CARO Carolina Financial Corporation

SUMMARY

This summary highlights material information regarding the merger and the special meetings contained later in joint proxy statement/prospectus. This summary does not contain all of the information that may be important to you, and we urge you to carefully read this entire document carefully, including the Annexes, exhibits and enclosures, to better understand the merger and its potential impact on you before deciding how to vote. Each item in this summary includes a page reference directing you to a more complete discussion of the item.

The Companies (page 105 for Carolina Financial and page 105 for First South)

Carolina Financial Corporation

288 Meeting Street

Charleston, South Carolina 29401

(843) 723-7700

Jerold L. Rexroad, President and Chief Executive Officer

Carolina Financial Corporation is a Delaware corporation and a financial holding company registered under the Bank Holding Company Act of 1956. Its primary business is to serve as the holding company for CresCom Bank, a South Carolina state-chartered commercial bank with 34 branches located throughout the Carolinas, in addition to a loan production office in Greenville, South Carolina. CresCom Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the Federal Deposit Insurance Corporation (the “FDIC”), and providing commercial, consumer and mortgage loans to the general public. CresCom Bank operates Crescent Mortgage Company, a wholly-owned subsidiary of CresCom Bank based in Atlanta, Georgia, as a wholesale and correspondent mortgage lender for community banks. Crescent Mortgage Company is licensed to originate loans in 48 states, partnering with community banks, credit unions and mortgage brokers. CresCom Bank also operates Carolina Services Corporation of Charleston, a Delaware financial services company that provides financial processing services to, and otherwise supports the operations of, CresCom Bank and Crescent Mortgage Company.

First South Bancorp, Inc.

1311 Carolina Avenue

Washington, North Carolina 27889

(888) 993-7664

Bruce W. Elder, President and Chief Executive Officer

First South Bancorp, Inc. is a Virginia corporation and a financial holding company under the Bank Holding Company Act of 1956. Its primary business is to own and control all of the capital stock of First South Bank. First South Bank opened for business in 1902. First South Bank currently maintains a main office located at 1311 Carolina Avenue, Washington, North Carolina and 28 full-service branch offices throughout eastern and central North Carolina.

The Merger (page 40)

Under the terms of the merger agreement, First South will merge with and into Carolina Financial, with Carolina Financial being the surviving corporation (we refer to this as the “merger”). Simultaneously with the merger or immediately thereafter, First South Bank will merge with and into CresCom Bank, and CresCom Bank will be the surviving bank (we refer to this as the “bank merger”). Both Carolina Financial and CresCom Bank will continue their existence under Delaware and South Carolina law, respectively, while First South and First South Bank will cease to exist. The merger agreement is attached as Annex A and is incorporated into this joint proxy statement/prospectus by reference. We encourage you to read the merger agreement carefully as it is the legal document that governs the merger.

What First South Stockholders Will Receive in the Merger (page 81)

If the merger is completed, each outstanding share of First South common stock will be exchanged for 0.5200 shares of Carolina Financial common stock. If the closing price of Carolina Financial common stock is greater than $35.14 just prior to the scheduled closing of the merger and it has outperformed the N asdaq Bank Index by 15% or more between signing and closing, the exchange ratio will be decreased automatically based upon the change in the N asdaq Bank Index. If the closing price of Carolina Financial common stock is less than $25.98 just prior to the scheduled closing of the merger and it has underperformed the N asdaq 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 N asdaq Bank Index. First South stockholders will not receive any fractional shares of Carolina Financial common stock. Instead, they will be paid cash in an amount equal to the fraction of a share of Carolina Financial common stock otherwise issuable upon conversion multiplied by the Carolina Financial Average Closing Price, as defined in the merger agreement.

Based on the number of shares of Carolina Financial common stock and First South common stock outstanding at the close of business on August 28, 2017, and based on the number of shares of Carolina Financial common stock expected to be issued in the merger, the former First South stockholders as a group will receive shares in the merger constituting approximately 23.4% of the outstanding shares of Carolina Financial common stock immediately after the merger. As a result, the current Carolina Financial stockholders as a group will own approximately 76.6% of the outstanding shares of Carolina Financial common stock immediately after the merger.

Effect of the Merger on First South Stock Options and Restricted Stock Awards (page 82)

As of the date of the merger agreement, there were outstanding options to purchase 144,350 shares of First South common stock, with a weighted average exercise price of $9.96 per share. All unvested stock options outstanding at the time of the merger will vest upon the effective date of the merger. 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.

All unvested restricted stock awards outstanding at the time of the merger will vest upon the effective date of the merger.  

Regulatory Approvals (page 78)

Because the merger qualifies as a “waiver transaction” under the applicable rules and regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), we are not required to file a formal merger application with the Federal Reserve and must only make a notice filing with the Federal Reserve with respect to the merger. However, for the merger of First South Bank with and into CresCom Bank, we must obtain approval from the FDIC, the South Carolina Board of Financial Institutions (the “SCBFI”), and the North Carolina Commissioner of Banks (the “NCCOB”). As of the date of this joint proxy statement/prospectus, we have not received any of the required regulatory approvals for the bank merger, but the Federal Reserve has advised us of its non-objection to characterization of the merger as a “waiver transaction.”

Carolina Financial’s Special Stockholders’ Meeting (page 32)

Carolina Financial will hold its special stockholders’ meeting on October 24, 2017, at 4:00 p.m., local time, at the Charleston Country Club, 1 Country Club Drive, Charleston, SC 29412.

Carolina Financial’s Record Date and Voting (page 32-35)

If you owned shares of Carolina Financial common stock at the close of business on August 28, 2017, the record date for the Carolina Financial special stockholders’ meeting, you are entitled to vote on the merger agreement as well as any other matters considered at the special stockholders’ meeting. On the record date, there were 16,197,152 shares of Carolina Financial common stock outstanding. You will have one vote at the meeting for each share of common stock you owned on the record date. The affirmative vote of the holders of a majority of Carolina Financial’s outstanding shares of common stock is required to approve the merger agreement. As of August 28, 2017, Carolina Financial’s directors and executive officers and their affiliates beneficially owned approximately 9.59% of the outstanding shares of Carolina Financial common stock.

Carolina Financial’s Board of Directors Recommends that Carolina Financial Stockholders Vote “FOR” the Approval of the Merger Agreement (page 32)

Carolina Financial’s board of directors has determined that the merger, the merger agreement, and the transactions contemplated by the merger agreement are advisable and in the best interests of Carolina Financial and its stockholders and has adopted the merger agreement. Carolina Financial’s board of directors recommends that Carolina Financial stockholders vote “ FOR ” the approval of the merger agreement. For the factors considered by Carolina Financial’s board of directors in reaching its decision to adopt the merger agreement, see “The Merger—Carolina Financial’s Reasons for the Merger; Recommendation of the Carolina Financial Board of Directors.”

Opinion of Carolina Financial’s Financial Advisor (page 60 and Appendix B)

In connection with the merger, Carolina Financial’s financial advisor, Keefe, Bruyette & Woods, Inc. (“KBW”), delivered a written opinion, dated June 9, 2017, 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. The full text of KBW’s opinion, which describes the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by KBW in preparing the opinion, is attached as Appendix B to this document. The opinion was for the information of, and was directed to, the Carolina Financial board of directors (in its capacity as such) in connection with its consideration of the financial terms of the merger. The opinion 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 of directors 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.

First South’s Special Stockholders’ Meeting (page 36)

First South will hold its special stockholders’ meeting on October 26, 2017, at 11:00 a.m., local time, at the First South Bank Operations Center, 220 Creekside Drive, Washington, NC 27889.

First South’s Record Date and Voting (page 36-39)

If you owned shares of First South common stock at the close of business on August 25, 2017, the record date for the First South special stockholders’ meeting, you are entitled to vote on the merger agreement as well as any other matters considered at the special stockholders’ meeting. On the record date, there were 9,503,691 shares of First South common stock outstanding. You will have one vote at the meeting for each share of common stock you owned on the record date. The affirmative vote of the holders of two-thirds of First South’s outstanding shares of common stock is required to approve the merger agreement. As of August 25, 2017, First South’s directors and executive officers and their affiliates beneficially owned approximately 6.68% of the outstanding shares of First South common stock. Each of First South’s directors and executive officers has agreed, subject to several conditions, to vote his or her shares of First South common stock in favor of the merger agreement and the transactions contemplated thereby.

First South’s Board of Directors Recommends that First South Stockholders Vote “FOR” the Approval of the Merger Agreement (page 36)

First South’s board of directors has determined that the merger, the merger agreement, and the transactions contemplated by the merger agreement are advisable and in the best interests of First South and its stockholders and has adopted the merger agreement. First South’s board of directors recommends that First South stockholders vote “ FOR ” the approval of the merger agreement. For the factors considered by First South’s board of directors in reaching its decision to adopt the merger agreement, see “The Merger—First South’s Reasons for the Merger; Recommendation of the First South Board of Directors.”

Opinion of First South’s Financial Advisor (page 52 and Appendix C)

At the June 9, 2017 meeting of the First South board of directors, representatives of Raymond James & Associates, Inc. (“Raymond James”) delivered Raymond James’ written opinion, dated and as of June 9, 2017, to the First South board of directors 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 in the merger, 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, dated June 9, 2017, which sets forth, among other things, the various qualifications, assumptions and limitations on the scope of the review undertaken, is attached as Annex C to this document. Raymond James provided its opinion for the information and assistance of the First South board (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. The opinion of Raymond James did 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 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.

Interests of Executive Officers, Employees and Directors of First South that Differ from Your Interests (page 73)

When considering whether to approve the merger agreement, you should be aware that some officers and directors of First South have interests in the merger that differ from the interests of other First South stockholders, including, among other things, the following:

Each First South board member was aware of these and other interests and considered them before approving and adopting the merger agreement.

Material U.S. Federal Income Tax Consequences and Opinion of Tax Counsel (page 94)

The merger is expected to qualify as a reorganization under Section 368(a) of the Code. Accordingly, we expect that First South stockholders will generally not recognize any gain or loss on the conversion of shares of First South common stock into shares of Carolina Financial common stock but will recognize gain (but not any loss) on any cash received in lieu of fractional shares of Carolina Financial common stock, or in the event a price increase is triggered and Carolina Financial elects to pay the adjustment in cash. Carolina Financial stockholders generally will have no direct tax consequences as a result of the merger. If the merger does not qualify as a reorganization under Section 368(a) of the Code, First South’s stockholders generally will recognize gain or loss for federal income tax purposes equal to the difference between (1) the sum of the fair market value of the Carolina Financial common stock and cash received in the merger and (2) the basis in their First South common stock. Tax matters are complicated, and the tax consequences of the merger may vary among First South stockholders. We urge each First South stockholder to contact his or her own tax advisor to fully understand the tax implications of the merger.

Comparative Rights of Stockholders (page 97)

The rights of First South’s stockholders are currently governed by Virginia corporate law and First South’s articles of incorporation and bylaws. The rights of Carolina Financial’s stockholders are currently governed by Delaware corporate law and Carolina Financial’s certificate of incorporation and bylaws. Upon consummation of the merger, the stockholders of First South will become stockholders of Carolina Financial, and Delaware corporate law, as well as the certificate of incorporation and bylaws of Carolina Financial, will govern their rights. Carolina Financial’s certificate of incorporation and bylaws differ somewhat from those of First South.

Termination of the Merger Agreement and Termination Fee (page 91)

Notwithstanding the approval of the merger agreement by the Carolina Financial stockholders or the First South stockholders, the parties can mutually agree at any time to terminate the merger agreement before completing the merger.

Either Carolina Financial or First South can also terminate the merger agreement:

Carolina Financial can also terminate the merger agreement if First South’s board of directors (i) withdraws or modifies its recommendation that the First South stockholders approve the merger agreement or approves or recommends an acquisition proposal by a third party, (ii) fails to reaffirm the merger agreement after being requested to do so following the announcement of an acquisition proposal by a third party, or (iii) otherwise fails to comply with the terms of the merger agreement regarding obtaining stockholder approval of the merger agreement and soliciting other offers for an acquisition of First South. In this event, First South must pay a $5,750,000 termination fee to Carolina Financial.

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.

First South can also terminate the merger agreement if First South’s stockholders do not approve the merger agreement at the First South special meeting, and prior to the First South special meeting, First South received a superior proposal which did not result from a breach of its non-solicitation obligations under the merger agreement, and First South’s board of directors determines to enter into a definitive agreement for such proposal upon termination of the merger agreement and enters into such agreement concurrently with its termination of the merger agreement. In this event, First South must pay a $5,750,000 termination fee to Carolina Financial.

In addition, if (i) an acquisition proposal with respect to First South is communicated to the stockholders, senior management, or board of directors of First South or any person publicly announces an intention to make an acquisition proposal with respect to First South after the date of the merger agreement, (ii) the merger agreement is then terminated due to a failure to obtain the First South stockholder vote, a material breach of the merger agreement by First South, or failure to close the merger by March 31, 2018, and (iii) within one year after the termination of the merger agreement, First South consummates an acquisition transaction or enters into an acquisition agreement, then it must pay the $5,750,000 termination fee to Carolina Financial.

Accounting Treatment (page 96)

Carolina Financial will account for the merger using the acquisition method of accounting. Under this accounting method, Carolina Financial will record the acquired identifiable assets and liabilities assumed at their fair market value at the time the merger is complete. Any excess of the cost of First South over the sum of the fair values of tangible and identifiable intangible assets less liabilities assumed will be recorded as goodwill. Based on an assumed purchase price of $169.9 million and utilizing information as of August 28, 2017 estimated goodwill and other intangibles would total approximately $102.1 million. Carolina Financial’s reported income would include the operations of First South after the merger. Financial statements of Carolina Financial after completion of the merger will reflect the impact of the acquisition of First South. Financial statements of Carolina Financial issued before completion of the merger will not be restated retroactively to reflect First South’s historical financial position or results of operations.