy statement for
its 2017 annual meeting of stockholders a proposal for a stockholder resolution recommending that the First South board
take
the necessary steps to achieve a sale, merger, or other disposition of First South. This request was substantially identical to
the request that led to the stockholder proposal being included in the proxy materials for First South’s 2016 annual meeting
of stockholders.
In December of 2016, Mr. Elder contacted
Bank C to determine if Bank C had any interest in a potential business combination transaction with First South. After consideration,
Bank C elected not to pursue a transaction with First South.
On December 29, 2016, First South
entered into a confidentiality agreement with Bank A. The terms of the confidentiality agreement, including the standstill provision,
were similar to those contained in the confidentiality agreement between First South and Bank C described above.
Following the U.S. presidential election
on November 8, 2016, and continuing into the new year, there was a general increase in the prices of financial institution stocks
and a material increase in valuations in the financial institutions sector. This economic environment served as a backdrop for
the First South board’s continued consideration of its strategic alternatives in 2017.
On January 13, 2017, representatives
of Bank A verbally indicated that Bank A would be willing to pay $12.00 to $15.50 per share in an all-stock transaction to acquire
First South. At a January 26, 2017 meeting, the First South board agreed to a meeting with representatives of Bank A to discuss
Bank A’s verbal indication of interest in acquiring First South. Also during this time, Mr. Elder had been in contact with
Jerold L. Rexroad, President and Chief Executive Officer of Carolina Financial. Mr. Rexroad indicated that Carolina Financial
remained highly interested in a transaction with First South, but would not be in a position to deliver a written indication of
interest until later in the first quarter of 2017 due to an ongoing acquisition transaction. The First South board approved of
Mr. Elder scheduling additional meetings with Mr. Rexroad.
On February 10, 2017, the First South
board and representatives from Raymond James met with an executive officer of Bank A to gain a better understanding of Bank A’s
long-term strategic plans and further discuss the benefits of a business combination. Following this presentation, the parties
attempted to schedule a meeting between Mr. Elder and the executive officer of Bank A to whom Mr. Elder would report in the event
First South merged with Bank A. Due to scheduling conflicts, this meeting never occurred. Bank A subsequently announced it was
entering into a transaction with another financial institution.
On February 16, 2017, First South
entered into a confidentiality agreement with a fourth financial institution, which we refer to as Bank D. The standstill provision
of the confidentiality agreement with Bank D was different from the standstill provisions in the confidentiality agreements with
Banks A and C. Under the standstill provision in the agreement with Bank D, Bank D agreed that, for a period of one year from
the date of the agreement, it would not, without the prior written consent of First South: (i) either in its own capacity or as
part of a group, acquire, offer to acquire or agree to acquire by purchase, tender offer or otherwise more than 5% of the outstanding
shares of common stock of First South; (ii) seek to “control” (as defined in federal banking regulations) the management,
board of directors, or policies of First South; (iii) seek or propose any merger, consolidation, business combination, sale or
purchase of assets or securities, or similar transaction of or involving First South or any of its subsidiaries; (iv) make a stockholder
proposal or participate in any solicitation of proxies to vote any voting securities of First South against any proposal supported
by First South’s management regarding any of the foregoing; (v) have any discussions or enter into any arrangements, understandings
or agreements (written or oral) with, or advise, finance, assist or encourage, any other persons in connection with any of the
foregoing; (vi) make any publicly disclosed proposal regarding any of the foregoing; or (vii) assist any other party, directly
or indirectly in taking any action which would be prohibited by the foregoing provisions. The confidentiality agreement with Bank
D also provided that the restrictions in the standstill provision would terminate if First South entered into a definitive agreement
with respect to, or publicly announced that it planned to enter into, a transaction involving all or a controlling portion of
its equity securities or all or substantially all of its assets, whether by merger, consolidation, business combination, tender
or exchange offer, recapitalization, restructuring, sale, equity issuance or otherwise. Mr. Elder met with a representative
of Bank D on February 16, 2017, at the request of Bank D. Discussions were held regarding a possible merger of equals
of First South and Bank D. Because of timing with respect to other ongoing discussions, representatives of First South and Bank
D discussed pricing expectations and quickly determined that further conversations were not likely to lead to any meaningful results.
On February 22, 2017, the First
South board and representatives from Raymond James met with Mr. Rexroad and William A. Gehman, III, Executive Vice
President and Chief Financial Officer of Carolina Financial, to gain a better understanding of Carolina
Financial’s long-term strategic plans and to further discuss the benefits of a business combination.
On February 23, 2017, the First South
board met and was joined by representatives of Raymond James. Raymond James had prepared an analysis comparing potential transactions
between First South and Bank A or Carolina Financial. At the time of this meeting, Carolina Financial had verbally indicated it
would be willing to pay $15.00 to $15.50 per share to acquire First South and Bank A had verbally indicated it would be willing
to pay $15.50 to $17.00 per share. The First South board engaged in discussion with Raymond James on the merits of a potential
transaction with either Bank A or Carolina Financial. Following this discussion, the First South board instructed Raymond James
to inform Carolina Financial of Bank A’s verbal indication of interest with a range up to $17.00 per share and to provide
Carolina Financial with an opportunity to reconsider its verbal indication. The First South board also instructed Raymond James
to inform Bank A that it would reconvene at a future date to consider its strategic alternatives.
As a result of Raymond James’s
communication with Carolina Financial subsequent to the February 23, 2017 board meeting, Carolina Financial requested access to
a significant amount of additional information regarding First South. In late February, an additional electronic data room was
opened and access to given solely to Carolina Financial. On February 28, 2017, Mr. Elder and Scott C. McLean, Executive Vice President
and Chief Financial Officer of First South, met with Messrs. Rexroad and Gehman, along with a representative of Raymond James,
to discuss, among other things, due diligence findings as well as operational and corporate integration issues. Following this
additional investigation and discussion, Carolina Financial verbally indicated a proposed exchange ratio of 0.5150 to 0.5175 shares
of Carolina Financial common stock for each share of First South common stock.
On March 12, 2017, a special meeting
of the First South board was convened for the purpose of determining whether First South should pursue a path to remain independent
or to actively pursue a partnership with Carolina Financial or Bank A. Representatives from Raymond James made a presentation
outlining the future value of First South on a standalone basis compared to the value as a partner with the other banks. The board
determined that a partnership with either Bank A or Carolina Financial had the potential to increase stockholder value more than
First South might accomplish as an independent bank. Raymond James presented an analysis comparing the two verbal indications.
Bank A’s verbal indication was converted to a range of fixed exchange ratios. The analysis, using each company’s 10-day
average closing price as of March 10, resulted in a per share price range for Carolina Financial of $15.62 to $15.70 and a range
of $15.14 to $16.60 for Bank A. Both verbal indications were subject to due diligence findings. Due to the amount of due diligence
conducted by Carolina Financial, the resulting tightening of the range of the proposed exchange ratio and Carolina Financial’s
current and future projected performance, the board determined that pursuing a merger transaction with Carolina Financial was
in the best interest of stockholders.
The First South board next met on
March 23, 2017. Representatives of Raymond James presented a draft letter of intent from Carolina Financial dated March 17, 2017
for the acquisition of First South and provided a more detailed overview of a potential transaction with Carolina Financial, including
price protection features, representation on the board of the combined company, treatment of First South equity awards, personnel
issues, and the creation of a Carolina Financial regional advisory board for North Carolina. The First South board directed Raymond
James to discuss and clarify these issues with Carolina Financial in anticipation of Carolina Financial submitting a written letter
of intent to acquire First South in the near future.
On April 3, 2017, Carolina Financial
provided Raymond James with a non-binding letter of intent to acquire First South. The financial terms provided for an all-stock
transaction with an exchange ratio of 0.5150 to 0.5175 shares of Carolina Financial common stock for each share of First South
common stock. This exchange ratio would be finalized subject to completion of Carolina Financial’s due diligence on First
South. The letter indicated that the merger consideration would include possible adjustments based on 15% thresholds for (A) the
trading price of Carolina Financial’s common stock and (B) the price performance of Carolina Financial’s common stock
against the Nasdaq Bank Index. The letter further indicated that two directors of First South would be invited to join the Carolina
Financial board and that the other First South directors would be asked to serve on an Eastern North Carolina Advisory Board for
CresCom Bank. The letter also contained an exclusivity provision. This provision required that First South refrain from (A) participating
in any negotiations or soliciting, initiating or seeking to encourage submission of inquiries, proposals or offers from any potential
buyer of First South; (B) entering into any agreement or taking any action that by its terms or effect was intended to adversely
affect the ability of Carolina Financial and First South to consummate a merger; or (C) furnishing or authorizing any agent or
representative to furnish any information concerning the proposed merger to any party. The exclusivity period began on the date
the proposal was accepted by First South and ended on the earlier of (A) 45 days thereafter or (B) Carolina Financial’s
written notification to First South that it did not intend to consummate the proposed transaction. During the exclusivity period,
First South was required to notify Carolina Financial of any unsolicited inquiries, proposals, or offers from any other potential
buyer of First South. Carolina Financial requested a response to its letter no later than 12:00 p.m. Eastern Time on April 7,
2017. First South accepted Carolina Financial’s non-binding letter of intent on April 4, 2017 at a special meeting of the
First South board.
On April 28, 2017, a representative
of Bank B contacted Raymond James and Mr. Elder by e-mail. The representative indicated Bank B’s desire to continue discussions
regarding the acquisition of First South and that Bank B would like to increase its proposed consideration and further indicated
that Bank B would deliver a letter containing its updated proposal on or after May 16, 2017.
The expiration date of the exclusivity
period under the Carolina Financial letter of intent was May 19, 2017. On May 4, 2017, the First South board met to consider Carolina
Financial’s request to extend the exclusivity period to June 10, 2017. In light of the verbal indication from Bank B that
an updated offer proposal would be forth coming on May 16, 2017, the board elected to not extend the exclusivity period in order
to potentially enter into conversations with Bank B.
On May 16, 2017, Bank B delivered
a non-binding indication of interest letter to First South. The letter indicated that each share of First South’s common
stock would be converted into the right to receive consideration of between $14.50 and $17.50 per share. The consideration would
be, at the holder’s option, in the form of cash, Bank B preferred stock (5.75% fixed rate dividend for ten years, non-callable
for ten years), or a combination of cash and Bank B preferred stock. The specific amount of the consideration was subject to reduction
and would be established at the conclusion of Bank B’s due diligence. The letter had an expiration date of 5:30 p.m. on
May 31, 2017 if not accepted prior to then by First South.
Upon receipt, First South reviewed
Bank B’s indication of interest letter with its financial and legal advisors. Per the terms of the Carolina Financial letter
of intent, First South also notified Carolina Financial in writing of the existence of Bank’s B’s indication of interest
and provided a summary of its material terms to Carolina Financial.
Also on May 16, 2017, Raymond James
received an updated letter of intent from Carolina Financial offering a fixed exchange ratio of 0.5163 shares of Carolina Financial
common stock for each share of First South common stock. The letter also asked for an exclusivity period running from the date
the proposal was accepted until June 12, 2017. First South did not accept this letter of intent and allowed the exclusivity period
under the original letter of intent to expire on May 19, 2017.
On May 22, 2017, after the expiration
of the exclusivity period with Carolina Financial, Mr. Elder, along with representatives of Raymond James and Wyrick Robbins,
met with representatives of Bank B to discuss Bank B’s indication of interest and a proposed acquisition of First South
by Bank B.
On May 24, 2017, Nelson Mullins Riley & Scarborough LLP, or Nelson Mullins, legal counsel to Carolina Financial, provided a draft merger agreement to Wyrick Robbins.
The following day, May 25, 2017, Nelson Mullins provided draft employment agreement for Mr. Elder and for Cornelius J. Sullivan
to Wyrick Robbins. Over the succeeding days, First South and Carolina Financial, with the assistance of their respective
legal counsel and financial advisors, negotiated the provisions of the merger agreement and ancillary documents. Key terms
negotiated between the first draft of the merger agreement delivered on May 24, 2017 and the draft of the merger agreement presented
to the First South board on June 9, 2017 included, among others: (A) covenants regarding the conduct of First South’s business
prior to the closing of the merger, (B) the amount of the termination fee payable by First South if the merger agreement was terminated
under certain circumstances, (C) the circumstances in which the merger agreement may be terminated, and (D) the representations
and warranties of First South and Carolina Financial.
On May 25, 2017, the First South
board met with its advisors from Raymond James and Wyrick Robbins to discuss the May 22
nd
meeting with Bank B, the
draft definitive merger agreement received from Carolina Financial on May 24
th
and to receive current information on
the general state of bank mergers and acquisitions in the Carolinas. Over an eight-day period from the end of April to the beginning
of May, four bank mergers had occurred involving North Carolina banks which impacted certain merger pricing metrics since the
board last reviewed merger and acquisition data. The board concluded that based on the amount of time that had transpired since
negotiations with Carolina Financial began, the growth in First South’s balance sheet and earnings projected for the second
quarter of 2017 and the pricing for recently announced merger transactions, that the fixed exchange ratio of 0.5163 was too low
and instructed Raymond James to request that Carolina financial consider increasing the exchange ratio to 0.5263.
On May 26, 2017, Carolina Financial
verbally agreed to increase the exchange ratio to 0.5200 shares of Carolina Financial common stock for each share of First South
common stock. The board of First South agreed to the verbal indication. Carolina Financial delivered a letter to Raymond James
wherein it reaffirmed the terms of its letter of intent dated April 3, 2017. The May 26 letter proposed an exchange ratio of 0.5200
shares of Carolina Financial common stock for each share of First South common stock in an all-stock transaction. The May 26 letter
also contained an exclusivity provision similar to that contained in Carolina Financial’s April 3 letter. The exclusivity
period began on the date the proposal was accepted by First South and ended on the earlier of (A) June 10, 2017 or (B) Carolina
Financial’s written notification to First South that it did not intend to consummate the proposed transaction. The exclusivity
provision was subject to an automatic ten-day extension if Carolina Financial and First South were still actively pursuing a transaction
on June 10, 2017.
On May 31, 2017, the deadline for
First South to respond to Bank B’s indication of interest expired. After consulting with the First South board and its financial
and legal advisors, First South’s management had determined to allow Bank B’s indication of interest to expire. The
reasons for this decision are summarized below.
On June 1, 2017, First South accepted
Carolina Financial’s May 26 updated letter of intent.
Subsequently, Carolina Financial
and First South also continued to conduct due diligence and Messrs. Elder and Sullivan continued to negotiate and finalize
their respective employment agreements with Carolina Financial. On June 2, 2017, representatives of First South and Raymond
James conducted due diligence interviews of representatives of Carolina Financial.
On June 5, 2017, the First South board
received a letter from Bank B. The letter referenced Bank B’s May 16, 2017 indication of interest to acquire First South
and the fact that First South had allowed the indication of interest to expire. In the June 5 letter, Bank B reiterated its interest
in First South and stated it was prepared to make an offer to acquire First South at a price of $17.00 per share to be paid either
in all cash or, as previously indicated, in the form of a combination of cash and Bank B preferred stock. The amount of the consideration
was subject to Bank B’s due diligence investigation of First South. Bank B also indicated in its letter that it intended
to publicly announce its proposal to acquire First South on June 15, 2017. As required by the letter of intent with Carolina Financial,
First South notified Carolina Financial of Bank B’s letter and reviewed the letter with First South’s financial and
legal advisors.
On the afternoon of June 7, 2017,
the First South board held a meeting at which the potential merger transaction with Carolina Financial and the proposal from Bank
B were discussed. It was made clear at the outset of the meeting that the First South board would not be voting to approve any
transaction at this meeting. The purpose of the meeting was to provide the First South board with an opportunity to review, consider,
and discuss the situation. Representatives from Raymond James and Wyrick Robbins were also present at this meeting and provided
an update on the status of merger discussions. Raymond James presented a financial analysis of the proposed merger with Carolina
Financial and a description and analysis of the price protection features of the merger agreement. Wyrick Robbins reviewed the
proposed merger agreement with Carolina Financial in detail with the board. The board, with the assistance of Raymond James and
Wyrick Robbins, engaged in extensive discussion of the proposed merger with Carolina Financial and the advantages and disadvantages
of a merger with Carolina Financial as compared to a potential transaction with Bank B. The board discussed, among other things,
the advantages and disadvantages of cash versus stock consideration, the status of due diligence, the risk of losing the potential
transaction with Carolina Financial to pursue a more uncertain potential transaction with Bank B, pro forma ownership percentages,
and tax considerations.
First South and Carolina Financial,
with the assistance of their respective advisors, continued negotiation of the merger agreement. On June 9, 2017,
the First South board met and further considered the proposed merger with Carolina Financial and reviewed the latest draft of
the merger agreement. Representatives of Raymond James attended the meeting and representatives of Wyrick Robbins joined the meeting
by telephone. Raymond James presented the financial analysis supporting its fairness opinion, including a review of selected regional
transactions, a review of selected national transactions, an analysis of the proposed consideration in the form of common stock
of Carolina Financial, pro forma ownership percentages, and tax considerations. Based on this analysis, Raymond James stated it
was prepared to deliver a written opinion stating that the proposed exchange ratio in the merger of 0.5200 shares of Carolina
Financial common stock for each share of First South’s common stock was fair to First South’s stockholders
from a financial point of view. On June 9, the value of the proposed merger consideration from Carolina Financial was approximately
$16.89 per share, based on Carolina Financial’s closing price that day. The closing price of First South common stock on
that day was $14.60.
The First South board also discussed
the indication of interest and follow-up letter from Bank B. After having discussed and considered Bank B’s offer over a
period of several weeks and a series of meetings, the First South board determined not to pursue a transaction with Bank B. The
First South board’s decision was based on the following factors, among others:
|
·
|
The
limited potential upside to First South’s stockholders of a cash transaction.
|
|
·
|
The
illiquidity of any preferred stock consideration.
|
|
·
|
The
lack of ownership by First South’s stockholders in the combined company on a going-forward
basis.
|
|
·
|
The
risk of losing the proposed merger with Carolina Financial, for which due diligence and
negotiations were substantially complete.
|
|
·
|
Market
overlap and anti-competitive concerns that would be present in a transaction with Bank
B that are not present in the proposed merger with Carolina Financial.
|
|
·
|
The
tax consequences to First South’s stockholders of a cash transaction.
|
|
·
|
The
recent strong performance of Carolina Financial’s common stock.
|
Following extensive review and discussion,
including consideration of the factors described under “— First South’s Reasons for the Merger; Recommendation
of First South’s Board of Directors” beginning on page 61, and consideration of the above referenced presentations,
the First South board unanimously voted to approve the merger and the merger agreement with Carolina Financial, and directed First
South’s management to finalize and execute a definitive merger agreement on the terms presented at the meeting.
Carolina Financial’s board also met on
June 9, 2017 and unanimously approved the merger. At this meeting, KBW reviewed the financial aspects of the proposed merger
and rendered to the Carolina Financial’s board of directors an opinion to the effect that, as of that date and subject to
the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by
KBW as set forth in such opinion, the exchange ratio in the proposed merger was fair, from a financial point of view, to Carolina
Financial.
Carolina Financial and First South executed
the merger agreement after their respective board meetings on June 9, 2017 and, before the financial markets opened on the morning
on June 12, 2017, issued a joint press release announcing the execution of the merger agreement and the terms of the merger.
First South’s Reasons for the Merger; Recommendation
of the First South Board of Directors
After careful consideration, First South’s
board of directors, at a meeting held on June 9, 2017, unanimously determined the merger agreement and the transactions contemplated
thereby to be fair and in the best interest of First South and its stockholders. Accordingly, First South’s board of directors
adopted and approved the merger agreement and unanimously recommends that First South’s stockholders vote “FOR”
the approval of the merger agreement.
In evaluating the merger agreement and reaching
its decision to adopt and approve the merger agreement and recommend that First South’s stockholders approve the merger
agreement, First South’s board consulted with First South’s management, as well as its outside legal and financial
advisors, and considered a number of factors, including the following material factors (not in any relative order of importance):
|
·
|
First
South’s board’s knowledge and understanding of First South’s business,
operations, financial condition, asset quality, earnings and prospects, and of Carolina
Financial’s business, operations, financial condition, asset quality, earnings
and prospects, taking into account the presentations made by Carolina Financial officers
and information provided by First South’s financial advisors;
|
|
·
|
its
understanding of Carolina Financial’s commitment to enhancing its strategic position
in eastern North Carolina, its prospects for the future and its projected financial results
and First South’s board’s belief that the combined enterprise would benefit
from Carolina Financial’s ability to take advantage of economies of scale and grow
in the current economic environment;
|
|
·
|
Carolina
Financial’s earnings track record and the market performance of its common stock;
|
|
·
|
the
ability of First South’s stockholders to benefit from Carolina Financial’s
potential growth and stock appreciation since it is more likely that the combined entity
will have superior future earnings and prospects compared to First South’s earnings
and prospects on an independent basis as the result of greater operating efficiencies
and better penetration of commercial and consumer markets;
|
|
·
|
the
perceived ability of Carolina Financial to complete a merger transaction from a financial
and regulatory perspective;
|
|
·
|
the
financial and other terms of the merger agreement, including the exchange ratio and tax
treatment, which First South’s board reviewed with its outside financial and legal
advisors, including:
|
|
·
|
First
South’s ability, under certain circumstances specified in and prior to the time
First South’s stockholders approve the merger agreement (i) to provide non-public
information in response to a written acquisition proposal from a third party and (ii)
participate in discussions or negotiations with a third party making such proposal, if,
in each case, the acquisition proposal was not the result of a material violation of
the provisions of the merger agreement relating to the solicitation of acquisition proposals,
and if First South’s board, prior to taking any such actions, determines in good
faith, after consultation with its outside legal counsel, that failure to take such actions
would violate First South’s board’s fiduciary duties under applicable law
and, after consultation with its financial advisor and outside counsel, that such acquisition
proposal constitutes a superior proposal;
|
|
·
|
the
fact that the outside date under the merger agreement allows for sufficient time to complete
the merger;
|
|
·
|
First
South’s board’s belief, based on the then-current market price of Carolina
Financial common stock, that the proposed merger with Carolina Financial would generally
be a tax-free transaction to First South’s stockholders;
|
|
·
|
the
level of effort that Carolina Financial must use under the merger agreement to obtain
required regulatory approvals, and the prospects for such approvals being obtained in
a timely fashion and without the imposition of any adverse conditions; and
|
|
·
|
its
review of the potential costs associated with executing the merger agreement, including
change in control, severance and related costs, as well as estimated advisor fees, which
First South’s board concluded were reasonable and would not affect the advice from,
or the work performed by senior management of First South or First South’s financial
advisors in connection with the evaluation of the merger and the merger agreement by
First South’s board;
|
|
·
|
the
complementary aspects of the First South and Carolina Financial businesses, including
customer focus, geographic coverage, business orientation and compatibility of the companies’
management operating styles;
|
|
·
|
the
potential expense-saving and revenue-enhancing opportunities in connection with the merger,
the related potential impact on the combined company’s earnings and the fact that
the nature of the merger consideration would allow former First South stockholders to
participate in the potential future upside as Carolina Financial stockholders;
|
|
·
|
the
anticipated effect of the acquisition on First South’s retained employees and the
terms of severance for employees who would not be retained;
|
|
·
|
the
long-term and short-term interests of First South and its stockholders, and the interests
of First South’s employees, customers, creditors and suppliers, and the community
and societal considerations of the communities in which First South maintains offices;
|
|
·
|
the
financial analyses provided by Raymond James, First South’s financial advisor,
regarding the merger, and its opinion, delivered to First South’s board on June
9, 2017, that as of that date, the merger consideration to be received under the terms
of the merger agreement was fair, from a financial point of view, to First South’s
stockholders;
|
|
·
|
its
knowledge of the current environment in the financial services industry, including national,
regional and local economic conditions, continued industry consolidation, increased regulatory
burdens, evolving trends in technology and increasing nationwide and global competition,
the current financial market conditions, the current environment for community banks,
particularly in the Carolinas, and the likely effects of these factors on First South’s
and the combined company’s potential growth, development, productivity, profitability
and strategic options, and the historical prices of First South and Carolina Financial
common shares;
|
|
·
|
its
knowledge of First South’s prospects as an independent entity, including challenges
relating to increasing regulatory burdens and overhead expense, and First South’s
ability to increase capital to support growth;
|
|
·
|
its
knowledge of the strategic alternatives available to First South, including the challenges
for organic growth by a financial institution of First South’s size; and
|
|
·
|
its
belief that the merger is more favorable to First South’s stockholders than the
alternatives to the merger, which belief was formed based on the careful review undertaken
by First South’s board of directors, with the assistance of its management, outside
legal and financial advisors.
|
With respect to the indication of interest
received from Bank B as described above, the First South’s board’s reasons for pursing the merger with Carolina Financial
as opposed to a transaction with Bank B included the following (not in any relative order of importance):
|
·
|
The
limited potential upside to First South’s stockholders of a cash transaction such
as the one proposed by Bank B.
|
|
·
|
The
illiquidity of any preferred stock consideration as was proposed by Bank B.
|
|
·
|
The
lack of ownership by First South’s stockholders in the combined company on a going-forward
basis.
|
|
·
|
The
risk of losing the proposed merger with Carolina Financial, for which due diligence and
negotiations were substantially complete at the time of Bank B’s indication of
interest letter.
|
|
·
|
Market
overlap and anti-competitive concerns that would be present in a transaction with Bank
B that are not present in the proposed merger with Carolina Financial.
|
|
·
|
The
tax consequences to First South’s stockholders of a cash transaction such as the
one proposed by Bank B.
|
|
·
|
The
recent strong performance of Carolina Financial’s common stock.
|
First South’s board also considered
potential risks and a variety of potential negative factors in connection with its deliberations concerning the merger agreement
and the merger, including the following material factors (not in any relative order of importance):
|
·
|
the
fact that, while First South expects that the merger will be consummated, there can be
no assurance that all conditions to the parties’ obligations to complete the merger
agreement will be satisfied, including the risk that certain regulatory approvals, the
receipt of which are conditions to the consummation of the merger, might not be obtained,
and, as a result, the merger may not be consummated;
|
|
·
|
the
restrictions on the conduct of First South’s business prior to the completion of
the merger, which are customary for public company merger agreements involving financial
institutions, but which, subject to specific exceptions, could delay or prevent First
South from undertaking business opportunities that may arise or any other action it would
otherwise take with respect to the operations of First South absent the pending completion
of the merger;
|
|
·
|
the
significant risks and costs involved in connection with entering into or completing the
merger, or failing to complete the merger in a timely manner, or at all, including as
a result of any failure to obtain required regulatory approvals or stockholder approval,
such as the risks and costs relating to diversion of management and employee attention
from other strategic opportunities and operational matters, potential employee attrition,
and the potential effect on business and customer relationships;
|
|
·
|
the
fact that First South would be prohibited from soliciting acquisition proposals after
execution of the merger agreement, and the possibility that the $5,750,000 termination
fee payable by First South upon the termination of the merger agreement under certain
circumstances could discourage other potential acquirers from making a competing bid
to acquire First South;
|
|
·
|
the
fact that some of First South’s directors and executive officers have other interests
in the merger that are different from, or in addition to, their interests as First South
stockholders, including, but not limited to, the specific terms of the employment
agreements offered to Mr. Elder and Mr. Sullivan; and
|
|
·
|
the
possibility of litigation in connection with the merger.
|
Based on the factors described above, the
board of First South determined that the merger with Carolina Financial and the merger of First South Bank with CresCom Bank would
be advisable and in the best interests of First South and its stockholders and other constituencies the board was authorized by
the articles of incorporation to consider, and adopted the merger agreement and resolved to recommend its approval to the stockholders
of First South.
The foregoing discussion of the information
and factors considered by First South’s board is not intended to be exhaustive but includes the material factors considered
by First South’s board. In view of the wide variety of factors considered in connection with its evaluation of the merger
and the complexity of these matters, First South’s board did not find it useful, and did not attempt, to quantify, rank
or otherwise assign relative weights to these factors. In considering the factors described above, the individual members of First
South’s board may have given different weight to different factors. First South’s board conducted an overall analysis
of the factors described above including through discussions with, and questioning of, First South’s management and First
South’s legal and financial advisors, and considered the factors overall to be favorable to, and to support, its determination.
Carolina
Financial’s Reasons for the Merger and Recommendation of the Carolina Financial Board of Directors
Carolina
Financial’s board of directors believes that the completion of the merger presents a unique opportunity for Carolina Financial
to further its strategic plan by expanding its franchise and banking operations in the eastern and central North Carolina
markets, which Carolina Financial believes is an attractive market area in North Carolina, and which is contiguous to its
existing markets in southeastern North Carolina. Carolina Financial’s board of directors also noted that the merger furthered
Carolina Financial’s strategic growth plan, would add a solid core deposit base, diversify its loan portfolio composition,
be immediately accretive to earnings and be a good cultural fit.
The terms
of the merger, including the merger consideration, are the result of arm’s-length negotiations between representatives of
Carolina Financial and First South. In reaching its decision to approve the merger, Carolina Financial’s board of directors
consulted with its legal advisors regarding the terms of the transaction and with management of Carolina Financial. In approving
the entry into the merger agreement, Carolina Financial’s board of directors considered the following material factors:
|
·
|
The
merger represents an attractive opportunity to continue to execute on its strategic objective
of disciplined, profitable growth;
|
|
·
|
First
South represents a scarce market expansion opportunity as one of the few suitable community
banks in the attractive eastern and central North Carolina markets, which
have strong demographics complementary and contiguous to Carolina Financial’s
expansion into the southeastern North Carolina market;
|
|
·
|
The
merger would expand and diversify Carolina Financial’s markets, and further diversify
its loan portfolio, revenue and deposit mix;
|
|
·
|
First
South is a very well-managed, quality organization with strong historical earnings and
a service-focused business model;
|
|
·
|
First
South’s and Carolina Financial’s respective management teams share a common
business vision and commitment to their respective clients, stockholders, employees and
other constituencies;
|
|
·
|
The
two companies have complementary service-focused business models;
|
|
·
|
Carolina
Financial’s management believes that the merger would be immediately accretive
to Carolina Financial’s earnings per share (excluding one-time charges) due to
a combination of revenue synergies and cost savings opportunities for the combined company.
Revenue synergies will be derived from Carolina Financial having a greater array of products
and services to offer to the former First South customers, as well as having the ability
to provide expanded credit availability through Carolina Financial’s higher capital
resources; and
|
|
·
|
The
Carolina Financial board’s belief that
the
merger is likely to provide an increase in stockholder value, including the benefits
of a stronger strategic position.
|
In addition, Carolina Financial’s board of directors considered the opinion, dated June 9, 2017, of
KBW to the Carolina Financial board of directors as to the fairness, from a financial point of view and as of the date of the opinion,
to Carolina Financial of the exchange ratio in the proposed merger, as more fully described below under “Opinion of Carolina
Financial’s Financial Advisor.”
Carolina
Financial’s board of directors also considered potential risks associated with the merger in connection with its deliberations
of the proposed transaction, including the challenges of integrating First South’s business, operations, and workforce with
those of Carolina Financial, the potential negative impact on Carolina Financial’s stock price and the need to obtain stockholder
and regulatory approvals in order to complete the transaction.
Carolina
Financial’s board of directors considered all of these factors as a whole and, on balance, Carolina Financial’s board
of directors believes that the opportunities created by the merger to increase the value of Carolina Financial’s franchise
more than offset any integration or other risks inherent in the merger.
The foregoing
discussion of the information and factors considered by Carolina Financial’s board of directors is not exhaustive, but includes
the material factors considered by Carolina Financial’s board of directors. In view of the wide variety of factors considered
by Carolina Financial’s board of directors in connection with its evaluation of the merger and the complexity of these matters,
Carolina Financial’s board of directors did not consider it practical to, nor did it attempt to, quantify, rank or otherwise
assign relative weights to the specific factors that it considered in reaching its decision. In considering the factors described
above, individual members of Carolina Financial’s board of directors may have given different weights to different factors.
The Carolina
Financial board of directors unanimously adopted the merger agreement, authorized the merger and the other transactions contemplated
by the merger agreement, and determined that the merger and the other transactions contemplated by the merger agreement, including
the issuance of shares of Carolina Financial common stock to First South stockholders in connection with the merger, are in the
best interests of Carolina Financial and its stockholders. Accordingly, the Carolina Financial board of directors unanimously
recommends that Carolina Financial stockholders vote “FOR” the proposal to approve the merger agreement, “FOR”
the proposal to approve the issuance of shares of Carolina Financial common stock to First South stockholders in connection with
the merger, and “FOR” the Carolina Financial adjournment proposal.
Opinion of First South’s
Financial Advisor
First South retained Raymond James as its
financial advisor on November 2, 2016. Pursuant to that engagement, the First South board of directors requested that Raymond
James deliver its opinion as to the fairness, from a financial point of view, to the holders of First South’s outstanding
common stock of the exchange ratio to be received by such holders pursuant to the merger agreement.
At the June 9, 2017 meeting of the First
South board, representatives of Raymond James delivered its written opinion to the First South board dated June 9, 2017, as to
the fairness, as of such date, from a financial point of view, to the holders of First South’s outstanding common stock
of the exchange ratio to be received by such holders in the merger pursuant to the merger agreement, based upon and subject to
the qualifications, assumptions and other matters considered in connection with the preparation of its opinion
.
The full text of the written opinion of
Raymond James is attached as Annex C to this document. The summary of the opinion of Raymond James set forth in this document
is qualified in its entirety by reference to the full text of such written opinion. Holders of First South common stock are urged
to read the opinion in its entirety.
Raymond James provided its opinion for the
information of the First South board of directors (solely in each director’s capacity as such) in connection with, and for
purposes of, its consideration of the merger and its opinion only addresses whether the exchange ratio to be received by the holders
of First South common stock in the merger pursuant to the merger agreement was fair, from a financial point of view, to such holders
as of the date of such opinion. The opinion of Raymond James does not address any other term or aspect of the merger agreement
or the merger contemplated thereby. The Raymond James opinion does not constitute a recommendation to the First South board or
to any holder of First South common stock as to how the First South board, such stockholder or any other person should vote or
otherwise act with respect to the merger or any other matter. Raymond James did not express any opinion as to the likely trading
range of Carolina Financial common stock following the date of the opinion, which may vary depending on numerous factors that
generally impact the price of securities or on the financial condition of Carolina Financial at that time. Raymond James also
does not express any opinion as to the trading price of Carolina Financial common stock relative to its historical or future financial
condition or results of operations.
In connection with its review of the proposed
merger and the preparation of its opinion, Raymond James, among other things:
|
·
|
reviewed
the financial terms and conditions as stated in the draft of the merger agreement dated
as of June 9, 2017, which is referred to in this section as the “Draft Agreement”;
|
|
·
|
reviewed
certain information related to the historical, current and future operations, financial
condition and prospects of First South made available to Raymond James by First South,
including, but not limited to, financial projections prepared by the management of First
South relating to First South for the period ending December 31, 2022, as approved for
Raymond James’ use by First South, which are referred to in this section as the
“Projections”;
|
|
·
|
reviewed
First South’s and Carolina Financial’s recent public filings and certain
other publicly available information regarding First South and Carolina Financial;
|
|
·
|
reviewed
financial, operating and other information regarding First South and Carolina Financial
and the industry in which they operate;
|
|
·
|
reviewed
the financial and operating performance of First South and those of other selected public
companies that Raymond James deemed to be relevant;
|
|
·
|
considered
the publicly available financial terms of certain transactions that Raymond James deemed
to be relevant;
|
|
·
|
reviewed
the current and historical market prices and trading volume for shares of First South
common stock, and the current market prices of the publicly traded securities of certain
other companies that Raymond James deemed to be relevant;
|
|
·
|
conducted
such other financial studies, analyses and inquiries and considered such other information
and factors, as Raymond James deemed appropriate; and
|
|
·
|
discussed
with members of the senior management of First South certain information relating to
the aforementioned and any other matters which Raymond James deemed relevant to its inquiry.
|
With First South’s consent, Raymond
James assumed and relied upon the accuracy and completeness of all information supplied by or on behalf of First South, or otherwise
reviewed by or discussed with Raymond James, and Raymond James did not undertake any duty or responsibility to, nor did Raymond
James, independently verify any of such information. Raymond James did not make or obtain an independent appraisal of the assets
or liabilities (contingent or otherwise) of First South. Raymond James is not an expert in the evaluation of loan and lease portfolios
for purposes of assessing the adequacy of the allowances for loan losses; accordingly, it assumed that such allowances for losses
are in the aggregate adequate to cover such losses. With respect to the Projections and any other information and data provided
to or otherwise reviewed by or discussed with Raymond James, Raymond James, with First South’s consent, assumed that the
Projections and such other information and data were reasonably prepared in good faith on bases reflecting the best currently
available estimates and judgments of management of First South, and Raymond James relied upon First South to advise Raymond James
promptly if any information previously provided became inaccurate or was required to be updated during the period of its review.
Raymond James expressed no opinion with respect to the Projections or the assumptions on which they were based. Raymond James
relied upon, without independent verification, First South’s assessment of its management and its legal, tax, accounting
and regulatory advisors with respect to all legal, tax, accounting and regulatory matters, including without limitation that the
merger will qualify as a reorganization under the provisions of Section 368(a) of the Internal Revenue Code. Raymond James assumed
that the final form of the merger agreement would be substantially similar to the Draft Agreement reviewed by Raymond James and
that the merger would be consummated in accordance with the terms of the merger agreement without waiver of or amendment to any
of the conditions thereto and without adjustment to the exchange ratio. Furthermore, Raymond James assumed, in all respects material
to its analysis, that the representations and warranties of each party contained in the merger agreement were true and correct
and that each party will perform all of the covenants and agreements required to be performed by it under the merger agreement
without being waived. Raymond James also relied upon and assumed, without independent verification, that (i) the merger would
be consummated in a manner that complies in all respects with all applicable international, federal and state statutes, rules
and regulations, and (ii) all governmental, regulatory or other consents and approvals necessary for the consummation of the merger
would be obtained and that no delay, limitations, restrictions or conditions would be imposed or amendments, modifications or
waivers made that would have an effect on the merger or First South that would be material to its analysis or opinion.
Raymond James expressed no opinion as to
the underlying business decision to effect the merger, the structure or tax consequences of the merger, or the availability or
advisability of any alternatives to the merger. The Raymond James opinion is limited to the fairness, from a financial point of
view, of the exchange ratio to be received by the holders of First South common stock. Raymond James expressed no opinion with
respect to any other reasons (legal, business, or otherwise) that may support the decision of First South’s board of directors
to approve or consummate the merger. Furthermore, no opinion, counsel or interpretation was intended by Raymond James on matters
that require legal, accounting or tax advice. Raymond James assumed that such opinions, counsel or interpretations had been or
would be obtained from appropriate professional sources. Furthermore, Raymond James relied, with the consent of First South, on
the fact that First South was assisted by legal, accounting and tax advisors, and, with the consent of First South relied upon
and assumed the accuracy and completeness of the assessments by First South and its advisors, as to all legal, accounting and
tax matters with respect to First South and the merger.
In formulating its opinion, Raymond James
considered only the exchange ratio to be received by the holders of First South common stock, and Raymond James did not consider,
and its opinion did not address, the fairness of the amount or nature of any compensation to be paid or payable to any of First
South’s officers, directors or employees, or such class of persons, whether relative to the exchange ratio or otherwise.
Raymond James was not requested to opine as to, and its opinion did not express an opinion as to or otherwise address, among other
things: (1) the fairness of the merger to the holders of any class of securities, creditors or other constituencies of First South,
or to any other party, except and only to the extent expressly set forth in the last sentence of its opinion or (2) the fairness
of the merger to any one class or group of First South’s or any other party’s security holders or other constituencies
vis-à-vis any other class or group of First South’s or such other party’s security holders or other constituencies
(including, without limitation, the allocation of any consideration to be received in the merger amongst or within such classes
or groups of security holders or other constituencies). Raymond James expressed no opinion as to the impact of the merger on the
solvency or viability of First South or Carolina Financial or the ability of First South or Carolina Financial to pay their respective
obligations when they come due.
Material Financial Analyses
The following summarizes the material financial
analyses reviewed by Raymond James with the First South board of directors at its meeting on June 9, 2017, which material was
considered by Raymond James in rendering its opinion. No company or transaction used in the analyses described below is identical
or directly comparable to First South, Carolina Financial or the contemplated merger.
Selected Companies Analysis.
Raymond
James analyzed the relative valuation multiples of sixteen (16) publicly-traded bank holding companies, banks, and thrifts headquartered
in the Southeast (Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West
Virginia) with the following characteristics: (i) listed on either the NASDAQ, NYSE, or NYSE MKT exchanges; (ii) total assets
between $500 million and $2.0 billion; (iii) last twelve months (LTM) return on average assets (ROAA) between 0.50% and 1.25%;
(iv) tangible common equity to tangible assets ratio between 6.0% and 12.0%; and (v) nonperforming assets to total assets ratio
(NPAs / Assets) less than 3.00%. The aforementioned financial characteristics were shown for the bank subsidiary if consolidated
data was unavailable, and the financial characteristics were based on the most recent last twelve months (“LTM”) period
reported as of June 8, 2017. Raymond James excluded mutual holding companies, targets of announced mergers, and the four following
companies: (i) Access National Corporation, which was the subject of a recently completed merger of equals transaction; (ii) Southern
National Bancorp of Virginia, Inc., which was the subject of an announced merger of equals transaction; (iii) Live Oak Bancshares,
Inc., which was not comparable due to its unique business model; and (iv) C&F Financial Corporation, which was not comparable
due to its unique business model. The selected companies that Raymond James deemed relevant included the following:
|
•
|
First
Bancshares, Inc.
|
|
•
|
American
National Bankshares Inc.
|
|
•
|
Premier
Financial Bancorp, Inc.
|
|
•
|
Southern
First Bancshares, Inc.
|
|
•
|
Entegra
Financial Corp.
|
|
•
|
CapStar
Financial Holdings, Inc.
|
|
•
|
Community
Bankers Trust Corporation
|
|
•
|
Colony
Bankcorp, Inc.
|
|
•
|
Peoples
Bancorp of North Carolina, Inc.
|
|
•
|
Citizens
Holding Company
|
|
•
|
Commerce
Union Bancshares, Inc.
|
|
•
|
First
Community Corporation
|
|
•
|
Select
Bancorp, Inc.
|
|
•
|
Auburn
National Bancorporation, Inc.
|
|
•
|
Fauquier
Bankshares, Inc.
|
|
•
|
Bank
of the James Financial Group, Inc.
|
Raymond James calculated various financial
multiples for each company, including: price per share at close on June 8, 2017 compared to (i) tangible book value (TBV) per
share at March 31, 2017; and (ii) LTM earnings per share (EPS) for the most recent LTM period reported. All financial multiples—TBV
per share and LTM EPS—greater than two standard deviations away from the unadjusted mean were considered not meaningful.
Raymond James reviewed the 75
th
percentile, mean, median and 25
th
percentile relative valuation multiples
of the selected public companies. The results of the selected public companies analysis are summarized below:
|
|
Price /
|
|
|
TBV per Share
|
|
LTM EPS
|
75
th
Percentile
|
|
|
178
|
%
|
|
|
20.0
|
x
|
Mean
|
|
|
158
|
%
|
|
|
19.0
|
x
|
Median
|
|
|
152
|
%
|
|
|
18.2
|
x
|
25
th
Percentile
|
|
|
139
|
%
|
|
|
17.9
|
x
|
|
|
|
|
|
|
|
|
|
Implied Transaction Metric
|
|
|
181
|
%
|
|
|
20.4
|
x
|
Furthermore, Raymond James applied the 75
th
percentile, mean, median and 25
th
percentile relative valuation multiples for each of the metrics to First South’s
actual financial results and then divided those values by Carolina Financial’s 20-day volume-weighted average closing price
of $30.62 as of June 8, 2017 to derive an implied exchange ratio for shares of First South common stock. Raymond James then compared
those implied exchange ratios to the exchange ratio of 0.5200. The results of this are summarized below:
|
|
Price /
|
|
|
TBV per Share
|
|
LTM EPS
|
75
th
Percentile
|
|
|
0.5114
|
|
|
|
0.5083
|
|
Mean
|
|
|
0.4528
|
|
|
|
0.4842
|
|
Median
|
|
|
0.4357
|
|
|
|
0.4630
|
|
25
th
Percentile
|
|
|
0.3992
|
|
|
|
0.4565
|
|
|
|
|
|
|
|
|
|
|
Exchange Ratio
|
|
|
0.5200
|
|
|
|
0.5200
|
|
Selected Transaction Analysis.
Raymond
James analyzed publicly available information relating to selected transactions announced since January 1, 2016 involving targets
headquartered in the Southeast with (i) total assets between $500 million and $2.0 billion; (ii) LTM ROAA between 0.50% and 1.25%;
(iii) tangible common equity to tangible assets ratio between 6.0% and 12.0%; and (iv) NPAs / Assets less than 3.00%. Raymond
James also analyzed publicly available information relating to selected national transactions announced in the twelve-month period
ended June 8, 2017 involving targets headquartered in the United States with (i) total assets between $500 million and $2.0 billion;
(ii) LTM ROAA between 0.50% and 1.25%; (iii) tangible common equity to tangible assets ratio between 6.0% and 12.0%; and (iv)
NPAs / Assets less than 3.00%. Financial data for the selected targets were based on the most recent twelve month period reported
as of June 8, 2017. Both regional and national selected transaction analyses excluded (i) transactions without publicly disclosed
deal value or key financial information; (ii) transactions with cumulative equity ownership acquired less than 100%; (iii) investor
recapitalizations; and (iv) mergers of equals transactions. Profitability metrics, including LTM ROAA and LTM EPS, for certain
target companies structured as Subchapter S corporations were adjusted to assume a normalized tax rate of 35%. Certain financial
and valuation metrics for the target Royal Bancshares of Pennsylvania, Inc. were adjusted to exclude its $4.3 million valuation
allowance reversal recorded in 2016. The selected transactions (with respective transaction announcement dates shown) used in
the analyses included:
Regional:
|
•
|
Acquisition
of Capstone Bancshares, Inc. by SmartFinancial, Inc. (05/22/17)
|
|
•
|
Acquisition
of Paragon Commercial Corporation by TowneBank (04/27/17)
|
|
•
|
Acquisition
of Metropolitan BancGroup, Inc. by Renasant Corporation (01/17/17)
|
|
•
|
Acquisition
of Gateway Financial Holdings of Florida, Inc. by CenterState Banks, Inc. (11/30/16)
|
|
•
|
Acquisition
of Platinum Bank Holding Company by CenterState Banks, Inc. (10/18/16)
|
|
•
|
Acquisition
of Carolina Bank Holdings, Inc. by First Bancorp (06/22/16)
|
|
•
|
Acquisition
of Southeastern Bank Financial Corporation by South State Corporation (06/17/16)
|
|
•
|
Acquisition
of Citizens National Bank by Simmons First National Corporation (05/18/16)
|
|
•
|
Acquisition
of Avenue Financial Holdings, Inc. by Pinnacle Financial Partners, Inc. (01/28/16)
|
National:
|
•
|
Acquisition
of Capstone Bancshares, Inc. by Smart Financial, Inc. (05/22/17)
|
|
•
|
Acquisition
of Paragon Commercial Corporation by TowneBank (04/27/17)
|
|
•
|
Acquisition
of Independence Alliance Banks, Inc. by First Merchants Corporation (02/17/17)
|
|
•
|
Acquisition
of Citywide Banks of Colorado, Inc. by Heartland Financial USA, Inc. (02/13/17)
|
|
•
|
Acquisition
of First Community Financial Partners, Inc. by First Busey Corporation (02/06/17)
|
|
•
|
Acquisition
of Royal Bancshares of Pennsylvania, Inc. by Bryn Mawr Bank Corporation (01/31/17)
|
|
•
|
Acquisition
of Metropolitan BancGroup, Inc. by Renasant Corporation (01/17/17)
|
|
•
|
Acquisition
of Sovereign Bancshares, Inc. by Veritex Holdings, Inc. (12/14/16)
|
|
•
|
Acquisition
of Heritage Oaks Bancorp by Pacific Premier Bancorp, Inc. (12/13/16)
|
|
•
|
Acquisition
of Gateway Financial Holdings of Florida, Inc. by CenterState Banks, Inc. (11/30/16)
|
|
•
|
Acquisition
of Merchants Bancshares, Inc. by Community Bank System, Inc. (10/24/16)
|
|
•
|
Acquisition
of Platinum Bank Holding Company by CenterState Banks, Inc. (10/18/16)
|
|
•
|
Acquisition
of Jefferson County Bancshares, Inc. by Enterprise Financial Services Corp (10/11/16)
|
|
•
|
Acquisition
of Ocean Shore Holding Co. by OceanFirst Financial Corp. (07/13/16)
|
|
•
|
Acquisition
of Carolina Bank Holdings, Inc. by First Bancorp (06/22/16)
|
|
•
|
Acquisition
of Southeastern Bank Financial Corporation by South State Corporation (06/17/16)
|
Raymond James examined valuation multiples
of transaction value compared to the target companies’ (i) most recent quarter tangible book value per share; (ii) most
recent LTM EPS; and (iii) core deposits (total deposits less time deposits greater than $100,000). All financial multiples—TBV,
LTM EPS, and core deposit premiums—greater than two standard deviations away from the unadjusted mean were considered not
meaningful. TBV per share and LTM EPS transaction valuation multiples were shown on a per share basis where possible, and if per
share valuation metrics were unavailable, aggregate pricing multiples were used. Valuation multiples based on core deposits were
based on aggregate transaction values. Raymond James reviewed the 75
th
percentile, mean, median and 25
th
percentile relative valuation multiples of the selected transactions. Furthermore, Raymond James applied the 75
th
percentile,
mean, median and 25
th
percentile relative valuation multiples to First South’s actual TBV per share, LTM EPS
and core deposits and divided those values by Carolina Financial’s 20-day volume-weighted average closing price of $30.62
as of June 8, 2017 to determine the implied exchange ratio for shares of First South common stock. Raymond James then compared
those implied exchange ratios to the exchange ratio of 0.5200. The results of the selected transactions analysis are summarized
below:
Regional:
|
|
Deal
Value per Share /
|
|
|
|
|
TBV per Share
|
|
Implied Exchange Ratio
|
75
th
Percentile
|
|
|
209
|
%
|
|
|
0.5993
|
|
Mean
|
|
|
183
|
%
|
|
|
0.5256
|
|
Median
|
|
|
183
|
%
|
|
|
0.5252
|
|
25
th
Percentile
|
|
|
155
|
%
|
|
|
0.4444
|
|
|
|
|
|
|
|
|
|
|
Implied Transaction Metric
|
|
|
181
|
%
|
|
|
0.5200
|
|
|
|
Deal
Value per Share /
|
|
|
|
|
LTM EPS
|
|
Implied Exchange Ratio
|
75
th
Percentile
|
|
|
22.1
|
x
|
|
|
0.5633
|
|
Mean
|
|
|
21.9
|
x
|
|
|
0.5586
|
|
Median
|
|
|
21.9
|
x
|
|
|
0.5576
|
|
25
th
Percentile
|
|
|
18.6
|
x
|
|
|
0.4734
|
|
|
|
|
|
|
|
|
|
|
Implied Transaction Metric
|
|
|
20.4
|
x
|
|
|
0.5200
|
|
|
|
Premium
/
|
|
|
|
|
Core Deposits
|
|
Implied Exchange Ratio
|
75
th
Percentile
|
|
|
13.5
|
%
|
|
|
0.6498
|
|
Mean
|
|
|
10.7
|
%
|
|
|
0.5763
|
|
Median
|
|
|
10.0
|
%
|
|
|
0.5564
|
|
25
th
Percentile
|
|
|
8.8
|
%
|
|
|
0.5239
|
|
|
|
|
|
|
|
|
|
|
Implied Transaction Metric
|
|
|
8.8
|
%
|
|
|
0.5200
|
|
National:
|
|
Deal
Value per Share /
|
|
|
|
|
TBV per Share
|
|
Implied Exchange Ratio
|
75
th
Percentile
|
|
|
196
|
%
|
|
|
0.5629
|
|
Mean
|
|
|
179
|
%
|
|
|
0.5147
|
|
Median
|
|
|
183
|
%
|
|
|
0.5252
|
|
25
th
Percentile
|
|
|
156
|
%
|
|
|
0.4470
|
|
|
|
|
|
|
|
|
|
|
Implied Transaction Metric
|
|
|
181
|
%
|
|
|
0.5200
|
|
|
|
Deal
Value per Share /
|
|
|
|
|
LTM EPS
|
|
Implied Exchange Ratio
|
75
th
Percentile
|
|
|
22.9
|
x
|
|
|
0.5836
|
|
Mean
|
|
|
21.8
|
x
|
|
|
0.5548
|
|
Median
|
|
|
21.4
|
x
|
|
|
0.5443
|
|
25
th
Percentile
|
|
|
19.9
|
x
|
|
|
0.5071
|
|
|
|
|
|
|
|
|
|
|
Implied Transaction Metric
|
|
|
20.4
|
x
|
|
|
0.5200
|
|
|
|
Premium /
|
|
|
|
|
Core Deposits
|
|
Implied Exchange Ratio
|
75
th
Percentile
|
|
|
15.5
|
%
|
|
|
0.7054
|
|
Mean
|
|
|
11.7
|
%
|
|
|
0.6007
|
|
Median
|
|
|
10.4
|
%
|
|
|
0.5670
|
|
25
th
Percentile
|
|
|
8.6
|
%
|
|
|
0.5197
|
|
|
|
|
|
|
|
|
|
|
Implied Transaction Metric
|
|
|
8.8
|
%
|
|
|
0.5200
|
|
Discounted Cash Flow Analysis.
Raymond
James analyzed the discounted present value of First South’s projected free cash flows for the years ending December 31,
2017 through December 31, 2022 on a stand-alone basis. Raymond James used tangible common equity in excess of a target ratio of
8.0% at the end of each projection period for free cash flow.
The discounted cash flow analysis was based
on the Projections. Consistent with the periods included in the Projections, Raymond James used calendar year 2022 as the final
year for the analysis and applied multiples, ranging from 12.0x to 18.0x, to calendar year 2022 adjusted net income in order to
derive a range of terminal values for First South in 2022. Raymond James selected a range of terminal price-to-earnings multiples
based upon the long-term average of the price-to-earnings multiple of selected banking indexes and current multiples for similar
public companies.
The projected free cash flows and terminal
values were discounted using rates ranging from 11.4% to 13.4%. The resulting range of equity values was adjusted for options
outstanding and divided by the number of diluted shares outstanding in order to arrive at a range of present values per First
South share. The aforementioned present values were divided by Carolina Financial’s 20-day volume-weighted average closing
price of $30.62 as of June 8, 2017 to derive a range of implied exchange ratios. Raymond James reviewed the range of exchange
ratios derived in the discounted cash flow analysis and compared them to the exchange ratio in the merger. The results of the
discounted cash flow analysis are summarized below:
|
|
|
|
|
Implied
Exchange Ratio
|
Maximum
|
|
|
0.5807
|
|
Minimum
|
|
|
0.3742
|
|
|
|
|
|
|
Exchange Ratio
|
|
|
0.5200
|
|
Additional Considerations.
The preparation
of a fairness opinion is a complex process and is not susceptible to a partial analysis or summary description. Raymond James
believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering the
analyses taken as a whole, would create an incomplete view of the process underlying its opinion. In addition, Raymond James considered
the results of all such analyses and did not assign relative weights to any of the analyses, but rather made qualitative judgments
as to significance and relevance of each analysis and factor, so the ranges of valuations resulting from any particular analysis
described above should not be taken to be the view of Raymond James as to the actual value of First South.
In performing its analyses, Raymond James
made numerous assumptions with respect to industry performance, general business, economic and regulatory conditions and other
matters, many of which are beyond the control of First South. The analyses performed by Raymond James are not necessarily indicative
of actual values, trading values or actual future results which might be achieved, all of which may be significantly more or less
favorable than suggested by such analyses. Such analyses were provided to the First South board of directors (solely in each director’s
capacity as such) and were prepared solely as part of the analysis of Raymond James of the fairness, from a financial point of
view, to the holders of shares of First South common stock of the exchange ratio to be received by such holders in connection
with the proposed merger pursuant to the merger agreement. The analyses do not purport to be appraisals or to reflect the prices
at which companies may actually be sold, and such estimates are inherently subject to uncertainty. The opinion of Raymond James
was one of many factors taken into account by the First South board in making its determination to approve the merger. Neither
Raymond James’ opinion, nor the analyses described above should be viewed as determinative of the First South board’s
or First South management’s views with respect to First South, Carolina Financial, or the merger. Raymond James provided
advice to the First South board of directors with respect to the proposed transaction. Raymond James did not, however, determine
the amount of consideration, recommend any specific amount of consideration to the First South board or recommend that any specific
consideration constituted the only appropriate consideration for the merger. First South placed no limits on the scope of the
analysis performed, or opinion expressed, by Raymond James.
The Raymond James opinion was necessarily
based upon market, economic, financial and other circumstances and conditions existing and disclosed to it as of June 8, 2017,
and any material change in such circumstances and conditions may require a reevaluation of the opinion of Raymond James, but Raymond
James does not have any obligation to update, revise or reaffirm its opinion. Raymond James relied upon and assumed, without independent
verification, that there had been no change in the business, assets, liabilities, financial condition, results of operations,
cash flows or prospects of First South since the respective dates of the most recent financial statements and other information,
financial or otherwise, provided to Raymond James that would be material to its analyses or its opinion, and that there was no
information or any facts that would make any of the information reviewed by Raymond James incomplete or misleading in any material
respect.
During the two years preceding the date of
Raymond James’ written opinion, Raymond James has been engaged by or otherwise performed services for First South for which
it was paid a fee (separately from any amounts that were paid to Raymond James under the engagement letter described in this joint
proxy statement/prospectus pursuant to which Raymond James was retained as a financial advisor to First South to assist
in reviewing strategic alternatives).
First South paid Raymond James a retainer
of $25,000 upon execution of the engagement letter. For services rendered in connection with the delivery of its opinion, First
South paid Raymond James, upon delivery of the opinion, a customary investment banking fee of $250,000. First South will also
pay Raymond James a customary fee for advisory services in connection with the merger of 1.20% of the implied value of the merger
(less the fee paid upon delivery of the opinion, the amount of which shall be deducted), all of which is contingent upon the closing
of the merger. First South agreed to reimburse Raymond James up to $15,000 for its expenses incurred in connection with its services,
including the fees and expenses of its counsel, and will indemnify Raymond James against certain liabilities arising out of its
engagement. In the event that, subject to certain conditions, First South is the target of a hostile takeover, First South has
agreed to pay Raymond James an additional retainer of $50,000, with additional amounts due during the pendency of the term of
the engagement letter, plus additional reimbursement of legal fees of up to $25,000. In addition, Raymond James will be entitled
to 25.0% of any break-up or termination fee received by First South in connection with a termination of the merger agreement (up
to the amount that Raymond James would have received had the merger been closed).
Raymond James is actively involved in the
investment banking business and regularly undertakes the valuation of investment securities in connection with public offerings,
private placements, business combinations and similar transactions. In the ordinary course of business, Raymond James may trade
in the securities of First South and Carolina Financial for its own account and for the accounts of its customers and, accordingly,
may at any time hold a long or short position in such securities. Raymond James has provided certain services to Carolina Financial
(in the previous two years), including serving as bookrunning manager for its 2015 and 2017 public offerings of common equity,
for which it has been paid fees in the aggregate amount of $2.6 million. In addition, Raymond James served as financial advisor
to Greer Bancshares Incorporated in connection with its acquisition by Carolina Financial, for which Raymond James received fees
of $0.8 million. Furthermore, Raymond James may provide investment banking, financial advisory and other financial services to
First South and/or Carolina Financial or other participants in the merger in the future, for which Raymond James may receive compensation.
Opinion of Carolina Financial’s
Financial Advisor
Carolina Financial engaged KBW to render
financial advisory and investment banking services to Carolina Financial, including an opinion to the Carolina Financial board
of directors as to the fairness, from a financial point of view, to Carolina Financial of the exchange ratio in the proposed merger.
Carolina Financial selected KBW because KBW is a nationally recognized investment banking firm with substantial experience in transactions
similar to the merger. As part of its investment banking business, KBW is continually engaged in the valuation of financial services
businesses and their securities in connection with mergers and acquisitions.
As part of its engagement, representatives
of KBW attended the meeting of the Carolina Financial board held on June 9, 2017 at which the Carolina Financial board evaluated
the proposed merger. At this meeting, KBW reviewed the financial aspects of the proposed merger and rendered an opinion to the
effect that, as of such date and subject to the procedures followed, assumptions made, matters considered, and qualifications and
limitations on the review undertaken by KBW as set forth in such opinion, the exchange ratio in the proposed merger was fair, from
a financial point of view, to Carolina Financial. The Carolina Financial board approved the merger agreement at this meeting.
The description of the opinion set forth
herein is qualified in its entirety by reference to the full text of the opinion, which is attached as
Annex
B
to this document and is incorporated herein by reference, and describes the procedures followed, assumptions made, matters
considered, and qualifications and limitations on the review undertaken by KBW in preparing the opinion.
KBW’s opinion speaks only as
of the date of the opinion. The opinion was for the information of, and was directed to, the Carolina Financial board (in its capacity
as such) in connection with its consideration of the financial terms of the merger. The opinion addressed only the fairness, from
a financial point of view, of the exchange ratio in the merger to Carolina Financial. It did not address the underlying business
decision of Carolina Financial to engage in the merger or enter into the merger agreement or constitute a recommendation to the
Carolina Financial board in connection with the merger, and it does not constitute a recommendation to any holder of Carolina Financial
common stock or any stockholder of any other entity as to how to vote in connection with the merger or any other matter, nor does
it constitute a recommendation as to whether or not any such stockholder should enter into a voting, stockholders’, affiliates’
or other agreement with respect to the merger or exercise any dissenters’ or appraisal rights that may be available to such
stockholder.
KBW’s opinion was reviewed and
approved by KBW’s Fairness Opinion Committee in conformity with its policies and procedures established under the requirements
of Rule 5150 of the Financial Industry Regulatory Authority.
In connection with the opinion, KBW reviewed,
analyzed and relied upon material bearing upon the financial and operating condition of Carolina Financial and First South and
bearing upon the merger, including, among other things:
|
·
|
a draft of the merger agreement, dated June 8, 2017 (the most recent draft then made available to KBW);
|
|
·
|
the audited financial statements and the Annual Reports on Form 10-K for the three fiscal years ended December 31, 2016
of Carolina Financial;
|
|
·
|
the unaudited quarterly financial statements and the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2017
of Carolina Financial;
|
|
·
|
the audited financial statements and the Annual Reports on Form 10-K for the three fiscal years ended December 31, 2016 of
First South;
|
|
·
|
the unaudited quarterly financial statements and the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2017
of First South;
|
|
·
|
certain regulatory filings of Carolina Financial and First South and their respective subsidiaries, including the quarterly
reports on Form FRY-9C and quarterly call reports filed with respect to each quarter during the three year period ended December
31, 2016 and the quarter ended March 31, 2017;
|
|
·
|
certain other interim reports and other communications of Carolina Financial and First South to their respective stockholders;
and
|
|
·
|
other financial information concerning the respective businesses and operations of Carolina Financial and First South that
was furnished to KBW by Carolina Financial and First South or which KBW was otherwise directed to use for purposes of its analysis.
|
KBW’s consideration of financial
information and other factors that it deemed appropriate under the circumstances or relevant to its analyses included, among others,
the following:
|
·
|
the historical and current financial position and results of operations of Carolina Financial and First South;
|
|
·
|
the assets and liabilities of Carolina Financial and First South;
|
|
·
|
the nature and terms of certain other merger transactions and business combinations in the banking industry;
|
|
·
|
a comparison of certain financial and stock market information of Carolina Financial and First South with similar information
for certain other companies, the securities of which were publicly traded;
|
|
·
|
financial and operating forecasts and projections of First South with respect to the 2017 fiscal year that were prepared by,
and provided to KBW and discussed with KBW by, First South management and that were used and relied upon by KBW based on such discussions,
at the direction of such management and with the consent of the Carolina Financial board;
|
|
·
|
financial and
operating forecasts and projections of First South with respect to the period from the
2018 fiscal year through the 2020 fiscal year that were prepared by Carolina Financial
management, as well as assumed First South long-term growth rates with respect to periods
thereafter, all of which information was provided to KBW and discussed with KBW by Carolina
Financial management and used and relied upon by KBW at the direction of such management
and with the consent of the Carolina Financial board;
|
|
·
|
publicly available consensus “street estimates” of Carolina Financial, as well as assumed Carolina Financial long
term growth rates provided to KBW by Carolina Financial management, all of which information was discussed with KBW by such management
and used and relied upon by KBW at the direction of such management and with the consent of the Carolina Financial board; and
|
|
·
|
estimates regarding certain pro forma financial effects of the merger on Carolina Financial (including without limitation the
cost savings and related expenses expected to result or be derived from the merger) that were prepared by Carolina Financial management,
provided to and discussed with KBW by such management, and used and relied upon by KBW at the direction of such management and
with the consent of the Carolina Financial board.
|
KBW also performed such other studies
and analyses as it considered appropriate and took into account its assessment of general economic, market and financial conditions
and its experience in other transactions, as well as its experience in securities valuation and knowledge of the banking industry
generally. KBW also participated in discussions that were held by the managements of Carolina Financial and First South regarding
the past and current business operations, regulatory relations, financial condition and future prospects of their respective companies
and such other matters as KBW deemed relevant to its inquiry.
In conducting its review and arriving
at its opinion, KBW relied upon and assumed the accuracy and completeness of all of the financial and other information provided
to it or that was publicly available and KBW did not independently verify the accuracy or completeness of any such information
or assume any responsibility or liability for such verification, accuracy or completeness. KBW relied upon the management of First
South, with the consent of Carolina Financial, as to the reasonableness and achievability of the financial and operating forecasts
and projections of First South with respect to the 2017 fiscal year referred to above (and the assumptions and bases therefor),
and KBW assumed that such forecasts and projections were reasonably prepared and represented the best currently available estimates
and judgments of First South management with respect to such fiscal year and that such forecasts and projections would be realized
in the amounts and in the time periods estimated by such management. In addition, KBW relied upon the management of Carolina Financial
as to the reasonableness and achievability of the financial and operating forecasts and projections of First South with respect
to the period from the 2018 fiscal year through the 2020 fiscal year, as well as assumed First South long-term growth rates with
respect to periods thereafter, all as referred to above (and the assumptions and bases for all such information) and KBW assumed
that all such information was reasonably prepared and represented the best currently available estimates and judgments of Carolina
Financial management and that the forecasts, projections and estimates contained in such information would be realized in the
amounts and in the time periods estimated by such management. KBW further relied upon the management of Carolina Financial as
to the reasonableness and achievability of the publicly available consensus “street estimates” of Carolina Financial,
the assumed Carolina Financial long-term growth rates and the estimates regarding certain pro forma financial effects of the merger
on Carolina Financial (including, without limitation, the cost savings and related expenses expected to result or be derived from
the merger) referred to above and the assumptions set forth in and the bases for such information. KBW assumed, at the direction
of Carolina Financial, that all such information was reasonably prepared and represented, or in the case of the publicly available
consensus “street estimates” of Carolina Financial referred to above that such estimates were consistent with, the
best currently available estimates and judgments of Carolina Financial management, and that the forecasts, projections and estimates
reflected in such information would be realized in the amounts and in the time periods estimated.
It is understood that the forecasts,
projections and estimates of Carolina Financial and First South that were provided to and discussed with KBW were not prepared
with the expectation of public disclosure, that all such forecasts, projections and estimates, together with the publicly available
consensus “street estimates” of Carolina Financial referred to above, were based on numerous variables and assumptions
that are inherently uncertain, including, without limitation, factors related to general economic and competitive conditions and
that, accordingly, actual results could vary significantly from those set forth in such information. KBW assumed, based on discussions
with the respective managements of Carolina Financial and First South and with the consent of the Carolina Financial board, that
all such information provided a reasonable basis upon which KBW could form its opinion and KBW expressed no view as to any such
information or the assumptions or bases therefor. KBW relied on all such information without independent verification or analysis
and did not in any respect assume any responsibility or liability for the accuracy or completeness thereof.
KBW also assumed that there were no material
changes in the assets, liabilities, financial condition, results of operations, business or prospects of either Carolina Financial
or First South since the date of the last financial statements of each such entity that were made available to KBW and that KBW
was directed to use. KBW is not an expert in the independent verification of the adequacy of allowances for loan and lease losses
and KBW assumed, without independent verification and with Carolina Financial’s consent, that the aggregate allowances for
loan and lease losses for each of Carolina Financial and First South are adequate to cover such losses. In rendering its opinion,
KBW did not make or obtain any evaluations or appraisals or physical inspection of the property, assets or liabilities (contingent
or otherwise) of Carolina Financial or First South, the collateral securing any of such assets or liabilities, or the collectability
of any such assets, nor did KBW examine any individual loan or credit files, nor did it evaluate the solvency, financial capability
or fair value of Carolina Financial or First South under any state or federal laws, including those relating to bankruptcy, insolvency
or other matters. Estimates of values of companies and assets do not purport to be appraisals or necessarily reflect the prices
at which companies or assets may actually be sold. Because such estimates are inherently subject to uncertainty, KBW assumed no
responsibility or liability for their accuracy.
KBW assumed, in all respects material
to its analyses:
|
·
|
the merger and any related transactions (including the subsidiary bank merger) would be completed substantially in accordance
with the terms set forth in the merger agreement (the final terms of which KBW assumed would not differ in any respect material
to its analyses from the draft version of the merger agreement that had been reviewed by KBW and referred to above) with no adjustments
to the exchange ratio and with no other consideration or payments in respect of First South common stock;
|
|
·
|
the representations and warranties of each party in the merger agreement and in all related documents and instruments referred
to in the merger agreement were true and correct;
|
|
·
|
each party to the merger agreement or any of the related documents would perform all of the covenants and agreements required
to be performed by such party under such documents;
|
|
·
|
that there are no factors that would delay or subject to any adverse conditions, any necessary regulatory or governmental approval
for the merger or any related transaction (including the subsidiary bank merger) and that all conditions to the completion of the
merger and any such related transaction would be satisfied without any waivers or modifications to the merger agreement or any
of the related documents; and
|
|
·
|
in the course of obtaining the necessary regulatory, contractual, or other consents or approvals for the merger and any related
transactions (including the subsidiary bank merger), no restrictions, including any divestiture requirements, termination or other
payments or amendments or modifications, would be imposed that would have a material adverse effect on the future results of operations
or financial condition of Carolina Financial, First South, the pro forma entity or the contemplated benefits of the merger, including
without limitation the cost savings and related expenses expected to result or be derived from the merger.
|
KBW assumed that the merger would be
consummated in a manner that complied with the applicable provisions of the Securities Act, the Exchange Act, and all other applicable
federal and state statutes, rules and regulations. KBW was further advised by representatives of Carolina Financial that Carolina
Financial relied upon advice from its advisors (other than KBW) or other appropriate sources as to all legal, financial reporting,
tax, accounting and regulatory matters with respect to Carolina Financial, First South, the merger and any related transaction
(including the subsidiary bank merger), and the merger agreement. KBW did not provide advice with respect to any such matters.
KBW’s opinion addressed only the
fairness, from a financial point of view, as of the date of such opinion, of the exchange ratio in the merger to Carolina Financial.
KBW expressed no view or opinion as to any other terms or aspects of the merger or any term or aspect of any related transaction
(including the subsidiary bank merger), including without limitation, the form or structure of the merger or any such related transaction,
any consequences of the merger to Carolina Financial, its stockholders, creditors or otherwise, or any terms, aspects, merits or
implications of any employment, retention, consulting, voting, support, cooperation, stockholder or other agreements, arrangements
or understandings contemplated or entered into in connection with the merger, any such related transaction, or otherwise. KBW’s
opinion was necessarily based upon conditions as they existed and could be evaluated on the date of such opinion and the information
made available to KBW through such date. Developments subsequent to the date of KBW’s opinion may have affected, and may
affect, the conclusion reached in KBW’s opinion and KBW did not and does not have an obligation to update, revise or reaffirm
its opinion. For purposes of its analyses, KBW did not incorporate recently-announced proposed changes to United States tax laws
regarding corporate tax rates. KBW’s opinion did not address, and KBW expressed no view or opinion with respect to:
|
·
|
the underlying business decision of Carolina Financial to engage in the merger or enter into the merger agreement;
|
|
·
|
the relative merits of the merger as compared to any strategic alternatives that are, have been or may be available to or contemplated
by Carolina Financial or the Carolina Financial board;
|
|
·
|
any business, operational or other plans with respect to First South or the pro forma entity that may be currently contemplated
by Carolina Financial or the Carolina Financial board or that may be implemented subsequent to the closing of the merger;
|
|
·
|
the fairness of the amount or nature of any compensation to any of Carolina Financial’s officers, directors or employees,
or any class of such persons, relative to any compensation to the holders of Carolina Financial common stock or relative to the
exchange ratio;
|
|
·
|
the effect of the merger or any related transaction (including the subsidiary bank merger) on, or the fairness of the consideration
to be received by, holders of any class of securities of Carolina Financial, First South or any other party to any transaction
contemplated by the merger agreement;
|
|
·
|
any adjustment (as provided in the merger agreement) to the exchange ratio assumed for purposes of KBW’s opinion;
|
|
·
|
the actual value of Carolina Financial common stock to be issued in connection with the merger;
|
|
·
|
the prices, trading range or volume at which Carolina Financial common stock or First South common stock would trade following
the public announcement of the merger or the prices, trading range or volume at which Carolina Financial common stock would trade
following the consummation of the merger;
|
|
·
|
any advice or opinions provided by any other advisor to any of the parties to the merger or any other transaction contemplated
by the merger agreement; or
|
|
·
|
any legal, regulatory, accounting, tax or similar matters relating to Carolina Financial, First South, any of their respective
stockholders, or relating to or arising out of or as a consequence of the merger or any other related transaction (including the
subsidiary bank merger), including whether or not the merger would qualify as a tax-free reorganization for United States federal
income tax purposes.
|
In performing its analyses, KBW made
numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other
matters, which are beyond the control of KBW, Carolina Financial and First South. Any estimates contained in the analyses performed
by KBW are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than
suggested by these analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or
to reflect the prices at which such businesses or securities might actually be sold. Accordingly, these analyses and estimates
are inherently subject to substantial uncertainty. In addition, the KBW opinion was among several factors taken into consideration
by the Carolina Financial board in making its determination to approve the merger agreement and the merger. Consequently, the analyses
described below should not be viewed as determinative of the decision of the Carolina Financial board with respect to the fairness
of the exchange ratio. The type and amount of consideration payable in the merger were determined through negotiation between Carolina
Financial and First South and the decision of Carolina Financial to enter into the merger agreement was solely that of the Carolina
Financial board.
The following is a summary of the material
financial analyses presented by KBW to the Carolina Financial board in connection with its opinion. The summary is not a complete
description of the financial analyses underlying the opinion or the presentation made by KBW to the Carolina Financial board, but
summarizes the material analyses performed and presented in connection with such opinion. The financial analyses summarized below
include information presented in tabular format. The tables alone do not constitute a complete description of the financial analyses.
The preparation of a fairness opinion is a complex analytic process involving various determinations as to appropriate and relevant
methods of financial analysis and the application of those methods to the particular circumstances. Therefore, a fairness opinion
is not readily susceptible to partial analysis or summary description. In arriving at its opinion, KBW did not attribute any particular
weight to any analysis or factor that it considered, but rather made qualitative judgments as to the significance and relevance
of each analysis and factor. Accordingly, KBW believes that its analyses and the summary of its analyses must be considered as
a whole and that selecting portions of its analyses and factors or focusing on the information presented below in tabular format,
without considering all analyses and factors or the full narrative description of the financial analyses, including the methodologies
and assumptions underlying the analyses, could create a misleading or incomplete view of the process underlying its analyses and
opinion.
For purposes of the financial analyses
described below, KBW utilized an implied transaction value for the proposed merger of $155.8 million, or $16.28 per outstanding
share of First South common stock, based on the 0.52x exchange ratio in the proposed merger and the closing price of Carolina Financial
common stock on June 8, 2017. In addition to the financial analyses described below, KBW reviewed with the Carolina Financial board
for informational purposes, among other things, implied transaction multiples for the proposed merger, based on the implied transaction
value for the proposed merger of $16.28 per outstanding share of First South common stock, of 19.9x First South’s estimated
2017 earnings per share (“EPS”) and 18.4x First South’s estimated 2018 EPS using estimates for First South provided
by First South management for 2017 and Carolina Financial management for 2018.
Carolina Financial Selected Companies
Analysis
.
Using publicly available information, KBW compared the financial performance, financial condition and market
performance of Carolina Financial to 11 selected banks that were listed on NASDAQ, the New York Stock Exchange or NYSE MKT and
headquartered in the Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee
with total assets between $1.5 billion and $5.0 billion and Nonperforming Assets / Loans + OREO less than 2.0%. Merger targets
were excluded from the selected companies.
The selected companies were as follows:
Atlantic Capital Bancshares, Inc.
|
|
Home Bancorp, Inc.
|
Bear State Financial, Inc.
|
|
Live Oak Bancshares, Inc.
|
FB Financial Corporation
|
|
National Commerce Corporation
|
First Bancorp
|
|
Seacoast Banking Corporation of Florida
|
First Bancshares, Inc.
|
|
State Bank Financial Corporation
|
Franklin Financial Network, Inc.
|
|
|
To perform this analysis, KBW used profitability
data and other financial information as of, or for the most recent available completed fiscal quarter (“MRQ”) or latest
12 months (“LTM”) period ended, March 31, 2017 and market price information as of June 8, 2017. KBW also used 2017
and 2018 EPS estimates taken from consensus “street estimates” for Carolina Financial and, to the extent available,
the selected companies. Certain financial data prepared by KBW, as referenced in the tables presented below, may not correspond
to the data presented in Carolina Financial’s historical financial statements, or the data prepared by Raymond James
presented under the section “The Merger — Opinion of First South’s Financial Advisor,”
as a result of the different periods, assumptions and methods used by KBW to compute the financial data presented.
KBW’s analysis showed the following
concerning the financial performance of Carolina Financial and the selected companies:
|
|
|
|
Selected Companies
|
|
|
Carolina Financial
|
|
25
th
Percentile
|
|
Median
|
|
Average
|
|
75
th
Percentile
|
MRQ Core Return on Average Assets (%)
(1)
|
|
|
1.30
|
|
|
|
0.93
|
|
|
|
1.06
|
|
|
|
1.05
|
|
|
|
1.25
|
|
MRQ Core Return on Average Equity (%)
(1)
|
|
|
10.91
|
|
|
|
8.97
|
|
|
|
9.48
|
|
|
|
9.56
|
|
|
|
10.50
|
|
MRQ Core Return on Average Tangible Common Equity (%)
(1)
|
|
|
12.49
|
|
|
|
10.49
|
|
|
|
11.47
|
|
|
|
11.28
|
|
|
|
12.77
|
|
MRQ Net Interest Margin (%)
|
|
|
3.73
|
|
|
|
3.65
|
|
|
|
3.99
|
|
|
|
3.88
|
|
|
|
4.17
|
|
MRQ Efficiency Ratio (%)
|
|
|
63.2
|
|
|
|
59.1
|
|
|
|
51.3
|
|
|
|
64.7
|
|
|
|
71.1
|
|
LTM Gain on Sale of Securities
|
|
|
20.4
|
|
|
|
4.3
|
|
|
|
7.8
|
|
|
|
13.5
|
|
|
|
9.2
|
|
|
(1)
|
Core Income excluded extraordinary items, non-recurring items and gains / (losses) on sale of securities and non-controlling
interests and included amortization of intangibles and goodwill impairment.
|
KBW’s analysis also showed the
following concerning the financial condition of Carolina Financial and the selected companies:
|
|
|
|
Selected Companies
|
|
|
Carolina Financial
|
|
25
th
Percentile
|
|
Median
|
|
Average
|
|
75
th
Percentile
|
Tangible Common Equity / Tangible Assets (%)
|
|
|
10.58
|
|
|
|
8.31
|
|
|
|
9.04
|
|
|
|
9.50
|
|
|
|
10.61
|
|
Leverage Ratio (%)
|
|
|
14.52
|
|
|
|
9.07
|
|
|
|
10.32
|
|
|
|
10.09
|
|
|
|
10.82
|
|
CET1 Ratio
|
|
|
14.73
|
|
|
|
10.66
|
|
|
|
11.32
|
|
|
|
11.88
|
|
|
|
12.86
|
|
Total Risk Based Capital Ratio (%)
|
|
|
16.94
|
|
|
|
12.82
|
|
|
|
13.77
|
|
|
|
13.69
|
|
|
|
14.73
|
|
Loans / Deposits (%)
|
|
|
89.0
|
|
|
|
82.6
|
|
|
|
87.7
|
|
|
|
86.1
|
|
|
|
91.6
|
|
Loan Loss Reserve / Gross Loans (%)
|
|
|
0.74
|
|
|
|
1.03
|
|
|
|
0.93
|
|
|
|
0.92
|
|
|
|
0.77
|
|
Nonperforming Assets / Loans + OREO (%)
|
|
|
0.89
|
|
|
|
1.50
|
|
|
|
0.83
|
|
|
|
0.98
|
|
|
|
0.47
|
|
LTM Net Charge-Offs / Average Loans (%)
|
|
|
(0.04
|
)
|
|
|
0.09
|
|
|
|
0.03
|
|
|
|
0.06
|
|
|
|
(0.00
|
)
|
In addition, KBW’s analysis showed
the following concerning the market performance of Carolina Financial and, to the extent available, the selected companies:
|
|
|
|
Selected Companies
|
|
|
Carolina Financial
|
|
25
th
Percentile
|
|
Median
|
|
Average
|
|
75
th
Percentile
|
One – Year Stock Price Change (%)
|
|
|
80.8
|
|
|
|
26.9
|
|
|
|
40.6
|
|
|
|
42.9
|
|
|
|
59.9
|
|
One – Year Total Return (%)
|
|
|
81.9
|
|
|
|
27.8
|
|
|
|
40.6
|
|
|
|
43.8
|
|
|
|
60.6
|
|
Stock Price / Tangible Book Value per Share (%)
|
|
|
224
|
|
|
|
188
|
|
|
|
198
|
|
|
|
225
|
|
|
|
236
|
|
Stock Price / 2017 EPS Estimate (x)
(1)
|
|
|
17.0
|
|
|
|
15.9
|
|
|
|
18.9
|
|
|
|
19.4
|
|
|
|
19.9
|
|
Stock Price / 2018 EPS Estimate (x)
(1)
|
|
|
14.9
|
|
|
|
13.5
|
|
|
|
14.8
|
|
|
|
15.5
|
|
|
|
16.8
|
|
Dividend Yield (%)
(2)
|
|
|
0.5
|
|
|
|
0.7
|
|
|
|
1.2
|
|
|
|
1.1
|
|
|
|
1.4
|
|
MRQ Dividend Payout Ratio (%)
(2)
|
|
|
11.4
|
|
|
|
19.9
|
|
|
|
23.3
|
|
|
|
25.9
|
|
|
|
29.3
|
|
|
(1)
|
Consensus “street estimates” were not available for one of the selected companies.
|
|
(2)
|
Dividend yield and MRQ dividend payout ratio reflected most recent quarterly dividend annualized as a percentage of stock price
and annualized MRQ EPS, respectively. Five of the selected companies did not pay dividends in its most recent completed quarter.
|
No company used as a comparison in the
above selected companies analysis is identical to Carolina Financial. Accordingly, an analysis of these results is not mathematical.
Rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the
companies involved.
First South Selected Companies
Analysis
.
Using publicly available information, KBW compared the financial performance, financial condition and market
performance of First South to 13 selected banks that were listed on NASDAQ, the New York Stock Exchange or NYSE MKT and headquartered
in Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia with
total assets between $750 million and $1.5 billion and NPAs / Loans + OREO less than 2.0%. Merger targets and institutions involved
in a pending merger of equals were excluded from the selected companies.
The selected companies were as follows:
Auburn National Bancorporation, Inc.
|
|
National Bankshares, Inc.
|
C&F Financial Corporation
|
|
Peoples Bancorp of North Carolina, Inc.
|
CapStar Financial Holdings, Inc.
|
|
Select Bancorp, Inc.
|
Charter Financial Corporation
|
|
SmartFinancial, Inc.
|
Commerce Union Bancshares, Inc.
|
|
Southern First Bancshares, Inc.
|
Community Bankers Trust Corporation
|
|
Sunshine Bancorp, Inc.
|
First Community Corporation
|
|
|
To perform this analysis, KBW used profitability
data and other financial information as of, or for the most recent available completed fiscal quarter or latest 12 months period
ended, March 31, 2017 and market price information as of June 8, 2017. KBW also used 2017 and 2018 EPS estimates taken from consensus
“street estimates” for the selected companies (to the extent available) and estimates for First South provided by
First South management for 2017 and Carolina Financial management for 2018. Where consolidated holding company level financial
data for Sunshine Bancorp, Inc. was unreported, subsidiary bank level data was utilized to calculate ratios. Certain financial
data prepared by KBW, as referenced in the tables presented below, may not correspond to the data presented in First South’s
historical financial statements, or the data prepared Raymond James presented under the section “The Merger — Opinion
of First South’s Financial Advisor,” as a result of the different periods, assumptions and methods used by KBW to
compute the financial data presented.
KBW’s analysis showed the following
concerning the financial performance of First South and the selected companies:
|
|
|
|
Selected Companies
|
|
|
First South
|
|
25
th
Percentile
|
|
Median
|
|
Average
|
|
75
th
Percentile
|
MRQ Core Return on Average Assets (%)
(1)
|
|
|
0.75
|
|
|
|
0.78
|
|
|
|
0.88
|
|
|
|
0.81
|
|
|
|
0.90
|
|
MRQ Core Return on Average Equity (%)
(1)
|
|
|
8.57
|
|
|
|
6.28
|
|
|
|
8.14
|
|
|
|
7.49
|
|
|
|
8.58
|
|
MRQ Core Return on Average Tangible Common Equity (%)
(1)
|
|
|
9.17
|
|
|
|
7.43
|
|
|
|
8.86
|
|
|
|
8.09
|
|
|
|
9.24
|
|
MRQ Net Interest Margin (%)
|
|
|
3.66
|
|
|
|
3.47
|
|
|
|
3.65
|
|
|
|
3.82
|
|
|
|
4.02
|
|
MRQ Efficiency Ratio (%)
|
|
|
74.3
|
|
|
|
64.7
|
|
|
|
67.0
|
|
|
|
67.1
|
|
|
|
71.9
|
|
|
(1)
|
Core Income excluded extraordinary items, non-recurring items and gains / (losses) on sale of securities and non-controlling
interests and included amortization of intangibles and goodwill impairment.
|
KBW’s analysis also showed the
following concerning the financial condition of First South and the selected companies:
|
|
|
|
Selected Companies
|
|
|
First South
|
|
25
th
Percentile
|
|
Median
|
|
Average
|
|
75
th
Percentile
|
Tangible Common Equity / Tangible Assets (%)
|
|
|
8.08
|
|
|
|
9.08
|
|
|
|
9.89
|
|
|
|
10.22
|
|
|
|
11.34
|
|
Leverage Ratio (%)
|
|
|
8.89
|
|
|
|
10.30
|
|
|
|
10.50
|
|
|
|
11.30
|
|
|
|
12.37
|
|
CET1 Ratio
|
|
|
11.59
|
|
|
|
11.89
|
|
|
|
12.65
|
|
|
|
13.77
|
|
|
|
14.40
|
|
Total Risk Based Capital Ratio (%)
|
|
|
12.79
|
|
|
|
13.25
|
|
|
|
14.76
|
|
|
|
15.66
|
|
|
|
16.34
|
|
Loans / Deposits (%)
|
|
|
79.3
|
|
|
|
81.2
|
|
|
|
85.7
|
|
|
|
84.0
|
|
|
|
90.8
|
|
Loan Loss Reserve / Gross Loans (%)
|
|
|
1.23
|
|
|
|
1.27
|
|
|
|
1.08
|
|
|
|
1.24
|
|
|
|
0.99
|
|
Nonperforming Assets / Loans + OREO (%)
|
|
|
0.87
|
|
|
|
1.42
|
|
|
|
1.03
|
|
|
|
1.08
|
|
|
|
0.85
|
|
LTM Net Charge-Offs / Average Loans (%)
|
|
|
0.03
|
|
|
|
0.09
|
|
|
|
0.07
|
|
|
|
0.16
|
|
|
|
0.01
|
|
In addition, KBW’s analysis showed
the following concerning the market performance of First South and, to the extent available, the selected companies (excluding
the impact of the LTM EPS multiple for one of the selected companies, which multiple was considered to be not meaningful because
it was negative):
|
|
|
|
Selected Companies
|
|
|
First South
|
|
25
th
Percentile
|
|
Median
|
|
Average
|
|
75
th
Percentile
|
One – Year Stock Price Change (%)
|
|
|
54.2
|
|
|
|
23.5
|
|
|
|
41.0
|
|
|
|
37.7
|
|
|
|
48.0
|
|
One – Year Total Return (%)
|
|
|
56.0
|
|
|
|
23.6
|
|
|
|
42.5
|
|
|
|
39.2
|
|
|
|
50.9
|
|
Stock Price / Tangible Book Value per Share (%)
|
|
|
163
|
|
|
|
151
|
|
|
|
161
|
|
|
|
163
|
|
|
|
178
|
|
Stock Price / LTM EPS (x)
|
|
|
18.4
|
|
|
|
18.1
|
|
|
|
19.3
|
|
|
|
19.9
|
|
|
|
19.9
|
|
Stock Price / 2017 EPS Estimate (x)
(1)
|
|
|
17.5
|
|
|
|
17.3
|
|
|
|
18.4
|
|
|
|
20.4
|
|
|
|
25.8
|
|
Stock Price / 2018 EPS Estimate (x)
(1)
|
|
|
16.2
|
|
|
|
14.1
|
|
|
|
15.9
|
|
|
|
16.1
|
|
|
|
16.6
|
|
Dividend Yield (%)
(2)
|
|
|
1.0
|
|
|
|
1.6
|
|
|
|
1.8
|
|
|
|
2.0
|
|
|
|
2.7
|
|
MRQ Dividend Payout Ratio (%)
(2)
|
|
|
17.5
|
|
|
|
30.0
|
|
|
|
34.6
|
|
|
|
35.7
|
|
|
|
42.3
|
|
|
(1)
|
Consensus “street estimates” were not available for four of the selected companies.
|
|
(2)
|
Dividend yield and MRQ dividend payout ratio reflected most recent quarterly dividend annualized as a percentage of stock price
and annualized MRQ EPS, respectively. Eight of the selected companies did not pay dividends in its most recent completed quarter.
|
No company used as a comparison in the
above selected companies analysis is identical to First South. Accordingly, an analysis of these results is not mathematical.
Rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of
the companies involved.
Selected Transactions Analysis.
KBW reviewed publicly available information related to 25 selected U.S. bank and thrift transactions announced since January 1,
2016 with deal values between $100 million and $300 million. Merger-of-equals transactions were excluded from the selected transactions.
The selected transactions were as follows:
Acquiror
|
|
Acquired Company
|
Berkshire Hills Bancorp, Inc.
|
|
Commerce Bancshares Corp.
|
First Bancorp
|
|
ASB Bancorp, Inc.
|
First Busey Corporation
|
|
Mid Illinois Bancorp, Inc.
|
First Merchants Corporation
|
|
Independent Alliance Banks, Inc.
|
Heartland Financial USA, Inc.
|
|
Citywide Banks of Colorado, Inc.
|
FB Financial Corporation
|
|
American City Bank/Clayton Bank and Trust
|
First Busey Corporation
|
|
First Community Financial Partners, Inc.
|
Bryn Mawr Bank Corporation
|
|
Royal Bancshares of Pennsylvania, Inc.
|
Midland States Bancorp, Inc.
|
|
Centrue Financial Corporation
|
Renasant Corporation
|
|
Metropolitan BancGroup, Inc.
|
Veritex Holdings, Inc.
|
|
Sovereign Bancshares, Inc.
|
CenterState Banks, Inc.
|
|
Gateway Financial Holdings of Florida, Inc.
|
Enterprise Financial Services Corp
|
|
Jefferson County Bancshares, Inc.
|
First Commonwealth Financial Corporation
|
|
DCB Financial Corp
|
OceanFirst Financial Corp.
|
|
Ocean Shore Holding Co.
|
Berkshire Hills Bancorp, Inc.
|
|
First Choice Bank
|
Byline Bancorp, Inc.
|
|
Ridgestone Financial Services, Inc.
|
Bar Harbor Bankshares
|
|
Lake Sunapee Bank Group
|
WesBanco, Inc.
|
|
Your Community Bankshares, Inc.
|
Westfield Financial, Inc.
|
|
Chicopee Bancorp, Inc.
|
Guaranty Bancorp
|
|
Home State Bancorp
|
Midland Financial Co.
|
|
1st Century Bancshares, Inc.
|
Hampton Roads Bankshares, Inc.
|
|
Xenith Bankshares, Inc.
|
Pinnacle Financial Partners, Inc.
|
|
Avenue Financial Holdings, Inc.
|
OceanFirst Financial Corp.
|
|
Cape Bancorp, Inc.
|
For each selected transaction, KBW derived
the following implied transaction statistics, in each case based on the transaction consideration value paid for the acquired company
and using financial data based on the acquired company’s then latest publicly available financial statements prior to the
announcement of the acquisition:
|
·
|
Price per common share to tangible book value per share of the acquired company (in the case of selected transactions involving
a private acquired company, this transaction statistic was calculated as total transaction consideration divided by total tangible
common equity);
|
|
·
|
Tangible equity premium to core deposits (total deposits less time deposits greater than $100,000) of the acquired company,
referred to as core deposit premium; and
|
|
·
|
Price per common share to LTM EPS of the acquired company (in the case of selected transactions involving a private acquired
company, this transaction statistic was calculated as total transaction consideration divided by LTM net income)
|
The above transaction statistics for
the selected transactions were compared with the corresponding transaction statistics for the proposed merger based on the implied
transaction value for the proposed merger of $155.8 million and using historical financial information for First South as of or
for the 12 months ended March 31, 2017.
The results of the analysis are set forth
in the following table (excluding the impact of the LTM EPS multiples for three of the selected transactions, which multiples were
considered to be not meaningful because they were negative or greater than 35.0x):
|
|
|
|
Selected Transactions
|
Transaction Price to
|
|
Carolina Financial /
First South
Merger
|
|
25
th
Percentile
|
|
Average
|
|
Median
|
|
75
th
Percentile
|
Tangible Book Value (%)
|
|
|
185
|
|
|
|
141
|
|
|
|
171
|
|
|
|
173
|
|
|
|
185
|
|
Core Deposit Premium (%)
|
|
|
8.2
|
|
|
|
5.7
|
|
|
|
10.1
|
|
|
|
8.8
|
|
|
|
13.7
|
|
LTM EPS (x)
|
|
|
20.9
|
|
|
|
14.5
|
|
|
|
18.9
|
|
|
|
19.6
|
|
|
|
23.2
|
|
No company or transaction used as a comparison
in the above selected transaction analysis is identical to First South or the proposed merger. Accordingly, an analysis of these
results is not mathematical. Rather, it involves complex considerations and judgments concerning differences in financial and operating
characteristics of the companies involved.
Relative Contribution Analysis
.
KBW analyzed the relative standalone contribution of Carolina Financial and First South to various pro forma balance sheet and
income statement items and the pro forma market capitalization of the combined entity. This analysis did not include purchase accounting
adjustments or cost savings. To perform this analysis, KBW used (i) historical balance sheet data for Carolina Financial and First
South as of March 31, 2017, (ii) historical earnings data for Carolina Financial and First South for the 12 months ended March
31, 2017, (iii) publicly available EPS consensus “street estimates” of Carolina Financial for 2017 and 2018 and earnings
estimates for First South provided by First South management for 2017 and Carolina Financial management for 2018, and (iv) market
price data as of June 8, 2017. The results of KBW’s analysis are set forth in the following table, which also compares the
results of KBW’s analysis with the implied pro forma ownership percentages of Carolina Financial and First South shareholders
in the combined company based on the 0.52x exchange ratio in the proposed merger:
|
|
Carolina Financial
as a % of
Total
|
|
First South
as a % of
Total
|
Ownership
|
|
|
|
|
|
|
|
|
Pro Forma Ownership
|
|
|
76.6
|
%
|
|
|
23.4
|
%
|
Balance Sheet
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
67.7
|
%
|
|
|
32.3
|
%
|
Gross Loans
|
|
|
66.3
|
%
|
|
|
33.7
|
%
|
Total Deposits
|
|
|
63.7
|
%
|
|
|
36.3
|
%
|
Equity
|
|
|
75.3
|
%
|
|
|
24.7
|
%
|
Tangible Common Equity
|
|
|
72.6
|
%
|
|
|
27.4
|
%
|
Income Statement
|
|
|
|
|
|
|
|
|
Latest 12 Months Net Income
|
|
|
71.9
|
%
|
|
|
28.1
|
%
|
2017 Estimated Net Income
|
|
|
78.3
|
%
|
|
|
21.7
|
%
|
2018 Estimated Net Income
|
|
|
80.1
|
%
|
|
|
19.9
|
%
|
Market Capitalization
|
|
|
|
|
|
|
|
|
Market Capitalization
|
|
|
78.8
|
%
|
|
|
21.2
|
%
|
Pro Forma Financial Impact Analysis.
KBW performed a pro forma financial impact analysis that combined projected income statement and balance sheet information
of Carolina Financial and First South. Using closing balance sheet estimates as of December 31, 2017 for Carolina Financial and
First South provided by Carolina Financial management, EPS estimates for First South provided by First South management for 2017
and Carolina Financial management for 2018, publicly available EPS consensus “street estimates” of Carolina Financial
for 2017 and 2018, and pro forma assumptions (including, without limitation, the cost savings and related expenses expected to
result from the merger and certain accounting adjustments and restructuring charges assumed with respect thereto) provided by
Carolina Financial management, KBW analyzed the estimated financial impact of the merger on certain projected financial results.
This analysis indicated that the merger could be accretive to Carolina Financial’s 2018 estimated EPS and dilutive to Carolina
Financial’s estimated tangible book value per share at closing. Furthermore, the analysis indicated that, pro forma for
the merger, each of Carolina Financial’s tangible common equity to tangible assets ratio, leverage ratio, Common Equity
Tier 1 Ratio, Tier 1 Risk-Based Capital Ratio, and Total Risk-Based Capital Ratio at closing could be lower. For all of the above
analysis, the actual results achieved by Carolina Financial following the merger may vary from the projected results, and the
variations may be material.
Discounted Cash Flow Analysis.
KBW performed a discounted cash flow analysis to estimate a range for the implied equity value of First South, taking into account
the cost savings and related expenses expected to result from the merger as well as certain accounting adjustments and restructuring
charges assumed with respect thereto. In this analysis, KBW used financial forecasts and projections relating to the earnings and
assets of First South with respect to the period from 2018 to 2020 provided by Carolina Financial management, assumed First South
long term growth rates provided by Carolina Financial management and estimated cost savings and related expenses and accounting
adjustments and restructuring charges provided by Carolina Financial management, and KBW assumed discount rates ranging from 9.0%
to 13.0%. The ranges of values were derived by adding (i) the present value of the estimated excess cash flows that First
South could generate over the five-year period from 2018 to 2022 and (ii) the present value of First South’s implied
terminal value at the end of such period, in each case applying estimated cost savings and related expenses and accounting adjustments
and restructuring charges. KBW assumed that First South would maintain a tangible common equity to tangible assets ratio of 8.00%
and First South would retain sufficient earnings to maintain that level. In calculating the terminal value of First South, KBW
applied a range of 13.0x to 17.0x First South’s estimated 2023 earnings. This discounted cash flow analysis resulted in a
range of implied values per share of First South common stock, taking into account the cost savings and related expenses expected
to result from the merger as well as certain accounting adjustments and restructuring charges assumed with respect thereto, of
$17.74 per share to $26.67 per share.
The discounted cash flow analysis is
a widely used valuation methodology, but the results of such methodology are highly dependent on the assumptions that must be made,
including asset and earnings growth rates, terminal values, dividend payout rates, and discount rates. The above analyses did not
purport to be indicative of the actual values or expected values of First South.
Miscellaneous.
KBW acted
as financial advisor to Carolina Financial in connection with the proposed merger and did not act as an advisor to or agent of
any other person. As part of its investment banking business, KBW is continually engaged in the valuation of bank and bank holding
company securities in connection with acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for various other purposes. As specialists in the securities of banking companies, KBW has experience
in, and knowledge of, the valuation of banking enterprises. In the ordinary course of its and their broker-dealer businesses, KBW
and its affiliates may from time to time purchase securities from, and sell securities to, Carolina Financial and First South.
In addition, as a market maker in securities, KBW and its affiliates may from time to time have a long or short position in, and
buy or sell, debt or equity securities of Carolina Financial or First South for its and their own respective accounts and for the
accounts of its and their respective customers and clients.
Pursuant to the KBW engagement agreement,
Carolina Financial has agreed to pay KBW a total cash fee equal to $900,000, $100,000 of which became payable with the rendering
of KBW’s opinion and the balance of which is contingent upon the consummation of the merger. Carolina Financial also agreed
to reimburse KBW for reasonable out-of-pocket expenses and disbursements incurred in connection with its engagement and to indemnify
KBW against certain liabilities relating to or arising out of KBW’s engagement or KBW’s role in connection therewith.
In addition to this present engagement, in the two years preceding the date of KBW’s opinion, KBW provided investment banking
and financial advisory services to Carolina Financial for which compensation was received. KBW acted as financial advisor to Carolina
Financial in connection with its March 2017 acquisition of Greer Bancshares Incorporated. In addition, KBW acted as an underwriter
in connection with each of Carolina Financial’s January 2017 and December 2015 registered offerings of Carolina Financial
common stock. In the two years preceding the date of KBW’s opinion, KBW did not provide investment banking and financial
advisory services to First South. KBW may in the future provide investment banking and financial advisory services to Carolina
Financial or First South and receive compensation for such services.
Certain Carolina Financial and
First South Unaudited Prospective Financial Information
Carolina Financial and
First South do not as a matter of course publicly disclose forecasts or internal projections as to future performance, revenues,
earnings, financial condition or other results due to, among other reasons, the inherent uncertainty of the underlying assumptions
and estimates and the inherent difficulty of accurately predicting financial performance for future periods. In connection with
the proposed transaction, however, (1) First South management prepared certain projections of First South’s future financial
performance, which contain unaudited prospective financial information with respect to First South on a standalone, pre-merger
basis, and which were made available, in part, to each of the potential merger partners that signed a non-disclosure agreement
with First South, including Carolina Financial, First South’s Board of Directors and First South’s financial advisor,
Raymond James, and (2) Carolina Financial management provided to KBW and Raymond James certain assumptions relating to certain
unaudited prospective pro forma financial information. Carolina Financial and First South have included in this joint proxy
statement/prospectus limited unaudited financial information for Carolina Financial and First South to give First South
stockholders access to certain nonpublic prospective financial information provided to the First South board of directors
for purposes of considering and evaluating the merger and to Raymond James and KBW for purposes of performing financial
analyses in connection with their respective opinions to the First South Board of Directors and the Carolina Financial
Board of Directors, which we refer to in this section as the “Prospective Financial Information.”
The Prospective Financial
Information was not prepared with a view toward public disclosure, and the inclusion of the Prospective Financial Information
in this joint proxy statement/prospectus should not be regarded as an indication that Carolina Financial, First South
or any other recipient of the Prospective Financial Information considered, or now considers, them to be necessarily predictive
of actual future results. None of Carolina Financial, First South, or their respective affiliates assume any responsibility for
the accuracy of the Prospective Financial Information. The Prospective Financial Information was not prepared with
a view toward complying with the guidelines of the SEC, the guidelines established by the Public Company Accounting Oversight
Board for preparation or presentation of financial information, or generally accepted accounting principles in the United States.
None of Carolina Financial’s current independent registered public accounting firm, Elliott Davis Decosimo, PLLC, First
South’s current independent registered public accounting firm, Cherry Bekaert LLP, First South’s former independent
registered public accounting firm, Turlington and Company, L.L.P., or any other independent accountants, have compiled, examined
or performed any procedures with respect to the projections or expressed any opinion or any other form of assurance on such information
or its achievability. The reports of Elliott Davis Decosimo, PLLC, Cherry Bekaert LLP, and Turlington and Company, L.L.P. that
are incorporated by reference into this joint proxy statement/prospectus related only to Carolina Financial’s and First
South’s historical financial information, respectively. They do not extend to any prospective financial information.
The Prospective Financial
Information reflects numerous estimates and assumptions made by Carolina Financial and First South with respect to industry
performance, general business, economic, regulatory, market and financial conditions and other future events, as well as matters
specific to Carolina Financial’s and First South’s businesses, all of which are difficult to predict and many of which
are beyond Carolina Financial’s or First South’s control. The Prospective Financial Information also reflects
assumptions as to certain business decisions that are subject to change. The Prospective Financial Information reflects
subjective judgment in many respects and thus are susceptible to multiple interpretations and periodic revisions based on
actual experience and business developments. As such, the Prospective Financial Information constitutes forward-looking
information and is subject to risks and uncertainties that could cause actual results to differ materially from the results
forecasted in such prospective information, including, but not limited to, Carolina Financial’s performance, First South’s
performance, the performance of the combined entity following the merger, industry performance, general business and economic
conditions, customer requirements, competition, adverse changes in applicable laws, regulations or rules, interest rates, the
regulatory environment, and the various risks set forth in Carolina Financial’s and First South’s reports filed with
the SEC. None of First South, Carolina Financial, their respective financial advisors, or any of their respective affiliates assumes
any responsibility for the validity, accuracy or completeness of the Prospective Financial Information set forth below.
The Prospective Financial Information does not take into account any circumstances or events occurring after the date it
was prepared, including the transactions contemplated by the merger agreement. Further, the Prospective Financial Information
does not take into account the effect of any failure of the merger to occur. None of Carolina Financial, First South, any
of their respective financial advisors, or any of their respective affiliates intends to, and each of them disclaims any obligation
to, update, revise or correct such Prospective Financial Information if they are or become inaccurate (even in the short
term). The inclusion of the Prospective Financial Information herein should not be deemed an admission or representation
Carolina Financial or First South that it is viewed by Carolina Financial or First South as material information of either
Carolina Financial or First South, particularly in light of the inherent risks and uncertainties associated with such forward-looking
information.
Certain Unaudited Prospective Financial Information
The following table presents
selected items of the unaudited Prospective Financial Information that were prepared by, and provided to KBW and discussed
with KBW by, First South management:
|
|
Fiscal 2017
|
|
Fiscal 2018
|
|
Fiscal 2019
|
|
Fiscal 2020
|
|
|
(dollars in thousands, except per share data)
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,105,549
|
|
|
$
|
1,193,841
|
|
|
$
|
1,286,598
|
|
|
$
|
1,389,617
|
|
Gross loans
(1)
|
|
|
821,000
|
|
|
|
901,000
|
|
|
|
981,000
|
|
|
|
1,060,000
|
|
Total deposits
|
|
|
946,002
|
|
|
|
1,007,498
|
|
|
|
1,065,911
|
|
|
|
1,127,900
|
|
Total stockholders’ equity
|
|
|
93,733
|
|
|
|
1,010,636
|
|
|
|
108,793
|
|
|
|
119,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
36,251
|
|
|
|
39,148
|
|
|
|
42,136
|
|
|
|
45,658
|
|
Provision for loan losses
|
|
|
1,838
|
|
|
|
1,316
|
|
|
|
1,340
|
|
|
|
1,458
|
|
Noninterest income
|
|
|
13,978
|
|
|
|
14,265
|
|
|
|
14,522
|
|
|
|
14,748
|
|
Noninterest expense
|
|
|
37,103
|
|
|
|
37,940
|
|
|
|
38,872
|
|
|
|
39,836
|
|
Income before tax
|
|
|
11,288
|
|
|
|
14,157
|
|
|
|
16,446
|
|
|
|
19,112
|
|
Income tax
|
|
|
3,499
|
|
|
|
4,389
|
|
|
|
5,098
|
|
|
|
5,925
|
|
Net income
|
|
$
|
7,789
|
|
|
$
|
9,768
|
|
|
$
|
11,348
|
|
|
$
|
13,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio
|
|
|
8.73
|
%
|
|
|
8.82
|
%
|
|
|
8.78
|
%
|
|
|
8.96
|
%
|
Tier 1 risk-based capital ratio
|
|
|
11.49
|
%
|
|
|
11.49
|
%
|
|
|
11.32
|
%
|
|
|
11.49
|
%
|
Total risk-based capital ratio
|
|
|
14.47
|
%
|
|
|
14.32
|
%
|
|
|
14.00
|
%
|
|
|
14.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio Analysis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
3.69
|
%
|
|
|
3.60
|
%
|
|
|
3.58
|
%
|
|
|
3.58
|
%
|
Return on average assets
|
|
|
0.74
|
%
|
|
|
0.85
|
%
|
|
|
0.91
|
%
|
|
|
0.98
|
%
|
Return on average equity
|
|
|
8.61
|
%
|
|
|
10.00
|
%
|
|
|
10.79
|
%
|
|
|
11.53
|
%
|
Efficiency ratio
|
|
|
73.87
|
%
|
|
|
71.03
|
%
|
|
|
68.61
|
%
|
|
|
65.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.82
|
|
|
$
|
1.03
|
|
|
$
|
1.20
|
|
|
$
|
1.39
|
|
Book value per share
|
|
|
9.28
|
|
|
|
10.14
|
|
|
|
10.92
|
|
|
|
12.11
|
|
(1)
Excludes loans held for sale
and allowance for loan losses.
|
Certain Unaudited Prospective Pro Forma Financial Information
The following unaudited
Prospective Financial Information reflecting the effect of the merger was provided by the management of Carolina Financial
to KBW and was reviewed by First South:
|
•
|
Purchase
accounting adjustment of a credit mark on loans equal to 1.8% of gross loans;
|
|
•
|
Cost
savings equal to approximately 26% of First South’s projected non-interest expense,
which would be 75% realized in 2018 and 100% realized thereafter;
|
|
•
|
Pre-tax
merger-related charges of $23.7 million; and
|
|
•
|
Fixed
asset fair value adjustment of $3.0 million.
|
Interests of Executive Officers,
Employees, and Directors of First South in the Merger
General.
Some of the executive
officers, employees and directors of First South may be deemed to have interests in the merger in addition to their interests
as stockholders of First South generally. These interests include, among others, change in control payments under the executive
officer’s employment or other agreements with First South; proposed employee benefits for those who become employees of
Carolina Financial or a Carolina Financial subsidiary after the merger; entry into retention bonus agreements with First South
and Carolina Financial; the appointment of certain First South directors to the Carolina Financial board, the CresCom Bank board,
and the Eastern North Carolina Advisory Board of CresCom Bank; lump sum payments in exchange for the cancellation of outstanding
First South stock options; and insurance coverage and indemnification for First South’s directors and officers, as described
below.
Board Seats.
Prior to the
effective time of the merger, Carolina Financial has agreed to appoint two representatives of First South’s board of directors
to the board of Carolina Financial. During 2016, non-employee directors of Carolina Financial received a retainer fee of $8,000
paid in cash and 618 shares of Carolina Financial’s common stock. Those directors not employed by a subsidiary of Carolina
Financial also received $500 for each committee meeting attended.
Prior to the effective time of the bank
merger, CresCom Bank has agreed to appoint Bruce W. Elder as a director of CresCom Bank. It is not anticipated that Mr. Elder
will be paid in connection with his service as a director of CresCom Bank.
It is anticipated that the directors of
First South Bank in office immediately prior to the effective time of the bank merger, other than Mr. Elder, will serve as CresCom
Bank’s Eastern North Carolina Advisory Board and will be entitled to receive a fee of $500 for each advisory board meeting
attended. The CresCom Bank Eastern North Carolina Advisory Board is expected to meet no less than three times per year.
Officer Positions.
Carolina
Financial will appoint the following officers of First South to officer positions with CresCom Bank, effective upon consummation
of the merger, as set forth below:
|
·
|
Bruce
W. Elder, President and Chief Executive Officer of First South and First South Bank,
will be appointed President of North Carolina Banking of CresCom Bank.
|
|
·
|
Cornelius
F. Sullivan III, Senior Vice President and Area Executive for Raleigh, Durham, and Wilmington
of First South Bank, will be appointed Senior Vice President and Raleigh Area Executive
of CresCom Bank.
|
Employment Agreements for First South
Officers.
In connection with entering into the merger agreement, Carolina Financial has entered into employment agreements
with Messrs. Elder and Sullivan that will be effective upon consummation of the merger, as summarized below.
Employment Agreement with Mr. Elder.
CresCom Bank has entered into an employment agreement, dated June 9, 2017, with Mr. Elder to serve as President of North Carolina
Banking of CresCom Bank. The term of Mr. Elder’s employment will begin upon the closing of the merger and continue for two
years thereafter, unless otherwise terminated as provided in the agreement. On the first anniversary of the merger closing, and
at each anniversary date thereafter, the agreement will automatically renew for an additional year unless either party provides
notice of nonrenewal at least thirty days prior to the anniversary date.
During the employment period, Mr. Elder
will receive an annual base salary of $270,000. During this period, he will also be entitled to receive annual cash incentive
payments and stock awards in such amounts and at such times as may be determined by CresCom Bank pursuant to its incentive plans
and programs.
Within 30 days after the merger closing,
Carolina Financial will issue to Mr. Elder shares of restricted common stock of Carolina Financial with a market value of $500,000
as of the grant date. The restricted shares will vest in five equal annual increments beginning on the first anniversary of the
closing of the merger, provided that Mr. Elder has not been terminated for cause, as defined in the employment agreement, by CresCom
Bank on such anniversary date.
During the employment period, Mr. Elder
will have access to CresCom Bank’s health-and-accident plans and medical coverage benefits on the same basis as other similarly
situated senior executives and key management employees of CresCom Bank. He will also be entitled to participate in all incentive,
bonus, retirement, supplemental retirement, pension, profit-sharing, and other employee benefits plans and programs of CresCom
Bank. CresCom Bank will pay or reimburse Mr. Elder for reasonable expenses incurred by him in the performance of his duties pursuant
to the employment agreement.
If Mr. Elder dies while employed by CresCom
Bank, CresCom Bank will pay his estate, legal representatives, or named beneficiaries all benefits for which he is eligible under
his salary continuation agreement (which will be assumed by CresCom Bank) and any retirement plan of CresCom Bank, if any, to
which Mr. Elder is party or in which he participated immediately prior to his death.
If Mr. Elder becomes disabled while employed
by CresCom Bank, CresCom Bank must provide him with written notice of its intention to terminate his employment, in which event
his employment would terminate on the thirtieth day after receipt of such notice. If Mr. Elder’s employment is terminated
due to disability, he will receive his base salary through the date of his termination, all benefits for which he is eligible
under his salary continuation agreement, and any applicable long-term disability plan maintained by CresCom Bank. Mr. Elder will
be considered “disabled” if he is entitled to receive long-term disability benefits under CresCom Bank’s long-term
disability plan, or, if there is no such plan, if he would qualify for disability benefits under the federal social security system.
If Mr. Elder voluntarily resigns from his
employment, then he will have no right to render services or to receive compensation or other benefits following such termination
other than benefits for which he is eligible under his salary continuation agreement. Mr. Elder must provide CresCom Bank with
written notice of his intention to terminate his employment, in which event his employment would terminate on the thirtieth day
after receipt by CresCom Bank of such notice.
CresCom Bank may terminate Mr. Elder’s
employment at any time for “cause.” If Mr. Elder’s employment is terminated for cause, he will have no right
to render services or to receive compensation or other benefits from CresCom Bank following termination other than benefits for
which he is eligible under the salary continuation agreement. The following constitute “cause” for termination:
|
(1)
|
personal
dishonesty, incompetence, or willful misconduct by Mr. Elder;
|
|
(2)
|
any
breach of fiduciary duty involving personal profit or intentional failure by Mr. Elder
to perform his duties as stated in the employment agreement;
|
|
(3)
|
Mr.
Elder’s willful violation of any law, rule, or regulation (other than traffic violations,
regulations that do not adversely affect CresCom Bank or its employees, or similar offenses)
or final cease-and-desist order; or
|
|
(4)
|
breach
of a material term of the employment agreement.
|
In the event of a change in control or if
CresCom Bank terminates Mr. Elder’s employment without cause before the end of the employment period, Mr. Elder will receive
the benefits described below if he signs a release and waiver of claims in favor of CresCom Bank:
|
(1)
|
All
base salary through the date of termination.
|
|
(2)
|
A
lump sum cash payment equal to two times Mr. Elder’s base salary at the rate in
effect on his date of termination.
|
|
(3)
|
All
benefits for which Mr. Elder is eligible under his salary continuation agreement and
any retirement plan of CresCom Bank, if any, to which he is party or in which he participated
immediately prior to his termination.
|
Mr. Elder will be subject to a covenant
not to compete and a covenant not to solicit customers or employees of CresCom Bank. These restrictions apply during the employment
period and for a period of two years following the term of the employment agreement except when termination of Mr. Elder’s
employment agreement is due to CresCom Bank’s nonrenewal of the employment agreement.
Employment Agreement with Mr. Sullivan.
CresCom Bank has entered into an employment agreement, dated June 9, 2017, with Mr. Sullivan to serve as Senior Vice President
and Raleigh Area Executive of CresCom Bank. The term of Mr. Sullivan’s employment will begin upon the closing of the merger
and continue for two years thereafter, unless otherwise terminated as provided in the agreement. On the first anniversary of the
merger closing, and at each anniversary date thereafter, the agreement will automatically renew for an additional year unless
either party provides notice of nonrenewal at least thirty days prior to the anniversary date.
During the employment period, Mr. Sullivan
will receive an annual base salary of $190,000. During this period, he will also be entitled to receive annual cash incentive
payments and stock awards in such amounts and at such times as may be determined by CresCom Bank pursuant to its incentive plans
and programs.
Within 30 days after the merger closing,
Carolina Financial will issue to Mr. Sullivan shares of restricted common stock of Carolina Financial with a market value of $100,000
as of the grant date. The restricted shares will vest in four equal annual increments beginning on the first anniversary of the
closing of the merger, provided that Mr. Sullivan has not been terminated for cause, as defined in the employment agreement, by
CresCom Bank on such anniversary date.
During the employment period, Mr. Sullivan
will have access to CresCom Bank’s health-and-accident plans and medical coverage benefits on the same basis as other similarly
situated senior executives and key management employees of CresCom Bank. He will also be entitled to participate in all incentive,
bonus, retirement, supplemental retirement, pension, profit-sharing, and other employee benefits plans and programs of CresCom
Bank. CresCom Bank will pay or reimburse Mr. Sullivan for reasonable expenses incurred by him in the performance of his duties
pursuant to the employment agreement.
The provisions of Mr. Sullivan’s employment
agreement with respect to termination as a consequence of death, disability or voluntary resignation, change in control and termination
for cause are substantially the same as those included Mr. Elder’s employment agreement with CresCom Bank described above.
In the event of a change in control or if Mr. Sullivan’s employment is terminated by CresCom Bank without cause, Mr. Sullivan
will receive the same benefits as Mr. Elder, except Mr. Sullivan is not a party to a salary continuation agreement.
Mr. Sullivan will be subject to a
covenant not to compete and a covenant not to solicit customers or employees of CresCom Bank. These restrictions apply during
the employment period and for a period of two years following the term of the employment agreement. In the event Mr. Sullivan’s
employment agreement is terminated due to his nonrenewal, then the non-competition restrictions apply only during the term of
the agreement. If Mr. Sullivan voluntarily resigns from his employment after the third anniversary date of his employment agreement,
then the non-competition restrictions apply for one year following the date of termination.
Retention Bonus Agreements.
First South intends to enter into retention bonus agreements with certain non-executive employees of First South. The total of
all payments under such agreements is estimated to aggregate $372,000 in cash and 19,300 shares of Carolina Financial common stock.
Employee Benefits.
The merger
agreement generally provides that Carolina Financial will furnish to those employees of First South who become employees of CresCom
Bank or one of its subsidiaries after the effective time of the merger benefits on the same basis as it provides coverage to other
Carolina Financial or CresCom Bank employees, and Carolina Financial will use commercially reasonable efforts to cause any pre-existing
condition, eligibility waiting period, or other limitation or exclusion otherwise applicable under such plans to new employees
not to apply to a continuing employee or his or her covered dependents who were covered under a similar First South plan at the
effective time of the merger. For purposes of eligibility and vesting under Carolina Financial’s employee benefit plans,
service with First South prior to the effective time of the merger will be treated as service with Carolina Financial or its subsidiaries.
Carolina Financial will use commercially reasonable efforts to cause any successor Carolina Financial employee benefit plan providing
health coverage to give credit towards satisfaction of any annual deductible limitation and out-of-pocket maximum applied under
such successor plan for any deductible, co-payment and other cost-sharing amounts previously paid by a First South employee respecting
his or her participation in the corresponding First South benefit plan during the plan year prior to the transition effective
date.
Insurance and Indemnification.
Carolina Financial has agreed to provide directors’ and officers’ insurance coverage for directors and officers of
First South and First South Bank, by purchasing or directing First South to purchase, at Carolina Financial’s election,
continuation coverage under First South’s current policy for directors and officers for a period of not less than six years
after the effective time of the merger. Carolina Financial has also agreed to indemnify the present and former directors, officers,
and employees of First South and First South Bank against all liabilities and damages for all acts or omissions arising out of
service for First South or, at First South’s request, for another entity, occurring at or prior to the merger to the fullest
extent permitted under Delaware corporate law, Virginia corporate law, Section 402 of the Sarbanes-Oxley Act, the federal securities
laws and FDIC Regulations Part 359, the rules and regulations of any other regulatory authority, and by First South’s articles
of incorporation and bylaws.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933 or otherwise may be permitted to directors, officers, and controlling persons pursuant
to the foregoing provisions, Carolina Financial has been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
Stock Options.
First South
has granted certain employees, officers and directors options to purchase First South common stock under its equity compensation
plans. Pursuant to these plans, all stock options outstanding at the time of a corporate transaction such as the merger will vest
and become fully exercisable upon the effective date of such corporate transaction.
In connection with entering into the merger
agreement, First South has agreed to offer each of the current holders of its stock options the opportunity to cancel, effective
upon and subject to the merger, all of their respective stock options covering shares of First South’s common stock having
an exercise price per share less than the per share value of the merger consideration in exchange for a cash payment equal to
the per share value of the merger consideration minus the exercise price for each share of First South’s common stock subject
to such stock option. Any stock option not cashed out will convert into an option to acquire shares of Carolina Financial common
stock, as adjusted to reflect the exchange ratio.
Restricted Stock Awards.
First
South has granted certain employees, officers and directors restricted stock awards under its 2008 Equity Incentive Plan. Pursuant
to the 2008 Equity Incentive Plan, all unvested restricted stock awards outstanding at the time of a corporate transaction such
as the merger will vest upon the effective date of such corporate transaction.
LIST OF EXHIBITS
Exhibit
|
Description
|
|
|
A
|
Form of Bank Agreement of Merger
|
|
|
B
|
Form of Non-Employee Director Non-Competition Agreement
|
|
|
C
|
Form of Shareholder Support Agreement
|
|
|
D
|
Form of Claims Letter
|
|
|
E
|
Form of CresCom Bank Merger / Cash Retention Bonus Agreement
|
|
|
F
|
Form of CresCom Bank Merger / Cash and Stock Retention Bonus Agreement
|
|
|
G
|
Form of Stock Option Cash-Out Agreement
|
|
|
H
|
Form of Employment Agreement for Bruce W. Elder
|
|
|
I
|
Form of Employment Agreement for Cornelius F. Sullivan
|
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
(this “
Agreement
”) dated as of June 9, 2017, is by and between Carolina Financial
Corporation, a Delaware corporation (“
Carolina Financial
”), and First South Bancorp, Inc., a Virginia corporation
(“
First South
”). Except as otherwise set forth herein, capitalized and certain other terms used herein shall
have the meanings set forth in Section 10.1 of this Agreement.
RECITALS
WHEREAS
, the respective
Boards of Directors of Carolina Financial and First South have determined that it is in the best interests of their respective
companies and shareholders for Carolina Financial to acquire First South pursuant to the terms of this Agreement and have unanimously
approved the merger of First South with and into Carolina Financial, with Carolina Financial being the surviving entity (the “
Merger
”),
upon the terms and subject to the conditions set forth in this Agreement, whereby the issued and outstanding shares of First South
Common Stock will be converted into the right to receive the Merger Consideration from Carolina Financial;
WHEREAS
, the Board
of Directors of Carolina Financial has adopted this Agreement, duly authorized the Merger and the other transactions contemplated
hereby, and resolved to recommend that Carolina Financial’s stockholders approve this Agreement and the transactions contemplated
hereby, including the Merger;
WHEREAS
, the Board
of Directors of First South has adopted this Agreement, duly authorized the Merger and the other transactions contemplated hereby,
and resolved to recommend that First South’s shareholders approve this Agreement and the transactions contemplated hereby,
including the Merger;
WHEREAS
, it is intended
that, immediately following the Merger, or as soon as is practicable thereafter, First South Bank, a North Carolina bank and wholly-owned
subsidiary of First South, will be merged with and into CresCom Bank, a South Carolina banking corporation and wholly-owned subsidiary
of Carolina Financial, so that CresCom Bank is the surviving bank;
WHEREAS
, for federal
income Tax purposes, it is intended that the Merger shall qualify as a reorganization under the provisions of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the “
Code
”); and
WHEREAS
, Carolina
Financial and First South desire to make certain representations, warranties, covenants, and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
NOW, THEREFORE
,
in consideration of the above and the mutual warranties, representations, covenants, and agreements set forth herein, and other
good and valuable consideration and the receipt and sufficiency of which are acknowledged, the Parties, intending to be legally
bound, agree as follows:
Article
1
TRANSACTIONS AND TERMS OF MERGER
Subject to the terms and
conditions of this Agreement, at the Effective Time, First South shall be merged with and into Carolina Financial pursuant to
and with the effect provided in Section 252 of the DGCL and Section 13.1-716 of the VSCA, and Carolina Financial shall be the
Surviving Corporation resulting from the Merger and shall continue to be governed by the Laws of the State of Delaware. As of
the Effective Time, the separate corporate existence of First South shall cease. The Merger shall be consummated pursuant to the
terms of this Agreement, which has been approved and adopted by the respective Boards of Directors of Carolina Financial and First
South.
|
1.2
|
Time and Place of Closing.
|
The closing of the transactions
contemplated hereby (the “
Closing
”) will take place at 12:01 A.M. Eastern Time on the date that the Effective
Time occurs (the “
Effective Date
”), or at such other time as the Parties, acting through their authorized officers,
may mutually agree. The Closing shall be held at such location as may be mutually agreed upon by the Parties and may be effected
by electronic or other transmission of signature pages, as mutually agreed upon.
The Merger shall be
consummated by filing a Certificate of Merger reflecting the Merger with the Delaware Secretary of State (the “
Certificate
of Merger
”) and Articles of Merger reflecting the Merger with the Virginia State Corporation Commission (the “
Articles
of Merger
”). The Merger shall become effective (the “
Effective Time
”) when the Certificate of Merger
and Articles of Merger have been filed or at such later time as may be mutually agreed upon by Carolina Financial and First South
and specified in the Certificate of Merger and Articles of Merger. Subject to the terms and conditions hereof, unless otherwise
mutually agreed upon in writing by the authorized officers of each Party, the Parties shall use their reasonable efforts to cause
the Effective Time to occur within 10 business days after the last of the following dates to occur: (i) the effective date
(including expiration of any applicable waiting period) of the last required Consent of any Regulatory Authority having authority
over and approving or exempting the Merger, (ii) the date on which the shareholders of First South approve this Agreement;
and (iii) the date on which the stockholders of Carolina Financial approve this Agreement.
|
1.4
|
Restructure of Transaction.
|
Carolina Financial shall
have the right to revise the structure of the Merger contemplated by this Agreement by merging First South with and into a wholly-owned
subsidiary of Carolina Financial,
provided,
that no such revision to the structure of the Merger (i) shall result in any
changes in the amount or type of the consideration which the holders of shares of First South Common Stock are entitled to receive
under this Agreement, (ii) would unreasonably impede or delay consummation of the Merger, or (iii) imposes any less favorable
terms or conditions on First South or First South Bank. In such event, Carolina Financial will give written notice to First South
in the manner provided in Section 10.8, which notice shall be in the form of an amendment to this Agreement, in the form of a proposed
amendment to this Agreement, or in the form of an Amended and Restated Agreement and Plan of Merger and Reorganization, and the
addition of such other exhibits hereto as are reasonably necessary or appropriate to effect such change.
|
1.5
|
Bank Merger; Directors and Officers of the Surviving Bank.
|
(a)
Concurrently with or as soon as practicable after the execution and delivery of this Agreement, CresCom Bank and First
South Bank shall enter into the Bank Agreement of Merger, in the form attached hereto as
Exhibit A
, with such changes thereto
as Carolina Financial and First South mutually agree to, pursuant to which First South Bank will merge with and into CresCom Bank
(the “
Bank Merger
”), with CresCom Bank as the surviving institution (the “
Surviving Bank
”).
The Parties intend that the Bank Merger will become effective simultaneously with or immediately following the Effective Time.
(b)
The Bank Agreement of Merger shall provide that the Articles of Incorporation and Bylaws of the Surviving Bank shall be
the Articles of Incorporation and Bylaws of CresCom Bank as in effect immediately prior to the Bank Merger until otherwise duly
amended or repealed.
(c)
The Bank Agreement of Merger shall provide that the directors of the Surviving Bank shall be the directors of CresCom Bank
serving immediately prior to the Bank Merger from and after the effective time of the Bank Merger, in accordance with the Surviving
Bank’s Bylaws, until the earlier of their resignation or removal or otherwise ceasing to be a director. Prior to the effective
time of the Bank Merger, CresCom Bank shall take all action necessary to appoint Bruce W. Elder as a director of the Surviving
Bank, to be effective as of 12:01 a.m. on the next business day following the effective time of the Bank Merger, and to cause Mr.
Elder to be nominated as a board nominee for re-election by the shareholders at the next annual meeting of shareholders of the
Surviving Bank following his appointment to the Board of Directors of the Surviving Bank. It is anticipated that the directors
of First South Bank in office immediately prior to the effective time of the Bank Merger, other than Mr. Elder, shall serve as
the Surviving Bank’s Eastern North Carolina Advisory Board and shall be entitled to receive a fee of $500.00 for each advisory
board meeting attended. The Surviving Bank’s Eastern North Carolina Advisory Board is expected to meet no less than three
times per year.
(d)
The Bank Agreement of Merger shall provide that the officers of the Surviving Bank shall be the officers of CresCom Bank
serving immediately prior to the Bank Merger, together with such additional persons as may hereafter be appointed, from and after
the effective time of the Bank Merger in accordance with the Surviving Bank’s Bylaws, until the earlier of their resignation
or removal or otherwise ceasing to be an officer. Concurrently with or as soon as practicable after the execution and delivery
of this Agreement, each of Bruce W. Elder, who shall be the President of North Carolina Banking of the Surviving Bank, and Cornelius
F. Sullivan, who shall be the Senior Vice President and Raleigh Area Executive of the Surviving Bank, shall enter into employment
agreements in the forms attached hereto as
Exhibits H and I
, respectively, which shall become effective only upon the Effective
Time.
1.6
Tax Treatment of the Merger.
It is intended by the Parties
that the Merger constitute a “reorganization” within the meaning of Section 368(a) of the Code. The Parties hereby
adopt this Agreement as a “plan of reorganization” within the meaning of Treasury Regulation Sections 1.368-2(g) and
1.368-3(a). All of the Parties agree to cooperate and use their best efforts in order to qualify the transactions contemplated
herein as a reorganization under Section 368(a)(1)(A) of the Code, to not take any action that could reasonably be expected to
cause the Merger to fail to so qualify, and to report the Merger for federal, state and any local income Tax purposes in a manner
consistent with such characterization.
Article
2
TERMS OF MERGER
|
2.1
|
Articles of Incorporation.
|
The Certificate of Incorporation
of Carolina Financial in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving
Corporation until otherwise duly amended or repealed.
The Bylaws of Carolina
Financial in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation until otherwise duly
amended or repealed.
|
2.3
|
Directors and Officers.
|
The directors of
Carolina Financial in office immediately prior to the Effective Time, together with such additional persons as may thereafter be
elected, shall serve as the directors of the Surviving Corporation from and after the Effective Time in accordance with the Surviving
Corporation’s Bylaws, until the earlier of their resignation or removal or otherwise ceasing to be a director. Prior to the
Effective Time, Carolina Financial shall take all action necessary to appoint a representative of First South’s board of
directors, as mutually agreed upon by First South and Carolina Financial, as a Class II director and a representative of First
South’s board of directors, as mutually agreed upon by First South and Carolina Financial, as a Class III director of the
Board of Directors of the Surviving Corporation , to be effective as of 12:01 a.m. on the next business day following the Effective
Time, and to cause such representatives to be nominated as board nominees for election by the stockholders to the Board of Directors
of the Surviving Corporation at the next annual meeting of stockholders of the Surviving Corporation at which such director’s
class is nominated for re-election following their appointment to the Board of Directors of the Surviving Corporation. The officers
of Carolina Financial in office immediately prior to the Effective Time, together with such additional persons as may hereafter
be appointed, shall serve as the officers of the Surviving Corporation from and after the Effective Time in accordance with the
Surviving Corporation’s Bylaws, until the earlier of their resignation or removal or otherwise ceasing to be an officer.
Article
3
MANNER OF CONVERTING SHARES
|
3.1
|
Effect on First South Common Stock.
|
(a)
At the Effective Time, in each case subject to Sections 3.1(b), 3.1(c), 3.1(d) and 3.1(f), by virtue of the Merger and without
any action on the part of the Parties, each share of First South Common Stock that is issued and outstanding immediately prior
to the Effective Time (other than the Extinguished Shares) shall be converted into the right to receive 0.5200 shares (the “
Exchange
Ratio
”) of Carolina Financial Common Stock (the “
Merger Consideration
”).
(b)
Notwithstanding any other provision of this Agreement, and notwithstanding the approval of this Agreement by the stockholders
of Carolina Financial and/or the shareholders of First South, the Exchange Ratio shall be decreased as set forth in Section 3.1(c)
if (A) the Carolina Financial Average Closing Price is greater than $35.14, and (B) (x) the number obtained by dividing the Carolina
Financial Average Closing Price by the Initial Price (the “
Closing Price Change Ratio
”) is more than 0.15 greater
than (y) the number obtained by dividing the Final Index Price by the Initial Index Price (the “
Index Change Ratio
”).
(c)
If the conditions of Section 3.1(b) are satisfied, the Exchange Ratio shall become the ratio obtained by multiplying (A)
the quotient of the Per Share Purchase Price divided by the Carolina Final Average Closing Price by (B) the sum of the Index Change
Ratio plus 0.15.
(d)
At the Effective Time, all shares of First South Common Stock shall no longer be outstanding and shall automatically be
cancelled and retired and shall cease to exist as of the Effective Time, and each certificate previously representing any such
shares of First South Common Stock (the “
Certificates
”) and each non-certificated share of First South Common
Stock (the “
First South Book-Entry Shares
”) shall thereafter represent only the right to receive applicable
payments as set forth in Section 3.8.
(e)
If, prior to the Effective Time, the outstanding shares of First South Common Stock, First South Options, or the outstanding
shares of Carolina Financial Common Stock or any rights with respect to Carolina Financial Common Stock pursuant to stock options
or other equity-based awards granted by Carolina Financial under the Carolina Financial Corporation 2013 Equity Incentive Plan
(the “
Carolina Financial Awards
”) shall have been increased, decreased, changed into or exchanged for a different
number or kind of shares or securities as a result of a reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, or other similar change in capitalization, then an appropriate and proportionate adjustment shall be
made to the Per Share Purchase Price. For the avoidance of doubt, Carolina Financial shall have the right to grant additional Carolina
Financial Awards prior to the Effective Date under the Carolina Financial Corporation 2013 Equity Incentive Plan without triggering
an adjustment to the Per Share Purchase Price under this Section 3.1(e).
(f)
Each share of First South Common Stock issued and outstanding immediately prior to the Effective Time and owned by either
of the Parties or their respective Subsidiaries (in each case other than shares of First South Common Stock held on behalf of third
parties or as a result of debts previously contracted) shall, by virtue of the Merger and without any action on the part of the
holder thereof, cease to be outstanding, shall be cancelled and retired without payment of any consideration therefor, and shall
cease to exist (the “
Extinguished Shares
”).
(a)
Promptly after the Effective Time, Carolina Financial shall deposit with the Exchange Agent for exchange in accordance with
this Section 3.2, the Merger Consideration and cash in an aggregate amount sufficient for payment in lieu of fractional shares
of Carolina Financial Common Stock to which holders of First South Common Stock may be entitled pursuant to Section 3.6 (collectively,
the “
Exchange Fund
”). In the event the cash in the Exchange Fund shall be insufficient to fully satisfy all
of the payment obligations to be made by the Exchange Agent hereunder, Carolina Financial shall promptly make available to the
Exchange Agent the amounts so required to satisfy such payment obligations in full. The Exchange Agent shall deliver the Merger
Consideration and cash in lieu of any fractional shares of Carolina Financial Common Stock out of the Exchange Fund. Except as
contemplated by this Section 3.2 and Section 3.6, the Exchange Fund will not be used for any other purpose.
(b)
Unless different timing is agreed to by Carolina Financial and First South, as soon as reasonably practicable after the
Effective Time, but in any event no more than seven business days after the Effective Time, Carolina Financial shall cause the
Exchange Agent to mail to the former shareholders of First South appropriate transmittal materials (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates or other instruments theretofore representing shares of First
South Common Stock shall pass, only upon proper delivery of such Certificates or other instruments to the Exchange Agent). In
the event of a transfer of ownership of shares of First South Common Stock represented by one or more Certificates or First South
Book-Entry Shares that are not registered in the transfer records of First South, the Merger Consideration payable for such shares
as provided in Section 3.1 may be issued to a transferee if the Certificate or Certificates or First South Book-Entry Shares representing
such shares are delivered to the Exchange Agent, accompanied by all documents required to evidence such transfer and by evidence
reasonably satisfactory to the Exchange Agent that such transfer is proper and that any applicable stock transfer taxes have been
paid. In the event any Certificate or First South Book-Entry Shares representing First South Common Stock shall have been lost,
mutilated, stolen, destroyed or are otherwise missing, upon the making of an affidavit of that fact by the person claiming such
Certificate or First South Book-Entry Shares to be lost, stolen, mutilated, destroyed or otherwise missing and, if required by
the Exchange Agent, the posting by such person of a bond in such amount as the Exchange Agent may reasonably direct as indemnity
against any claim that may be made against it or Carolina Financial with respect to such Certificate or First South Book-Entry
Shares, the Exchange Agent shall issue in exchange for such lost, mutilated, stolen, or destroyed Certificate or First South Book-Entry
Shares the Merger Consideration as provided for in Section 3.1. The Exchange Agent may establish such other reasonable and customary
rules and procedures in connection with its duties as it may deem appropriate. Carolina Financial shall pay all charges and expenses,
including those of the Exchange Agent in connection with the distribution of the Merger Consideration as provided in Section 3.1.
Carolina Financial or its Exchange Agent will maintain a book entry list of Carolina Financial Common Stock to which each former
holder of First South Common Stock is entitled. Certificates evidencing Carolina Financial Common Stock into which First South
Common Stock has been converted will not be issued.
(c)
Unless different timing is agreed to by Carolina Financial and First South, after the Effective Time, each holder of shares
of First South Common Stock (other than Extinguished Shares) issued and outstanding at the Effective Time shall surrender the Certificate
or Certificates or First South Book-Entry Shares representing such shares to the Exchange Agent and shall promptly upon surrender
thereof receive in exchange therefor the consideration provided in Section 3.1, without interest, pursuant to this Section 3.2.
The Certificate or Certificates of First South Common Stock so surrendered shall be duly endorsed as the Exchange Agent may reasonably
require. Carolina Financial shall not be obligated to deliver the Merger Consideration to which any former holder of First South
Common Stock is entitled as a result of the Merger until such holder surrenders such holder’s Certificate or Certificates
or First South Book-Entry Shares (or affidavit of loss in lieu thereof as provided in Section 3.2(b)) for exchange as provided
in this Section 3.2. Similarly, no dividends or other distributions in respect of the Carolina Financial Common Stock shall be
paid to any holder of any unsurrendered Certificate or Certificates or First South Book-Entry Shares until such Certificate or
Certificates or First South Book-Entry Shares (or affidavit of loss in lieu thereof as provided in Section 3.2(b)) are surrendered
for exchange as provided in this Section 3.2. Any other provision of this Agreement notwithstanding, neither any Carolina Financial
Entities, nor any First South Entities, nor the Exchange Agent shall be liable to any holder of First South Common Stock for any
amounts paid or properly delivered in good faith to a public official pursuant to any applicable abandoned property, escheat, or
similar Law.
(d)
Each of Carolina Financial and the Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of First South Common Stock and First South Options such amounts, if
any, as it is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state,
local, or foreign Tax Law or by any Taxing Authority or Governmental Authority. To the extent that any amounts are so withheld
by Carolina Financial, the Surviving Corporation, or the Exchange Agent, as the case may be, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the holder of the shares of First South Common Stock in respect of which
such deduction and withholding was made by Carolina Financial, the Surviving Corporation, or the Exchange Agent, as the case may
be.
(e)
Any portion of the Merger Consideration and cash delivered to the Exchange Agent by Carolina Financial pursuant to Section
3.2(a) that remains unclaimed by the holder of shares of First South Common Stock for 12 months after the Effective Time (as well
as any proceeds from any investment thereof) shall be delivered by the Exchange Agent to Carolina Financial. Any holder of shares
of First South Common Stock who has not theretofore complied with Section 3.2(c) shall thereafter look only to Carolina Financial
for the consideration deliverable in respect of each share of First South Common Stock such holder holds as determined pursuant
to this Agreement without any interest thereon. If outstanding Certificates for shares of First South Common Stock or First South
Book-Entry Shares are not surrendered or the payment for them is not claimed prior to the date on which such shares of Carolina
Financial Common Stock and cash would otherwise escheat to or become the property of any Governmental Authority, the unclaimed
items shall, to the extent permitted by abandoned property and any other applicable law, become the property of Carolina Financial
(and to the extent not in its possession shall be delivered to it), free and clear of all claims or interest of any person previously
entitled to such property. Neither the Exchange Agent nor any party to this Agreement shall be liable to any holder of stock represented
by any Certificate or First South Book-Entry Shares for any consideration paid to a Governmental Authority pursuant to applicable
abandoned property, escheat or similar laws. Carolina Financial and the Exchange Agent shall be entitled to rely upon the stock
transfer books of First South to establish the identity of those persons entitled to receive the consideration specified in this
Agreement, which books shall be conclusive with respect thereto. In the event of a dispute with respect to ownership of stock
represented by any Certificate or Certificates or First South Book-Entry Shares, Carolina Financial and the Exchange Agent shall
be entitled to deposit any consideration represented thereby in escrow with an independent third party and thereafter be relieved
with respect to any claims thereto.
(f)
Adoption of this Agreement by the shareholders of First South shall constitute ratification of the appointment of the Exchange
Agent.
|
3.3
|
Effect on Carolina Financial Common Stock.
|
At and after the Effective
Time, each share of Carolina Financial Common Stock issued and outstanding immediately prior to the Effective Time shall remain
an issued and outstanding share of common stock of Carolina Financial and shall not be affected by the Merger.
|
3.4
|
First South Options and Equity-Based Awards.
|
(a)
Prior to the Effective Time, First South shall offer to enter into a Stock Option Cash-Out Agreement in the form of
Exhibit
G
with each holder of First South Options having an exercise price per share less than the per share value of the Merger Consideration
to cash out their First South Options.
(b)
As of the Effective Time, Carolina Financial shall have the right to (i) either assume any options or other stock-based
awards (“
First South Options
”) substantially in accordance with the terms of the First South Equity Plans and
the option grants or other award agreements by which they are evidenced in accordance with the terms of the First South Equity
Plans or (ii) replace the First South Options with substantially identical awards under any plans sponsored by Carolina Financial
under which options and other stock-based awards are granted, and the award agreements thereunder (each, a “
Carolina Financial
Stock Plan
”), such that after the Merger and without any action on the part of the holders of any First South Options,
the First South Options shall be converted into and become rights with respect to Carolina Financial Common Stock. From and after
the Effective Time, (A) each First South Option assumed or replaced by Carolina Financial may be exercised solely for shares of
Carolina Financial Common Stock, (B) the number of shares of Carolina Financial Common Stock subject to such First South Option
shall be equal to the number of shares of First South Common Stock subject to such First South Option immediately prior to the
Effective Time multiplied by the Exchange Ratio (rounded down to the nearest whole share), and (C) the per share exercise price
under each such First South Option shall be adjusted to reflect the Exchange Ratio (rounded up to the nearest whole cent). It is
intended that the foregoing assumption shall be undertaken in a manner that will not constitute a “modification” as
defined in Section 424 of the Code, as to any stock option which is an “incentive stock option.” Carolina Financial
and First South agree to take all steps necessary to effect the provisions of this
Section 3.4(b)
.
(c)
First South’s Board of Directors and its compensation committee shall not make any grants of First South Options
following the execution of this Agreement.
(d)
To the extent permitted under applicable Law and the terms of the First South Bancorp, Inc. 1997 Stock Option Plan, as amended,
and the First South Bancorp, Inc. 2008 Equity Incentive Plan (collectively, the “
First South Equity Plans
”),
First South’s Board of Directors or its compensation committee shall make any adjustments and amendments to or make such
determinations with respect to the First South Options necessary to effect the foregoing provisions of this Section 3.4.
|
3.5
|
Rights of Former First South Shareholders.
|
At the Effective Time,
the stock transfer books of First South shall be closed as to holders of First South Common Stock and no transfer of First South
Common Stock by any holder of such shares shall thereafter be made or recognized. Until surrendered for exchange in accordance
with the provisions of Section 3.2, each Certificate or First South Book-Entry Shares theretofore representing shares of First
South Common Stock (other than Certificates or First South Book-Entry Shares representing Extinguished Shares), shall from and
after the Effective Time represent for all purposes only the right to receive the Merger Consideration, without interest, as provided
in Article 3.
Notwithstanding any other
provision of this Agreement, each holder of shares of First South Common Stock exchanged pursuant to the Merger, who would otherwise
have been entitled to receive a fraction of a share of Carolina Financial Common Stock (after taking into account all Certificates
or First South Book-Entry Shares delivered by such holder), shall receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of Carolina Financial Common Stock multiplied by the Carolina Financial Average Closing
Price. No such holder will be entitled to dividends, voting rights, or any other rights as a shareholder in respect of any fractional
shares
.
Article
4
REPRESENTATIONS AND WARRANTIES OF FIRST SOUTH
First South represents
and warrants to Carolina Financial, except as set forth on the First South Disclosure Memorandum with respect to each such Section
below, as follows:
|
4.1
|
Organization, Standing, and Power.
|
First South is a corporation
duly organized, validly existing, and in good standing under the Laws of the Commonwealth of Virginia and is a bank holding company
within the meaning of the Bank Holding Company Act of 1956 (the “
BHCA
”). First South Bank is a North Carolina
state bank, duly organized, validly existing and in good standing under the laws of the State of North Carolina. Each of First
South and First South Bank has the corporate power and authority to carry on its business as now conducted and to own, lease,
and operate its Assets. Each of First South and First South Bank is duly qualified or licensed to transact business as a foreign
corporation in good standing in the states of the United States and foreign jurisdictions where the character of its Assets or
the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions where the failure
to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a First South Material Adverse
Effect. The minute book and other organizational documents for each of First South and First South Bank have been made available
to Carolina Financial for its review and, except as disclosed in Section 4.1 of the First South Disclosure Memorandum, are true
and complete in all material respects as in effect as of the date of this Agreement and accurately reflect in all material respects
all amendments thereto and all proceedings of the respective Board of Directors (including any committees of the Board of Directors)
and shareholders thereof. First South Bank is an “insured institution” as defined in the Federal Deposit Insurance
Act and applicable regulations thereunder, and the deposits held by First South Bank are insured up to applicable limits by the
FDIC’s Deposit Insurance Fund.
|
4.2
|
Authority of First South; No Breach by Agreement.
|
(a)
First South has the corporate power and authority necessary to execute, deliver, and, other than with respect to the Merger,
perform this Agreement, and with respect to the Merger, upon the approval of the Merger, including any necessary approvals referred
to in Sections 8.1(b) and 8.1(c) and by First South’s shareholders in accordance with Section 8.1(a) of this Agreement and
the VSCA, to perform its obligations under this Agreement and to consummate the transactions contemplated hereby. The execution,
delivery, and performance of this Agreement and the consummation of the transactions contemplated herein, including the Merger,
have been duly and validly authorized by all necessary corporate action in respect thereof on the part of First South, subject
to the approval of this Agreement by the holders of more than two-thirds of the outstanding shares of First South Common Stock,
which is the only First South shareholder vote required for approval of this Agreement and consummation of the Merger (the “
Requisite
First South Shareholder Vote
”). Subject to any necessary approvals referred to in Sections 8.1(b) and 8.1(c) and by such
Requisite First South Shareholder Vote, this Agreement represents a legal, valid, and binding obligation of First South, enforceable
against First South in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or similar Laws affecting the enforcement of creditors’ rights generally and except
that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the
court before which any proceeding may be brought).
(b)
Except as disclosed in Section 4.2 of the First South Disclosure Memorandum, neither the execution and delivery of this
Agreement by First South, nor the consummation by First South and First South Bank of the transactions contemplated hereby, nor
compliance by First South and First South Bank with any of the provisions hereof, will (i) assuming the Requisite First South
Shareholder Vote, conflict with or result in a breach of any provision of First South’s Articles of Incorporation or Bylaws
or the Articles of Incorporation or Bylaws of any First South Subsidiary or any resolution adopted by the Board of Directors or
the shareholders of any First South Entity, or (ii) constitute or result in a Default under, or require any Consent pursuant to,
or result in the creation of any Lien on any material Asset of any First South Entity under, any material Contract or any material
Permit of any First South Entity or, (iii) subject to receipt of the requisite Consents referred to in Section 8.1(b), constitute
or result in a Default under, or require any Consent pursuant to, any Law or Order applicable to any First South Entity or any
of their respective material Assets (including any First South Entity becoming subject to or liable for the payment of any Tax
on any of the Assets owned by any First South Entity being reassessed or revalued by any Regulatory Authority).
(c)
Except for (a) the filing of applications and notices with, and approval of such applications and notices from, the Federal
Reserve, the FDIC, the South Carolina Board of Financial Institutions and North Carolina Commissioner of Banks, (b) the filing
of any other required applications, filings, or notices with any other federal or state banking, insurance or other regulatory
or self-regulatory authorities or any courts, administrative agencies or commissions or other Governmental Authorities and approval
of or non-objection to such applications, filings and notices, (c) the filing with the SEC of a registration statement on Form
S-4 (the “
Registration Statement
”) in which proxy statements relating to First South’s Shareholders’
Meeting and Carolina Financial Shareholders’ Meeting to be held in connection with this Agreement and the transactions contemplated
by this Agreement (the “
Joint Proxy Statement/Prospectus
”) will be included, and the declaration of effectiveness
of the Registration Statement, (d) the filing of the Certificate of Merger and the Articles of Merger, (e) any consents, authorizations,
approvals, filings or exemptions in connection with compliance with the applicable provisions of federal and state securities
laws relating to the regulation of broker-dealers, investment advisers or transfer agents, and federal commodities laws relating
to the regulation of futures commission merchants and the rules and regulations thereunder and of any applicable industry self-regulatory
organization, and the rules and regulations of the NASDAQ Stock Market, or that are required under consumer finance, mortgage
banking and other similar laws, and (f) notices or filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, if any, no consents or approvals of or filings or registrations with any Governmental Authority are necessary in connection
with the consummation by First South of the Merger and the other transactions contemplated by this Agreement. No consents
or approvals of or filings or registrations with any Governmental Authority are necessary in connection with the execution and
delivery by First South of this Agreement.
(a)
The authorized capital stock of First South consists of 25,000,000 shares of First South Common Stock, of which 9,501,016
shares are issued and outstanding as of the date of this Agreement, and 1,000,000 shares of serial preferred stock, $0.01 par value
per share, of which no shares are issued and outstanding as of the date of this Agreement. Section 4.3(a) of the First South Disclosure
Memorandum lists all issued and outstanding First South Options and First South Stock Awards, which schedule includes the names
of the recipients, the date of grant, the exercise prices, the vesting schedules and the expiration dates, to the extent applicable.
All of the issued and outstanding shares of capital stock of First South are duly and validly issued and outstanding and are fully
paid and nonassessable. None of the outstanding shares of capital stock of First South has been issued in violation of any preemptive
rights of the current or past shareholders of First South.
(b)
Except for the 144,600 shares of First South Common Stock reserved for issuance pursuant to outstanding First South Options
and First South Stock Awards, as disclosed in Section 4.3(a) of the First South Disclosure Memorandum, there are no shares of capital
stock or other equity securities of First South reserved for issuance and no outstanding Rights relating to the capital stock of
First South.
(c)
Except as specifically set forth in this Section 4.3, there are no shares of First South capital stock or other equity securities
of First South outstanding and there are no outstanding Rights with respect to any First South securities or any right or privilege
(whether pre-emptive or contractual) capable of becoming a Contract or Right for the purchase from First South of, exchange with
First South for, subscription for or issuance of any securities of First South.
|
4.4
|
First South Subsidiaries.
|
First South has
no Subsidiaries except as set forth in Section 4.4 of First South Disclosure Memorandum, and First South owns all of the equity
interests in each of its Subsidiaries. No capital stock (or other equity interest) of any such Subsidiary is or may become required
to be issued (other than to another First South Entity) by reason of any Rights, and there are no Contracts by which any such Subsidiary
is bound to issue (other than to another First South Entity) additional shares of its capital stock (or other equity interests)
or Rights or by which any First South Entity is or may be bound to transfer any shares of the capital stock (or other equity interests)
of any such Subsidiary (other than to another First South Entity). There are no Contracts relating to the rights of any First South
Entity to vote or to dispose of any shares of the capital stock (or other equity interests) of any such Subsidiary. All of the
shares of capital stock (or other equity interests) of each Subsidiary are fully paid and nonassessable and are owned directly
or indirectly by First South free and clear of any Lien.
|
4.5
|
Exchange Act Filings; Securities Offerings; Financial Statements.
|
(a)
First South has timely filed all Exchange Act Documents required to be filed since December 31, 2014 (the “
First
South Exchange Act Reports
”). The First South Exchange Act Reports (i) at the time filed, (or, if amended or superseded
by a filing prior to the date of this Agreement, then on the date of such filing) complied in all material respects with the applicable
requirements of the Securities Laws and other applicable Laws and (ii) did not, at the time they were filed (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a
material fact or omit to state a material fact required to be stated in such First South Exchange Act Reports or necessary in
order to make the statements in such First South Exchange Act Reports, in light of the circumstances under which they were made,
not misleading. Each offering or sale of securities by First South (x) was either registered under the Securities Act or made
pursuant to a valid exemption from registration under the Securities Act, (y) complied in all material respects with the applicable
requirements of the Securities Laws and other applicable Laws, except for immaterial “blue sky” filings, including
disclosure and broker/dealer registration requirements, and (z) was made pursuant to offering documents which did not, at the
time of the offering (or, in the case of registration statements, at the effective date thereof) contain any untrue statement
of a material fact or omit to state a material fact required to be stated in the offering documents or necessary in order to make
the statements in such documents, in light of the circumstances under which they were made, not misleading. First South’s
principal executive officer and principal financial officer have made the certifications required by Sections 302 and 906 of the
Sarbanes-Oxley Act and the rules and regulations of the Exchange Act thereunder with respect to First South Exchange Act Reports
to the extent such rules or regulations applied at the time of the filing. For purposes of the preceding sentence, “principal
executive officer” and “principal financial officer” shall have the meanings given to such terms in the Sarbanes–Oxley
Act. Such certifications contain no qualifications or exceptions to the matters certified therein and have not been modified or
withdrawn; and neither First South nor any of its officers has received notice from any Regulatory Authority questioning or challenging
the accuracy, completeness, content, form, or manner of filing or submission of such certifications. No First South Subsidiary
is required to file any Exchange Act Documents.
(b)
Each of the First South Financial Statements (including, in each case, any related notes) that are contained in First South
Exchange Act Reports, including any First South Exchange Act Reports filed after the date of this Agreement until the Effective
Time, complied, or will comply, as to form in all material respects with the Exchange Act, was, or will be, prepared in accordance
with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial
statements or, in the case of unaudited interim statements, as permitted by Form 10-Q of the Exchange Act), fairly presented in
accordance with GAAP the consolidated financial position of First South and its Subsidiaries as of the respective dates and the
consolidated results of operations and cash flows for the periods indicated, including the fair values of the assets and liabilities
shown therein, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments
which were not or are not expected to be material in amount or effect, and were certified to the extent required by the Sarbanes-Oxley
Act.
(c)
First South’s independent registered public accountants, which have expressed their opinion with respect to the
First South Financial Statements and its Subsidiaries whether or not included in First South’s Exchange Act Reports (including
the related notes), are and have been throughout the periods covered by such Financial Statements (i) a registered public accounting
firm (as defined in Section 2(a)(12) of the Sarbanes-Oxley Act) (to the extent applicable during such period), (ii) “independent”
with respect to First South within the meaning of Regulation S-X, and (iii) with respect to First South, in compliance with subsections
(g) through (l) of Section 10A of the Exchange Act and related Securities Laws. First South’s independent public accountants
have audited First South’s year-end financial statements, and have reviewed First South’s interim financial statements,
that are included in the First South Financial Statements. Section 4.5(c) of the First South Disclosure Memorandum lists all non-audit
services performed by First South’s independent public accountants for First South or First South Bank.
(d)
First South maintains disclosure controls and procedures as required by Rule 13a-15 or 15d-15 under the Exchange Act, and
such controls and procedures are effective to ensure that all material information relating to First South and its Subsidiaries
is made known on a timely basis to First South’s principal executive officer and First South’s principal financial
officer.
|
4.6
|
Absence of Undisclosed Liabilities.
|
No First South Entity
has any Liabilities required under GAAP to be set forth on a consolidated balance sheet or in the notes thereto that are reasonably
likely to have, individually or in the aggregate, a First South Material Adverse Effect, except Liabilities which are (i) accrued
or reserved against in the consolidated balance sheet of First South as of March 31, 2017 as filed with the SEC or reflected in
the notes thereto, (ii) incurred in the ordinary course of business consistent with past practices, or (iii) incurred in connection
with the transactions contemplated by this Agreement. Section 4.6 of the First South Disclosure Memorandum lists, and First South
has delivered to Carolina Financial copies of the documentation creating or governing, all securitization transactions and “
off-balance
sheet arrangements
” (as defined in Item 303(c)(2) of Regulation S-K of the Exchange Act) effected by First South or its
Subsidiaries since December 31, 2016 (or with respect to off-balance sheet arrangements, that remain in effect), other than letters
of credit and unfunded loan commitments or credit lines. Except as reflected on First South’s balance sheet at March 31,
2017 as filed with the SEC, no First South Entity is directly or indirectly liable, by guarantee, indemnity, or otherwise, upon
or with respect to, or obligated, by discount or repurchase agreement or in any other way, to provide funds in respect to, or obligated
to guarantee or assume any Liability of any Person for any amount in excess of $25,000 and any amounts, whether or not in excess
of $25,000 that, in the aggregate, exceed $50,000. Except (x) as reflected in First South’s balance sheet at March 31, 2017
as filed with the SEC or Liabilities described in any notes thereto (or Liabilities for which neither accrual nor footnote disclosure
is required pursuant to GAAP or any applicable Regulatory Authority) or (y) for Liabilities incurred in the ordinary course of
business since March 31, 2017 as filed with the SEC consistent with past practice or in connection with this Agreement or the transactions
contemplated hereby, neither First South nor any of its Subsidiaries has any Material Liabilities or obligations of any nature.
|
4.7
|
Absence of Certain Changes or Events.
|
Except as disclosed in
the First South Financial Statements as filed with the SEC, (i) since December 31, 2013, there have been no events, changes,
or occurrences which have had, or are reasonably likely to have, individually or in the aggregate, a First South Material Adverse
Effect and (ii) since December 31, 2013, the First South Entities have conducted their respective businesses in the ordinary
course of business consistent with past practice. Section 4.7 of the First South Disclosure Memorandum sets forth attorneys’
fees, investment banking fees, accounting fees and other costs or fees of First South and its Subsidiaries that, based upon reasonable
inquiry, are expected to be paid or accrued through the Effective Time in connection with the merger transaction contemplated by
this Agreement.
(a)
Each of the First South Entities has timely filed with the appropriate Taxing Authorities, all material Tax Returns in
all jurisdictions in which Tax Returns are required to be filed, and such Tax Returns are correct and complete in all material
respects. None of the First South Entities is the beneficiary of any extension of time within which to file any Tax Return. All
material Taxes of the First South Entities to the extent due and payable (whether or not shown on any Tax Return) have been fully
and timely paid. There are no Liens for any material Taxes (other than a Lien for current real property or
ad valorem
Taxes
not yet due and payable, or for Taxes being contested in good faith for which adequate reserves are established in the First South
Financial Statements) filed of record on any of the Assets of any of the First South Entities. No written claim has ever been
made by any Taxing Authority in a jurisdiction where any First South Entity does not file a Tax Return that such First South Entity
may be subject to Taxes by that jurisdiction.
(b)
None of the First South Entities has received any written notice of assessment or proposed assessment in connection with
any Taxes. There are no ongoing or pending claims, audits, or examinations regarding any Taxes of any First South Entity or the
assets of any First South Entity. No officer or employee responsible for Tax matters of any First South Entity expects any Taxing
Authority to assess any additional material Taxes for any period for which Tax Returns have been filed. No issue has been raised
by a Taxing Authority in any prior examination of the First South which, by application of the same or similar principles, could
be expected to result in a proposed material deficiency for any subsequent taxable period. None of the First South Entities has
waived any statute of limitations in respect of any Taxes that remain in effect or agreed to a Tax assessment or deficiency.
(c)
Each First South Entity has complied in all material respects with all applicable Laws relating to the withholding of Taxes
and the payment thereof to Governmental Authorities, including Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee or independent contractor, and Taxes required to be withheld and paid pursuant to Sections
1441 and 1442 of the Code or similar provisions under foreign Law.
(d)
The unpaid Taxes of each First South Entity (i) did not, as of the most recent fiscal month end, materially exceed the reserve
for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income)
set forth on the face of the most recent balance sheet (rather than in any notes thereto) for such First South Entity and (ii)
do not materially exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with past custom
and practice of the First South Entities in filing their Tax Returns.
(e)
Except as disclosed in Section 4.8(e) of the First South Disclosure Memorandum, none of the First South Entities is a party
to any Tax allocation or sharing agreement and none of the First South Entities has been a member of an affiliated group filing
a consolidated federal income Tax Return (other than a group the common parent of which was First South) or has any Liability for
Taxes of any Person (other than First South or any of its Subsidiaries) under Treasury Regulation Section 1.1502-6 or any similar
provision of state, local or foreign Law, or as a transferee or successor, by contract or otherwise.
(f)
During the five-year period ending on the date hereof, none of the First South Entities was a “distributing corporation”
or a “controlled corporation” as defined in, and in a transaction intended to be governed by Section 355 of the Code.
(g)
None of the First South Entities has made any payments, is obligated to make any payments, or is a party to any contract
that could obligate it to make any payments, for which a deduction could be disallowed under Section 280G or 162(m) of the Code,
or that would be subject to withholding under Section 4999 of the Code. None of the First South Entities has been or will be required
to include any adjustment in taxable income for any Tax period (or portion thereof) pursuant to Section 481 of the Code or any
comparable provision under state or foreign Tax Laws as a result of transactions or events occurring prior to the Closing. There
is no material taxable income of First South that will be required under applicable tax law to be reported by Carolina Financial
for a taxable period beginning after the date of the Effective Time which taxable income was realized prior to the Closing Date.
Any net operating losses of the First South Entities disclosed in Section 4.8(g) of the First South Disclosure Memorandum are
not subject to any limitation on their use under the provisions of Sections 382 or 269 of the Code or any other provisions of
the Code or the Treasury Regulations dealing with the utilization of net operating losses other than any such limitations as may
arise as a result of the consummation of the transactions contemplated by this Agreement.
(h)
Each of the First South Entities is in compliance in all material respects with, and its records contain all information
and documents (including properly completed IRS Forms W-9) necessary to comply in all material respects with, all applicable information
reporting and Tax withholding requirements under federal, state, and local Tax Laws, and such records identify with specificity
all accounts subject to backup withholding under Section 3406 of the Code.
(i)
No First South Entity is subject to any private letter ruling of the IRS or comparable rulings of any Taxing Authority that
is currently applicable.
(j)
No property owned by any First South Entity is (i) property required to be treated as being owned by another Person pursuant
to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the
enactment of the Tax Reform Act of 1986, (ii) “tax-exempt use property” within the meaning of Section 168(h)(1) of
the Code, (iii) “tax-exempt bond financed property” within the meaning of Section 168(g) of the Code, (iv) “limited
use property” within the meaning of IRS Revenue Procedure 76-30, (v) tangible property used predominantly outside the United
States, or (vi) subject to any provision of state, local or foreign Law comparable to any of the provisions listed above in this
paragraph.
(k)
No First South Entity has any “corporate acquisition indebtedness” within the meaning of Section 279 of the
Code.
(l)
First South has disclosed on its federal income Tax Returns all positions taken therein that are reasonably believed to
give rise to substantial understatement of federal income tax within the meaning of Section 6662 of the Code.
(m)
No First South Entity has participated in any reportable transaction, as defined in Code Section 6707A(c)(1) or Treasury
Regulations Section 1.6011-4(b)(1).
(n)
First South has made available to Carolina Financial complete copies of (i) all federal, state, local and foreign income
or franchise Tax Returns of the First South Entities relating to the taxable periods since December 31, 2012, and (ii) any audit
report issued by any Taxing Authority since December 31, 2012 relating to any Taxes due from or with respect to the First South
Entities.
(o)
No First South Entity nor any other Person on its behalf has (i) filed a consent pursuant to Section 341(f) of the Code
(as in effect prior to the repeal under the Jobs and Growth Tax Reconciliation Act of 2003) or agreed to have Section 341(f)(2)
of the Code (as in effect prior to the repeal under the Jobs and Growth Tax Reconciliation Act of 2003) apply to any disposition
of a subsection (f) asset (as such term is defined in former Section 341(f)(4) of the Code) owned by any First South Entities,
(ii) executed or entered into a closing agreement pursuant to Section 7121 of the Code or any similar provision of Law with respect
to the First South Entities, or (iii) granted to any Person any power of attorney that is currently in force with respect to any
Tax matter.
(p)
No First South Entity has, or ever had, a permanent establishment in any country other than the United States, or has engaged
in a trade or business in any country other than the United States that subjected it to tax in such country.
(q)
No First South Entity has been a United States real property holding corporation within the meaning of Section 897(c)(2)
of the Code since January 1, 2012.
For purposes of this Section
4.8, any reference to First South or any First South Entity shall be deemed to include any Person that merged with or was liquidated
into or otherwise combined with First South or a First South Entity prior to the Effective Time.
|
4.9
|
Allowance for Possible Loan Losses; Loan and Investment Portfolios, etc.
|
(a)
First South’s allowance for possible loan or lease losses (the “
Allowance
”) is, and has been since
January 1, 2016, in material compliance with First South’s methodology for determining the adequacy of its allowance for
loan losses as well as the standards established by applicable Governmental Authorities and the Financial Accounting Standards
Board in all material respects.
(b)
As of the date hereof, all loans, discounts and leases (in which any First South Entity is lessor) reflected on First South’s
Financial Statements were, and with respect to the consolidated balance sheets delivered as of the dates subsequent to the execution
of this Agreement will be as of the dates thereof, (a) at the time and under the circumstances in which made, made for good, valuable
and adequate consideration in the ordinary course of business and, to the Knowledge of First South, are the legal and binding obligations
of the obligors thereof, (b) evidenced by genuine notes, agreements, or other evidences of indebtedness and (c) to the extent secured,
to the Knowledge of First South, have been secured by valid liens and security interests which have been perfected. Accurate lists
of all loans, discounts, other real estate owned and financing leases as of June 9, 2017 and on a monthly basis thereafter, and
of the investment portfolios of each First South Entity as of such date, have been and will be made available to Carolina Financial
concurrently with the First South Disclosure Memorandum. Except as specifically set forth in Section 4.9(b) of the First South
Disclosure Memorandum, neither First South nor First South Bank is a party to any written or oral loan agreement, note, or borrowing
arrangement, including any loan guaranty, that was, as of the most recent month-end (i) delinquent by more than 30 days in the
payment of principal or interest, (ii) otherwise in material default for more than 30 days, (iii) classified as “substandard,”
“doubtful,” “loss,” “other assets especially mentioned” or any comparable classification by
First South or under the standards of any applicable Regulatory Authority, (iv) an obligation of any director, executive officer
or 10% shareholder of any First South Entity who is subject to Regulation O of the Federal Reserve (12 C.F.R. Part 215), or any
person, corporation or enterprise controlling, controlled by or under common control with any of the foregoing, or (v) in material
violation of any Law.
(c)
All securities held by First South or First South Bank, as reflected in the consolidated balance sheets of First South included
in the First South Financial Statements, are carried in accordance with GAAP, specifically including Accounting Standards Codification
Topic 320, Investments – Debt and Equity Securities. Except for pledges to secure public and trust deposits and Federal Home
Loan Bank advances, to the Knowledge of First South, none of the securities reflected in the First South Financial Statements as
of March 31, 2017, and none of the securities since acquired by First South or First South Bank is subject to any restriction,
whether contractual or statutory, which impairs the ability of First South or First South Bank to freely dispose of such security
at any time, other than those restrictions imposed on securities held to maturity under GAAP, pursuant to a clearing agreement
or in accordance with laws.
(d)
Section 4.9(d) of the First South Disclosure Memorandum lists all interest rate swaps, caps, floors, option agreements,
futures and forward contracts and other similar risk management arrangements, whether entered into for First South’s own
account, or for the account of First South Bank or its customers, and all such risk management agreements or arrangements were
entered into (a) in the ordinary and usual course of business consistent with past practice and in compliance with all applicable
laws, rules, regulations and regulatory policies, and (b) with counterparties believed to be financially responsible at the time;
and each of them constitutes the valid and legally binding obligation of First South or First South Bank, enforceable in accordance
with its terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting creditors’ rights or by general equity principles),
and is in full force and effect. Neither First South nor First South Bank, nor to the First South’s Knowledge, any other
party thereto, is in breach of any material obligation under any such agreement or arrangement.
(a)
Except as disclosed or reserved against in the First South Financial Statements, the First South Entities have good and
marketable title, free and clear of all Liens except those permitted in Section 4.10(e), to all of their respective Assets that
they own. In addition, to First South’s Knowledge, all tangible properties used in the businesses of the First South Entities
are in good condition, reasonable wear and tear excepted, and are usable in the ordinary course of business consistent with First
South’s past practices.
(b)
All Assets which are material to First South’s business, held under leases or subleases by any of the First South
Entities, are held under valid Contracts enforceable in accordance with their respective terms (except in all cases as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar Laws affecting the enforcement of creditors’
rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject
to the discretion of the court before which any proceeding may be brought), and to the Knowledge of First South each such Contract
is in full force and effect.
(c)
The First South Entities currently maintain insurance, including bankers’ blanket bonds, with insurers of recognized
financial responsibility in such amounts as management of First South has reasonably determined to be prudent. None of the First
South Entities has received notice from any insurance carrier that (i) any policy of insurance will be canceled or that coverage
thereunder will be reduced or eliminated, (ii) premium costs with respect to such policies of insurance will be substantially
increased, or (iii) similar coverage will be denied or limited or not extended or renewed with respect to any First South Entity,
any act or occurrence, or that any Asset, officer, director, employee or agent of any First South Entity will not be covered by
such insurance or bond. There are presently no claims for amounts exceeding $50,000 individually or in the aggregate pending under
such policies of insurance or bonds, and no written notices of claims in excess of such amounts have been given by any First South
Entity under such policies. First South has made no claims, and no claims are contemplated to be made, under its directors’
and officers’ errors and omissions or other insurance or bankers’ blanket bond.
(d)
The Assets of the First South Entities include all material Assets required by First South Entities to operate the business
of the First South Entities as presently conducted. All real and personal property which is material to the business of First South
or First South Bank that is leased or licensed by it is held pursuant to leases or licenses which are valid and enforceable in
accordance with their respective terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar Laws affecting the enforcement of creditors’ rights generally and except that the
availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before
which any proceeding may be brought) and, to the Knowledge of First South, such leases and licenses will not terminate or lapse
prior to the Effective Time or thereafter by reason of completion of the Merger. To the Knowledge of First South, all improved
real property owned or leased by First South or First South Bank is in material compliance with all applicable laws, including
zoning laws and the Americans with Disabilities Act of 1990.
(e)
Each First South Entity has fee simple title to all the real property assets reflected in the First South Financial Statements
as being owned by a First South Entity or acquired after the date thereof (except properties sold or otherwise disposed of since
the date thereof in the ordinary course of business) (the “
First South Realty
”), free and clear of all Liens
of any nature whatsoever, except (i) statutory Liens securing payments not yet due, (ii) Liens for real property or ad valorem
Taxes not yet delinquent (or being contested in good faith and for which adequate reserves have been established), (iii) easements,
rights of way and other similar encumbrances and matters of record that do not materially adversely affect the use of the properties
or assets subject thereto or affected thereby as used by a First South Entity on the date hereof or otherwise materially impair
business operations at such properties, as conducted by a First South Entity on the date hereof and (iv) such imperfections or
irregularities of title or Liens as do not materially affect the use of the properties or assets subject thereto or affected thereby
or otherwise materially impair business operations at such properties as used on the date hereof.
(f)
To the Knowledge of First South, the First South Realty and the real property with respect to which a First South Entity
is the lessee (the “
First South Leased Real Properties
”) are in material compliance with all applicable building,
fire, zoning (or are legal nonconforming uses allowed under applicable zoning ordinances) and other applicable laws, ordinances
and regulations and with all deed restrictions of record, no written notice of any material violation or material alleged violation
thereof has been received in the past three years that has not been resolved, and there are no proposed changes therein that would
materially and adversely affect the First South Realty, the First South Leased Real Properties or their uses. First South has no
Knowledge of any proposed or pending change in the zoning of, or of any proposed or pending condemnation proceeding with respect
to, any of the First South Realty or the First South Leased Real Properties which may materially and adversely affect the First
South Realty or the First South Leased Real Properties or the current use by a First South Entity thereof.
|
4.11
|
Intellectual Property.
|
Each First South Entity
owns or has a license to use all of the Intellectual Property used by such First South Entity in the course of its business, including
sufficient rights in each copy possessed by each First South Entity. Each First South Entity is the owner of or has a license,
with the right to sublicense, to any Intellectual Property sold or licensed to a third party by such First South Entity in connection
with such First South Entity’s business operations, and such First South Entity has the right to convey by sale or license
any Intellectual Property so conveyed. To the Knowledge of First South, no First South Entity is in material Default under any
of its Intellectual Property licenses. No proceedings have been instituted, or are pending or to First South’s Knowledge
threatened, which challenge the rights of any First South Entity with respect to Intellectual Property used, sold, or licensed
by such First South Entity in the course of its business, nor has any person claimed or alleged that any First South Entity has
misappropriated any rights to such Intellectual Property. To the Knowledge of First South, the conduct of the business of the
First South Entities does not infringe any Intellectual Property of any other person. No First South Entity is obligated to pay
any recurring royalties to any Person with respect to any such Intellectual Property, other than any license or maintenance fees
specified in a license agreement with such party. First South does not have any Contracts with its directors, officers, or employees
which require such officer, director, or employee to assign any interest in any Intellectual Property to a First South Entity
and to keep confidential any trade secrets, proprietary data, customer information, or other business information of a First South
Entity, and to First South’s Knowledge, no such officer, director, or employee is party to any Contract with any Person
other than a First South Entity which requires such officer, director or employee to assign any interest in any Intellectual Property
to any Person other than a First South Entity or to keep confidential any trade secrets, proprietary data, customer information,
or other business information of any Person other than a First South Entity. To First South’s Knowledge, no officer, director,
or employee of any First South Entity is party to any confidentiality, nonsolicitation, noncompetition, or other Contract which
restricts or prohibits such officer, director, or employee from engaging in activities competitive with any Person, including
any First South Entity.
|
4.12
|
Environmental Matters.
|
(a)
First South has delivered, or caused to be delivered or made available to Carolina Financial, true and complete copies of,
all environmental site assessments, test results, analytical data, boring logs, permits for storm water, wetlands fill, or other
environmental permits for construction of any building, parking lot or other improvement, and other environmental reports, studies,
or non-privileged correspondence in the possession of any First South Entity relating to any property owned, leased or operated
by any of the First South Entities. To the Knowledge of First South, there are no material violations of Environmental Laws on
properties that secure loans made by First South or First South Bank.
(b)
There are no legal, administrative, arbitral or other proceedings, claims, actions, causes of action, orders, assessments
(including penalty assessments) or written notices of any kind with respect to any environmental, health or safety matters or any
private or governmental environmental, health or safety investigations or remediation activities of any nature seeking to impose,
or that are reasonably likely to result in, any material liability or obligation of the First South Entities arising under any
Environmental Law pending or, to First South’s Knowledge, threatened against the First South Entities. To First South’s
Knowledge, there is no reasonable basis for, or circumstances that are reasonably likely to give rise to, any such proceeding,
claim, action, investigation or remediation by any Governmental Authority or any third party that would give rise to any material
liability or obligation on the part of the First South Entities. None of the First South Entities is subject to any agreement,
order, judgment, decree, letter or memorandum by or with any Governmental Authority or third party imposing any liability or obligation
with respect to any of the foregoing. Each property owned or operated by First South, and, to First South’s Knowledge, any
property in which any of the First South Entities holds a security interest, is in material compliance with all Environmental Laws.
(c)
Notwithstanding any other provision herein, the representations and warranties in Subsections 4.12(a) and (b) above constitute
First South’s sole representations and warranties with respect to compliance with Environmental Laws or the presence of Hazardous
Material.
|
4.13
|
Compliance with Laws.
|
(a)
First South is a bank holding company duly registered and in good standing as such with the Federal Reserve. First South
Bank is a state chartered bank in good standing with the North Carolina Commissioner of Banks.
(b)
Compliance with Permits, Laws and Orders
.
(i)
Each of the First South Entities has in effect all Permits and has made all filings, applications, and registrations with
Governmental Authorities that are required for it to own, lease, or operate its assets and to carry on its business as now conducted,
and to the Knowledge of First South, there has occurred no Default under any such Permit applicable to their respective businesses
or employees conducting their respective businesses.
(ii)
To the Knowledge of First South, none of the First South Entities is in material Default under any Laws or Orders applicable
to its business or employees conducting its business.
(iii)
None of the First South Entities has received any notification or communication from any Governmental Authority (A) asserting
that First South or any of its Subsidiaries is in Default under any of the Permits, Laws, or Orders which such Governmental Authority
enforces, (B) threatening to revoke any Permits, or (C) requiring First South or any of its Subsidiaries (x) to
enter into or consent to the issuance of a cease and desist order, formal agreement, directive, commitment, or memorandum of understanding,
or (y) to adopt any resolution of its Board of Directors or similar undertaking.
(iv)
There (A) is no material unresolved violation, criticism, or exception by any Governmental Authority with respect to
any report or statement relating to any examinations or inspections of First South or any of its Subsidiaries, (B) are no written
notices or correspondence received by First South with respect to pending formal or informal inquiries of a material nature by,
or disagreements or disputes with, any Governmental Authority with respect to First South’s or any of First South’s
Subsidiaries’ business, operations, policies, or procedures since its inception, and (C) is not any pending or, to First
South’s Knowledge, threatened, nor has any Governmental Authority indicated an intention to conduct, any investigation or
review (other than regular or routine examinations or inspections) of it or any of its Subsidiaries.
(v)
None of the First South Entities nor, to the Knowledge of First South, any of its directors, officers, employees, or Representatives
acting on its behalf has offered, paid, or agreed to pay any Person, including any Government Authority, directly or indirectly,
any thing of value for the purpose of, or with the intent of obtaining or retaining any business in violation of applicable Laws,
including (1) using any corporate funds for any unlawful contribution, gift, entertainment, or other unlawful expense relating
to political activity, (2) making any direct or indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds, (3) violating any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (4) making
any bribe, rebate, payoff, influence payment, kickback, or other unlawful payment.
(vi)
Each First South Entity has complied in all material respects with all requirements of Law under the Bank Secrecy Act and
the USA Patriot Act, and each First South Entity has timely filed all reports of suspicious activity, including those required
under 12 C.F.R. § 353.3.
(vii)
Each First South Entity’s collection and use of individually identifiable personal information (“IIPI”)
to an identifiable or identified natural person complies in all material respects with the Fair Credit Reporting Act and the Gramm-Leach-Bliley
Act.
(a)
No First South Entity is the subject of any Litigation asserting that it or any other First South Entity has committed an
unfair labor practice (within the meaning of the National Labor Relations Act or comparable state Law) or other violation of state
or federal labor Law or seeking to compel it or any other First South Entity to bargain with any labor organization or other employee
representative as to wages or conditions of employment, nor is any First South Entity party to any collective bargaining agreement
or subject to any bargaining order, injunction, or other Order relating to any First South Entity’s relationship or dealings
with its employees, any labor organization or any other employee representative. There is no strike, slowdown, lockout, or other
similar job action or labor dispute involving any First South Entity pending or, to the Knowledge of First South, threatened, and
there have been no such actions or disputes in the past five years. To First South’s Knowledge, there has not been any attempt
by any First South Entity employees or any labor organization or other employee representative to organize or certify a collective
bargaining unit or to engage in any other union organization activity with respect to the workforce of any First South Entity.
(b)
Except as disclosed in Section 4.14(b) of the First South Disclosure Memorandum, the employment of each employee and the
engagement of each independent contractor of each First South Entity is terminable at will by the relevant First South Entity
without (i) any penalty, liability, or severance obligation incurred by any First South Entity, (ii) and in all cases without
prior consent by any Governmental Authority. No First South Entity will owe any amounts to any of its employees or independent
contractors as of the Closing Date, including any amounts incurred for wages, bonuses, vacation pay, sick leave, contract notice
periods, change of control payments, or severance obligations that have not been properly accrued for or otherwise recorded in
the books and records of First South.
(c)
To First South’s Knowledge, all of the employees employed by First South and First South Bank in the United States
are either United States citizens or are legally eligible to work in the United States under the Immigration Reform and Control
Act of 1986, as amended, other United States immigration Laws and the Laws related to the employment of non-United States citizens
applicable in the state in which the employees are employed
.
(d)
Within the 90 days prior to the Effective Date, no First South Entity has effectuated (i) a “plant closing”
(as defined in the Worker Adjustment and Retraining Notification Act (the “
WARN Act
”)) affecting a single site
of employment or one or more facilities or operating units within a single site of employment of any First South Entity; or (ii) a
“mass layoff” (as defined in the WARN Act) affecting a single site of employment of any First South Entity; and no
First South Entity has been affected by any layoffs or employment losses sufficient in number to trigger application of any similar
state or local Law.
(e)
Section 4.14(e) of the First South Disclosure Memorandum contains a list of all individuals who are independent contractors
of each First South Entity (separately listed by First South Entity) and each such individual meets the standard for an independent
contractor under all Laws (including Treasury Regulations under the Code and federal and state labor and employment Laws) and no
such Person is an employee of any First South Entity under any applicable Law.
|
4.15
|
Employee Benefit Plans.
|
(a)
First South has disclosed in Section 4.15(a) of the First South Disclosure Memorandum, and has delivered or made available
to Carolina Financial prior to the execution of this Agreement, (i) copies of each Employee Benefit Plan currently adopted, maintained
by, sponsored in whole or in part by, or contributed or required to be contributed to by any First South Entity or any ERISA Affiliate
thereof for the benefit of employees, former employees, retirees, directors, independent contractors, or their respective dependents,
spouses, or other beneficiaries or under which employees, retirees, former employees, directors, independent contractors, or their
respective dependents, spouses, or other beneficiaries are eligible to participate (each, a “
First South Benefit Plan
,”
and collectively, the “
First South Benefit Plans
”) and (ii) a list of each Employee Benefit Plan that is not
identified in (i) above and in connection with which any First South Entity or any ERISA Affiliate thereof has or reasonably could
have any obligation or Liability. Any of the First South Benefit Plans which is an “employee pension benefit plan,”
as that term is defined in ERISA Section 3(2), is referred to herein as a “
First South ERISA Plan
.”
(b)
First South has delivered or made available to Carolina Financial prior to the execution of this Agreement (i) all trust
agreements or other funding arrangements for all Employee Benefit Plans, (ii) all determination letters, rulings, opinion letters,
information letters, or advisory opinions issued by the United States Internal Revenue Service (“
IRS
”), the
United States Department of Labor (“
DOL
”) or the Pension Benefit Guaranty Corporation (“
PBGC
”)
during this calendar year or any of the preceding three calendar years, (iii) any filing or documentation (whether or not filed
with the IRS) where corrective action was taken in connection with the IRS EPCRS program set forth in Revenue Procedure 2013-12,
as modified (or its predecessor or successor rulings), (iv) annual reports or returns, audited or unaudited financial statements,
actuarial reports, and valuations prepared for any Employee Benefit Plan for the current plan year and the three preceding plan
years, (v) the most recent summary plan descriptions for each First South Benefit Plan and any material modifications thereto,
and (vi) all material correspondence from or to the IRS, DOL, or PBGC regarding any First South Benefit Plan received or sent
during this calendar year or any of the preceding three calendar years.
(c)
Each First South Benefit Plan is in material compliance with the terms of such First South Benefit Plan, in material compliance
with the applicable requirements of the Code, in material compliance with the applicable requirements of ERISA, and in material
compliance with any and all other applicable Laws. Each First South ERISA Plan which is intended to be qualified under Section
401(a) of the Code has received a favorable determination letter or opinion from the IRS or, in the alternative, appropriately
relies upon a favorable opinion letter or advisory letter issued to a prototype plan or volume submitter under which the First
South ERISA Plan has been adopted and First South is not aware of any circumstances likely to result in revocation of any such
favorable determination letter. First South has not received any communication (written or unwritten) from any Governmental Authority
questioning or challenging the compliance of any First South Benefit Plan with applicable Laws. No First South Benefit Plan is
currently being audited by any Governmental Authority for compliance with applicable Laws or has been audited with a determination
by any Governmental Authority that the First South Benefit Plan failed to comply with applicable Laws.
(d)
There has been no material written or, to the First South’s Knowledge, oral representation or communication with respect
to any aspect of the First South Benefit Plans made to employees of the First South which is not in all material respects in accordance
with the written or otherwise preexisting terms and provisions of such plans. Neither First South nor, to the Knowledge of First
South, any administrator or fiduciary of any First South Benefit Plan (or any agent of any of the foregoing) has engaged in any
transaction, or acted or failed to act in any manner, which could subject First South or Carolina Financial to any direct or indirect
Liability (by indemnity or otherwise) for breach of any fiduciary, co-fiduciary, or other duty under ERISA. There are no unresolved
claims or disputes under the terms of, or in connection with, the First South Benefit Plans other than claims for benefits which
are payable in the ordinary course of business and no action, proceeding, prosecution, inquiry, hearing, or investigation has been
commenced with respect to any First South Benefit Plan other than routine claims for benefits.
(e)
All First South Benefit Plan documents and annual reports or returns, audited or unaudited financial statements, actuarial
valuations, summary annual reports, and summary plan descriptions issued with respect to the First South Benefit Plans are correct
and complete in all material respects, and to the extent applicable, have been timely filed with the IRS or the DOL, and distributed
to participants of the First South Benefit Plans (to the extent required by Law), and there have been no material misstatements
or omissions in the information set forth therein.
(f)
To the First South’s Knowledge, no “Party in Interest” (as defined in ERISA Section 3(14)) or “Disqualified
Person” (as defined in Code Section 4975(e)(2)) of any First South Benefit Plan has engaged in any nonexempt “Prohibited
Transaction” (described in Code Section 4975(c) or ERISA Section 406).
(g)
No First South Entity nor any of its ERISA Affiliates has, or ever has had, any obligation or Liability in connection with,
any plan that is or was subject to Code Section 412 or ERISA Section 302 or Title IV of ERISA.
(h)
No material Liability under Title IV of ERISA has been or is expected to be incurred by any First South Entity or any ERISA
Affiliate thereof, and no event has occurred that could reasonably result in Liability under Title IV of ERISA being incurred
by any First South Entity or any ERISA Affiliate thereof with respect to any ongoing, frozen, terminated, or other single-employer
plan of any First South Entity or the single-employer plan of any ERISA Affiliate. Except as may arise in connection with the
transactions contemplated by this Agreement, there has been no “reportable event,” within the meaning of ERISA Section
4043, for which the 30-day reporting requirement has not been waived by any ongoing, frozen, terminated, or other single-employer
plan of First South or of an ERISA Affiliate.
(i)
Except as required under Part 6 of ERISA or Code Section 4980B, no First South Entity has any material Liability or obligation
for retiree or post-termination of employment or services health or life benefits under any of the First South Benefit Plans, or
other plan or arrangement, and there are no restrictions on the rights of such First South Entity to amend or terminate any and
all such retiree or post-termination of employment or services health or benefit plans or arrangements without incurring any Liability.
No Tax under Code Sections 4980B or 5000 has been incurred with respect to any First South Benefit Plan, or other plan or arrangement,
and no circumstance exists which could give rise to such Taxes.
(j)
Except as disclosed in Section 4.15(j) of the First South Disclosure Memorandum, neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment for or related to individual
services (including severance, unemployment compensation, “excess parachute payment” as defined under Code Section
280G, or otherwise) becoming due from any First South Entity to any employee, officer, director or independent contractor under
any First South Benefit Plan or otherwise, (ii) increase any benefits otherwise payable under any First South Benefit Plan,
or (iii) result in any acceleration of the time of payment or vesting of any such benefit, or any benefit under any life insurance
owned by any First South Entity or the rights of any First South Entity in, to or under any insurance on the life of any current
or former officer, director, or employee of any First South Entity, or change any rights or obligations of any First South Entity
with respect to such insurance.
(k)
Section 4.15(k) of the First South Disclosure Memorandum sets forth preliminary calculations, based on assumptions set forth
therein, of the following: (i) the amount of all payments and benefits to which each individual set forth on such First South Disclosure
Memorandum is entitled to receive, pursuant to all employment, salary continuation, bonus, change in control, and all other agreements,
plans and arrangements, in connection with a termination of employment before or following, or otherwise in connection with or
contingent upon, the transactions contemplated under this Agreement (for the avoidance of doubt, excluding payments or benefits
in respect of vested equity awards) (each such total amount in respect of each such individual, the “
Change in Control
Benefit
”), other than the payment any such individual shall otherwise be entitled to receive as a gross-up payment in
respect of any excise tax imposed on the individual pursuant to Section 4999 of the Code as calculated pursuant to the applicable
agreement (any each such payment, a “
Gross-Up Payment
”); (ii) the amount of any Gross-Up Payment payable to
each such individual; and (iii) the aggregate amount of all Change in Control Benefits and Gross-Up Payments.
(l)
No First South Benefit Plan is or has been funded by, associated with, or related to a “voluntary employee’s
beneficiary association” within the meaning of Section 501(c)(9) of the Code, a “welfare benefit fund” within
the meaning of Section 419 of the Code, a “qualified asset account” within the meaning of Section 419A of the Code
or a “multiple employer welfare arrangement” within the meaning of Section 3(40) of ERISA. The actuarial present values
of all accrued deferred compensation entitlements (including entitlements under any executive compensation, supplemental retirement,
or employment agreement) of employees and former employees of any First South Entity and their respective beneficiaries, other
than entitlements accrued pursuant to funded retirement plans, whether or not subject to the provisions of Code Section 412 or
ERISA Section 302, have been fully reflected on the First South Financial Statements in all material respects to the extent required
by and in accordance with GAAP.
(m)
Each First South Benefit Plan that is a “nonqualified deferred compensation plan” (within the meaning of Section
409A of the Code) has been operated in compliance with Section 409A of the Code and the guidance issued by the IRS with respect
to such plans or is not required to comply therewith due to its grandfathered status under Section 409A of the Code.
(n)
All individuals who render services to any First South Entity and who are authorized to participate in a First South Benefit
Plan pursuant to the terms of such First South Benefit Plan are in fact eligible to and authorized to participate in such First
South Benefit Plan. All First South Entities have, for purposes of the First South Benefit Plans and all other purposes, correctly
classified all individuals performing services for such First South Entity as common law employees, independent contractors or
agents, as applicable.
(o)
Neither the First South nor any of its ERISA Affiliates has had an “obligation to contribute” (as defined in
ERISA Section 4212) to, or other obligations or Liability in connection with, a “multiemployer plan” (as defined in
ERISA Sections 4001(a)(3) or 3(37)(A)) or any employee pension benefit plan within the meaning of ERISA Section 3(2) that is subject
to Section 412 of the Code or Section 302 of ERISA or a multiple employer plan within the meaning of Section 413(c) of the Code
or ERISA Sections 4063, 4064 or 4066.
(p)
There are no payments or changes in terms due to any insured person as a result of this Agreement, the Merger or the transactions
contemplated herein, under any bank-owned, corporate-owned split dollar life insurance, other life insurance, or similar arrangement
or Contract, and the Successor Corporation shall, upon and after the Effective Time, succeed to and have all the rights in, to
and under such life insurance Contracts as First South presently holds. Each First South Entity will, upon the execution and delivery
of this Agreement, and will continue to have, notwithstanding this Agreement or the consummation of the transaction contemplated
hereby, all ownership rights and interest in all corporate or bank-owned life insurance.
(q)
Each First South ERISA Plan that is intended to qualify under Section 401(a) of the Code so qualifies, and its related trust
is tax exempt under Section 501(a) of the Code, and no event has occurred and no condition exists that could reasonably be expected
to cause the loss of such qualified or tax exempt status.
(r)
Each First South Benefit Plan may be amended or terminated by First South without the consent of any Person.
(s)
Except as disclosed in Section 4.15(t) of the First South Disclosure Memorandum, no First South Benefit Plan that is described
in ERISA Section 3(2) is involved or connected with any fund or other investment that has or involves any early termination, market
value adjustment or other similar fee, payment requirement, or other charge.
(t)
Other than agreements identified in Section 4.16(a) of the First South Disclosure Memorandum, no First South Benefit Plan,
or other plan or arrangement, is subject to any requirement of Section 409A(a)(2), (3), or (4) of the Code.
(u)
Other than the First South Benefit Plans identified in Section 4.15(a) of the First South Disclosure Memorandum, no First
South Benefit Plan provides for the potential issuance of equity compensation.
(v)
No event has occurred or condition exists that could subject the First South or any of its ERISA Affiliates to Liability
(whether direct or indirect, contingent or otherwise) on account of a violation of the health care requirements of Part 6 or 7
of Title I of ERISA or Section 4980B or 4980D of the Code.
(w)
Each group health plan sponsored, maintained or contributed to by the First South or any of its ERISA Affiliates (or to
which the First South or any of its ERISA Affiliates is obligated to contribute or otherwise has any liability or contingent liability)
satisfies the requirements of the Patient Protection and Affordable Care Act and the regulations and guidance issued thereunder
(“
PPACA
”), such that there is no Tax or penalty that could be imposed pursuant to the PPACA that relates to
such group health plan. No condition exists that could cause the First South or any of its ERISA Affiliates to incur Liability
for any assessable payment under Section 4980H of the Code.
(a)
Except as reflected in the First South Financial Statements, disclosed in First South Exchange Act Reports or otherwise
disclosed in Section 4.16(a) of the First South Disclosure Memorandum, as of the date of this Agreement, none of the First South
Entities, nor any of their respective Assets, businesses, or operations, is a party to, or is bound or affected by, or receives
benefits under, (i) any employment, bonus, severance, termination, consulting, or retirement Contract providing for aggregate
payments to any Person in any calendar year in excess of $25,000, (ii) any Contract relating to the borrowing of money by
any First South Entity or the guarantee by any First South Entity of any such obligation (other than Contracts evidencing the creation
of deposit liabilities, endorsements or guarantees in connection with presentation of items for collection, purchases of federal
funds, advances from the Federal Reserve or Federal Home Loan Bank, entry into repurchase agreements fully secured by U.S. government
securities or U.S. government agency securities, advances of depository institution Subsidiaries incurred in the ordinary course
of First South’s business, and trade payables and Contracts relating to borrowings or guarantees made in the ordinary course
of First South’s business), (iii) any Contract which prohibits or restricts any First South Entity or any personnel
of a First South Entity from engaging in any business activities in any geographic area, line of business or otherwise in competition
with any other Person, (iv) any Contract involving Intellectual Property (other than Contracts entered into in the ordinary course
with vendors or customers or “shrink-wrap” software licenses), (v) any Contract relating to the provision of data
processing, network communication, or other technical services to or by any First South Entity, (vi) any Contract relating
to the purchase or sale of any goods or services (other than Contracts entered into in the ordinary course of business and involving
payments under any individual Contract or series of contracts not in excess of $25,000), (vii) any exchange-traded or over-the-counter
swap, forward, future, option, cap, floor, or collar financial Contract, or any other interest rate or foreign currency protection
Contract or any Contract that is a combination thereof not included on its balance sheet, and (viii) any other Contract that would
be required to be filed as an exhibit to a Form 10-K filed by First South as of the date of this Agreement pursuant to the reporting
requirements of the Exchange Act (together with all Contracts referred to in Sections 4.11 and 4.15(a), the “
First South
Contracts
”).
(b)
With respect to each First South Contract, (i) the Contract is in full force and effect; (ii) no First South
Entity is in material Default thereunder; (iii) no First South Entity has repudiated or waived any material provision of
any such Contract; (iv) no other party to any such Contract is, to First South’s Knowledge, in Default in any respect
or has repudiated or waived any material provision thereunder; and (v) no consent which has not been or will not be obtained is
required by a Contract for the execution, delivery, or performance of this Agreement, the consummation of the Merger or the other
transactions contemplated hereby. Section 4.16(b) of the First South Disclosure Memorandum lists every consent required by any
Contract involving an amount in excess of $100,000. All of the indebtedness of any First South Entity for money borrowed (other
than deposit liabilities, purchases of federal funds, advances from the Federal Reserve or Federal Home Loan Bank, repurchase
agreements fully secured by U.S. government securities or U.S. government agency securities, advances of depository institution
Subsidiaries incurred in the ordinary course of First South’s business, and trade payables and Contracts relating to borrowings
or guarantees made in the ordinary course of First South’s business) is prepayable at any time by such First South Entity
without penalty, premium or charge.
|
4.17
|
Privacy of Customer Information.
|
(a)
For the purposes contemplated by this Agreement, each First South Entity has valid rights to use and transfer to Carolina
Financial and to CresCom Bank all IIPI relating to customers, former customers, and prospective customers that will be transferred
pursuant to this Agreement.
(b)
Each First South Entity’s collection and use of such IIPI and the transfer of such IIPI to Carolina Financial or CresCom
Bank complies in all material respects with First South’s Gramm-Leach-Bliley Act privacy notice, the Gramm-Leach-Bliley Act,
and the Fair Credit Reporting Act.
Except as disclosed in
Section 4.18 of the First South Disclosure Memorandum, there is no Litigation instituted or pending, or, to the Knowledge of First
South, threatened (or unasserted but considered probable of assertion) against any First South Entity, or to First South’s
Knowledge, against any director, officer, employee, or agent of any First South Entity in their capacities as such or with respect
to any service to or on behalf of any First South Benefit Plan or any other Person at the request of the First South Entity or
First South Benefit Plan, or against any Asset, interest, or right of any of them, nor are there any Orders or judgments outstanding
against any First South Entity. No claim for indemnity has been made or, to First South’s Knowledge, threatened by any director,
officer, employee, independent contractor, or agent to any First South Entity and to the Knowledge of First South, no basis for
any such claim exists.
Except for immaterial
late filings, since December 31, 2013, each First South Entity has timely filed all reports and statements, together with any amendments
required to be made with respect thereto, that it was required to file with Governmental Authorities. As of their respective dates,
each of such reports and documents, including the financial statements, exhibits, and schedules thereto, complied in all material
respects with all applicable Laws. As of their respective dates, such reports and documents did not, in all material respects,
contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which they were made, not misleading.
First South’s internal
control over financial reporting is effective to provide reasonable assurance regarding the reliability of First South’s
financial reporting and the preparation of First South financial statements for external purposes in accordance with GAAP. First
South’s internal control over financial reporting is effective to provide reasonable assurance (i) regarding the maintenance
of records, that in reasonable detail, accurately and fairly reflect the transactions and disposition of First South’s consolidated
Assets; (ii) that transactions are recorded as necessary to permit the preparation of First South’s financial statements
in accordance with GAAP and that receipts and expenditures are being made only in accordance with the authorizations of ’s
management and directors; and (iii) regarding prevention or timely detection of unauthorized acquisition, use or disposition of
First South’s consolidated Assets that could have a material impact on First South’s financial statements.
|
4.21
|
Loans to, and Transactions with, Executive Officers and Directors.
|
No First South Entity
has, since December 31, 2013, extended or maintained credit, arranged for the extension of credit, or renewed an extension of
credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof) of any First South
Entity, except as permitted by Section 13(k) of the Exchange Act and Federal Reserve Regulation O. Section 4.21 of the First South
Disclosure Memorandum sets forth a list of all Loans as of the date hereof by the First South Entities to any directors, executive
officers and principal shareholders (as such terms are defined in Regulation O of the Federal Reserve (12 C.F.R. Part 215)) of
First South or any First South Entity. There are no employee, officer, director or other affiliate Loans on which the borrower
is paying a rate other than that reflected in the note or other relevant credit or security agreement or on which the borrower
is paying a rate which was below market rate for similar loans to similarly situated borrowers at the time the Loan was originated.
All such Loans are and were originated in compliance in all material respects with all applicable laws. No director or executive
officer of First South or any First South Entity, or any “associate” (as such term is defined in Rule 14a-1 under
the Exchange Act) or related interest of any such Person, has any interest in any contract or property (real or personal, tangible
or intangible), used in, or pertaining to, the business of First South or any First South Entity.
No First South Entity nor,
to the Knowledge of First South, any Affiliate thereof, has taken or agreed to take any action or has any Knowledge of any fact
or circumstance that is reasonably likely to materially impede or delay receipt of any required Consents or result in the imposition
of a condition or restriction of the type referred to in the last sentence of Section 8.1(b). No First South Entity is subject
to any cease-and-desist or other order or enforcement action issued by, or is a party to any written agreement, consent agreement
or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order
or directive by, or has been ordered to pay any civil penalty by, or is a recipient of any supervisory letter from, or has adopted
any board resolutions at the request or suggestion of any Regulatory Authority or other Governmental Authority that restricts the
conduct of its business or that relates to its capital adequacy, its ability to pay dividends, its credit or risk management policies,
its management or its business (any such agreement, memorandum of understanding, letter, undertaking, order, directive or resolutions,
whether or not set forth in the First South Disclosure Memorandum, a “
First South Regulatory Agreement
”), nor
are there any pending or, to the Knowledge of First South, threatened regulatory investigations or other actions by any Regulatory
Authority or other Governmental Authority that could reasonably be expected to lead to the issuance of any such First South Regulatory
Agreement.
|
4.23
|
Brokers and Finders; Opinion of Financial Advisor.
|
Except for the First South
Financial Advisor, neither First South nor any First South Entity, or any of their respective officers, directors, employees, or
Representatives, has employed any broker, finder, or investment banker or incurred any Liability for any financial advisory fees,
investment bankers fees, brokerage fees, commissions, or finder’s or other such fees in connection with this Agreement or
the transactions contemplated hereby. Section 4.23 of the First South Disclosure Memorandum lists the fees and expenses that are
currently owed to the First South Financial Advisor and that will be owed to the First South Financial Advisor as a result of transactions
contemplated by this Agreement. First South has received the written opinion of the First South Financial Advisor, dated as of
the date of this Agreement, to the effect that the Exchange Ratio is fair, from a financial point of view, to the holders of First
South Common Stock, a signed copy of which has been or will be delivered to Carolina Financial.
|
4.24
|
Board Recommendation.
|
The First South’s
Board, at a meeting duly called and held, has by unanimous vote of the directors present (i) adopted this Agreement and approved
the transactions contemplated hereby, including the Merger and the transactions contemplated hereby and thereby, and has determined
that, taken together, they are fair to and in the best interests of the First South’s shareholders, and (ii) resolved,
subject to the terms of this Agreement, to recommend that the holders of the shares of First South Common Stock approve this Agreement,
the Merger, and the related transactions and to call and hold a meeting of First South’s shareholders at which this Agreement,
the Merger, and the related transactions shall be submitted to the holders of the shares of First South Common Stock for approval.
|
4.25
|
Statements True and Correct.
|
(a)
No statement, certificate, instrument, or other writing furnished or to be furnished by any First South Entity or any Affiliate
thereof to Carolina Financial pursuant to this Agreement or any other document, agreement, or instrument referred to herein contains
or will contain any untrue statement of material fact or will omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(b)
None of the information supplied or to be supplied by any First South Entity or any Affiliate thereof for inclusion in the
Registration Statement to be filed by Carolina Financial with the SEC in connection with the Merger will (after taking into account
any supplemental or amended information provided prior to approval), when the Registration Statement is declared effective by the
SEC, be false or misleading with respect to any material fact, or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not misleading. None of the information supplied or to be supplied
by the First South Entity or any Affiliate thereof for inclusion in any final Joint Proxy Statement/Prospectus to be mailed to
the shareholders of First South and the stockholders of Carolina Financial in connection with First South’s Shareholders’
Meeting and Carolina Financial’s Stockholders’ Meeting, and any other documents to be filed by any First South Entity
or any Affiliate thereof with any Regulatory Authority in connection with the transactions contemplated hereby, will, (after taking
into account any supplemental or amended information provided prior to filing, mailing, or the date of First South’s Shareholders’
Meeting or the Carolina Financial Stockholders’ Meeting, as applicable) at the respective time such documents are filed,
and with respect to any Joint Proxy Statement/Prospectus, when first mailed to the shareholders of First South and the stockholders
of Carolina Financial be false or misleading with respect to any material fact, or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were made, not misleading, or, in the case of the Joint
Proxy Statement/Prospectus or any amendment thereof or supplement thereto, at the time of First South’s Shareholders’
Meeting and the Carolina Financial Stockholders’ Meeting be false or misleading with respect to any material fact, or omit
to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of
any proxies for each meeting.
(c)
All documents that any First South Entity or any Affiliate thereof is responsible for filing with any Governmental Authority
in connection with the transactions contemplated hereby will comply as to form in all material respects with the provisions of
applicable Law.
|
4.26
|
Delivery of First South Disclosure Memorandum.
|
First South has delivered
to Carolina Financial a complete First South Disclosure Memorandum.
4.27
No Additional Representations.
Except for the representations
and warranties specifically set forth in Article 4 of this Agreement, neither First South nor any of its Affiliates or Representatives,
nor any other Person, makes or shall be deemed to make any representation or warranty to Carolina Financial, express or implied,
at law or in equity, with respect to the transactions contemplated hereby, and First South hereby disclaims any such representation
or warranty by First South or any of its officers, directors, employees, agents, or representatives, or any other person.
Article
5
REPRESENTATIONS AND WARRANTIES OF CAROLINA FINANCIAL
Carolina Financial hereby
represents and warrants to First South as follows:
|
5.1
|
Organization, Standing, and Power.
|
Carolina Financial is a
corporation duly organized, validly existing, and in good standing under the Laws of the State of Delaware and is a bank holding
company within the meaning of the BHCA. CresCom Bank is a South Carolina state bank, duly organized, validly existing and in good
standing under the laws of the State of South Carolina. Each of Carolina Financial and CresCom Bank has the corporate power and
authority to carry on its business as now conducted and to own, lease, and operate its Assets. Each of Carolina Financial and CresCom
Bank is duly qualified or licensed to transact business as a foreign corporation in good standing in the states of the United States
and foreign jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified
or licensed, except for such jurisdictions in which the failure to be so qualified or licensed is not reasonably likely to have,
individually or in the aggregate, a Carolina Financial Material Adverse Effect. The minute book and other organizational documents
for each of Carolina Financial and CresCom Bank (including any and all amendments thereto) have been made available to First South
for its review and are complete and accurate as in effect as of the date of this Agreement and accurately reflect in all material
respects all amendments thereto and all proceedings of the respective Board of Directors (including any committees of the Board
of Directors) and stockholders thereof. CresCom Bank is an “insured institution” as defined in the Federal Deposit
Insurance Act and applicable regulations thereunder, and the deposits held by CresCom Bank are insured up to applicable limits
by the FDIC’s Deposit Insurance Fund.
|
5.2
|
Authority; No Breach by Agreement.
|
(a)
Carolina Financial has the corporate power and authority necessary to execute, deliver, and, other than with respect to
the Merger, perform this Agreement and with respect to the Merger, upon the approval of the Merger, including any necessary approvals
referred to in Sections 8.1(b) and 8.1(c) and by Carolina Financial’s stockholders in accordance with Section 8.1(a) of
this Agreement, the DGCL, and the rules and regulations of the NASDAQ Stock Market, to perform its obligations under this Agreement
and to consummate the transactions contemplated hereby. The execution, delivery, and performance of this Agreement and the consummation
of the transactions contemplated herein, including the Merger, have been duly and validly authorized by all necessary corporate
action in respect thereof on the part of Carolina Financial, subject to the approval of this Agreement by (i) the holders of a
majority of the outstanding shares of Carolina Financial Common Stock entitled to vote thereon of this Agreement and the transactions
contemplated hereby, and (ii) the holders of a majority of the total votes cast thereon on the issuance of the Merger Consideration,
which are the only Carolina Financial stockholder votes required for approval of this Agreement and consummation of the Merger
and the issuance of the Merger Consideration (collectively, the “
Requisite Carolina Financial Stockholder Votes
”).
Subject to any necessary approvals referred to in Sections 8.1(b) and 8.1(c) and by such Requisite Carolina Financial Stockholder
Votes, this Agreement represents a legal, valid, and binding obligation of Carolina Financial, enforceable against Carolina Financial
in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar Laws affecting the enforcement of creditors’ rights generally and except that the
availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before
which any proceeding may be brought).
(b)
Neither the execution and delivery of this Agreement by Carolina Financial, nor the consummation by Carolina Financial and
CresCom Bank of the transactions contemplated hereby, nor compliance by Carolina Financial and CresCom Bank with any of the provisions
hereof, will (i) assuming the Requisite Carolina Financial Stockholder Votes, conflict with or result in a breach of any provision
of Carolina Financial’s Certificate of Incorporation or Bylaws or the Articles of Incorporation or Bylaws of any Carolina
Financial Subsidiary or any resolution adopted by the Board of Directors or the shareholders of any Carolina Financial Entity,
or (ii) constitute or result in a Default under, or require any Consent pursuant to, or result in the creation of any Lien on any
material Asset of any Carolina Financial Entity under, any material Contract or material Permit of any Carolina Financial Entity
or, (iii) subject to receipt of the requisite Consents referred to in Section 8.1(b), constitute or result in a Default under,
or require any Consent pursuant to, any Law or Order applicable to any Carolina Financial Entity or any of their respective material
Assets (including any Carolina Financial Entity becoming subject to or liable for the payment of any Tax on any of the Assets owned
by any Carolina Financial Entity being reassessed or revalued by any Regulatory Authority).
(c)
Except for (a) the filing of applications and notices with, and approval of such applications and notices from, the Federal
Reserve, the FDIC, the South Carolina Board of Financial Institutions and North Carolina Commissioner of Banks, (b) the filing
of any other required applications, filings, or notices with any other federal or state banking, insurance or other regulatory
or self-regulatory authorities or any courts, administrative agencies or commissions or other Governmental Authorities and approval
of or non-objection to such applications, filings and notices, (c) the filing with the SEC of the Registration Statement in which
the Joint Proxy Statement/Prospectus will be included, and the declaration of effectiveness of the Registration Statement, (d)
the filing of the Certificate of Merger and the Articles of Merger, (e) any consents, authorizations, approvals, filings or exemptions
in connection with compliance with the applicable provisions of federal and state securities laws relating to the regulation of
broker-dealers, investment advisers or transfer agents, and federal commodities laws relating to the regulation of futures commission
merchants and the rules and regulations thereunder and of any applicable industry self-regulatory organization, and the rules and
regulations of the NASDAQ Stock Market, or that are required under consumer finance, mortgage banking and other similar laws, and
(f) notices or filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, if any, no consents or approvals
of or filings or registrations with any Governmental Authority are necessary in connection with the consummation by Carolina Financial
of the Merger and the other transactions contemplated by this Agreement. No consents or approvals of or filings or registrations
with any Governmental Authority are necessary in connection with the execution and delivery by Carolina Financial of this Agreement.
The authorized capital
stock of Carolina Financial consists of 25,000,000 shares of Carolina Financial Common Stock, of which 16,194,786 shares are issued
and outstanding as of the date of this Agreement, and 1,000,000 shares of Carolina Financial preferred stock, of which no shares
are issued and outstanding as of the date of this Agreement. All of the issued and outstanding shares of capital stock of Carolina
Financial are duly and validly issued and outstanding and are fully paid and nonassessable. Carolina Financial Common Stock is
listed for trading and quotation on the Nasdaq Capital Market. None of the outstanding shares of capital stock of Carolina Financial
has been issued in violation of any preemptive rights of the current or past stockholders of Carolina Financial. The shares of
Carolina Financial Common Stock to be issued in the Merger will be (i) duly authorized, validly issued, fully paid and nonassessable;
(ii) registered under the Securities Act; and (iii) listed for trading and quotation on the Nasdaq Capital Market.
|
5.4
|
Carolina Financial Subsidiaries
|
Carolina Financial has
no Subsidiaries except as set forth in the Carolina Financial Exchange Act Reports, and Carolina Financial owns all of the equity
interests in each of its Subsidiaries. No capital stock (or other equity interest) of any such Subsidiary is or may become required
to be issued (other than to another Carolina Financial Entity) by reason of any Rights, and there are no Contracts by which any
such Subsidiary is bound to issue (other than to another Carolina Financial Entity) additional shares of its capital stock (or
other equity interests) or Rights or by which any Carolina Financial Entity is or may be bound to transfer any shares of the capital
stock (or other equity interests) of any such Subsidiary (other than to another Carolina Financial Entity). There are no Contracts
relating to the rights of any Carolina Financial Entity to vote or to dispose of any shares of the capital stock (or other equity
interests) of any such Subsidiary. All of the shares of capital stock (or other equity interests) of each Subsidiary are fully
paid and nonassessable and are owned directly or indirectly by Carolina Financial free and clear of any Lien.
|
5.5
|
Exchange Act Filings; Offer and Sale of Securities; Financial Statements.
|
(a)
Carolina Financial has timely filed and made available to First South all Exchange Act Documents required to be filed by
Carolina Financial since December 31, 2014 (together with all such Exchange Act Documents filed, whether or not required to be
filed, the “
Carolina Financial Exchange Act Reports
”). The Carolina Financial Exchange Act Reports (i) at
the time filed (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing),
complied in all material respects with the applicable requirements of the Securities Laws and other applicable Laws and (ii) did
not, at the time they were filed (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date
of such amended or subsequent filing or, in the case of registration statements, at the effective date thereof) contain any untrue
statement of a material fact or omit to state a material fact required to be stated in such Carolina Financial Exchange Act Reports
or necessary in order to make the statements in such Carolina Financial Exchange Act Reports, in light of the circumstances under
which they were made, not misleading. No Carolina Financial Subsidiary is required to file any Exchange Act Documents. Each offering
or sale of securities by Carolina Financial (i) was either registered under the Securities Act or made pursuant to a valid exemption
from registration, (ii) complied in all material respects with the applicable requirements of the Securities Laws and other applicable
Laws, except for immaterial late “blue sky” filings, including disclosure and broker/dealer registration requirements,
and (iii) was made pursuant to offering documents which did not, at the time of the offering (or, in the case of registration statements,
at the effective date thereof) contain any untrue statement of a material fact or omit to state a material fact required to be
stated in the offering documents or necessary in order to make the statements in such documents, in light of the circumstances
under which they were made, not misleading. Carolina Financial’s principal executive officer and principal financial officer
have made the certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act and the rules and regulations of the Exchange
Act thereunder with respect to the Carolina Financial Exchange Act Reports to the extent such rules or regulations applied at the
time of the filing. For purposes of the preceding sentence, “principal executive officer” and “principal financial
officer” shall have the meanings given to such terms in the Sarbanes-Oxley Act. Such certifications contain no qualifications
or exceptions to the matters certified therein and have not been modified or withdrawn; and neither Carolina Financial nor any
of its officers has received notice from any Regulatory Authority questioning or challenging the accuracy, completeness, content,
form, or manner of filing or submission of such certifications.
(b)
Each of the Carolina Financial Financial Statements (including, in each case, any related notes) contained in the Carolina
Financial Exchange Act Reports, including any Carolina Financial Exchange Act Reports filed after the date of this Agreement until
the Effective Time, complied, or will comply, as to form in all material respects with the applicable published rules and regulations
of the Exchange Act with respect thereto, was, or will be, prepared in accordance with GAAP applied on a consistent basis throughout
the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited interim
statements, as permitted by Form 10-Q of the Exchange Act), fairly presented in accordance with GAAP the consolidated financial
position of Carolina Financial and its Subsidiaries as at the respective dates and the consolidated results of operations and
cash flows for the periods indicated, including the fair values of the assets and liabilities shown therein, except that the unaudited
interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected
to be material in amount or effect. The Carolina Financial Financial Statements are certified to the extent required by the Sarbanes-Oxley
Act.
(c)
Carolina Financial’s independent public accountants, which have expressed their opinion with respect to the Financial
Statements of Carolina Financial and its Subsidiaries whether or not included in Carolina Financial’s Exchange Act Reports
(including the related notes), are and have been throughout the periods covered by such Financial Statements (x) a registered public
accounting firm (as defined in Section 2(a)(12) of the Sarbanes-Oxley Act) (to the extent applicable during such period), (y) “independent”
with respect to Carolina Financial within the meaning of Regulation S-X and, (z) with respect to Carolina Financial, in compliance
with subsections (g) through (l) of Section 10A of the Exchange Act and related Securities Laws. Carolina Financial’s independent
public accountants have audited Carolina Financial’s year-end financial statements, and have reviewed Carolina Financial’s
interim financial statements that are included in the Financial Statements of Carolina Financial in accordance with Public Company
Accounting Oversight Board Auditing Standard No. 4105.
(d)
Carolina Financial maintains disclosure controls and procedures required by Rule 13a-15 or 15d-15 under the Exchange Act;
such controls and procedures are effective to ensure that all material information concerning Carolina Financial is made known
on a timely basis to the individuals responsible for the preparation of Carolina Financial’s Exchange Act Documents.
|
5.6
|
Absence of Undisclosed Liabilities
.
|
Neither Carolina Financial
nor any of its Subsidiaries has incurred any liability or obligation of any nature whatsoever (whether absolute, accrued, contingent,
determined, determinable, or otherwise and whether due or to become due), except for (i) those liabilities that are reflected or
reserved against on the consolidated balance sheet of Carolina Financial included in its Annual Report on Form 10-K for the year
ended December 31, 2016 (including any notes thereto), (ii) liabilities incurred in the ordinary course of business consistent
in nature and amount with past practice since December 31, 2016, or (iii) liabilities incurred in connection with this Agreement
and the transactions contemplated hereby. Neither Carolina Financial nor any of its Subsidiaries is a party to, or has any commitment
to become a party to, any joint venture, off-balance sheet partnership or any similar Contract or arrangement (including any Contract
or arrangement relating to any transaction or relationship between or among Carolina Financial and any of its Subsidiaries, on
the one hand, and any unconsolidated Affiliate, including any structured finance, special purpose or limited purpose entity or
Person, on the other hand, or any “off-balance sheet arrangement”), where the result, purpose or intended effect of
such Contract or arrangement is to avoid disclosure of any material transaction involving, or material liabilities of, Carolina
Financial or any of its Subsidiaries in Carolina Financial’s or such Subsidiary’s financial statements.
|
5.7
|
Absence of Certain Changes or Events
.
|
Since December 31, 2013,
(i) there have been no events, changes, or occurrences which have had, or are reasonably likely to have, individually or in the
aggregate, a Carolina Financial Material Adverse Effect, (ii) none of the Carolina Financial Entities has taken any action, or
failed to take any action, prior to the date of this Agreement, which action or failure, if taken after the date of this Agreement,
would represent or result in a material breach or violation of any covenants and agreements of Carolina Financial provided in
this Agreement, and (iii) since December 31, 2016, the Carolina Financial Entities have conducted their respective businesses
in the ordinary course of business consistent with past practice.
As of the date of this
Agreement, it is the present intention, and as of the day of the Effective Time, it will be the present intention, of Carolina
Financial to continue, either through Carolina Financial or through a member of Carolina Financial’s “qualified group”
within the meaning of Treasury Regulation Section 1.368-1(d)(4)(ii) (the “
Qualified Group
”), at least one significant
historic business line of First South, or to use at least a significant portion of First South’s historic business assets
in a business, in each case within the meaning of Treasury Regulation Section 1.368-1(d). As of the date of this Agreement and
as of the Effective Time, neither Carolina Financial nor any “related person” (as defined in Treasury Regulations Section
1.368-1(e)(4)) to Carolina Financial has or will have any plan or intention to redeem or reacquire, either directly or indirectly,
any of the Carolina Financial Common Stock issued to the holders of First South Common Stock in connection with the Merger. As
of the date of this Agreement and as of the Effective Time, Carolina Financial does not have and will not have any plan or intention
to sell or otherwise dispose of any of the assets of First South acquired in the Merger, except for dispositions made in the ordinary
course of business or transfers described in Section 368(a)(2)(C) of the Code or described and permitted in Treasury Regulation
Section 1.368-2(k).
|
5.9
|
Compliance with Laws
.
|
(a)
Carolina Financial is a bank holding company duly registered and in good standing as such with the Federal Reserve. CresCom
Bank is a state chartered bank in good standing with the South Carolina Board of Financial Institutions.
(b)
Compliance with Permits, Laws and Orders
.
(i)
Each of the Carolina Financial Entities has in effect all Permits and has made all filings, applications, and registrations
with Governmental Authorities that are required for it to own, lease, or operate its assets and to carry on its business as now
conducted, and to the Knowledge of Carolina Financial, there has occurred no Default under any such Permit applicable to their
respective businesses or employees conducting their respective businesses.
(ii)
To the Knowledge of Carolina Financial, none of the Carolina Financial Entities is in Default under any Laws or Orders applicable
to its business or employees conducting its business.
(iii)
None of the Carolina Financial Entities has received any notification or communication from any Governmental Authority (A) asserting
that Carolina Financial or any of its Subsidiaries is in Default under any of the Permits, Laws, or Orders which such Governmental
Authority enforces, (B) threatening to revoke any Permits, or (C) requiring Carolina Financial or any of its Subsidiaries
(x) to enter into or consent to the issuance of a cease and desist order, formal agreement, directive, commitment, or memorandum
of understanding, or (y) to adopt any resolution of its Board of Directors or similar undertaking.
(iv)
There (A) is no material unresolved violation, criticism, or exception by any Governmental Authority with respect
to any report or statement relating to any examinations or inspections of Carolina Financial or any of its Subsidiaries, (B) are
no written notices or correspondence received by Carolina Financial with respect to pending formal or informal inquiries of a
material nature by, or disagreements or disputes with, any Governmental Authority with respect to Carolina Financial’s or
any of Carolina Financial’s Subsidiaries’ business, operations, policies, or procedures since its inception, and (C)
is not any pending or, to Carolina Financial’s Knowledge, threatened, nor has any Governmental Authority indicated an intention
to conduct, any investigation or review (other than regular or routine examinations or inspections) of it or any of its Subsidiaries.
(v)
None of the Carolina Financial Entities nor, to the Knowledge of Carolina Financial, any of its directors, officers, employees,
or Representatives acting on its behalf has offered, paid, or agreed to pay any Person, including any Government Authority, directly
or indirectly, any thing of value for the purpose of, or with the intent of obtaining or retaining any business in violation of
applicable Laws, including (1) using any corporate funds for any unlawful contribution, gift, entertainment, or other unlawful
expense relating to political activity, (2) making any direct or indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds, (3) violating any provision of the Foreign Corrupt Practices Act of 1977, as amended,
or (4) making any bribe, rebate, payoff, influence payment, kickback, or other unlawful payment.
(vi)
Each Carolina Financial Entity has complied in all material respects with all requirements of Law under the Bank Secrecy
Act and the USA Patriot Act, and each Carolina Financial Entity has timely filed all reports of suspicious activity, including
those required under 12 C.F.R. § 353.3.
(vii)
Each Carolina Financial Entity’s collection and use of IIPI complies in all material respects with Carolina Financial’s
Gramm-Leach-Bliley Act privacy notice, the Gramm-Leach-Bliley Act, and the Fair Credit Reporting Act.
There is no Litigation
instituted or pending, or, to the Knowledge of Carolina Financial, threatened (or unasserted but considered probable of assertion)
against Carolina Financial, or to Carolina Financial’s Knowledge, against any director, officer, employee, or agent of Carolina
Financial in their capacities as such or with respect to any service to or on behalf of any Employee Benefit Plan or any other
Person at the request of the Carolina Financial or Employee Benefit Plan of Carolina Financial, or against any Asset, interest,
or right of any of them, nor are there any Orders or judgments outstanding against Carolina Financial; and no claim for indemnity
has been made or, to Carolina Financial’s Knowledge, threatened by any director, officer, employee, independent contractor,
or agent to Carolina Financial and, to the Knowledge of Carolina Financial, no basis for any such claim exists.
Except for immaterial
late filings, since December 31, 2013, each Carolina Financial Entity has timely filed all reports and statements, together with
any amendments required to be made with respect thereto, that it was required to file with Governmental Authorities. As of their
respective dates, each of such reports and documents, including the financial statements, exhibits, and schedules thereto, complied
in all material respects with all applicable Laws. As of their respective date, such reports and documents did not, in all material
respects, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances under which they were made, not misleading.
Carolina Financial’s
internal control over financial reporting is effective to provide reasonable assurance regarding the reliability of Buyer’s
financial reporting and the preparation of Carolina Financial financial statements for external purposes in accordance with GAAP.
Carolina Financial’s internal control over financial reporting is effective to provide reasonable assurance (i) regarding
the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and disposition of Carolina
Financial’s consolidated Assets; (ii) that transactions are recorded as necessary to permit the preparation of Carolina Financial’s
financial statements in accordance with GAAP and that receipts and expenditures are being made only in accordance with the authorizations
of Carolina Financial’s management and directors; and (iii) regarding prevention or timely detection of unauthorized acquisition,
use or disposition of Carolina Financial’s consolidated Assets that could have a material impact on Carolina Financial’s
consolidated financial statements.
No Carolina Financial Entity
is subject to any cease-and-desist or other order or enforcement action issued by, or is a party to any written agreement, consent
agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject
to any order or directive by, or has been ordered to pay any civil penalty by, or is a recipient of any supervisory letter from,
or has adopted any board resolutions at the request or suggestion of any Regulatory Authority or other Governmental Authority that
restricts the conduct of its business or that relates to its capital adequacy, its ability to pay dividends, its credit or risk
management policies, its management or its business (any such agreement, memorandum of understanding, letter, undertaking, order,
directive or resolutions, a “
Carolina Financial Regulatory Agreement
”), nor are there any pending or, to the
Knowledge of Carolina Financial, threatened regulatory investigations or other actions by any Regulatory Authority or other Governmental
Authority that could reasonably be expected to lead to the issuance of any such Carolina Financial Regulatory Agreement.
|
5.14
|
Brokers and Finders; Opinion of Financial Advisor.
|
Except for the Carolina
Financial Financial Advisor, neither Carolina Financial nor any Carolina Financial Entity, or any of their respective officers,
directors, employees, or Representatives, has employed any broker, finder or investment banker or incurred any Liability for any
financial advisory fees, investment bankers’ fees, brokerage fees, commissions, or finder’s or other such fees in connection
with this Agreement or the transactions contemplated hereby. The board of directors of Carolina Financial has received the opinion
of the Carolina Financial Financial Advisor (which, if initially rendered orally, has been or will be confirmed by a written opinion,
dated the same date) to the effect that, as of the date of such opinion, and based upon and subject to the factors, assumptions
and qualifications contained therein, the Exchange Ratio is fair, from a financial point of view, to Carolina Financial.
No Carolina Financial
Entity or any Affiliate thereof has taken or agreed to take any action or has any Knowledge of any fact or circumstance that is
reasonably likely to materially impede or delay receipt of any required Consents or result in the imposition of a condition or
restriction of the type referred to in the last sentence of Section 8.1(b).
|
5.16
|
Available Consideration.
|
Carolina Financial has
available to it, or as of the Effective Time will have available to it, sufficient shares of authorized and unissued Carolina Financial
Common Stock and all funds necessary for the issuance and payment of the Merger Consideration and has funds available to it to
satisfy its payment obligations under this Agreement.
|
5.17
|
Statements True and Correct.
|
(a)
No statement, certificate, instrument, or other writing furnished or to be furnished by any Carolina Financial Entity or
any Affiliate thereof to First South pursuant to this Agreement or any other document, agreement, or instrument referred to herein
contains or will contain any untrue statement of material fact or will omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not misleading.
(b)
None of the information supplied or to be supplied by any Carolina Financial Entity or any Affiliate thereof for inclusion
in the Registration Statement to be filed by Carolina Financial with the SEC in connection with the Merger will (after taking into
account any supplemental or amended information provided prior to approval), when the Registration Statement is declared effective
by the SEC, be false or misleading with respect to any material fact, or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made, not misleading. None of the information supplied
or to be supplied by any Carolina Financial Entity or any Affiliate thereof for inclusion in any final Joint Proxy Statement/Prospectus
to be mailed to the shareholders of First South and the stockholders of Carolina Financial in connection with First South’s
Shareholders’ Meeting and Carolina Financial’s Stockholders’ Meeting, and any other documents to be filed by
any Carolina Financial Entity or any Affiliate thereof with any Regulatory Authority in connection with the transactions contemplated
hereby, will, (after taking into account any supplemental or amended information provided prior to filing, mailing, or the date
of First South’s Shareholders’ Meeting or the Carolina Financial Stockholders’ Meeting, as applicable) at the
respective time such documents are filed, and with respect to any Joint Proxy Statement/Prospectus, when first mailed to the shareholders
of First South and the stockholders of Carolina Financial be false or misleading with respect to any material fact, or omit to
state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not
misleading, or, in the case of the Joint Proxy Statement/Prospectus or any amendment thereof or supplement thereto, at the time
of First South’s Shareholders’ Meeting and the Carolina Financial Stockholders’ Meeting be false or misleading
with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication
with respect to the solicitation of any proxies for each meeting.
(c)
All documents that any Carolina Financial Entity or any Affiliate thereof is responsible for filing with any Governmental
Authority in connection with the transactions contemplated hereby will comply as to form in all material respects with the provisions
of applicable Law.
|
5.18
|
No Additional Representations.
|
Except for the representations
and warranties specifically set forth in Article 5 of this Agreement, neither Carolina Financial nor any of its Affiliates or
Representatives, nor any other Person, makes or shall be deemed to make any representation or warranty to First South, express
or implied, at law or in equity, with respect to the transactions contemplated hereby, and Carolina Financial hereby disclaims
any such representation or warranty by Carolina Financial or any of its officers, directors, employees, agents, or representatives,
or any other person.
Article
6
CONDUCT OF BUSINESS PENDING CONSUMMATION
|
6.1
|
Affirmative Covenants of First South and Carolina Financial.
|
(a)
From the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of Carolina Financial shall have been obtained, and except as otherwise expressly contemplated herein, First
South shall, and shall cause each of its Subsidiaries to, (i) operate its business only in the usual, regular, and ordinary course,
(ii) use commercially reasonable efforts to preserve intact its business organization and Assets and maintain its rights and franchises,
(iii) use commercially reasonable efforts to cause its representations and warranties to be correct at all times, (iv) use best
efforts to provide all information requested by Carolina Financial related to loans or other transactions made by First South with
a value equal to or exceeding $1,000,000, and (v) take no action which would reasonably be expected to (A) adversely affect the
ability of any Party to obtain any Consents required for the transactions contemplated hereby without imposition of a condition
or restriction of the type referred to in the last sentences of Sections 8.1(b) or 8.1(c), or (B) materially adversely affect the
ability of any Party to perform its covenants and agreements under this Agreement.
(b)
From the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of First South shall have been obtained, and except as otherwise expressly contemplated herein, Carolina
Financial shall, and shall cause each of its Subsidiaries to, (i) operate its business only in the usual, regular, and ordinary
course, (ii) use commercially reasonable efforts to preserve intact its business organization and Assets and maintain its rights
and franchises, (iii) use commercially reasonable efforts to cause its representations and warranties to be correct at all times,
and (iv) take no action which would (A) adversely affect the ability of any Party to obtain any Consents required for the transactions
contemplated hereby without imposition of a condition or restriction of the type referred to in the last sentences of Sections
8.1(b) or 8.1(c), or (B) materially adversely affect the ability of any Party to perform its covenants and agreements under this
Agreement.
(c)
First South and Carolina Financial each shall, and shall cause each of its Subsidiaries to, cooperate with the other Party
and provide all necessary corporate approvals, and cooperate in seeking all approvals of any business combinations of such First
South and its Subsidiaries requested by Carolina Financial,
provided,
the effective time of such business combinations is
on or after the Effective Time of the Merger.
|
6.2
|
Negative Covenants of First South.
|
From the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement, unless the prior written consent of Carolina Financial
shall have been obtained (not to be unreasonably withheld or delayed), and except as otherwise expressly contemplated herein, First
South covenants and agrees that it will not do or agree or commit to do, or permit any of its Subsidiaries to do or agree or commit
to do, any of the following:
(a)
amend the Certificate of Incorporation, Bylaws, or other governing instruments of any First South Entity;
(b)
incur any additional debt obligation or other obligation for borrowed money in excess of an aggregate of $500,000 except
in the ordinary course of the business of any First South Entity consistent with past practices and that are pre-payable without
penalty, charge, or other payment (which exception shall include, for First South Entities that are depository institutions, creation
of deposit liabilities, purchases of federal funds, advances from the Federal Home Loan Bank and the Federal Reserve Bank, and
entry into repurchase agreements fully secured by U.S. government securities or U.S. government agency securities), or impose,
or suffer the imposition, on any Asset of any First South Entity of any Lien or permit any such Lien to exist (other than in connection
with public deposits, repurchase agreements, bankers’ acceptances, “treasury tax and loan” accounts established
in the ordinary course of business of Subsidiaries that are depository institutions, the satisfaction of legal requirements in
the exercise of trust powers, and Liens in effect as of the date hereof that are disclosed in the First South Disclosure Memorandum);
(c)
repurchase, redeem, or otherwise acquire or exchange (other than exchanges in the ordinary course under employee benefit
plans or as required by this Agreement), directly or indirectly, any shares, or any securities convertible into any shares, of
the capital stock of any First South Entity, or declare or pay any dividend or make any other distribution in respect of First
South’s capital stock;
(d)
except for this Agreement or upon the exercise of First South Options or vesting of First South Stock Awards, issue, sell,
pledge, encumber, authorize the issuance of, enter into any Contract to issue, sell, pledge, encumber, or authorize the issuance
of, or otherwise permit to become outstanding, any additional shares of First South Common Stock, any other capital stock of any
First South Entity, or any Right;
(e)
adjust, split, combine, or reclassify any capital stock of any First South Entity or issue or authorize the issuance of
any other securities in respect of or in substitution for shares of First South Common Stock, or sell, lease, mortgage, or otherwise
dispose of (i) any shares of capital stock of any First South Subsidiary or (ii) any Asset other than in the ordinary course of
business for reasonable and adequate consideration;
(f)
purchase any securities or make any material investment except in the ordinary course of business consistent with past practice,
either by purchase of stock or securities, contributions to capital, Asset transfers, or purchase of any Assets, in any Person
other than a wholly owned First South Subsidiary, or otherwise acquire direct or indirect control over any Person, other than in
connection with foreclosures of loans in the ordinary course of business;
(g)
(i) except as contemplated by this Agreement, grant any bonus in excess of an aggregate of $5,000 or increase in compensation
or benefits to the employees, officers or directors of any First South Entity (except in accordance with past practice), (ii) enter
into any new commitment or agreement to pay any severance or termination pay, or any stay or other bonus to any First South director,
officer or employee (except for payments according to the employment agreements attached hereto as
Exhibits H and I
) , (iii)
enter into or amend any severance agreements with officers, employees, directors, independent contractors, or agents of any First
South Entity, (iv) change any fees or other compensation or other benefits to directors of any First South Entity, (v) except as
contemplated by this Agreement, waive any stock repurchase rights, accelerate, amend, or change the period of exercisability of
any Rights or restricted stock, or reprice Rights granted under the outstanding First South Options or authorize cash payments
in exchange for any Rights; or (vi) except to the extent required under applicable Law or existing Contracts, accelerate, vest
or commit or agree to accelerate or vest any amounts, benefits or rights payable by any First South Entity;
(h)
enter into or amend any employment Contract between any First South Entity and any Person (unless such amendment is required
by Law or this Agreement) that the First South Entity does not have the unconditional right to terminate without Liability (other
than Liability for services already rendered), at any time on or after the Effective Time;
(i)
adopt any new employee benefit plan of any First South Entity or terminate or withdraw from, or make any material change
in or to, any existing employee benefit plans, welfare plans, insurance, stock or other plans of any First South Entity other
than any such change that is required by Law or to maintain continuous benefits at current levels or that, in the written opinion
of counsel, is necessary or advisable to maintain the tax qualified status of any such plan, or make any distributions from such
employee benefit or welfare plans, except as required by Law, the terms of such plans or consistent with past practice;
(j)
make any change in any Tax or accounting methods, systems of internal accounting controls or schedule of internal audits,
except as may be appropriate and necessary to conform to changes in Tax Laws, regulatory accounting requirements, or GAAP or at
the specific request of Carolina Financial;
(k)
commence any Litigation other than in accordance with past practice or settle any Litigation involving any Liability of
any First South Entity for money damages or restrictions upon the operations of any First South Entity;
(l)
enter into, modify, amend, or terminate any material Contract other than with respect to those involving aggregate payments
of less than, or the provision of goods or services with a market value of less than, $50,000 per annum and other than Contracts
covered by Sections 6.2(m) or (n);
(m)
enter into or make any loans or extensions of credit with a value equal to or exceeding $2,500,000, other than residential
mortgage loans for which First South has a commitment to buy from a reputable investor (for the avoidance of doubt, such limit
shall apply to separate extensions of credit and not to the total credit exposure to any Person), or enter into or make any loans
that exceed internal policy or regulatory loan-to-value guidelines;
(n)
except in the ordinary course of business, (i) renegotiate, renew, increase, extend, modify or purchase any loan, lease
(credit equivalent), advance, credit enhancement or other extension of credit, or make any commitment in respect of any of the
foregoing, except, with respect to any extension of credit with an unpaid balance of less than $250,000 (for the avoidance of doubt,
such limit shall apply to separate extensions of credit and not to the total credit exposure to any Person), in conformity with
existing lending policies and practices, (ii) waive, release, compromise, or assign any material rights or claims, or (iii) make
any adverse changes in the mix, rates, terms, or maturities of First South’s deposits and other Liabilities.
(o)
except for loans or extensions of credit made on terms generally available to the public, make or increase any loan or other
extension of credit, or commit to make or increase any such loan or extension of credit, to any director or executive officer of
First South or First South Bank, or any entity controlled, directly or indirectly, by any of the foregoing, other than renewals
of existing loans or commitments to loan;
(p)
except in the ordinary course of business, restructure or materially change its investment securities portfolio or its interest
rate risk position, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported;
(q)
make any capital expenditures other than pursuant to binding commitments existing on the date hereof and other than expenditures
of less than $50,000 and expenditures otherwise necessary to maintain existing assets in good repair or to make payment of necessary
Taxes;
(r)
establish or commit to the establishment of any new branch or other office facilities or file any application to relocate
or terminate the operation of any banking office;
(s)
take any action that is intended or expected to result in any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect at any time prior to the Effective Time, or in any of the conditions to the Merger
set forth in Article 8 not being satisfied or in a violation of any provision of this Agreement;
(t)
knowingly take any action that would prevent or impede the Merger from qualifying as a reorganization within the meaning
of Section 368(a) of the Code;
(u)
agree to take, make any commitment to take, or adopt any resolutions of its Board of Directors in support of, any of the
actions prohibited by this Section 6.2;
(v)
maintain First South Bank’s allowance for loan losses in a manner inconsistent with GAAP and applicable regulatory
guidelines and accounting principles, practices and methods consistent with past practices of First South Bank; or
(w)
take any action or fail to take any action that at the time of such action or inaction is reasonably likely to prevent,
or would be reasonably likely to materially interfere with, the consummation of the Merger.
|
6.3
|
Adverse Changes in Condition.
|
Each Party agrees to give
written notice promptly to the other Party upon becoming aware of the occurrence or impending occurrence of any event or circumstance
relating to it or any of its Subsidiaries which (i) has had or is reasonably likely to have, individually or in the aggregate,
a First South Material Adverse Effect or a Carolina Financial Material Adverse Effect, as applicable, (ii) would cause or constitute
a material breach of any of its representations, warranties, or covenants contained herein, or (iii) would be reasonably likely
to prevent or materially interfere with the consummation of the Merger, and to use its reasonable efforts to prevent or promptly
to remedy the same.
Each of Carolina Financial
and its Subsidiaries and First South and the First South Entities shall file all reports required to be filed by it with Regulatory
Authorities between the date of this Agreement and the Effective Time and shall make available to the other Party copies of all
such reports promptly after the same are filed. First South and the First South Entities shall also make available to Carolina
Financial monthly financial statements, copies of all written materials provided to members of First South’s board of Directors
in connection with its regular monthly meetings (other than reports or presentations prepared by the First South Financial Advisor
or legal counsel in connection with the Merger or materials containing confidential supervisory information) and quarterly call
reports following distribution to First South’s Board of Directors or filing, as applicable. The financial statements of
Carolina Financial and First South, whether or not contained in any such reports filed under the Exchange Act or with any other
Regulatory Authority, will fairly present the consolidated financial position of the entity filing such statements as of the dates
indicated and the consolidated results of operations, changes in shareholders’ or stockholders’ equity, and cash flows
for the periods then ended in accordance with GAAP (subject in the case of interim financial statements to normal recurring year-end
adjustments that are not material). As of their respective dates, such reports of Carolina Financial and First South filed under
the Exchange Act or with any other Regulatory Authority will comply in all material respects with the Securities Laws and will
not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial
statements contained in any other reports to another Regulatory Authority shall be prepared in accordance with the Laws applicable
to such reports.
|
6.5
|
Carolina Financial Use and Disclosure of IIPI.
|
Carolina Financial acknowledges
that IIPI disclosed to Carolina Financial Entities in connection with the Agreement has been and will be disclosed pursuant to
15 U.S.C. 6802(e)(7). Carolina Financial Entities may not use or disclose IIPI, nor permit the use or disclosure of IIPI, other
than for the purposes described in 15 U.S.C. § 6802(e)(7).
Article
7
ADDITIONAL AGREEMENTS
|
7.1
|
Shareholder Approvals.
|
(a)
Unless this Agreement has been terminated in accordance with its terms, First South shall submit to its shareholders this
Agreement and any other matters required to be approved by shareholders in order to carry out the intentions of this Agreement.
In furtherance of that obligation, First South shall take, in accordance with applicable Law and its Certificate of Incorporation
and Bylaws, all action necessary to call, give notice of, convene, and hold First South’s Shareholders’ Meeting as
soon as reasonably practicable. The First South Board shall recommend that its shareholders approve this Agreement in accordance
with the VSCA (the “
First South Recommendation
”) and shall include such recommendation in the Joint Proxy Statement/Prospectus,
except to the extent the First South’s Board has made an Adverse Recommendation Change (as defined below) in accordance with
the terms of this Agreement. Subject to Section 7.1(b) and 7.3, First South shall solicit and use its commercially reasonable efforts
to obtain the Requisite First South Shareholder Vote.
(b)
Neither First South’s Board nor any committee thereof shall, except as expressly permitted by this Section 7.1(b),
(i) withdraw, qualify or modify, or propose publicly to withdraw, qualify or modify, in a manner adverse to Carolina Financial,
the First South Recommendation or (ii) approve or recommend, or propose publicly to approve or recommend, any Acquisition Proposal
(each, an “
Adverse Recommendation Change
”). Notwithstanding the foregoing, prior to the Requisite First South
Shareholder Vote, the First South’s Board may make an Adverse Recommendation Change if and only if (A) a material development or
material change in circumstance occurs, arises or becomes known to First South’s Board after the date of this Agreement unrelated
to any potential or actual Acquisition Proposal (such material development or change in circumstances being referred to as an “
Intervening
Event
”) and First South’s Board determines in good faith, after consultation with First South’s outside counsel,
that in light of such Intervening Event an Adverse Recommendation Change is required in order for First South’s Board to
comply with its fiduciary obligations to First South’s shareholders under applicable Law, or (B):
(i)
First South’s Board determines in good faith, after consultation with the First South Financial Advisor and outside
counsel, that it has received an Acquisition Proposal (that did not result from a breach of Section 7.3) that is a Superior Proposal;
(ii)
First South’s Board determines in good faith, after consultation with First South’s outside counsel, that a
failure to accept such Superior Proposal would result in First South’s Board breaching its fiduciary duties to First South
and its shareholders under applicable Law;
(iii)
First South’s Board provides written notice (a “
Notice of Recommendation Change
”) to Carolina
Financial of its receipt of the Superior Proposal and its intent to announce an Adverse Recommendation Change on the fifth business
day following delivery of such notice, which notice shall specify the material terms and conditions of the Superior Proposal (and
include a copy thereof with all accompanying documentation, if in writing) and identify the Person or Group making such Superior
Proposal (it being understood that any amendment to any material term of such Acquisition Proposal shall require a new Notice
of Recommendation Change, except that, in such case, the five business day period referred to in this clause (iii) and in clauses
(iv) and (v) shall be reduced to three business days following the giving of such new Notice of Recommendation Change);
(iv)
after providing such Notice of Recommendation Change, First South shall negotiate in good faith with Carolina Financial
(if requested by Carolina Financial) and provide Carolina Financial reasonable opportunity during the subsequent five business
day period to make such adjustments in the terms and conditions of this Agreement as would enable the First South Board to proceed
without an Adverse Recommendation Change (
provided, however,
that Carolina Financial shall not be required to propose any
such adjustments); and
(v)
First South’s Board, following such five business day period, again determines in good faith, after consultation with the
First South Financial Advisor and outside counsel, that such Acquisition Proposal nonetheless continues to constitute a Superior
Proposal and that failure to take such action would violate their fiduciary duties to First South and its shareholders under applicable
Law.
(c)
Notwithstanding any other provision of this Agreement, except to the extent prohibited by the VSCA as determined by First
South after consultation with First South’s outside counsel, First South shall submit this Agreement to its shareholders
at the First South’s Shareholders’ Meeting even if First South’s Board has made an Adverse Recommendation Change,
in which case the First South’s Board may communicate the Adverse Recommendation Change and the basis for it to the shareholders
of First South in the Joint Proxy Statement/Prospectus or any appropriate amendment or supplement thereto;
provided, however,
that First South may postpone or adjourn First South’s Shareholders’ Meeting: (i) with the consent of Carolina Financial;
(ii) for the absence of a quorum; (iii) to the extent necessary to ensure that any required supplement or amendment to the Joint
Proxy Statement/Prospectus is provided to the shareholders of First South within a reasonable period of time in advance of First
South’s Shareholders’ Meeting; (iv) to allow reasonable additional time to solicit additional proxies; (v) if required
by applicable Law; or (vi) if First South has provided a Notice of Recommendation Change to Carolina Financial pursuant to Section
7.1(b)(iii) and the notice period contemplated by Section 7.1(b)(iii) has not yet expired.
(d)
Carolina Financial shall submit to its stockholders this Agreement and any other matters required to be approved by its
stockholders in order to carry out the intentions of this Agreement, including the issuance of the Merger Consideration. In furtherance
of that obligation, Carolina Financial shall take, in accordance with applicable Law and its Certificate of Incorporation and Bylaws,
all action necessary to call, give notice of, convene, and hold Carolina Financial’s Stockholders’ Meeting as soon
as reasonably practicable. The Carolina Financial Board shall recommend that its stockholders approve this Agreement in accordance
with the DGCL and approve the issuance of the Merger Consideration in accordance with the rules and regulations of the NASDAQ Stock
Market and shall include such recommendations in the Joint Proxy Statement/Prospectus. Carolina Financial shall solicit and use
its reasonable best efforts to obtain the Requisite Carolina Financial Stockholder Votes.
|
7.2
|
Securities Act Compliance.
|
(a)
As promptly as reasonably practicable following the date hereof, Carolina Financial shall prepare and file with the SEC
the Registration Statement, which shall include the Joint Proxy Statement/Prospectus and constitute the prospectus relating to
the shares of Carolina Financial Common Stock to be issued in the Merger. First South will furnish to Carolina Financial the information
required to be included in the Registration Statement with respect to its business and affairs and shall have the right to review
and consult with Carolina Financial on the form of, and any characterizations of such information included in, the Registration
Statement prior to its being filed with the SEC. Carolina Financial shall use reasonable best efforts to have the Registration
Statement declared effective by the SEC and to keep the Registration Statement effective as long as is necessary to consummate
the Merger and the transactions contemplated hereby. Carolina Financial and First South will use their reasonable best efforts
to cause the Joint Proxy Statement/Prospectus to be mailed to their respective shareholders or stockholders, as applicable, as
promptly as practicable after the Registration Statement is declared effective under the Securities Act. Carolina Financial will
advise First South, promptly after it receives notice thereof, of the time when the Registration Statement has become effective,
the issuance of any stop order, the suspension of the qualification of the Carolina Financial Common Stock issuable in connection
with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Joint Proxy Statement/Prospectus
or the Registration Statement. If at any time prior to the Effective Time any information relating to Carolina Financial or First
South, or any of their respective affiliates, officers or directors, should be discovered by Carolina Financial or First South
which should be set forth in an amendment or supplement to any of the Registration Statement or the Joint Proxy Statement/Prospectus
so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary
to make the statements therein, in light of the circumstances under which they were made, not misleading, the party that discovers
such information shall promptly notify the other party hereto and, to the extent required by law, rules or regulations, an appropriate
amendment or supplement describing such information shall be promptly filed by Carolina Financial with the SEC and disseminated
by First South to its shareholders and by Carolina Financial to its stockholders.
(b)
Carolina Financial shall also take any action required to be taken under any applicable state securities laws in connection
with the Merger and each of Carolina Financial and First South shall furnish all information concerning it and the holders of First
South Common Stock as may be reasonably requested in connection with any such action.
(c)
Prior to the Effective Time, Carolina Financial shall notify the NASDAQ Stock Market of the additional shares of Carolina
Financial Common Stock to be issued by Carolina Financial in exchange for the shares of First South Common Stock.
(a)
From the date of this Agreement through the first to occur of the Effective Time or termination of this Agreement, each
First South Entity shall not, and shall cause its Affiliates and Representatives not to, directly or indirectly (i) solicit or
initiate, or knowingly encourage, induce or knowingly facilitate the making, submission, or announcement of any proposal that
constitutes an Acquisition Proposal, (ii) participate in any discussions (except to notify a third party of the existence of restrictions
provided in this Section 7.3 or to clarify the terms and conditions of an unsolicited Acquisition Proposal) or negotiations regarding,
or disclose or provide any nonpublic information with respect to, or knowingly take any other action to facilitate any inquiries
or the making of any proposal that constitutes an Acquisition Proposal, (iii) enter into any agreement (including any agreement
in principle, letter of intent or understanding, merger agreement, stock purchase agreement, asset purchase agreement, or share
exchange agreement, but excluding a confidentiality agreement of the type described below) (an “
Acquisition Agreement
”)
contemplating or otherwise relating to any Acquisition Transaction, or (iv) propose or agree to do any of the foregoing;
provided,
however,
that prior to the Requisite First South Shareholder Vote, this Section 7.3 shall not prohibit a First South Entity
from furnishing nonpublic information regarding any First South Entity to, or entering into a confidentiality agreement or discussions
or negotiations with, any Person or Group in response to a
bona fide
, unsolicited written Acquisition Proposal submitted
by such Person or Group (and not withdrawn) if and only if: (A) no First South Entity or Representative or Affiliate thereof shall
have violated any of the restrictions set forth in this Section 7.3 (other than any breach of such obligation that is unintentional
and immaterial and did not result in the submission of such Acquisition Proposal), (B) First South’s Board shall have determined
in good faith, after consultation with the First South Financial Advisor and First South’s outside counsel, that such Acquisition
Proposal constitutes or could reasonably be expected to result in a Superior Proposal, (C) First South’s Board concludes
in good faith, after consultation with its outside counsel, that the failure to take such action would be inconsistent with its
fiduciary duties under applicable Law to First South and its shareholders, (D) (1) at least two business days prior to furnishing
any such nonpublic information to, or entering into discussions or negotiations with, such Person or Group, First South gives
Carolina Financial written notice (which may be by electronic mail) of the identity of such Person or Group and of First South’s
intention to furnish nonpublic information to, or enter into discussions or negotiations with, such Person or Group, and (2) First
South receives from such Person or Group an executed confidentiality agreement containing terms no less favorable to the disclosing
Party than the confidentiality terms of this Agreement, and (E) contemporaneously with furnishing any such nonpublic information
to such Person or Group, First South furnishes such nonpublic information to Carolina Financial (to the extent such nonpublic
information has not been previously furnished by First South to Carolina Financial). In addition to the foregoing, First South
shall provide Carolina Financial with at least two business days’ prior written notice of a meeting of First South’s
Board at which meeting First South’s Board is reasonably expected to resolve to recommend the Acquisition Agreement as a
Superior Proposal to its shareholders, and First South shall keep Carolina Financial reasonably informed on a prompt basis, of
the status and material terms of such Acquisition Proposal, including any material amendments or proposed amendments as to price
and other material terms thereof.
(b)
In addition to the obligations of First South set forth in this Section 7.3, as promptly as practicable, after any of the
directors or executive officers of First South become aware thereof, First South shall advise Carolina Financial of any request
received by First South for nonpublic information which First South reasonably believes could lead to an Acquisition Proposal or
of any Acquisition Proposal, the material terms and conditions of such request or Acquisition Proposal, and the identity of the
Person or Group making any such request or Acquisition Proposal. First South shall keep Carolina Financial informed promptly of
material amendments or modifications to any such request or Acquisition Proposal.
(c)
First South shall, and shall cause its and each First South Entity’s directors, officers, employees, and Representatives
to immediately cease any and all existing activities, discussions, or negotiations with any Persons conducted heretofore with respect
to any Acquisition Proposal and will use and cause to be used all commercially reasonable best efforts to enforce any confidentiality
or similar or related agreement relating to any Acquisition Proposal.
(d)
Nothing contained in this Agreement shall prevent a Party or its Board of Directors from (i) complying with Rule 14e-2 under
the Exchange Act with respect to an Acquisition Proposal,
provided, however,
that such Rule will in no way eliminate or
modify the effect that any action pursuant to such Rule would otherwise have under this Agreement; (ii) making any disclosure to
First South’s shareholders if First South’s Board determines in good faith, after consultation with its outside legal
counsel, that the failure to make such disclosure would be reasonably likely to be inconsistent with applicable Law, (iii) informing
any Person of the existence of the provisions contained in this Section 7.3 or (iv) making any “stop, look and listen”
communication to First South’s shareholders pursuant to Rule 14d-9(f) under the Exchange Act (or any similar communication
to First South’s shareholders).
|
7.4
|
Consents of Regulatory Authorities.
|
The Parties hereto shall
cooperate with each other and use their commercially reasonable efforts to promptly prepare and file all necessary documentation
and applications, to effect all applications, notices, petitions and filings, and to obtain as promptly as practicable all Consents
of all Regulatory Authorities and other Persons which are necessary or advisable to consummate the transactions contemplated by
this Agreement (including the Merger). The Parties agree that they will consult with each other with respect to the obtaining
of all Consents of all Regulatory Authorities and other Persons necessary or advisable to consummate the transactions contemplated
by this Agreement and each Party will keep the other apprised of the status of matters relating to consummation of the transactions
contemplated herein. Each Party also shall promptly advise the other upon receiving any communication from any Regulatory Authority
or other Person whose Consent is required for consummation of the transactions contemplated by this Agreement which causes such
Party to believe that there is a reasonable likelihood that any requisite Consent will not be obtained or that the receipt of
any such Consent will be materially delayed.
|
7.5
|
Agreement as to Efforts to Consummate.
|
Subject
to the terms and conditions of this Agreement, each Party agrees to use, and to cause its Subsidiaries to use, its commercially
reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Laws to consummate and make effective, as soon as reasonably practicable after the date of this Agreement,
the transactions contemplated by this Agreement, including using its commercially reasonable efforts to lift or rescind any Order
adversely affecting its ability to consummate the transactions contemplated herein and to cause to be satisfied the conditions
referred to in Article 8;
provided,
however,
that
nothing herein shall preclude
either Party from exercising its rights under this Agreement.
|
7.6
|
Investigation and Confidentiality.
|
(a)
Prior to the Effective Time, each Party shall keep the other Party advised of all material developments relevant to its
business and the consummation of the Merger and shall permit the other Party to make or cause to be made such investigation of
its business and properties (including that of its Subsidiaries) and of their respective financial and legal conditions as the
other Party reasonably requests,
provided, that
such investigation shall be reasonably related to the transactions contemplated
hereby and shall not interfere unnecessarily or materially with normal operations. No investigation by a Party shall affect the
ability of such Party to rely on the representations and warranties of the other Party. Between the date hereof and the Effective
Time, First South shall permit Carolina Financial’s senior officers and independent accountants to meet with the senior officers
of First South, including officers responsible for the First South Financial Statements, the internal controls of First South,
and the disclosure controls and procedures of First South and First South’s independent public accountants, to discuss such
matters as Carolina Financial may deem reasonably necessary or appropriate for Carolina Financial to satisfy its obligations under
Sections 302, 404 and 906 of the Sarbanes-Oxley Act.
(b)
In addition to each Party’s obligations pursuant to Section 7.6(a), each Party shall, and shall cause its advisors
and agents to, maintain the confidentiality of all confidential information furnished to it by the other Party concerning its and
its Subsidiaries’ businesses, operations, and financial positions and shall not use such information for any purpose except
in furtherance of the transactions contemplated by this Agreement. If this Agreement is terminated prior to the Effective Time,
each Party shall promptly return or certify the destruction of all documents and copies thereof, and all work papers containing
confidential information received from the other Party.
(c)
First South shall use its commercially reasonable efforts to exercise, and shall not waive any of, its rights under confidentiality
agreements entered into with Persons which were considering an Acquisition Proposal with respect to First South to preserve the
confidentiality of the information relating to the First South Entities provided to such Persons and their Affiliates and Representatives.
(d)
Each Party agrees to give the other Party notice as soon as practicable after any determination by it of any fact or occurrence
relating to the other Party which it has discovered through the course of its investigation and which represents, or is reasonably
likely to represent, either a material breach of any representation, warranty, covenant, or agreement of the other Party or which
has had or is reasonably likely to have a First South Material Adverse Effect or a Carolina Financial Material Adverse Effect,
as applicable.
(e)
Each Carolina Financial Entity shall, in accordance with Carolina Financial’s comprehensive written data security
program established and maintained pursuant to 15 U.S.C. § 6801 and regulations promulgated thereunder (“
Carolina
Financial Security Program
”), safeguard IIPI disclosed to that Carolina Financial Entity pursuant to this Agreement or
in connection with the transactions contemplated hereby. In the event that any Carolina Financial Entity allows a third party to
access such IIPI, Carolina Financial shall ensure that the third party safeguards that IIPI in accordance with a data security
program substantially equivalent to the Carolina Financial Security Program.
(f)
Carolina Financial shall notify First South promptly (but in no event more than 24 hours) of any Data Incident. All Carolina
Financial Entities shall promptly take all actions that are necessary and advisable to correct, mitigate, and prevent recurrence
of the Data Incident. All Carolina Financial Entities shall cooperate fully with First South and its designees in all reasonable
efforts to investigate the Data Incident.
(g)
If this Agreement is terminated prior to the Effective Time, each Carolina Financial Entity shall promptly return or dispose
of, and certify the return or disposal, of all IIPI received by the Carolina Financial Entity in connection with this Agreement.
Any disposal of such IIPI must be performed in a manner that ensures that the IIPI is rendered permanently unreadable and unrecoverable.
Prior
to the Effective Time, First South and Carolina Financial shall consult with each other as to the form and substance of any press
release, communication with First South’s shareholders, or other public disclosure materially related to this Agreement,
or any other transaction contemplated hereby;
provided,
however,
that
nothing
in this Section 7.7 shall be deemed to prohibit any Party from making any disclosure which its counsel deems necessary or advisable
in order to satisfy such Party’s disclosure obligations imposed by Law.
Each First South Entity
shall take all necessary action to ensure that the entering into of this Agreement and the consummation of the Merger and the other
transactions contemplated hereby do not and will not result in the grant of any rights to any Person under the Certificate of Incorporation,
Bylaws, or other governing instruments of any First South Entity or restrict or impair the ability of Carolina Financial or any
of its Subsidiaries to vote, or otherwise to exercise the rights of a shareholder with respect to, shares of any First South Entity
that may be directly or indirectly acquired or controlled by them.
|
7.9
|
Employee Benefits and Contracts.
|
(a)
Except as specifically provided in this Agreement, all persons who are employees of the First South Entities immediately
prior to the Effective Time and whose employment is not terminated, if any, at or prior to the Effective Time (a “
Continuing
Employee
”) shall, at the Effective Time, become at-will employees of the Surviving Bank or one of its subsidiaries;
provided, however,
that in no event shall any of the employees of the First South Entities be officers of the Surviving
Corporation or the Surviving Bank, or have or exercise any power or duty conferred upon such an officer, unless and until duly
elected or appointed to such position by the Board of Directors of the Surviving Corporation or the Surviving Bank and in accordance
with the Bylaws of the Surviving Corporation or the Surviving Bank. All of the Continuing Employees shall be employed at the will
of the Surviving Bank, and no contractual right to employment shall inure to such employees because of this Agreement except as
may be otherwise expressly set forth in this Agreement.
(b)
As of the Effective Time, each Continuing Employee shall be eligible to participate in each of Carolina Financial’s
Employee Benefit Plans with full credit for prior service with First South and any other First South Entity solely for purposes
of eligibility and vesting, except that such service shall also be credited for purposes of calculating benefits under Carolina
Financial’s standard severance policy. For the avoidance of doubt, each Continuing Employee who is terminated involuntarily
other than for cause (as determined by the Carolina Financial) will be eligible to receive severance benefits under Carolina Financial’s
standard severance policy for its employees, an accurate and complete description of which has been provided to First South, in
addition to outplacement assistance;
provided, however,
that any Continuing Employees who are eligible to receive severance
benefits, change of control benefits or any payments that are enhanced on account of the Merger pursuant to an individual employment
arrangement, change of control arrangement or deferred compensation plan other than any Retention Bonus Agreement shall not be
eligible to receive severance benefits under Carolina Financial’s standard severance policy.
(c)
As of the Effective Time, Carolina Financial shall make available employer-provided benefits under Carolina Financial Employee
Benefit Plans to each Continuing Employee on the same basis as it provides such coverage to Carolina Financial or CresCom Bank
employees. With respect to Carolina Financial Employee Benefit Plans providing health coverage, Carolina Financial shall use commercially
reasonable efforts to cause any pre-existing condition, eligibility waiting period, or other limitations or exclusions otherwise
applicable under such plans to new employees not to apply to a Continuing Employee or their covered dependents who were covered
under a similar First South plan at the Effective Time of the Merger. In addition, if any such transition occurs during the middle
of a plan year, Carolina Financial shall use commercially reasonable efforts to cause any such successor Carolina Financial Employee
Benefit Plan providing health coverage to give credit towards satisfaction of any annual deductible limitation and out-of-pocket
maximum applied under such successor plan for any deductible, co-payment and other cost-sharing amounts previously paid by a Continuing
Employee respecting his or her participation in the corresponding First South Employee Benefit Plan during that plan year prior
to the transition effective date.
(d)
First South shall cause each of First South’s directors who are not employees of First South or First South Bank to
execute and deliver a Non-Employee Director Non-Competition Agreement dated as of the date hereof (and which shall be effective
as of the Effective Time) in the form attached hereto as
Exhibit B
(e)
Except as disclosed in Section 7.9 of the First South Disclosure Memorandum, First South shall cause each of First South’s
Executive Officers and directors to execute and deliver a Shareholder Support Agreement dated as of the date hereof in the form
attached hereto as
Exhibit C
pursuant to which he or she will vote his or her shares of First South Common Stock in favor
of this Agreement and the transactions contemplated hereby.
(f)
No officer, employee, or other Person (other than the corporate Parties to this Agreement) shall be deemed a third party
or other beneficiary of this Agreement, and no such Person shall have any right or other entitlement to enforce any provision
of this Agreement or seek any remedy in connection with this Agreement, except as may be expressly set forth in Section 7.11.
No provision of this Agreement constitutes or shall be deemed to constitute, an employee benefit plan or other arrangement, an
amendment of any employee benefit plan or other arrangement, or any provision of any employee benefit plan or other arrangement.
(g)
First South shall use its reasonable best efforts to cause the employees designated by Carolina Financial to execute a CresCom
Merger / Cash Retention Bonus Agreement in the form attached hereto as
Exhibit E
.
(h)
Consistent with applicable Law, First South shall notify each holder of First South Options having an exercise price per
share less than the per share value of the Merger Consideration of such optionee’s right to enter into a Stock Option Cash-Out
Agreement in the form of
Exhibit G
.
(i)
Concurrently with or as soon as practicable after the execution and delivery of this Agreement, Bruce W. Elder and Cornelius
F
.
Sullivan shall enter into employment agreements in the forms attached hereto as
Exhibits H and I
, respectively,
which shall become effective only upon the effective time of the Merger.
(j)
Upon not less than 10 days’ notice prior to the Closing Date from Carolina Financial to First South, First South shall
cause the adoption of resolutions (which are acceptable to Carolina Financial) by each applicable First South Entity’s Board
of Directors terminating, amending or causing other appropriate modification of each First South Benefit Plan as specified by Carolina
Financial in such notice, effective as of the date which immediately precedes the Closing Date or as of the Closing Date (as shall
be specified in such notice), provided that (a) First South shall be required to take such action only with respect to First South
Benefit Plans that may unilaterally be terminated, amended or modified, as applicable, as requested by Carolina Financial, by a
First South Entity in accordance with the terms of the plan and applicable Law, (b) First South shall not be required to take such
action if and to the extent it would cause a plan participant to be denied a benefit, or vesting of a benefit, that the participant
would have been entitled to under the plan if the plan had not been so terminated, amended or modified at or prior to the Effective
Time; and (c) for the avoidance of doubt, any reasonable costs or expenses that are incurred by a First South Entity in connection
with such termination, amendment or modification (including without limitation the payment of any benefits or compensation) shall
be considered reasonable expenses incurred by a First South Entity in connection with the Merger. Upon such action, participants
in such applicable First South Benefit Plans that are First South ERISA Plans shall be 100% vested in their account balances or
other applicable plan benefits.
Prior to the Effective
Time, First South and Carolina Financial shall take all such steps as may be required to cause (in the case of First South) any
dispositions of First South Common Stock (including derivative securities with respect to First South Common Stock) by each individual
who is subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to First South (“
First
South Insiders
”) or (in the case of Carolina Financial) any acquisitions of Carolina Financial Common Stock (including
derivative securities with respect to Carolina Financial Common Stock) by any First South Insiders who, immediately following
the Merger, will be subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to Carolina Financial,
in each case resulting from the transactions contemplated by this Agreement, to be exempt from liability pursuant to Rule 16b-3
promulgated under the Exchange Act to the fullest extent permitted by applicable law. First South agrees to promptly furnish Carolina
Financial with all requisite information necessary for Carolina Financial to take the actions contemplated by this Section 7.10.
(a)
Carolina Financial shall indemnify, defend, and hold harmless the present and former directors and executive officers of
the First South Entities (each, an “
Indemnified Party
”) against all Liabilities arising out of actions or omissions
arising out of the Indemnified Party’s service or services as directors, officers, employees, or agents of a First South
Entity or, at First South’s request, of another corporation, partnership, joint venture, trust, or other enterprise occurring
at or prior to the Effective Time (including service in connection with the transactions contemplated by this Agreement) to the
fullest extent permitted under the DGCL, the VSCA, Section 402 of the Sarbanes-Oxley Act, the Securities Laws and FDIC Regulations
Part 359, and by the Certificate of Incorporation and Bylaws of First South and any other First South Entity as in effect on the
date hereof, including provisions relating to advances of expenses incurred in the defense of any Litigation and whether or not
any First South Entity is insured against any such matter.
(b)
Prior to the Effective Time, Carolina Financial shall purchase, or shall direct First South to purchase, an extended reporting
period endorsement under First South’s existing directors’ and officers’ liability insurance coverage (“
First
South Entities’ D&O Policies
”) for acts or omissions occurring prior to the Effective Time by such directors
and officers currently covered by First South Entities’ D&O Policies. The directors and officers of First South shall
take all reasonable actions required by the insurance carrier necessary to procure such endorsement. Such endorsement shall provide
such directors and officers with coverage (including bankers’ professional liability, cyber and employment practices coverage)
following the Effective Time for six years or such lesser period of time as can be purchased for an aggregate amount equal to 200%
of the current annual premiums for the First South Entities’ D&O Policies (the “
Premium Multiple
”).
If Carolina Financial is unable to obtain or maintain the insurance coverage called for in this Section 7.11(b), then Carolina
Financial shall obtain the most advantageous coverage that can be purchased for the Premium Multiple.
(c)
Any Indemnified Party wishing to claim indemnification under paragraph (a) of this Section 7.11, upon learning of any such
Liability or Litigation, shall promptly notify Carolina Financial and the Surviving Corporation thereof in writing. In the event
of any such Litigation (whether arising before or after the Effective Time), (i) Carolina Financial or the Surviving Corporation
shall have the right to assume the defense thereof and neither Carolina Financial nor the Surviving Corporation shall be liable
to such Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if Carolina Financial or the Surviving Corporation elects not to assume
such defense or counsel for the Indemnified Parties advises that there are substantive issues which raise conflicts of interest
between Carolina Financial or the Surviving Corporation and the Indemnified Parties, the Indemnified Parties may retain counsel
satisfactory to them, and Carolina Financial or the Surviving Corporation shall pay all reasonable fees and expenses of such counsel
for the Indemnified Parties promptly as statements therefor are received;
provided, however,
that Carolina Financial and
the Surviving Corporation shall be obligated pursuant to this paragraph (c) to pay for only one firm of counsel for all Indemnified
Parties in any jurisdiction; (ii) the Indemnified Parties will cooperate in good faith in the defense of any such Litigation;
and (iii) neither Carolina Financial nor the Surviving Corporation shall be liable for any settlement effected without its prior
written consent and which does not provide for a complete and irrevocable release of all Carolina Financial’s Entities and
their respective directors, officers, and controlling persons, employees, agents, and Representatives; and
provided, further,
that neither Carolina Financial nor the Surviving Corporation shall have any obligation hereunder to any Indemnified Party
when and if a court of competent jurisdiction shall determine, and such determination shall have become final, that the indemnification
of such Indemnified Party in the manner contemplated hereby is prohibited by applicable Law.
(d)
If Carolina Financial or any successors or assigns shall consolidate with or merge into any other Person and shall not be
the continuing or surviving Person of such consolidation or merger or shall transfer all or substantially all of its assets to
any Person, then and in each case, proper provision shall be made so that the successors and assigns of Carolina Financial or the
Surviving Corporation shall assume the obligations set forth in this Section 7.11.
(e)
The provisions of this Section 7.11 are intended to be for the benefit of, shall be enforceable by, and may not be modified
without the prior written consent of each Indemnified Party and their respective heirs and legal and personal representatives.
7.12
Tax Covenants of Carolina Financial.
At and after the
Effective Time, Carolina Financial covenants and agrees that it:
(a)
will not take any action that could reasonably be expected to cause the Merger to fail to qualify as a reorganization under
Section 368(a)(1)(A) of the Code;
(b)
will maintain all books and records and prepare and file all federal, state and local income Tax Returns and schedules thereto
of Carolina Financial, First South and all Affiliates thereof in a manner consistent with the Merger’s being qualified as
a reorganization and nontaxable exchange under Section 368(a)(1)(A) of the Code (and comparable provisions of any applicable state
or local Tax Laws);
(c)
will, either directly or through a member of Carolina Financial’s Qualified Group, continue at least one significant
historic business line of First South, or use at least a significant portion of the historic business assets of First South in
a business, in each case within the meaning of Treasury Regulation Section 1.368-1(d);
(d)
in connection with the Merger, will not reacquire, and will not permit any Person that is a “related person”
(as defined in Treasury Regulation Section 1.368-1(e)(4)) to Carolina Financial to acquire, any of the Carolina Financial Common
Stock issued in connection with the Merger; and
(e)
will not sell or otherwise dispose of any of First South’s assets acquired in the Merger, and will not cause or permit
CresCom Bank to sell or otherwise dispose of any of the Bank’s assets acquired in the Bank Merger, except for dispositions
made in the ordinary course of business or transfers described in Section 368(a)(2)(C) of the Code or described and permitted in
Treasury Regulation Section 1.368-2(k).
Article
8
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
|
8.1
|
Conditions to Obligations of Each Party.
|
The respective obligations
of each Party to perform this Agreement and consummate the Merger and the other transactions contemplated hereby are subject to
the satisfaction of the following conditions, unless waived by both Parties pursuant to Section 10.6:
(a)
Shareholder Approvals
. The shareholders of First South shall have approved this Agreement and the consummation of
the transactions contemplated hereby, including the Merger, by the Requisite First South Shareholder Vote, as and to the extent
required by Law and by the provisions of First South’s Articles of Incorporation and Bylaws. The stockholders of Carolina
Financial shall have approved this Agreement and the consummation of the transactions contemplated hereby, including the Merger
and the issuance of the Merger Consideration, by the Requisite Carolina Financial Stockholder Votes, as and to the extent required
by Law and by the provisions of Carolina Financial’s Certificate of Incorporation and Bylaws.
(b)
Regulatory Approvals
. All Consents of, filings and registrations with, and notifications to, all Regulatory Authorities
required for consummation of the Merger shall have been obtained or made and shall be in full force and effect and all waiting
periods required by Law shall have expired. No Consent obtained from any Regulatory Authority which is necessary to consummate
the transactions contemplated hereby shall be conditioned or restricted in a manner (including requirements relating to the raising
of additional capital or the disposition of Assets) which in the reasonable judgment of the Board of Directors of Carolina Financial
would so materially adversely affect the economic or business benefits of the transactions contemplated by this Agreement that,
had such condition or requirement been known, Carolina Financial would not, in its reasonable judgment, have entered into this
Agreement.
(c)
Consents and Approvals
. Each Party shall have obtained any and all Consents required for consummation of the Merger
(other than those referred to in Section 8.1(b)) or for the preventing of any Default under any Contract or Permit of such Party
which, if not obtained or made, would be reasonably likely to have, individually or in the aggregate, a First South Material Adverse
Effect or a Carolina Financial Material Adverse Effect, as applicable. First South shall have obtained the Consents listed in Section
8.1(c) of the First South Disclosure Memorandum, including Consents from the lessors of each office leased by First South, if any.
No Consent so obtained which is necessary to consummate the transactions contemplated hereby shall be conditioned or restricted
in a manner which in the reasonable judgment of the Board of Directors of Carolina Financial would so materially adversely affect
the economic or business benefits of the transactions contemplated by this Agreement that, had such condition or requirement been
known, Carolina Financial would not, in its reasonable judgment, have entered into this Agreement.
(d)
Registration Statement
. The Registration Statement shall have been declared effective by the SEC, and no proceedings
shall be pending or threatened by the SEC to suspend the effectiveness of the Registration Statement.
(e)
Legal Proceedings
. No Governmental Authority of competent jurisdiction shall have enacted, issued, promulgated, enforced,
or entered any Law or Order (whether temporary, preliminary or permanent) or taken any other action which prohibits, restricts,
or makes illegal consummation of the transactions contemplated by this Agreement.
(f)
Exchange Listing
. Carolina Financial shall have filed with the NASDAQ Stock Market a notification form for the listing
of all shares of Carolina Financial Common Stock to be delivered as Merger Consideration, and the NASDAQ Stock Market shall not
have objected to the listing of such shares of Carolina Financial Common Stock.
(g)
Tax Opinion
. Carolina Financial and First South shall have received the opinion of Carolina Financial’s legal
counsel, dated as of the Closing, in form and substance customary in transactions of the type contemplated hereby, substantially
to the effect that on the basis of the facts, representations, and assumptions set forth in such opinion, which are consistent
with the state of facts existing at the Effective Time, (i) the Merger will be treated for federal income Tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and (ii) Carolina Financial and First South will each be a party to that reorganization
within the meaning of Section 368(b) of the Code. Such opinion may be based on, in addition to the review of such matters of fact
and Law as the opinion given considers appropriate, representations contained in certificates of officers of Carolina Financial
and First South.
|
8.2
|
Conditions to Obligations of Carolina Financial.
|
The obligations of Carolina
Financial to perform this Agreement and consummate the Merger and the other transactions contemplated hereby are subject to the
satisfaction of the following conditions, unless waived by Carolina Financial pursuant to Section 10.6(a):
(a)
Representations and Warranties
. For purposes of this Section 8.2(a), the accuracy of the representations and warranties
of First South set forth in this Agreement shall be assessed as of the date of this Agreement and as of the Effective Time with
the same effect as though all such representations and warranties had been made on and as of the Effective Time (
provided, that
representations and warranties which are confined to a specified date shall speak only as of such date). The representations
and warranties set forth in Sections 4.1, 4.2(a), 4.2(b)(i), 4.3, and 4.24 shall be true and correct (except for inaccuracies which
are
de minimis
in amount or effect). There shall not exist inaccuracies in the representations and warranties of First South
set forth in this Agreement (including the representations and warranties set forth in Sections 4.1, 4.2(a), 4.2(b)(i), 4.3, and
4.24) such that the aggregate effect of such inaccuracies has, or is reasonably likely to have, a First South Material Adverse
Effect;
provided, that
for purposes of this sentence only, those representations and warranties which are qualified by references
to “material” or “Material Adverse Effect” or to the “Knowledge” of any Person shall be deemed
not to include such qualifications.
(b)
Performance of Agreements and Covenants
. Each and all of the agreements and covenants of First South to be performed
and complied with pursuant to this Agreement and the other agreements contemplated hereby prior to the Effective Time shall have
been duly performed and complied with in all material respects.
(c)
Officers’ Certificate
. First South shall have delivered to Carolina Financial (i) a certificate, dated as of
the Closing Date and signed on its behalf by its chief executive officer and its chief financial officer, to the effect that the
conditions set forth in Section 8.1 as it relates to First South and in Sections 8.2(a), 8.2(b), and 8.2(f) have been satisfied.
(d)
Secretary’s Certificate
. First South and First South Bank shall have delivered a certificate of the secretary
of First South and First South Bank, dated as of the Closing Date, certifying as to (i) the incumbency of officers of First South
and First South Bank executing documents executed and delivered in connection herewith, (ii) a copy of the Articles of Incorporation
of First South as in effect from the date of this Agreement until the Closing Date, along with a certificate (dated not more than
10 days prior to the Closing Date) of the Virginia State Corporation Commission as to the good standing of First South; (iii)
a copy of the Bylaws of the First South as in effect from the date of this Agreement until the Closing Date, (iv) a copy of the
consent or resolutions of First South’s Board of Directors authorizing and approving the applicable matters contemplated
hereunder, (v) a certificate of the Federal Reserve (dated not more than 10 days prior to the Closing Date) certifying that the
First South is a registered bank holding company, (vi) a copy of the Articles of Incorporation of First South Bank as in effect
from the date of this Agreement until the Closing Date, (vii) a copy of the Bylaws of First South Bank as in effect from the date
of this Agreement until the Closing Date, (viii) a certificate of the North Carolina Commissioner of Banks (dated not more than
10 days prior to the Closing Date) as to the good standing of First South Bank, and (ix) a certificate of the FDIC (dated not
more than 10 days prior to the Closing Date) certifying that First South Bank is an insured depository institution.
(e)
Non-Competition Agreements; Shareholder Support Agreements; Claims Letters; Stock Option Cash-Out Agreements; Employment
Agreements.
The Non-Employee Director Non-Competition Agreements in the form attached hereto as
Exhibit B
shall have
been executed by the members of the First South’s Board of Directors who are not employed by First South or First South Bank
and delivered to Carolina Financial, in each case other than by those members of First South’s Board of Directors who will
serve, as of the Effective Time, as members of the Board of Directors of Carolina Financial. The Shareholder Support Agreements
in the form attached hereto as
Exhibit C
shall have been executed by each of the directors and Executive Officers and delivered
to Carolina Financial. Each of the directors and Executive Officers shall have executed claims letters in the form attached hereto
as
Exhibit D
and delivered the same to Carolina Financial. First South shall have complied in all material respects with
its obligation pursuant to Section 7.9(h). The employment agreements in the forms attached hereto as
Exhibits H and I
shall
have been executed by Bruce W. Elder and Cornelius F. Sullivan, respectively, and CresCom Bank (and such parties shall not have
advised Carolina Financial that they intend to breach any such agreements) and delivered to Carolina Financial.
(f)
No Material Adverse Effect
. There shall not have occurred any First South Material Adverse Effect from the March
31, 2017 balance sheet to the Effective Time with respect to First South or First South Bank.
(g)
Bank Merger
. The Parties shall stand ready to consummate the Bank Merger immediately after the Merger.
|
8.3
|
Conditions to Obligations of First South.
|
The obligations of First
South to perform this Agreement and consummate the Merger and the other transactions contemplated hereby are subject to the satisfaction
of the following conditions, unless waived by First South pursuant to Section 10.6(b):
(a)
Representations and Warranties
. For purposes of this Section 8.3(a), the accuracy of the representations and warranties
of Carolina Financial set forth in this Agreement shall be assessed as of the date of this Agreement and as of the Effective Time
with the same effect as though all such representations and warranties had been made on and as of the Effective Time (provided
that representations and warranties which are confined to a specified date shall speak only as of such date). The representations
and warranties set forth in Sections 5.1, 5.2(a) and 5.2(b)(i), and 5.5 shall be true and correct (except for inaccuracies which
are
de minimis
in amount or effect). There shall not exist inaccuracies in the representations and warranties of Carolina
Financial set forth in this Agreement (including the representations and warranties set forth in Sections 5.1, 5.2(a) and 5.2(b)(i),
and 5.5) such that the aggregate effect of such inaccuracies has, or is reasonably likely to have, a Carolina Financial Material
Adverse Effect;
provided that
, for purposes of this sentence only, those representations and warranties which are qualified
by references to “material” or “Material Adverse Effect” or to the “Knowledge” of any Person
shall be deemed not to include such qualifications.
(b)
Performance of Agreements and Covenants
. Each and all of the agreements and covenants of Carolina Financial to be
performed and complied with pursuant to this Agreement and the other agreements contemplated hereby prior to the Effective Time
shall have been duly performed and complied with in all material respects.
(c)
Officers’ Certificate
. Carolina Financial shall have delivered to the First South a certificate, dated as
of the Closing Date and signed on its behalf by its chief executive officer and its chief financial officer, to the effect that
the conditions set forth in Section 8.1 as they relate to Carolina Financial and in Sections 8.3(a), 8.3(b), and 8.3(f) have been
satisfied.
(d)
Secretary’s Certificate
. Carolina Financial and CresCom Bank shall have delivered a certificate of the secretary
of Carolina Financial and CresCom Bank, dated as of the Closing Date, certifying as to (i) the incumbency of officers of Carolina
Financial and CresCom Bank executing documents executed and delivered in connection herewith, (ii) a copy of the Certificate of
Incorporation of the Carolina Financial as in effect from the date of this Agreement until the Closing Date, along with a certificate
(dated not more than 10 days prior to the Closing Date) of the Secretary of State of the State of Delaware as to the good standing
of the Carolina Financial; (iii) a copy of the Bylaws of the Carolina Financial as in effect from the date of this Agreement until
the Closing Date, (iv) a copy of the consent or resolutions of Carolina Financial’s Board of Directors authorizing and approving
the applicable matters contemplated hereunder, (v) a certificate of the Federal Reserve (dated not more than 10 days prior to the
Closing Date) certifying that the Carolina Financial is a registered bank holding company, (vi) a copy of the Articles of Incorporation
of CresCom Bank as in effect from the date of this Agreement until the Closing Date, (vii) a copy of the Bylaws of CresCom Bank
as in effect from the date of this Agreement until the Closing Date, (viii) a certificate of the South Carolina Board of Financial
Institutions (dated not more than 10 days prior to the Closing Date) as to the good standing of CresCom Bank, and (ix) a certificate
of the FDIC (dated not more than 10 days prior to the Closing Date) certifying that CresCom Bank is an insured depository institution.
(e)
Payment of Merger Consideration
. Carolina Financial shall have executed and delivered an agreement with the Exchange
Agent obligating Carolina Financial to deliver the Merger Consideration and cash in an aggregate amount sufficient for payment
in lieu of fractional shares of Carolina Financial Common Stock to which holders of First South Common Stock may be entitled to
the Exchange Agent within five Business Days of the Effective Time.
(f)
No Material Adverse Effect.
There shall not have occurred any Carolina Financial Material Adverse Effect from the
March 31, 2017 balance sheet to the Effective Time with respect to Carolina Financial.
Article
9
TERMINATION
Notwithstanding any other
provision of this Agreement, and notwithstanding the approval of this Agreement by the shareholders of First South or the stockholders
of Carolina Financial, this Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time:
(a)
By mutual written agreement of Carolina Financial and First South; or
(b)
By Carolina Financial or First South (
provided, that
the terminating Party is not then in material breach of any
representation, warranty, covenant, or other agreement contained in this Agreement) in the event of a breach by the other Party
of any representation or warranty contained in this Agreement which cannot be or has not been cured within 30 days after the giving
of written notice to the breaching Party of such breach and which breach is reasonably likely, in the opinion of the non-breaching
Party, to permit such Party to refuse to consummate the transactions contemplated by this Agreement pursuant to the standard set
forth in Section 8.2 or 8.3 as applicable; or
(c)
By Carolina Financial or First South in the event (i) any Consent of any Regulatory Authority required for consummation
of the Merger and the other transactions contemplated hereby shall have been denied by final nonappealable action of such authority
or if any action taken by such authority is not appealed within the time limit for appeal, (ii) any Law or Order permanently restraining,
enjoining or otherwise prohibiting the consummation of the Merger shall have become final and nonappealable, (iii) the Requisite
First South Shareholder Vote is not obtained at First South’s Shareholders’ Meeting or (iv) the Requisite Carolina
Financial Stockholder Votes are not obtained at Carolina Financial’s Stockholders’ Meeting; or
(d)
By Carolina Financial or First South in the event that the Merger shall not have been consummated by March 31, 2018, if
the failure to consummate the transactions contemplated hereby on or before such date is not caused by any breach of this Agreement
by the Party electing to terminate pursuant to this Section 9.1(d); or
(e)
By Carolina Financial (provided, that Carolina Financial is not then in material breach of any representation, warranty,
covenant, or other agreement contained in this Agreement) in the event that (i) First South’s Board shall have made an Adverse
Recommendation Change relating to an Acquisition Proposal; (ii) First South’s Board shall have failed to reaffirm the First
South Recommendation within 10 business days after Carolina Financial requests such at any time following the public announcement
of an Acquisition Proposal,
provided
,
however
, that any actions taken by First South pursuant to Section 7.3 of this
Agreement shall not be considered a failure to reaffirm the First South Recommendation, or (iii) First South shall have failed
to comply in all material respects with its obligations under Section 7.1 or 7.3; or
(f)
By First South, if (i) First South’s Shareholders’ Meeting has been held, (ii) the Requisite First South Shareholder
Vote has not been obtained, (iii) prior to First South’s Shareholders’ Meeting, First South has received a Superior
Proposal which did not result from a breach of Section 7.3, and (iv) First South Board’s has determined to enter into a definitive
agreement providing for such Superior Proposal upon termination of this Agreement in accordance with this Section 9.1(f) and enters
into such agreement concurrently with such termination;
provided
, that First South shall pay Carolina Financial the Termination
Fee pursuant to Section 9.3(a) concurrently with and as a condition to the effectiveness of such termination; or
(g)
(i) by First South, upon written notice to Carolina Financial on the business day immediately following the Measurement
Date, if (A) the Carolina Financial Average Closing Price is less than $25.98 and (B) (x) the Closing Price Change Ratio is 0.15
less than (y) the Index Change Ratio. If First South elects to exercise its termination right pursuant to this Section 9.1(g)(i),
the provisions of Section 9.1(g)(ii) shall apply.
(ii) A
termination by First South pursuant to Section 9.1(g)(i) shall have no force or effect if Carolina Financial agrees in writing
within two business days after receipt of written notice of such termination to (A) increase the Exchange Ratio to the ratio obtained
by multiplying (x) the quotient of the Per Share Purchase Price divided by the Carolina Final Average Closing Price by (y) the
sum of the Index Change Ratio minus 0.15 or (B) add a cash component to the Merger Consideration in an amount per share equivalent
to the Exchange Ratio adjustment described in clause (A); or
(h)
by First South, at any time prior to the Requisite First South Shareholder Vote, if the First South Board shall have effected
an Adverse Recommendation Change in response to, or as a result of, an Intervening Event.
|
9.2
|
Effect of Termination.
|
In the event of the termination
and abandonment of this Agreement by either Carolina Financial or First South pursuant to Section 9.1, this Agreement shall become
void and have no effect, except that (i) the provisions of Sections 7.6, 9.2, 9.3, 10.2, and 10.3 shall survive any such termination
and abandonment, and (ii) no such termination shall relieve the breaching Party from Liability resulting from any breach by that
Party of this Agreement.
(a)
If Carolina Financial terminates this Agreement pursuant to Section 9.1(e) of this Agreement or First South terminates this
Agreement pursuant to Section 9.1(f) of this Agreement, then First South shall pay to Carolina Financial the sum of
Five Million
Seven Hundred Fifty Thousand
Dollars ($
5,750,000
) (the “
Termination Fee
”) within three business days
of the termination date, except as required by Section 9.1(f). The Termination Fee shall be paid to Carolina Financial in same
day funds. First South hereby waives any right to set-off or counterclaim against such amount.
(b)
In the event that, (i) before the termination of this Agreement, an Acquisition Proposal with respect to First South shall
have been communicated to or otherwise made known to the shareholders, senior management or Board of Directors of First South,
or any Person shall have publicly announced an intention (whether or not conditional) to make an Acquisition Proposal with respect
to First South, in either case after the date of this Agreement, (ii) thereafter this Agreement is terminated (A) by First South
or Carolina Financial pursuant to Section 9.1(d) (if the Requisite First South Shareholder Vote has not theretofore been obtained),
(B) by Carolina Financial pursuant to Section 9.1(b), or (C) by First South or Carolina Financial pursuant to Section 9.1(c)(iii),
and (iii) prior to the date that is 12 months after the date of such termination, First South consummates, or enters into a definitive
agreement to consummate, an Acquisition Transaction in which, as applicable, the acquirer acquires a majority of the total outstanding
voting securities of First South or First South Bank, the shareholders of First South immediately preceding the transaction hold
less than a majority of the equity interests of the surviving or resulting entity or the acquirer acquires more than 50% of the
assets of First South, then First South shall on the earlier of the date such Acquisition Transaction is consummated or such definitive
agreement is entered into, as applicable, pay Carolina Financial a fee equal to the Termination Fee in same day funds. First South
hereby waives any right to set-off or counterclaim against such amount.
(c)
The Parties acknowledge that the agreements contained in this Article 9 are an integral part of the transactions contemplated
by this Agreement, and that without these agreements, they would not enter into this Agreement; accordingly, if First South fails
to pay promptly any fee payable by it pursuant to this Section 9.3, then First South shall pay to Carolina Financial its reasonable
costs and expenses (including reasonable attorneys’ fees) in connection with collecting such Termination Fee, together with
interest on the amount of the fee at the prime annual rate of interest (as published in
The Wall Street Journal
) plus 2%
as the same is in effect from time to time from the date such payment was due under this Agreement until the date of payment.
|
9.4
|
Non-Survival of Representations and Covenants.
|
Except for Article 2, Sections
7.6(b), 7.8, 7.9, 7.11, and 7.12 and this Article 9, the respective representations, warranties, obligations, covenants, and agreements
of the Parties shall not survive the Effective Time.
Article
10
MISCELLANEOUS
(a)
Except as otherwise provided herein, the capitalized terms set forth below shall have the following meanings:
“Acquisition Agreement”
shall have the meaning as set forth in Section 7.3 of the Agreement.
“Acquisition Proposal”
means any proposal that is communicated to First South’s chief executive officer, chief financial officer or Board of Directors
or publicly announced to First South’s shareholders by any Person (other than Carolina Financial or any of its Affiliates)
for an Acquisition Transaction involving First South or any of its present or future consolidated Subsidiaries, or any combination
of such Subsidiaries, the assets of which constitute 5% or more of the consolidated assets of First South as reflected on First
South’s consolidated statement of condition prepared in accordance with GAAP.
“Acquisition Transaction”
means any transaction or series of related transactions (other than the transactions contemplated by this Agreement) involving:
(i) any acquisition or purchase from First South by any Person or Group (other than Carolina Financial or any of its Affiliates)
of 25% or more in interest of the total outstanding voting securities of First South or any of its Subsidiaries, or any tender
offer or exchange offer that if consummated would result in any Person or Group (other than Carolina Financial or any of its Affiliates)
beneficially owning 25% or more in interest of the total outstanding voting securities of First South or any of its Subsidiaries,
or any merger, consolidation, business combination or similar transaction involving First South pursuant to which the shareholders
of First South immediately preceding such transaction hold less than 75% of the equity interests in the surviving or resulting
entity (which includes the parent corporation of any constituent corporation to any such transaction) of such transaction; (ii) any
sale or lease (other than in the ordinary course of business), or exchange, transfer, license (other than in the ordinary course
of business), acquisition or disposition of 5% or more of the assets of First South; or (iii) any liquidation or dissolution
of First South.
“Adverse Recommendation
Change”
shall have the meaning as set forth in Section 7.1(b) of the Agreement.
“Affiliate”
of a Person means: (i) any other Person directly, or indirectly through one or more intermediaries, controlling, controlled
by or under common control with such Person; (ii) any officer, director, partner, employer, or direct or indirect beneficial
owner of any 10% or greater equity or voting interest of such Person; or (iii) any other Person for which a Person described
in clause (ii) acts in any such capacity.
“Agreement”
shall have the meaning as set forth in the introduction of the Agreement.
“Allowance”
shall have the meaning as set forth in Section 4.9(a) of the Agreement.
“Articles of Merger”
shall have the meaning as set forth in Section 1.3 of the Agreement.
“Assets”
of a Person means all of the assets, properties, businesses and rights of such Person of every kind, nature, character and description,
whether real, personal or mixed, tangible or intangible, accrued or contingent, or otherwise relating to or utilized in such Person’s
business, directly or indirectly, in whole or in part, whether or not carried on the books and records of such Person, and whether
or not owned in the name of such Person or any Affiliate of such Person and wherever located.
“Bank Agreement
of Merger”
shall have the meaning as set forth in Section 1.5 of the Agreement, and the form attached hereto as
Exhibit
A
.
“Bank Merger”
shall have the meaning as set forth in Section 1.5 of the Agreement.
“BHCA”
shall have the meaning as set forth in Section 4.1 of the Agreement.
“Carolina
Financial”
shall have the meaning as set forth in the introduction of the Agreement.
“Carolina Financial
Average Closing Price”
means the volume-weighted average of the closing prices (rounded to the nearest full cent) of
Carolina Financial Common Stock on the NASDAQ for the 20 trading days immediately preceding the Measurement Date (as such price
is appropriately adjusted for any stock split, reverse stock split, recapitalization, reclassification, or similar transaction
with respect to the then outstanding shares of Carolina Financial Common Stock declared or effected after the date hereof and prior
to the tenth day immediately preceding the Closing Date).
“Carolina Financial
Awards”
shall have the meaning as set forth in Section 3.1(e) of the Agreement.
“Carolina Financial
Common Stock”
means the common stock, par value $0.01 per share, of Carolina Financial.
“Carolina Financial
Entities”
means, collectively, Carolina Financial and all Carolina Financial Subsidiaries.
“Carolina Financial
Exchange Act Reports”
shall have the meaning as set forth in the Section 5.4(a) of the Agreement.
“Carolina Financial
Financial Advisor”
shall mean Keefe, Bruyette & Woods, Inc., a subsidiary of Stifel Financial Corp.
“Carolina Financial
Financial Statements”
means (i) the consolidated balance sheets of Carolina Financial as of March 31, 2017, and the related
statements of income, changes in stockholders’ equity, and cash flows (including related notes and schedules, if any) for
the period ended March 31, 2017, and for each of the three fiscal years ended December 31, 2016, as filed in amended form by Carolina
Financial in Exchange Act Documents, and (ii) the consolidated balance sheets of Carolina Financial (including related notes and
schedules, if any) and related statements of income, changes in stockholders’ equity, and cash flows (including related notes
and schedules, if any) included in Exchange Act Documents, as amended, filed with respect to periods ended subsequent to March
31, 2017.
“Carolina Financial
Material Adverse Effect”
means an event, change or occurrence which, individually or together with any other event, change
or occurrence, has a material adverse effect on (i) the financial position, property, business, assets or results of operations
of Carolina Financial and its Subsidiaries, taken as a whole, or (ii) the ability of Carolina Financial to perform its obligations
under this Agreement or to consummate the Merger or the other transactions contemplated by this Agreement,
provided, that
“Carolina Financial Material Adverse Effect” shall not be deemed to include the effects of (A) changes in banking
and other Laws of general applicability or interpretations thereof by Governmental Authorities, (B) changes in GAAP or regulatory
accounting principles generally applicable to banks and their holding companies, (C) actions and omissions of Carolina Financial
(or any of its Subsidiaries) taken with the prior written Consent of First South in contemplation of the transactions contemplated
hereby, (D) changes in economic conditions affecting financial institutions generally, including changes in interest rates,
credit availability and liquidity, and price levels or trading volumes in securities markets, except to the extent Carolina Financial
is materially and adversely affected in a disproportionate manner as compared to other community banks and their holding companies
in the Southeastern United States, (E) changes resulting from the announcement or pendency of the transactions contemplated by
this Agreement, or (F) the direct effects of negotiating, entering into, and compliance with this Agreement on the operating performance
of Carolina Financial. “Carolina Financial Material Adverse Effect” shall not be deemed to include any failure to meet
analyst projections, in and of itself, or, in and of itself, or the trading price of Carolina Financial Common Stock (it being
understood that the facts or occurrences giving rise or contributing to any such effect, change or development which affects or
otherwise relates to the failure to meet analyst financial forecasts or the trading price, as the case may be, may be deemed to
constitute, or be taken into account in determining whether there has been, or would reasonably be expected to be, a Carolina Material
Adverse Effect).
“Carolina Financial
Security Program”
shall have the meaning as set forth in Section 7.6(e) of the Agreement.
“Carolina Financial’s
Stockholders’ Meeting”
means the meeting of Carolina Financial’s stockholders to be held pursuant to Section
7.1(d), including any postponements or adjournments thereof.
“Carolina Financial
Subsidiaries”
means the Subsidiaries of Carolina Financial, which shall include any corporation, bank, savings association,
limited liability company, limited partnership, limited liability partnership or other organization acquired as a Subsidiary of
Carolina Financial in the future and held as a Subsidiary by Carolina Financial at the Effective Time.
“Certificate of Merger”
shall have the meaning as set forth in Section 1.3 of the Agreement.
“Certificates”
shall have the meaning as set forth in Section 3.1(d) of the Agreement.
“
Closing”
shall have the meaning as set forth in Section 1.2 of the Agreement.
“
Closing
Date”
means the date on which the Closing occurs.
“Closing Price
Change Ratio”
shall have the meaning as set forth in Section 3.1(b) of the Agreement.
“Code”
means
the Internal Revenue Code of 1986, and the rules and regulations promulgated thereunder.
“Consent”
means any consent, approval, authorization, clearance, exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order, or Permit.
“Continuing
Employee”
shall have the meaning as set forth in Section 7.9(a) of the Agreement.
“Contract”
means any written or oral agreement, arrangement, authorization, commitment, contract, indenture, instrument, lease, license, obligation,
plan, practice, restriction, understanding, or undertaking of any kind or character, or other document to which any Person is a
party or that is binding on any Person or its capital stock, Assets or business.
“Data Incident”
means any actual or reasonably suspected unauthorized access to or acquisition, disclosure, use, or loss of IIPI disclosed
to any Carolina Financial Entity in connection with this Agreement (including hard copies) or breach or compromise of Carolina
Financial’s Security Program that presents a viable threat to any such IIPI or any First South Entity’s systems.
“Default”
means (i) any breach or violation of, default under, contravention of, or conflict with, any Contract, Law, Order, or Permit,
(ii) any occurrence of any event that with the passage of time or the giving of notice or both would constitute a breach or
violation of, default under, contravention of, or conflict with, any Contract, Law, Order, or Permit, or (iii) any occurrence
of any event that with or without the passage of time or the giving of notice would give rise to a right of any Person to exercise
any remedy or obtain any relief under, terminate or revoke, suspend, cancel, or modify or change the current terms of, or renegotiate,
or to accelerate the maturity or performance of, or to increase or impose any Liability under, any Contract, Law, Order, or Permit.
“
DGCL
”
means the Delaware General Corporation Law.
“Director Non-Competition
Agreement”
shall have the meaning as set forth in Section 7.9(e) of the Agreement.
“Disqualified
Person”
shall have the meaning as set forth in Section 4.15(f) of the Agreement.
“DOL”
shall have the meaning as set forth in Section 4.15(b) of the Agreement.
“Effective
Date”
shall have the meaning as set forth in Section 1.2 of the Agreement.
“Effective
Time”
shall have the meaning as set forth in Section 1.3 of the Agreement.
“Employee Benefit
Plan”
means each pension, retirement, profit-sharing, deferred compensation, stock option, equity incentive, synthetic
equity incentive, phantom stock, employee stock ownership, share purchase, severance pay, vacation, bonus, retention, change in
control or other incentive plan, medical, vision, dental or other health plan, any life insurance plan, flexible spending account,
cafeteria plan, vacation, holiday, disability or any other employee benefit plan or fringe benefit plan, including any “employee
benefit plan,” as that term is defined in Section 3(3) of ERISA and any other plan, fund, policy, program, practice, custom
understanding or arrangement providing compensation or other benefits, whether or not such Employee Benefit Plan is or is intended
to be (i) covered or qualified under the Code, ERISA or any other applicable Law, (ii) written or oral, (iii) funded or unfunded,
(iv) actual or contingent or (v) arrived at through collective bargaining or otherwise.
“Environmental
Laws”
shall mean all Laws relating to pollution or protection of human health or the environment (including ambient air,
surface water, ground water, land surface or subsurface strata) and which are administered, interpreted or enforced by the United
States Environmental Protection Agency and state and local Governmental Authorities with jurisdiction over, and including common
law in respect of, pollution or protection of the environment, including: (i) the Comprehensive Environmental Response Compensation
and Liability Act, 42 U.S.C. §§9601 et seq. (“
CERCLA
”); (ii) the Solid Waste Disposal Act, as amended
by the Resource Conservation and Recovery Act, 42 U.S.C. §§6901 et seq. (“
RCRA
”); (iii) the Emergency
Planning and Community Right to Know Act (42 U.S.C. §§11001 et seq.); (iv) the Clean Air Act (42 U.S.C. §§7401
et seq.); (v) the Clean Water Act (33 U.S.C. §§1251 et seq.); (vi) the Toxic Substances Control Act (15 U.S.C. §§2601
et seq.); (vii) any state, county, municipal or local statues, laws or ordinances similar or analogous to the federal statutes
listed in parts (i) - (vi) of this subparagraph; (viii) any existing amendments to the statues, laws or ordinances listed in parts
(i) - (vi) of this subparagraph, (ix) any rules, regulations, guidelines, directives, orders or the like adopted pursuant to or
implementing the statutes, laws, ordinances and amendments listed in parts (i) - (vii) of this subparagraph; and (x) any other
law, statute, ordinance, amendment, rule, regulation, guideline, directive, order or the like in effect now relating to environmental,
health or safety matters and other Laws relating to emissions, discharges, releases, or threatened releases of any Hazardous Material,
or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of
any Hazardous Material.
“ERISA”
means the Employee Retirement Income Security Act of 1974, as amended through the date of this Agreement.
“ERISA Affiliate”
means any trade or business, whether or not incorporated, which together with a First South Entity would be treated as a single
employer under Code Section 414 or would be deemed a single employer within the meaning of Code Section 414.
“Exchange Act”
means the Securities Exchange Act of 1934, and the rules and regulations promulgated thereunder.
“Exchange Act
Documents”
means all forms, proxy statements, registration statements, reports, schedules, and other documents, including
all certifications and statements required by the Exchange Act or Section 906 of the Sarbanes-Oxley Act with respect to any report
that is an Exchange Act Document, filed, or required to be filed, by a Party or any of its Subsidiaries with any Regulatory Authority
pursuant to the Securities Laws.
“Exchange Agent”
shall have the meaning as set forth in Section 3.2(a) of the Agreement.
“Exchange Fund”
shall have the meaning as set forth in Section 3.2(a) of the Agreement.
“Executive Officers”
means the President and Chief Executive Officer and the EVP/Chief Financial Officer of First South and First South Bank, and
the EVP/Chief Banking Officer, EVP/Chief Credit Officer, EVP/Director of Bank Operations, and EVP/Mortgage Lending of First South
Bank.
“Exhibits”
means the Exhibits so marked, copies of which are attached to this Agreement. Such Exhibits are hereby incorporated by reference
herein and made a part hereof, and may be referred to in this Agreement and any other related instrument or document without being
attached hereto or thereto.
“Extinguished
Shares”
shall have the meaning as set forth in Section 3.1(f) of the Agreement.
“
FDIC
”
means the Federal Deposit Insurance Corporation.
“Federal Reserve
”
means the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Richmond, as applicable.
“Final Index Price”
means the average of the closing price of the Nasdaq Bank Index for the 20 trading days immediately preceding the Measurement Date.
“First South”
shall have the meaning as set forth in the introduction of the Agreement.
“First South Benefit
Plan(s)”
shall have the meaning as set forth in Section 4.15(a) of the Agreement.
“First South’s
Board”
means the Board of Directors of First South.
“First South Book-Entry
Shares”
shall have the meaning set forth in Section 3.1(d) of the Agreement.
“First South Common
Stock”
means the $0.01 par value common stock of First South.
“First South Contracts”
shall have the meaning as set forth in Section 4.16(a) of the Agreement.
“First South Disclosure
Memorandum”
means the written information entitled “First South Disclosure Memorandum” delivered with this
Agreement, it being understood that a disclosure in any section of the First South Disclosure Memorandum shall be deemed to have
been set forth in all other applicable sections of the First South Disclosure Memorandum where it is reasonably apparent on the
face of such disclosure that such disclosure is applicable to such other sections of the First South Disclosure Memorandum, notwithstanding
the omission of any cross-reference to such other section, and it being understood further that the inclusion of any disclosure
on the First South Disclosure Memorandum does not make such disclosure a material disclosure.
“First South Entities”
means, collectively, First South and all First South Subsidiaries.
“First South Entities’
D&O Policies”
shall have the meaning as set forth in Section 7.11(b) of the Agreement.
“First South Equity
Plans”
means the First South Bancorp, Inc. 1997 Stock Option Plan and the First South Bancorp, Inc. 2008 Equity Incentive
Plan.
“First South ERISA
Plan”
shall have the meaning as set forth in Section 4.15(a) of the Agreement.
“First South Financial
Advisor”
means Raymond James & Associates, Inc.
“First South Financial
Statements”
means (i) the consolidated balance sheets of First South as of March 31, 2017, and the related statements
of income, changes in shareholders’ equity, and cash flows (including related notes and schedules, if any) for the quarter
ended March 31, 2017, and for each of the three fiscal years ended December 31, 2016, as filed by First South with the SEC on its
Quarterly Report on Form 10-Q for the quarter then ended, and (ii) the consolidated balance sheets of First South (including related
notes and schedules, if any) and related statements of income, changes in shareholders’ equity, and cash flows (including
related notes and schedules, if any) as filed by First South with the SEC on its Annual Report on Form 10-K for the year then ended.
“First South Material
Adverse Effect”
means an event, change or occurrence which, individually or together with any other event, change or
occurrence, has a material adverse effect on (i) the financial position, property, business, assets or results of operations of
First South and its Subsidiaries, taken as a whole, or (ii) the ability of First South to perform its material obligations under
this Agreement or to consummate the Merger or the other transactions contemplated by this Agreement, provided, that “First
South Material Adverse Effect” shall not be deemed to include the effects of (A) changes in banking and other Laws of general
applicability or interpretations thereof by Governmental Authorities, (B) changes in GAAP or regulatory accounting principles generally
applicable to banks and their holding companies, (C) actions and omissions of First South (or any of its Subsidiaries) taken with
the prior written consent of Carolina Financial in contemplation of the transactions contemplated hereby, (D) changes in economic
conditions affecting financial institutions generally, including changes in interest rates, credit availability and liquidity,
and price levels or trading volumes in securities markets, except to the extent First South is materially and adversely affected
in a disproportionate manner as compared to other community banks and their holding companies in the Southeastern United States,
(E) changes resulting from the announcement or pendency of the transactions contemplated by this Agreement, or (F) the direct effects
of negotiating, entering into, and compliance with this Agreement on the operating performance of First South. “First South
Material Adverse Effect” shall not be deemed to include any failure to meet analyst projections, in and of itself, or, in
and of itself, or the trading price of the First South Common Stock (it being understood that the facts or occurrences giving rise
or contributing to any such effect, change or development which affects or otherwise relates to the failure to meet analyst financial
forecasts or the trading price, as the case may be, may be deemed to constitute, or be taken into account in determining whether
there has been, or would reasonably be expected to be, a First South Material Adverse Effect).
“First South Options”
shall have the meaning as set forth in Section 3.4(b) of the Agreement.
“
First South Recommendation
”
shall have the meaning as set forth in Section 7.1(a) of the Agreement.
“First South Realty”
shall have the meaning as set forth in Section 4.10(e) of the Agreement.
“First South’s
Shareholders’ Meeting”
means the meeting of First South’s shareholders to be held pursuant to Section 7.1(a),
including any postponements or adjournments thereof.
“First South Stock
Award” means a restricted stock award granted under a First South Equity Plan
.
“First South Subsidiaries”
means the Subsidiaries of First South and First South Bank. As of the date of this Agreement, the First South Subsidiaries are
First South Bank, and First South Preferred Trust I. The First South Bank Subsidiaries are DTFS, Inc., First South Insurance LLC,
First South Investments, Inc. and First South Leasing, LLC.
“GAAP”
means generally accepted accounting principles in the United States, consistently applied during the periods involved.
“Governmental
Authority”
means any federal, state, local, foreign, or other court, board, body, commission, agency, authority or instrumentality,
arbitral authority, self-regulatory authority, mediator, tribunal, including Regulatory Authorities and Taxing Authorities.
“Group”
shall have the meaning as set forth in Section 13(d) of the Exchange Act.
“Hazardous Material”
means any chemical, substance, waste, material, pollutant, or contaminant defined as or deemed hazardous or toxic or otherwise
regulated under any Environmental Law, including RCRA hazardous wastes, CERCLA hazardous substances, and HSRA regulated substances,
pesticides and other agricultural chemicals, oil and petroleum products or byproducts and any constituents thereof, urea formaldehyde
insulation, lead in paint or drinking water, mold, asbestos, and polychlorinated biphenyls (PCBs): (i) any hazardous substance,
hazardous material, hazardous waste, regulated substance, or toxic substance (as those terms are defined by any applicable Environmental
Laws) and (ii) any chemicals, pollutants, contaminants, petroleum, petroleum products, or oil (and specifically shall include asbestos
requiring abatement, removal, or encapsulation pursuant to the requirements of Environmental Law), provided, notwithstanding the
foregoing or any other provision in this Agreement to the contrary, the words “Hazardous Material” shall not mean or
include any such Hazardous Material used, generated, manufactured, stored, disposed of or otherwise handled in normal quantities
in the ordinary course of business in compliance with all applicable Environmental Laws, or such that may be naturally occurring
in any ambient air, surface water, ground water, land surface or subsurface strata.
“IIPI”
shall
have the meaning as set forth in Section 4.13(b)(vii) of the Agreement.
“Indemnified Party”
shall have the meaning as set forth in Section 7.11(a) of the Agreement.
“Index Change
Ratio”
shall have the meaning as set forth in Section 3.1(b) of the Agreement.
“Individually
Identifiable Personal Information” or “IIPI”
shall have the meaning as set forth in Section 4.17(a) of the
Agreement.
“Initial
Index Price”
$3,898.34.
“Initial
Price”
means $30.63.
“Intellectual
Property”
means copyrights, patents, trademarks, service marks, service names, trade names, domain names, together with
all goodwill associated therewith, registrations and applications therefor, technology rights and licenses, computer software (including
any source or object codes therefor or documentation relating thereto), trade secrets, franchises, know-how, inventions, and other
intellectual property rights.
“IRS”
shall
have the meaning as set forth in Section 4.15(b) of the Agreement.
“Joint Proxy Statement/Prospectus”
shall have the meaning as set forth in Section 4.2(c) of the Agreement.
“Knowledge”
as used with respect to a Person (including references to such Person being aware of a particular matter) means those facts that
are known, or should reasonably have been known after reasonable inquiry of the records and employees of such Person, by the chief
executive officer or chief financial officer of such Person without any further investigation.
“Law”
means any code, law (including common law), ordinance, regulation, reporting or licensing requirement, rule, statute, regulation
or order applicable to a Person or its Assets, Liabilities or business, including those promulgated, interpreted or enforced by
any Regulatory Authority.
“Liability”
or
“Liabilities”
means any direct or indirect, primary or secondary, liability, indebtedness, obligation,
penalty, cost or expense (including reasonable attorneys’ fees, costs of investigation, collection and defense), claim, deficiency,
guaranty or endorsement of or by any Person (other than endorsements of notes, bills, checks, and drafts presented for collection
or deposit in the ordinary course of business) of any type, whether accrued, absolute or contingent, liquidated or unliquidated,
matured or unmatured, or otherwise.
“Lien”
means any conditional sale agreement, default of title, easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention or other security arrangement, or any adverse right
or interest, charge, or claim of any nature whatsoever of, on, or with respect to any property or any property interest, other
than (i) Liens for current property Taxes not yet due and payable, and (ii) for any depository institution, pledges to
secure public deposits and other Liens incurred in the ordinary course of the banking business.
“Litigation”
means any action, arbitration, cause of action, lawsuit, claim, complaint, criminal prosecution, governmental or other examination
or investigation, audit (other than regular audits of financial statements by outside auditors), compliance review, inspection,
hearing, administrative or other proceeding relating to or affecting a Party, its business, its Assets or Liabilities (including
Contracts related to Assets or Liabilities), or the transactions contemplated by this Agreement, but shall not include regular,
periodic examinations of depository institutions and their Affiliates by Regulatory Authorities.
“Loan”
means all loan agreements, notes or borrowing arrangements (including leases, credit enhancements, commitments, guarantees and
interest-bearing assets) payable to the First South Entities.
“Material”
or
“material”
for purposes of this Agreement shall be determined in light of the facts and circumstances of
the matter in question;
provided, that
any specific monetary amount stated in this Agreement shall determine materiality
in that instance.
“Measurement Date”
means the date which is five business days immediately prior to the date on which the Effective Time is to occur.
“Merger”
shall have the meaning as set forth in the Recitals of the Agreement.
“Merger Consideration”
shall have the meaning as set forth in Section 3.1(a) of the Agreement.
“Notice of Recommendation
Change”
shall have the meaning as set forth in Section 7.1(b) of the Agreement.
“Off-Balance Sheet
Arrangements”
shall have the meaning as set forth in Section 4.6 of the Agreement.
“Order”
means any administrative decision or award, decree, injunction, judgment, order, quasi-judicial decision or award, directive, ruling,
or writ of any Governmental Authority.
“Party”
means First South or Carolina Financial, as applicable, and
“Parties”
means First South and Carolina Financial.
“Party in Interest”
shall have the meaning as set forth in Section 4.15(f) of the Agreement.
“Permit”
means any federal, state, local, and foreign Governmental Authority approval, authorization, certificate, easement, filing, franchise,
license, notice, permit, or right to which any Person is a party or that is or may be binding upon or inure to the benefit of any
Person or its securities, Assets, or business, the absence of which or a default under would constitute a Carolina Financial Material
Adverse Effect or First South Adverse Effect, as the case may be.
“Per
Share Purchase Price”
means $15.78.
“Person”
means a natural person or any legal, commercial or Governmental Authority, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company, limited liability partnership, trust, business association,
group acting in concert, or any person acting in a representative capacity.
“PPACA”
shall have the meaning as set forth in Section 4.15(x) of the Agreement.
“
Premium
Multiple
” shall have the meaning as set forth in Section 7.11(b) of the Agreement.
“Prohibited Transaction”
shall have the meaning as set forth in Section 4.15(f) of the Agreement.
“
Qualified Group
” shall have
the meaning set forth in Section 5.7 of the Agreement.
“RCRA”
shall have the meaning as set forth in the definition of “Environmental Laws” set forth above.
“Registration
Statement”
shall have the meaning set forth in Section 4.2(c) of the Agreement.
“Regulatory Authorities”
means, collectively, the SEC, the NASDAQ Stock Market, the Financial Industry Regulatory Authority, Inc., the North Carolina Commissioner
of Banks, the North Carolina Banking Commission, the South Carolina Board of Financial Institutions, the FDIC, the Department of
Justice, and the Federal Reserve and all other federal, state, county, local or other Governmental Authorities having jurisdiction
over a Party or its Subsidiaries.
“Replacement Stock
Award”
shall have the meaning as set forth in Section 3.4(c) of the Agreement.
“Representative”
means any investment banker, financial advisor, attorney, accountant, consultant, or other representative or agent of a Person.
“Requisite First
South Shareholder Vote”
shall have the meaning as set forth in Section 4.2(a) of the Agreement.
“Requisite
Carolina Financial Stockholder Votes”
shall have the meaning as set forth in Section 5.2(a) of the Agreement.
“Rights”
shall mean all arrangements, calls, commitments, Contracts, options, rights to subscribe to, scrip, warrants, or other binding
obligations of any character whatsoever by which a Person is or may be bound to issue additional shares of its capital stock or
other securities, securities or rights convertible into or exchangeable for, shares of the capital stock or other securities of
a Person or by which a Person is or may be bound to issue additional shares of its capital stock or other Rights.
“Sarbanes-Oxley
Act”
means the Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated thereunder.
“SCBCA”
means the South Carolina Business Corporation Act of 1988.
“SEC”
means the United States Securities and Exchange Commission.
“Securities Act”
means the Securities Act of 1933, and the rules and regulations promulgated thereunder.
“Securities Laws”
means the Securities Act, the Exchange Act, the Investment Company Act of 1940, the Investment Advisors Act of 1940, the Trust
Indenture Act of 1939, and the rules and regulations of any Regulatory Authority promulgated thereunder.
“Shareholder Support
Agreements”
shall have the meaning as set forth in Section 7.9(e) of the Agreement.
“Subsidiaries”
means all those corporations, banks associations, or other entities of which the entity in question either (i) owns or controls
50% or more of the outstanding equity securities either directly or through an unbroken chain of entities as to each of which 50%
or more of the outstanding equity securities is owned directly or indirectly by its parent (
provided
, there shall not be
included any such entity the equity securities of which are owned or controlled in a fiduciary capacity), (ii) in the case
of partnerships, serves as a general partner, (iii) in the case of a limited liability company, serves as a managing member,
or (iv) otherwise has the ability to elect a majority of the directors, trustees or managing members thereof.
“Superior Proposal”
means any bona fide written Acquisition Proposal made by a third party that if consummated would result in such Person (or
its shareholders) owning, directly or indirectly, more than 50% of the shares of First South Common Stock then outstanding (or
of the shares of the surviving entity in a merger or the direct or indirect parent of the surviving entity in a merger) or all
or substantially all of the assets of the First South which the First South’s Board (after consultation with the First South
Financial Advisor and the First South’s outside counsel) determines (taking into account all financial, legal, regulatory,
and other aspects of such proposal and the third party making the proposal) in good faith to be (i) more favorable to the First
South’s Shareholders from a financial point of view than the Merger (taking into account all the terms and conditions of
such proposal and this Agreement (including any changes to the financial terms of this Agreement proposed by Carolina Financial
in response to such offer or otherwise)), and (ii) reasonably capable of being completed.
“Surviving Corporation”
means Carolina Financial as the surviving corporation resulting from the Merger as set forth in Section 1.1 of the Agreement.
“Surviving Bank”
means CresCom Bank as the surviving bank resulting from the Bank Merger as set forth in Section 1.5 of the Agreement.
“Tax”
or
“Taxes”
means any and all taxes and charges, fees, levies, imposts, duties, or assessments in the nature
of a tax, including income, gross receipts, excise, employment, sales, use, transfer, recording license, payroll, franchise, severance,
documentary, stamp, occupation, windfall profits, environmental, federal highway use, commercial rent, customs duties, capital
stock, paid-up capital, profits, withholding, Social Security, single business and unemployment, disability, real property, personal
property, registration,
ad valorem
, value added, alternative or add-on minimum, estimated, or other taxes, fees, assessments
or charges of any kind whatsoever, that, in any case, are imposed or required to be withheld by any Governmental Authority (domestic
or foreign), including any interest, penalties, and additions imposed thereon or with respect thereto.
“Tax Return”
means any report, return, information return, or other information required to be supplied to a Governmental Authority in connection
with Taxes, including any return of an affiliated or combined or unitary group that includes a Party or its Subsidiaries.
“Taxing Authority”
means the Internal Revenue Service and any other Governmental Authority responsible for the administration of any Tax.
“Termination Fee”
shall have the meaning as set forth in Section 9.3(a) of the Agreement.
“
Treasury Regulations
” means
the final regulations promulgated under the Code by the United States Department of the Treasury.
“VSCA”
means the Virginia Stock Corporation Act.
“WARN Act”
shall have the meaning as set forth in Section 4.14(d) of the Agreement.
(b)
Any singular term in this Agreement shall be deemed to include the plural, and any plural term the singular. Whenever the
words “include,” “includes” or “including” are used in this Agreement, they shall be deemed
followed by the words “without limitation”, and such terms shall not be limited by enumeration or example. When used
in this Agreement, words such as “herein”, “hereinafter”, “hereof”, “hereto”,
and “hereunder” refer to this Agreement as a whole, unless the context clearly requires otherwise.
Each of the Parties shall
bear and pay all direct costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder,
including filing, registration and application fees, printing fees, and fees and expenses of its own financial or other consultants,
investment bankers, accountants, and counsel, and which in the case of First South, shall be paid at or prior to Closing and prior
to the Effective Time.
|
10.3
|
Brokers and Finders.
|
Except for the First South
Financial Advisor as to First South and the Carolina Financial Financial Advisor as to Carolina Financial, each of the Parties
represents and warrants that neither it nor any of its officers, directors, employees, or Affiliates has employed any broker or
finder or incurred any Liability for any financial advisory fees, investment bankers’ fees, brokerage fees, commissions,
or finders’ fees in connection with this Agreement or the transactions contemplated hereby. In the event of a claim by any
broker or finder based upon such broker’s representing or being retained by or allegedly representing or being retained by
First South or Carolina Financial, each of First South or Carolina Financial, as the case may be, agrees to indemnify and hold
the other Party harmless from any Liability in respect of any such claim. First South has provided a copy of the First South Financial
Advisor’s engagement letter and expected fee for its services as disclosed in Section 10.3 of the First South Disclosure
Memorandum and shall pay all amounts due thereunder at Closing and prior to the Effective Time.
Except as otherwise expressly
provided herein, this Agreement (including the documents and instruments referred to herein) constitutes the entire agreement between
the Parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with
respect thereto, written or oral. Nothing in this Agreement expressed or implied, is intended to confer upon any Person, other
than the Parties or their respective successors, any rights, remedies, obligations, or liabilities under or by reason of this Agreement,
other than as provided in Sections 7.9 and 7.11.
To the extent permitted
by Law, and subject to Section 1.4, this Agreement may be amended by a subsequent writing signed by each of the Parties upon the
approval of each of the Parties, whether before or after the Requisite First South Shareholder Vote and the Requisite Carolina
Financial Stockholder Votes of this Agreement have been obtained;
provided, that
after any such approval by the holders
of First South Common Stock, there shall be made no amendment that (a) reduces or modifies in any respect the consideration to
be received by holders of First South Common Stock or (b) alters or changes any of the terms and conditions of this Agreement if
such alteration or change would adversely affect the holders of First South Common Stock.
(a)
Prior to or at the Effective Time, Carolina Financial, acting through its Board of Directors, chief executive officer,
or other authorized officers, shall have the right to waive any Default in the performance of any term of this Agreement by First
South, to waive or extend the time for the compliance or fulfillment by First South of any and all of its obligations under this
Agreement, and to waive any or all of the conditions precedent to the obligations of Carolina Financial under this Agreement,
except any condition which, if not satisfied, would result in the violation of any Law. No such waiver shall be effective unless
in writing signed by a duly authorized officer of Carolina Financial.
(b)
Prior to or at the Effective Time, First South, acting through its Board of Directors, chief executive officer, or other
authorized officer, shall have the right to waive any Default in the performance of any term of this Agreement by Carolina Financial,
to waive or extend the time for the compliance or fulfillment by Carolina Financial of any and all of its obligations under this
Agreement, and to waive any or all of the conditions precedent to the obligations of First South under this Agreement, except any
condition which, if not satisfied, would result in the violation of any Law. No such waiver shall be effective unless in writing
signed by a duly authorized officer of First South.
(c)
The failure of any Party at any time or times to require performance of any provision hereof shall in no manner affect the
right of such Party at a later time to enforce the same or any other provision of this Agreement. No waiver of any condition or
of the breach of any term contained in this Agreement in one or more instances shall be deemed to be or construed as a further
or continuing waiver of such condition or breach or a waiver of any other condition or of the breach of any other term of this
Agreement.
Except as expressly contemplated
hereby, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any Party hereto
(whether by operation of Law, including by merger or consolidation, or otherwise) without the prior written consent of the other
Party. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the
Parties and their respective successors and assigns.
All notices or other communications
which are required or permitted hereunder shall be in writing and sufficient if delivered by hand, by registered or certified mail,
postage pre-paid, or by courier or overnight carrier, or email (with, in the case of email, confirmation of date and time by the
transmitting equipment) to the persons at the addresses set forth below (or at such other address as may be provided hereunder),
and shall be deemed to have been delivered as of the date so delivered or refused:
|
Carolina Financial:
|
Carolina Financial Corporation
|
|
|
|
288 Meeting Street
|
|
|
|
Charleston, SC 29401
|
|
|
|
Attention: Jerold L. Rexroad
|
|
|
|
|
|
|
Copy to Counsel:
|
Nelson Mullins Riley & Scarborough LLP
|
|
|
|
Poinsett Plaza, Suite 900
|
|
|
|
104 South Main Street
|
|
|
|
Greenville, SC 29601
|
|
|
|
Attention: Neil E. Grayson
|
|
|
|
|
|
|
First South:
|
First South Bancorp, Inc.
|
|
|
|
1311 Carolina Avenue
|
|
|
|
Washington, NC 27889
|
|
|
|
Attention: Bruce W. Elder
|
|
|
|
|
|
|
Copy to Counsel:
|
Wyrick Robbins Yates & Ponton LLP
|
|
|
|
4101 Lake Boone Trail, Suite 300
|
|
|
|
Raleigh, NC 27607
|
|
|
|
Attention: Todd H. Eveson
|
|
|
10.9
|
Governing Law; Jurisdiction.
|
Regardless of any conflict
of law or choice of law principles that might otherwise apply, the Parties agree that this Agreement shall be governed by and construed
in all respects in accordance with the laws of the State of South Carolina. The Parties agree that any suit, action or proceeding
brought by either Party to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement
or the transactions contemplated hereby shall be brought in any federal or state court located in Charleston, South Carolina. Each
of the Parties submits to the jurisdiction of any such court in any suit, action or proceeding seeking to enforce any provision
of, or based on any matter arising out of, or in connection with, this Agreement or the transactions contemplated hereby and hereby
irrevocably waives the benefit of jurisdiction derived from present or future domicile or otherwise in such action or proceeding.
Each Party irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying
of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding brought in any
such court has been brought in an inconvenient forum.
This Agreement may be executed
in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and
the same instrument.
|
10.11
|
Captions; Articles and Sections.
|
The captions contained
in this Agreement are for reference purposes only and are not part of this Agreement. Unless otherwise indicated, all references
to particular Articles or Sections shall mean and refer to the referenced Articles and Sections of this Agreement.
(a)
Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against any Party, whether
under any rule of construction or otherwise. No Party to this Agreement shall be considered the draftsman. The Parties acknowledge
and agree that this Agreement has been reviewed, negotiated, and accepted by all Parties and their attorneys and shall be construed
and interpreted according to the ordinary meaning of the words used so as fairly to accomplish the purposes and intentions of all
Parties hereto.
(b)
No disclosure, representation or warranty shall be required to be made (or any other action taken) pursuant to this Agreement
that would involve the disclosure of confidential supervisory information of a Governmental Authority by any Party hereto to the
extent prohibited by applicable law, and, to the extent legally permissible, appropriate substitute disclosures or actions shall
be made or taken under circumstances in which the limitations of this sentence apply.
(c) Any
reference contained in this Agreement to specific statutory or regulatory provisions or to specific Governmental Authorities includes
any successor statute or regulation, or Governmental Authority, as the case may be. Unless otherwise specified, the references
to “Section” and “Article” in this Agreement are to the Sections and Articles of this Agreement.
|
10.13
|
Enforcement of Agreement.
|
The Parties hereto agree
that irreparable damage would occur in the event that any of the provisions of this Agreement was not performed in accordance
with its specific terms or was otherwise breached. It is accordingly agreed that the Parties shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court
of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at
law or in equity.
Any term or provision of
this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement
or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable.
[Signature page follows]
IN WITNESS WHEREOF
,
each of the Parties has caused this Agreement to be executed on its behalf by its duly authorized officers as of the day and year
first above written.
|
CAROLINA FINANCIAL CORPORATION
|
|
|
(CAROLINA FINANCIAL)
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Jerold L. Rexroad
|
|
|
|
|
Jerold L. Rexroad
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIRST SOUTH BANCORP, INC.
|
|
|
(FIRST SOuth)
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Bruce W. Elder
|
|
|
|
|
Bruce W. Elder
|
|
|
|
|
President and Chief Executive Officer
|
|
|
[Signature page to Agreement and Plan of
Merger and Reorganization]
Annex
B
Opinion
of Keefe, Bruyette & Woods, Inc.
June 9, 2017
The Board of Directors
Carolina Financial Corporation
288 Meeting Street
Charleston, South Carolina 29401
Members of the Board:
You have requested
the opinion of Keefe, Bruyette & Woods, Inc. (“KBW” or “we”) as investment bankers as to the fairness,
from a financial point of view, to Carolina Financial Corporation (“Carolina”) of the Exchange Ratio (as defined below)
in the proposed merger (the “Merger”) of First South Bancorp, Inc. (“First South”) with and into Carolina,
pursuant to the Agreement and Plan of Merger and Reorganization (the “Agreement”) to be entered into by and between
Carolina and First South. Pursuant to the Agreement and subject to the terms, conditions and limitations set forth therein, at
the Effective Time (as defined in the Agreement), by virtue of the Merger and without any action on the part of Carolina or First
South, each share of common stock, par value $0.01 per share, of First South (“First South Common Stock”) that is
issued and outstanding immediately prior to the Effective Time (other than the Extinguished Shares (as defined in the Agreement))
shall be converted into the right to receive 0.52 of a share of common stock, par value $0.01 per share, of Carolina (“Carolina
Common Stock”), subject to adjustment as provided in the Agreement (as to which we express no opinion). The ratio of 0.52
of a share of Carolina Common Stock for one share of First South Common Stock is referred to herein as the “Exchange Ratio.”
The terms and conditions of the Merger are more fully set forth in the Agreement.
The Agreement further
provides that, simultaneously with or immediately following the Effective Time, and pursuant to a separate bank agreement of merger,
First South Bank, a wholly-owned subsidiary of First South, will merge with and into CresCom Bank, a wholly-owned subsidiary of
Carolina, with CresCom Bank as the surviving entity (such transaction, the “Bank Merger”).
KBW has acted as financial
advisor to Carolina and not as an advisor to or agent of any other person. As part of our investment banking business, we are
continually engaged in the valuation of bank and bank holding company securities in connection with acquisitions, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements and valuations for various other purposes. As specialists
in the securities of banking companies, we have experience in, and knowledge of, the valuation of banking enterprises. In the
ordinary course of our and their broker-dealer businesses, we and our affiliates may from time to time purchase securities from,
and sell securities to, Carolina and First South. In addition, as a market maker in securities, we and our affiliates may from
time to time have a long or short position in, and buy or sell, debt or equity securities of Carolina or First South for our and
their own respective accounts and for the accounts of our and their respective customers and clients. We have acted exclusively
for the board of directors of Carolina (the “Board”) in rendering this opinion and will receive a fee from Carolina
for our services. A portion of our fee is payable upon the rendering of this opinion, and a significant portion is contingent
upon the successful completion of the Merger. In addition, Carolina has agreed to indemnify us for certain liabilities arising
out of our engagement.
In addition to this
present engagement, in the past two years KBW has provided investment banking and financial advisory services to Carolina for
which compensation was received. KBW acted as financial advisor to Carolina in connection with its March 2017 acquisition of Greer
Bancshares Incorporated. In addition, KBW acted as an underwriter in connection with each of Carolina’s January 2017 and
December 2015 registered offerings of Carolina Common Stock. In the past two years, KBW has not provided investment banking and
financial advisory services to First South. We may in the future provide investment banking and financial advisory services to
Carolina or First South and receive compensation for such services.
In connection with
this opinion, we have reviewed, analyzed and relied upon material bearing upon the financial and operating condition of Carolina
and First South and bearing upon the Merger, including among other things, the following: (i) a draft of the Agreement dated June
8, 2017 (the most recent draft made available to us); (ii) the audited financial statements and the Annual Reports on Form 10-K
for the three fiscal years ended December 31, 2016 of Carolina; (iii) the unaudited quarterly financial statements and the Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2017 of Carolina; (iv) the audited financial statements and the Annual
Reports on Form 10-K for the three fiscal years ended December 31, 2016 of First South; (v) the unaudited quarterly financial
statements and the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2017 of First South; (vi) certain regulatory
filings of Carolina and First South and their respective subsidiaries, including the quarterly reports on Form FRY-9C and quarterly
call reports filed with respect to each quarter during the three year period ended December 31, 2016 and the quarter ended March
31, 2017; (vii) certain other interim reports and other communications of Carolina and First South to their respective stockholders;
and (viii) other financial information concerning the respective businesses and operations of Carolina and First South that was
furnished to us by Carolina and First South or which we were otherwise directed to use for purposes of our analysis. Our consideration
of financial information and other factors that we deemed appropriate under the circumstances or relevant to our analyses included,
among others, the following: (i) the historical and current financial position and results of operations of Carolina and First
South; (ii) the assets and liabilities of Carolina and First South; (iii) the nature and terms of certain other merger transactions
and business combinations in the banking industry; (iv) a comparison of certain financial and stock market information of Carolina
and First South with similar information for certain other companies, the securities of which are publicly traded; (v) financial
and operating forecasts and projections of First South with respect to the 2017 fiscal year that were prepared by, and provided
to us and discussed with us by, First South management and that were used and relied upon by us based on such discussions, at
the direction of Carolina management and with the consent of the Board; (vi) financial and operating forecasts and projections
of First South with respect to the period from the 2018 fiscal year through the 2020 fiscal year that were prepared by Carolina
management, as well as assumed First South long-term growth rates with respect to periods thereafter, all of which information
was provided to us and discussed with us by Carolina management and used and relied upon by us at the direction of such management
and with the consent of the Board; (vii) the publicly available consensus “street estimates” of Carolina, as well
as assumed Carolina long-term growth rates provided to us by Carolina management, all of which information was discussed with
us by such management and used and relied upon by us at the direction of such management and with the consent of the Board; and
(viii) estimates regarding certain pro forma financial effects of the Merger on Carolina (including without limitation the cost
savings and related expenses expected to result or be derived from the Merger) that were prepared by Carolina management, provided
to and discussed with us by such management, and used and relied upon by us at the direction of such management and with the consent
of the Board. We have also performed such other studies and analyses as we considered appropriate and have taken into account
our assessment of general economic, market and financial conditions and our experience in other transactions, as well as our experience
in securities valuation and knowledge of the banking industry generally. We have also participated in discussions that were held
by the managements of Carolina and First South regarding the past and current business operations, regulatory relations, financial
condition and future prospects of their respective companies and such other matters as we have deemed relevant to our inquiry.
In conducting our review
and arriving at our opinion, we have relied upon and assumed the accuracy and completeness of all of the financial and other information
provided to us or that was publicly available and we have not independently verified the accuracy or completeness of any such
information or assumed any responsibility or liability for such verification, accuracy or completeness. We have relied upon the
management of First South, with the consent of Carolina, as to the reasonableness and achievability of the financial and operating
forecasts and projections of First South with respect to the 2017 fiscal year referred to above (and the assumptions and bases
therefor), and we have assumed that such forecasts and projections were reasonably prepared and represent the best currently available
estimates and judgments of First South management with respect to such fiscal year and that such forecasts and projections will
be realized in the amounts and in the time periods currently estimated by such management. In addition, we have relied upon the
management of Carolina as to the reasonableness and achievability of the financial and operating forecasts and projections of
First South with respect to the period from the 2018 fiscal year through the 2020 fiscal year, as well as assumed First South
long-term growth rates with respect to periods thereafter, all as referred to above (and the assumptions and bases for all such
information) and we have assumed that all such information was reasonably prepared and represents the best currently available
estimates and judgments of Carolina management and that the forecasts, projections and estimates contained in such information
will be realized in the amounts and in the time periods currently estimated by such management. We have further relied upon the
management of Carolina as to the reasonableness and achievability of the publicly available consensus “street estimates”
of Carolina, the assumed Carolina long-term growth rates and the estimates regarding certain pro forma financial effects of the
Merger on Carolina (including, without limitation, the cost savings and related expenses expected to result or be derived from
the Merger) referred to above and the assumptions set forth in and the bases for such information. We have assumed, at the direction
of Carolina, that all such information was reasonably prepared and represents, or in the case of the publicly available consensus
“street estimates” of Carolina referred to above that such estimates are consistent with, the best currently available
estimates and judgments of Carolina management, and that the forecasts, projections and estimates reflected in such information
will be realized in the amounts and in the time periods currently estimated.
It is understood that
the forecasts, projections and estimates of Carolina and First South that were provided to and discussed with us were not prepared
with the expectation of public disclosure, that all such forecasts, projections and estimates, together with the publicly available
consensus “street estimates” of Carolina referred to above, are based on numerous variables and assumptions that are
inherently uncertain, including, without limitation, factors related to general economic and competitive conditions and that,
accordingly, actual results could vary significantly from those set forth in such information. We have assumed, based on discussions
with the respective managements of Carolina and First South and with the consent of the Board, that all such information provides
a reasonable basis upon which we could form our opinion and we express no view as to any such information or the assumptions or
bases therefor. We have relied on all such information without independent verification or analysis and do not in any respect
assume any responsibility or liability for the accuracy or completeness thereof.
We also have assumed
that there have been no material changes in the assets, liabilities, financial condition, results of operations, business or prospects
of either Carolina or First South since the date of the last financial statements of each such entity that were made available
to us and that we were directed to use. We are not experts in the independent verification of the adequacy of allowances for loan
and lease losses and we have assumed, without independent verification and with your consent, that the aggregate allowances for
loan and lease losses for each of Carolina and First South are adequate to cover such losses. In rendering our opinion, we have
not made or obtained any evaluations or appraisals or physical inspection of the property, assets or liabilities (contingent or
otherwise) of Carolina or First South, the collateral securing any of such assets or liabilities, or the collectability of any
such assets, nor have we examined any individual loan or credit files, nor did we evaluate the solvency, financial capability
or fair value of Carolina or First South under any state or federal laws, including those relating to bankruptcy, insolvency or
other matters. Estimates of values of companies and assets do not purport to be appraisals or necessarily reflect the prices at
which companies or assets may actually be sold. Because such estimates are inherently subject to uncertainty, we assume no responsibility
or liability for their accuracy.
We have assumed, in
all respects material to our analyses, the following: (i) that the Merger and any related transactions (including the Bank Merger)
will be completed substantially in accordance with the terms set forth in the Agreement (the final terms of which we have assumed
will not differ in any respect material to our analyses from the draft version reviewed by us and referred to above), with no
adjustments to the Exchange Ratio and with no other consideration or payments in respect of First South Common Stock; (ii) that
the representations and warranties of each party in the Agreement and in all related documents and instruments referred to in
the Agreement are true and correct; (iii) that each party to the Agreement or any of the related documents will perform all of
the covenants and agreements required to be performed by such party under such documents; (iv) that there are no factors that
would delay or subject to any adverse conditions, any necessary regulatory or governmental approval for the Merger or any related
transaction (including the Bank Merger) and that all conditions to the completion of the Merger and any such related transaction
will be satisfied without any waivers or modifications to the Agreement or any of the related documents; and (v) that in the course
of obtaining the necessary regulatory, contractual, or other consents or approvals for the Merger and any related transactions
(including the Bank Merger), no restrictions, including any divestiture requirements, termination or other payments or amendments
or modifications, will be imposed that will have a material adverse effect on the future results of operations or financial condition
of Carolina, First South, the pro forma entity or the contemplated benefits of the Merger, including without limitation the cost
savings and related expenses expected to result or be derived from the Merger. We have assumed that the Merger will be consummated
in a manner that complies with the applicable provisions of the Securities Act of 1933, as amended, the Securities Exchange Act
of 1934, as amended, and all other applicable federal and state statutes, rules and regulations. We have further been advised
by representatives of Carolina that Carolina has relied upon advice from its advisors (other than KBW) or other appropriate sources
as to all legal, financial reporting, tax, accounting and regulatory matters with respect to Carolina, First South, the Merger
and any related transaction (including the Bank Merger), and the Agreement. KBW has not provided advice with respect to any such
matters.
This opinion addresses
only the fairness, from a financial point of view, as of the date hereof, of the Exchange Ratio in the Merger to Carolina. We
express no view or opinion as to any other terms or aspects of the Merger or any term or aspect of any related transaction (including
the Bank Merger), including without limitation, the form or structure of the Merger or any such related transaction, any consequences
of the Merger to Carolina, its stockholders, creditors or otherwise, or any terms, aspects, merits or implications of any employment,
retention, consulting, voting, support, cooperation, stockholder or other agreements, arrangements or understandings contemplated
or entered into in connection with the Merger, any such related transaction, or otherwise. Our opinion is necessarily based upon
conditions as they exist and can be evaluated on the date hereof and the information made available to us through the date hereof.
It is understood that subsequent developments may affect the conclusion reached in this opinion and that KBW does not have an
obligation to update, revise or reaffirm this opinion. For purposes of our analyses, we have not incorporated recently-announced
proposed changes to United States tax laws regarding corporate tax rates. Our opinion does not address, and we express no view
or opinion with respect to, (i) the underlying business decision of Carolina to engage in the Merger or enter into the Agreement,
(ii) the relative merits of the Merger as compared to any strategic alternatives that are, have been or may be available to or
contemplated by Carolina or the Board, (iii) any business, operational or other plans with respect to First South or the pro forma
entity that may be currently contemplated by Carolina or the Board or that may be implemented subsequent to the closing of the
Merger, (iv) the fairness of the amount or nature of any compensation to any of Carolina’s officers, directors or employees,
or any class of such persons, relative to any compensation to the holders of Carolina Common Stock or relative to the Exchange
Ratio, (v) the effect of the Merger or any related transaction (including the Bank Merger) on, or the fairness of the consideration
to be received by, holders of any class of securities of Carolina, First South or any other party to any transaction contemplated
by the Agreement, (vi) any adjustment (as provided in the Agreement) to the Exchange Ratio assumed for purposes of our opinion,
(vii) the actual value of Carolina Common Stock to be issued in connection with the Merger, (viii) the prices, trading range or
volume at which Carolina Common Stock or First South Common Stock will trade following the public announcement of the Merger or
the prices, trading range or volume at which Carolina Common Stock will trade following the consummation of the Merger, (ix) any
advice or opinions provided by any other advisor to any of the parties to the Merger or any other transaction contemplated by
the Agreement, or (x) any legal, regulatory, accounting, tax or similar matters relating to Carolina, First South, any of their
respective stockholders, or relating to or arising out of or as a consequence of the Merger or any other related transaction (including
the Bank Merger), including whether or not the Merger will qualify as a tax-free reorganization for United States federal income
tax purposes.
This opinion is for
the information of, and is directed to, the Board (in its capacity as such) in connection with its consideration of the financial
terms of the Merger. This opinion does not constitute a recommendation to the Board as to how it should vote on the Merger or
to any holder of Carolina Common Stock or any stockholder of any other entity as to how to vote in connection with the Merger
or any other matter, nor does it constitute a recommendation as to whether or not any such stockholder should enter into a voting,
stockholders’, affiliates’ or other agreement with respect to the Merger or exercise any dissenters’ or appraisal
rights that may be available to such stockholder.
This opinion has been
reviewed and approved by our Fairness Opinion Committee in conformity with our policies and procedures established under the requirements
of Rule 5150 of the Financial Industry Regulatory Authority.
Based upon and subject
to the foregoing, it is our opinion that, as of the date hereof, the Exchange Ratio in the Merger is fair, from a financial point
of view, to Carolina.
|
Very truly yours,
|
|
|
|
|
|
|
|
|
Keefe, Bruyette & Woods, Inc.
|
|
Keefe, Bruyette & Woods, A Stifel Company
Annex
C
Opinion of Raymond James & Associates, Inc.
June 9, 2017
Board of Directors
First South Bancorp, Inc.
1311 Carolina Avenue
Washington, NC 27889
Members of the Board of Directors:
We understand that Carolina Financial Corporation
(“Carolina Financial”) and First South Bancorp, Inc. (the “Company”) propose to enter into the Agreement
(defined below) pursuant to which, among other things, the Company shall be merged with and into Carolina Financial (the “Transaction”)
and that, in connection with the Transaction, each issued and outstanding share of common stock, par value $0.01 per share, of
the Company, except for shares owned by the Company, Carolina Financial, or their respective Subsidiaries (in each case other
than shares of the Company’s common stock held on behalf of third parties or as a result of debts previously contracted)
(the “Common Shares”), will be converted into the right to receive 0.5200 shares (the “Exchange Ratio”)
of Carolina Financial common stock. The Board of Directors of the Company (the “Board”) has requested that Raymond
James & Associates, Inc. (“Raymond James”) provide an opinion (the “Opinion”) to the Board as to whether,
as of the date hereof, the Exchange Ratio to be received by the holders of the Common Shares in the Transaction pursuant to the
Agreement is fair from a financial point of view to such holders.
In connection with our review of the proposed
Transaction and the preparation of this Opinion, we have, among other things:
|
1.
|
reviewed the financial terms and conditions as stated in
the draft of the Agreement and Plan of Merger and Reorganization by and between Carolina
Financial Corporation and First South Bancorp, Inc. dated as of June 9, 2017 (the “Agreement”);
|
|
2.
|
reviewed certain information related to the historical,
current and future operations, financial condition and prospects of the Company made
available to us by the Company, including, but not limited to, financial projections
prepared by the management of the Company relating to the Company for the period ending
December 31, 2022, as approved for our use by the Company (the “Projections”);
|
|
3.
|
reviewed the Company’s and Carolina Financial’s
recent public filings and certain other publicly available information regarding the
Company and Carolina Financial;
|
|
4.
|
reviewed financial, operating and other information regarding
the Company and Carolina Financial and the industry in which they operate;
|
|
5.
|
reviewed the financial and operating performance of the
Company and those of other selected public companies that we deemed to be relevant;
|
|
6.
|
considered the publicly available financial terms of certain
transactions we deemed to be relevant;
|
|
7.
|
reviewed the current and historical market prices and trading
volume for the Common Shares, and the current market prices of the publicly traded securities
of certain other companies that we deemed to be relevant;
|
|
8.
|
conducted such other financial studies, analyses and inquiries
and considered such other information and factors as we deemed appropriate; and
|
|
9.
|
discussed with members of the senior management of the Company
certain information relating to the aforementioned and any other matters which we have
deemed relevant to our inquiry.
|
With your consent, we have assumed and relied upon the accuracy
and completeness of all information supplied by or on behalf of the Company or otherwise reviewed by or discussed with us, and
we have undertaken no duty or responsibility to, nor did we, independently verify any of such information. We have not made or
obtained an independent appraisal of the assets or liabilities (contingent or otherwise) of the Company. We are not experts in
the evaluation of loan and lease portfolios for purposes of assessing the adequacy of the allowances for loan losses; accordingly,
we have assumed that such allowances for losses are in the aggregate adequate to cover such losses. With respect to the Projections
and any other information and data provided to or otherwise reviewed by or discussed with us, we have, with your consent, assumed
that the Projections and such other information and data have been reasonably prepared in good faith on bases reflecting the best
currently available estimates and judgments of management of the Company, and we have relied upon the Company to advise us promptly
if any information previously provided became inaccurate or was required to be updated during the period of our review. We express
no opinion with respect to the Projections or the assumptions on which they are based. We have assumed that the final form of
the Agreement will be substantially similar to the draft reviewed by us, and that the Transaction will be consummated in accordance
with the terms of the Agreement without waiver or amendment of any conditions thereto and without adjustment to the Exchange Ratio.
Furthermore, we have assumed, in all respects material to our analysis, that the representations and warranties of each party
contained in the Agreement are true and correct and that each such party will perform all of the covenants and agreements required
to be performed by it under the Agreement without being waived. We have relied upon and assumed, without independent verification,
that (i) the Transaction will be consummated in a manner that complies in all respects with all applicable international, federal
and state statutes, rules and regulations, and (ii) all governmental, regulatory, and other consents and approvals necessary for
the consummation of the Transaction will be obtained and that no delay, limitations, restrictions or conditions will be imposed
or amendments, modifications or waivers made that would have an effect on the Transaction or the Company that would be material
to our analyses or this Opinion.
We have relied upon, without independent verification, the assessment
of the Company’s management and its legal, tax, accounting and regulatory advisors with respect to all legal, tax, accounting
and regulatory matters, including without limitation that the Transaction will qualify as a reorganization within the meaning
of Section 368(a) and related sections of the Internal Revenue Code of 1986, as amended.
Our opinion is based upon market, economic, financial and other
circumstances and conditions existing and disclosed to us as of June 8, 2017 and any material change in such circumstances and
conditions would require a reevaluation of this Opinion, which we are under no obligation to undertake. We have relied upon and
assumed, without independent verification, that there has been no change in the business, assets, liabilities, financial condition,
results of operations, cash flows or prospects of the Company since the respective dates of the most recent financial statements
and other information, financial or otherwise, provided to us that would be material to our analyses or this Opinion, and that
there is no information or any facts that would make any of the information reviewed by us incomplete or misleading in any material
respect.
We express no opinion as to the underlying
business decision to effect the Transaction, the structure or tax consequences of the Transaction or the availability or advisability
of any alternatives to the Transaction. We provided advice to the Board with respect to the proposed Transaction. We did not,
however, recommend any specific amount of consideration or that any specific consideration constituted the only appropriate consideration
for the Transaction. This letter does not express any opinion as to the likely trading range of Carolina Financial common stock
following the Transaction, which may vary depending on numerous factors that generally impact the price of securities or on the
financial condition of Carolina Financial at that time. Our opinion is limited to the fairness, from a financial point of view,
of the Exchange Ratio to be received by the holders of the Common Shares.
We express no opinion with respect to any
other reasons, legal, business, or otherwise, that may support the decision of the Board to approve or consummate the Transaction.
Furthermore, no opinion, counsel or interpretation is intended by Raymond James on matters that require legal, accounting or tax
advice. It is assumed that such opinions, counsel or interpretations have been or will be obtained from the appropriate professional
sources. Furthermore, we have relied, with the consent of the Board, on the fact that the Company has been assisted by legal,
accounting, tax and regulatory advisors and we have, with the consent of the Board, relied upon and assumed the accuracy and completeness
of the assessments by the Company and its advisors as to all legal, accounting, tax and regulatory matters with respect to the
Company and the Transaction.
In formulating our opinion, we have considered
only what we understand to be the consideration to be received by the holders of Common Shares as is described above and we did
not consider and we express no opinion on the fairness of the amount or nature of any compensation to be paid or payable to any
of the Company’s officers, directors or employees, or class of such persons, whether relative to the compensation received
by the holders of the Common Shares or otherwise. We have not been requested to opine as to, and this Opinion does not express
an opinion as to or otherwise address, among other things: (1) the fairness of the Transaction to the holders of any class of
securities, creditors, or other constituencies of the Company, or to any other party, except and only to the extent expressly
set forth in the last sentence of this Opinion or (2) the fairness of the Transaction to any one class or group of the Company’s,
or any other party’s security holders or other constituencies vis-à-vis any other class or group of the Company’s,
or such other party’s security holders or other constituents (including, without limitation, the allocation of any consideration
to be received in the Transaction amongst or within such classes or groups of security holders or other constituents). We are
not expressing any opinion as to the impact of the Transaction on the solvency or viability of the Company or Carolina Financial
or the ability of the Company or Carolina Financial to pay their respective obligations when they come due.
The delivery of this opinion was approved by an opinion committee
of Raymond James.
Raymond James has been engaged to render financial advisory
services to the Company in connection with the proposed Transaction and will receive a fee for such services, a substantial portion
of which is contingent upon consummation of the Transaction. Raymond James will also receive a fee upon the delivery of this Opinion,
which is not contingent upon the successful completion of the Transaction or on the conclusion reached herein. In addition, the
Company has agreed to reimburse certain of our expenses and to indemnify us against certain liabilities arising out of our engagement.
In the ordinary course of our business, Raymond James may trade
in the securities of the Company and Carolina Financial for our own account or for the accounts of our customers and, accordingly,
may at any time hold a long or short position in such securities. Raymond James has provided certain services to Carolina Financial
(in the previous two years), including serving as bookrunning manager for its 2015 and 2017 public offerings of common equity,
for which it has been paid fees. Furthermore, Raymond James may provide investment banking, financial advisory and other financial
services to the Company and/or Carolina Financial or other participants in the Transaction in the future, for which Raymond James
may receive compensation.
It is understood that this letter is for the
information of the Board of Directors of the Company (solely in each director’s capacity as such) in evaluating the proposed
Transaction and does not constitute a recommendation to any shareholder of the Company regarding how said shareholder should vote
on the proposed Transaction. Furthermore, this letter should not be construed as creating any fiduciary duty on the part of Raymond
James to any such party. This Opinion may not be reproduced or used for any other purpose without our prior written consent, except
that this Opinion may be disclosed in and filed with a proxy statement used in connection with the Transaction that is required
to be filed with the Securities and Exchange Commission, provided that this Opinion is quoted in full in such proxy statement.
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the Exchange Ratio to be received by the holders of the Common Shares in the Transaction pursuant to the
Agreement is fair, from a financial point of view, to such holders.
Very truly yours,
RAYMOND JAMES & ASSOCIATES, INC.