Carolina Financial Corporation Reports Results for Fourth Quarter of 2017

NEWS RELEASE – For Release January 24, 2018 4:00PM

For More Information, Contact:
William A. Gehman III, EVP and CFO, 843.723.7700

Charleston, S.C. January 24, 2018 - Carolina Financial Corporation (the “Company”) (NASDAQ: CARO) today announced financial results for the fourth quarter of 2017.

Operational highlights at and for the three months ended December 31, 2017, include:

· On November 1, 2017, the Company closed its previously announced acquisition of First South Bancorp, Inc., the holding company for First South Bank, (“First South”) with the operational conversion expected to be completed in the first quarter of 2018. Excluding purchase accounting adjustments, total assets of First South were $1.1 billion, total loans receivable were $774.3 million and total deposits were $952.6 million as of the closing date.

Financial highlights at and for the three months ended December 31, 2017, include:

· Effective November 1, 2017, the Company completed the previously announced merger of First South Bancorp, Inc. (“First South”).

· Net income for the fourth quarter 2017 increased 22.9% to $6.3 million, or $0.33 per diluted share, from $5.2 million, or $0.41 per diluted share for the fourth quarter of 2016. Included in earnings are pretax merger-related expenses of $4.1 million for the fourth quarter of 2017 compared to $260,000 for the fourth quarter of 2016.

· Operating earnings for the fourth quarter of 2017, which exclude certain non-operating income and expenses, increased 93.0% to $11.1 million, or $0.57 per diluted share, from $5.8 million, or $0.46 per diluted share, from the fourth quarter of 2016.

· Operating earnings for Q4 2017 have been adjusted to eliminate the following significant items:

o Pretax merger-related expenses of $4.1 million.

o The fair value gain on interest rate swaps of $419,000.

o The loss on sale of securities of $242,000.

o The effect of an increase in income tax expense of $2.3 million related to application of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act).

· Performance ratios Q4 2017 compared to Q4 2016:

o Return on average assets was 0.83% compared to 1.25%.

o Operating return on average assets was 1.46% compared to 1.40%.

o Return on average tangible equity was 8.78% compared to 13.46%.

o Operating return on average tangible equity was 15.44% compared to 15.06%.

· Loans receivable, excluding acquired loans, grew $187.5 million, or at an annualized rate of 15.9%, since December 31, 2016.

· Asset quality continues to improve as nonperforming assets to total assets were 0.20% at December 31, 2017 compared to 0.40% at December 31, 2016.

· Total deposits, excluding acquired deposits, increased $78.3 million since December 31, 2016. Core deposits, excluding core deposits acquired, increased $34.6 million since December 31, 2016.

· The 2017 Tax Act was signed into law by the President on Friday, December 22, 2017. The changes that most affect businesses include the reduction in the corporate tax rate, change in business deductions, and many international provisions. Generally accepted accounting principles require the effect of a change in tax law or rates be recognized as of the date of enactment. The Company’s net income for the quarter and year ended December 31 2017 was reduced by approximately $2.3 million, primarily due to a lower valuation of deferred income taxes.

“We continue to see the impact of solid organic growth and acquisitions on earnings. Overall operating results for the fourth quarter of 2017 continued to improve with an increase in operating net income of 93.0% compared to the fourth quarter of 2016. We believe we have partnered with a great franchise with the First South acquisition, and are actively working on integration. We expect the systems conversion to occur late in the first quarter of 2018,” stated Jerry Rexroad, the Company’s Chief Executive Officer.

Acquisition of First South Bancorp, Inc.

Effective November 1, 2017, the Company completed its previously announced acquisition of First South. At closing, the holding companies were merged with the Company as the surviving corporation, and First South Bank also merged with and into CresCom Bank, with CresCom Bank surviving the merger.

Under the terms of the merger, First South shareholders received 0.5064 shares of the Company’s common stock. Fractional shares were paid in cash.

The acquisition of First South was accounted for under the acquisition method of accounting. The assets and liabilities of First South have been recorded at their estimated fair values and added to those of the Company as of the merger date. Included in the December 31, 2017 consolidated balance sheet were approximately $728.7 million of acquired loans, net of related purchase accounting adjustments and $939.6 million of deposits. The Company may continue to refine its valuations of acquired assets and liabilities for up to one year following the merger date.

Financial Results

Carolina Financial Corporation

n The Company reported an increase in net income for the three months ended December 31, 2017 to $6.3 million, or $0.33 per diluted share, as compared to $5.2 million, or $0.41 per diluted share, for the three months ended December 31, 2016. Included in net income for the three months ended December 31, 2017 were pretax merger-related expenses of $4.1 million, compared to $260,000 for the three months ended December 31, 2016.

n The Company reported an increase in net income for the year ended December 31, 2017 to $28.6 million, or $1.73 per diluted share, as compared to $17.6 million, or $1.42 per diluted share, for the year ended December 31, 2016. Included in net income for the years ended December 31, 2017 and 2016 were pretax merger-related expenses of $6.0 million and $3.2 million, respectively.

n Operating earnings for the fourth quarter of 2017, which excludes certain non-operating income and expenses, increased 93.0% to $11.1 million, or $0.57 per diluted share, from $5.8 million, or $0.46 per diluted share, from the fourth quarter of 2016.

n Operating earnings for the year ended December 31, 2017, which excludes certain non-operating income and expenses, increased 67.3% to $33.8 million, or $2.04 per diluted share, from $20.2 million, or $1.64 per diluted share, from the same period of 2016.

n The Company’s net interest margin-tax equivalent increased to 4.19% for the fourth quarter of 2017 compared to 3.87% for the fourth quarter of 2016.

n The Company reported book value per common share of $22.76 and $13.23 as of December 31, 2017 and December 31, 2016, respectively. Tangible book value per common share was $15.14 and $12.59 as of December 31, 2017 and December 31, 2016, respectively.

n At December 31, 2017, the Company’s regulatory capital ratios exceeded the minimum levels currently required. Stockholders’ equity totaled $475.4 million as of December 31, 2017 compared to $163.2 million at December 31, 2016. Tangible equity to tangible assets at December 31, 2017 was 9.7% compared to 9.3% at December 31, 2016.

n As a result of the 2017 Tax Act, the Company’s net income for the quarter and year ended December 31 2017 was reduced by approximately $2.3 million, primarily from a lower valuation of deferred income taxes.

Community Banking

n Community banking segment net income increased 32.6% to $6.1 million for the three months ended December 31, 2017 compared to $4.6 million for the three months ended December 31, 2016. Included in net income for the three months ended December 31, 2017 were pretax merger-related expenses of $4.1 million compared to $254,000 for the three months ended December 31, 2016.

n The community banking segment net income increased 80.4% to $26.8 million for the year ended December 31, 2017 compared to $14.9 million for the year ended December 31, 2016. Included in net income for the year ended December 31, 2017 and 2016 were pretax merger-related expenses of $6.0 million and $3.1 million, respectively.

n Community banking segment operating earnings increased 115.8% to $11.2 million for the three months ended December 31, 2017 compared to $5.2 million for the three months ended December 31, 2016. Included in earnings for the three months ended December 31, 2017 and 2016 were pretax merger-related expenses of $4.1 million and $254,000, respectively. The community banking segment operating earnings increased 86.7% to $32.6 million for the year ended December 31, 2017 compared to $17.5 million for the year ended December 31, 2016. Included in earnings for the year ended December 31, 2017 and 2016 were pretax merger-related expenses of $6.0 million and $3.1 million, respectively.

n Provision for loan loss during the three months ended December 31, 2017 was $779,000. There was no provision for loan loss during the three months ended December 31, 2016. Asset quality and historical loss experience continue to remain favorable. The provision for loan loss was primarily driven by the organic loan growth.

n Non-performing assets were 0.20% and 0.40% of total assets at December 31, 2017 and December 31, 2016, respectively.

n Loans receivable, gross increased to $2.3 billion at December 31, 2017 compared to $1.2 billion at December 31, 2016. Excluding loans acquired, organic loans increased $187.5 million, or 15.9% over December 31, 2016.

n The number of checking accounts increased at an annualized rate of 8.7%, excluding First South and Greer checking accounts acquired, since December 31, 2016. Total deposits, excluding acquired deposits, increased $78.3 million since December 31, 2016. As of December 31, 2017 and December 31, 2016, core deposits, defined as checking, savings and money market, comprised approximately 66.8% and 60.6%, respectively, of total deposits.

n As a result of the Tax Act, the community banking segment’s net income for the quarter and year ended December 31 2017 was reduced by approximately $2.5 million, primarily from a lower valuation of deferred income taxes.

Wholesale Mortgage Banking

n Net income for the wholesale mortgage banking segment was $117,000 for the three months ended December 31, 2017 compared to $806,000 for the three months ended December 31, 2016.

n Net income was $2.5 million for the year ended December 31, 2017 compared to $3.5 million for the year ended December 31, 2016.

n Operating earnings for the wholesale mortgage banking segment were $444,000 for the three months ended December 31, 2017 compared to $806,000 for the three months ended December 31, 2016.

n Operating earnings for the wholesale mortgage banking segment were $2.8 million for the year ended December 31, 2017 compared to $3.5 million for the year ended December 31, 2016.

n Net margin was 1.43% for the three months ended December 31, 2017 compared to 1.61% for the three months ended December 31, 2016. Originations for the three months ended December 31, 2017 and 2016 were $239.8 million and $234.9 million, respectively.

n Net margin was 1.59% for the year ended December 31, 2017 compared to 1.73% for the year ended December 31, 2016. Originations for the year ended December 31, 2017 and 2016 were $911.0 million and $875.4 million, respectively.

n Net interest income for the wholesale mortgage banking segment was $388,000 for the three months ended December 31, 2017 compared to $407,000 for the three months ended December 31, 2016. Net interest income for the wholesale mortgage banking segment was $1.6 million for the year ended December 31, 2017 compared to $1.5 million for the year ended December 31, 2016.

n Mortgage loan servicing income, net of amortization of mortgage servicing rights and subservicing expense, for the wholesale mortgage banking segment was $400,000 and $400,000 for the three months ended December 31, 2017 and December 31, 2016, respectively. Mortgage loan servicing income, net of amortization of mortgage servicing rights and subservicing expense, for the wholesale mortgage banking segment was $1.6 million and $1.6 million for the year ended December 31, 2017 and December 31, 2016, respectively. At December 31, 2017, loans serviced for third parties totaled $2.6 billion.

n As a result of the Tax Act, the wholesale mortgage banking segment’s net income for the quarter and year ended December 31, 2017 was reduced by approximately $327,000, primarily from a lower valuation of deferred income taxes.

Dividend Declared

On January 24, 2018 the Company declared a $0.05 dividend per common share, payable on April 6, 2018, to stockholders of record on March 6, 2018.

Conference Call

A conference call will be held at 11:00 a.m., Eastern Time on January 25, 2018. The conference call can be accessed by dialing (866) 464-9448 or (213) 660-0874 and requesting the Carolina Financial Corporation earnings call. The conference ID number is 4095667. Listeners should dial in 10 minutes prior to the start of the call.  The live webcast and presentation slides will be available on www.haveanicebank.com under Investor Relations, “Investor Presentations.”

A replay of the webcast will be available on www.haveanicebank.com under Investor Relations, “Investor Presentations” approximately three hours after the call and can be accessed by dialing (855) 859-2056 or (404) 537-3406 and requesting conference number 4095667.

About Carolina Financial Corporation

Carolina Financial Corporation (NASDAQ: CARO) is the holding company of CresCom Bank, which also owns and operates Atlanta-based Crescent Mortgage Company.  As of December 31, 2017, Carolina Financial Corporation had approximately $3.5 billion in total assets and Crescent Mortgage Company was licensed to originate loans in 47 states, partnering with community banks, credit unions and mortgage brokers.

Addendum to News Release – Use of Certain Non-GAAP Financial Measures and Forward-Looking Statements

This news release contains financial information determined by methods other than in accordance with generally accepted accounting principles (“GAAP”). Such statements should be read along with the accompanying tables, which provide a reconciliation of non-GAAP measures to GAAP measures. This news release and the accompanying tables discuss financial measures, including but not limited to, core deposits, tangible book value, operating earnings and net income related to segments of the Company, which are non-GAAP measures. We believe that such non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare the Company’s operating results from period to period in a meaningful manner. Non-GAAP measures should not be considered as an alternative to any measure of performance as promulgated under GAAP. Investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the company. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company’s results or financial condition as reported under GAAP.

Please refer to the Non-GAAP reconciliation tables later in this release for additional information.

Forward-Looking Statements

Certain statements in this news release contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to future plans and expectations, and are thus prospective.  Such forward-looking statements include but are not limited to statements with respect to our plans, objectives, expectations and intentions and other statements that are not historical facts, and other statements identified by words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” and “projects,” as well as similar expressions.  Such statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.  Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate.  Therefore, we can give no assurance that the results contemplated in the forward-looking statements will be realized.  The inclusion of this forward-looking information should not be construed as a representation by the Company or any person that the future events, plans, or expectations contemplated by the Company will be achieved.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) competitive pressures among depository and other financial institutions may increase significantly and have an effect on pricing, spending, fourth-party relationships and revenues; (2) the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected resulting in, among other things, a deterioration in the credit quality or a reduced demand for credit, including the resultant effect on the Company’s loan portfolio and allowance for loan losses; (3) the rate of delinquencies and amounts of charge-offs, the level of allowance for loan loss, the rates of loan growth, or adverse changes in asset quality in our loan portfolio, which may result in increased credit risk-related losses and expenses; (4) the risk that the preliminary financial information reported herein and our current preliminary analysis will be different when our review is finalized; (5) changes in the U.S. legal and regulatory framework including, but not limited to, the Dodd-Frank Act, the Tax Cuts and Jobs Act of 2017 and regulations adopted thereunder; (6) adverse conditions in the stock market, the public debt market and other capital markets (including changes in interest rate conditions) could have a negative impact on the Company; (7) the business related to acquisitions may not be integrated successfully or such integration may take longer to accomplish than expected; (8) the expected cost savings and any revenue synergies from acquisitions may not be fully realized within expected timeframes; and (9) disruption from acquisitions may make it more difficult to maintain relationships with clients, associates, or suppliers.  Additional factors that could cause our results to differ materially from those described in the forward-looking statements can be found in our reports (such as our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the SEC and available at the SEC’s Internet site (http://www.sec.gov).  All subsequent written and oral forward-looking statements concerning the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

###

CAROLINA FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2017			December 31, 2016
	(Unaudited)			(Audited)
	(Dollars in thousands)
ASSETS
Cash and due from banks	$	25,254			9,761
Interest-bearing cash		51,298			14,591
Cash and cash equivalents		76,552			24,352
Securities available-for-sale		743,239			335,352
Federal Home Loan Bank stock, at cost		19,065			11,072
Other investments		3,446			1,768
Derivative assets		2,803			2,219
Loans held for sale		35,292			31,569
Loans receivable, gross		2,319,529			1,178,266
Allowance for loan losses		(11,479	)		(10,688	)
Loans receivable, net		2,308,050			1,167,578
Premises and equipment, net		61,406			37,054
Accrued interest receivable		11,992			5,373
Real estate acquired through foreclosure, net		3,106			1,179
Deferred tax assets, net		5,872			8,782
Mortgage servicing rights		21,003			15,032
Cash value life insurance		57,195			28,984
Core deposit intangible		19,601			3,658
Goodwill		139,617			4,266
Other assets		9,221			5,939
Total assets	$	3,517,460			1,684,177
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Noninterest-bearing deposits	$	520,914			229,905
Interest-bearing deposits		2,079,315			1,028,355
Total deposits		2,600,229			1,258,260
Short-term borrowed funds		338,000			203,000
Long-term debt		74,759			38,465
Derivative liabilities		156			342
Drafts outstanding		7,324			6,223
Advances from borrowers for insurance and taxes		3,005			1,058
Accrued interest payable		1,126			327
Reserve for mortgage repurchase losses		1,892			2,880
Dividends payable to stockholders		1,051			502
Accrued expenses and other liabilities		14,537			9,930
Total liabilities		3,042,079			1,520,987
Commitments and contingencies
Stockholders’ equity:
Preferred stock		—			—
Common stock		210			125
Additional paid-in capital		348,037			66,156
Retained earnings		122,705			98,451
Accumulated other comprehensive (loss) income, net of tax		4,429			(1,542	)
Total stockholders’ equity		475,381			163,190
Total liabilities and stockholders’ equity	$	3,517,460			1,684,177

CAROLINA FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months						For the Twelve Months
	Ended December 31,						Ended December 31,
	2017			2016			2017			2016*
	(In thousands, except share data)
Interest income
Loans	$	27,094			14,346			79,300			51,137
Investment securities		4,966			2,439			14,941			9,274
Dividends from Federal Home Loan Bank stock		145			86			496			374
Federal funds sold		—			—			7			5
Other interest income		164			32			343			124
Total interest income		32,369			16,903			95,087			60,914
Interest expense
Deposits		3,175			1,523			9,386			5,972
Short-term borrowed funds		663			189			1,888			509
Long-term debt		614			529			1,978			2,272
Total interest expense		4,452			2,241			13,252			8,753
Net interest income		27,917			14,662			81,835			52,161
Provision for loan losses		779			—			779			—
Net interest income after provision for loan losses		27,138			14,662			81,056			52,161
Noninterest income
Mortgage banking income		3,619			4,259			15,140			17,226
Deposit service charges		1,715			976			4,643			3,688
Net loss on extinguishment of debt		—			(1,694	)		—			(1,868	)
Net gain (loss) on sale of securities		(242	)		65			933			706
Fair value adjustments on interest rate swaps		419			998			382			590
Net increase in cash value life insurance		357			219			1,116			903
Mortgage loan servicing income		1,968			1,510			6,790			5,748
Other		1,743			576			4,912			2,304
Total noninterest income		9,579			6,909			33,916			29,297
Noninterest expense
Salaries and employee benefits		11,341			8,169			37,827			31,475
Occupancy and equipment		3,218			2,106			10,347			7,942
Marketing and public relations		235			284			1,417			1,428
FDIC insurance		341			175			721			702
Recovery of mortgage loan repurchase losses		(225	)		(250	)		(900	)		(1,000	)
Legal expense		134			121			507			306
Other real estate (income) expense, net		14			17			54			(20	)
Mortgage subservicing expense		501			504			1,986			1,857
Amortization of mortgage servicing rights		883			653			2,966			2,312
Merger related expenses		4,091			260			6,001			3,245
Other		3,254			2,034			10,220			7,793
Total noninterest expense		23,787			14,073			71,146			56,040
Income before income taxes		12,930			7,498			43,826			25,418
Income tax expense		6,602			2,348			15,261			7,848
Net income	$	6,328			5,150			28,565			17,570
Earnings per common share:
Basic	$	0.33			0.42			1.75			1.45
Diluted	$	0.33			0.41			1.73			1.42
Weighted average common shares outstanding:
Basic		19,207,307			12,336,420			16,317,501			12,080,128
Diluted		19,443,353			12,585,518			16,550,357			12,352,246

* Derived from audited financial statements.

CAROLINA FINANCIAL CORPORATION

(Unaudited)

(Dollars in thousands)

	At or for the Three Months Ended
Selected Financial Data:	December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016
Selected Average Balances:
Total assets	$	3,048,214			2,230,586			2,166,803			1,768,323			1,651,653
Investment securities and FHLB stock		647,276			521,569			510,706			373,551			326,485
Loans receivable, net		2,003,429			1,463,771			1,412,940			1,214,777			1,138,120
Loans held for sale		25,001			27,282			22,412			17,827			32,951
Deposits		2,352,303			1,710,263			1,633,285			1,330,805			1,288,665
Stockholders’ equity		380,529			286,524			277,708			210,071			160,991
Performance Ratios (annualized):
Return on average stockholders’ equity		6.65	%		11.16	%		13.45	%		9.34	%		12.80	%
Retun on average tangible equity (Non-GAAP)		8.78	%		13.24	%		16.02	%		9.98	%		13.46	%
Return on average assets		0.83	%		1.43	%		1.72	%		1.11	%		1.25	%
Operating return on average equity (Non-GAAP)		11.69	%		11.02	%		13.15	%		10.95	%		14.32	%
Operating return on average tangible equity (Non-GAAP)		15.44	%		13.08	%		15.65	%		11.70	%		15.06	%
Operating return on average assets (Non-GAAP)		1.46	%		1.42	%		1.69	%		1.30	%		1.40	%
Average earning assets to average total assets		89.25	%		91.09	%		90.68	%		91.99	%		93.21	%
Average loans receivable to average deposits		85.17	%		85.59	%		86.51	%		91.28	%		88.32	%
Average stockholders’ equity to average assets		12.48	%		12.85	%		12.82	%		11.88	%		9.75	%
Net interest margin-tax equivalent (1)		4.19	%		3.94	%		4.03	%		3.93	%		3.87	%
Net charge-offs  (recovery) to average loans receivable		0.02	%		0.02	%		(0.01	)%		(0.01	)%		(0.12	)%
Nonperforming assets to period end loans receivable		0.30	%		0.44	%		0.48	%		0.52	%		0.58	%
Nonperforming assets to total assets		0.20	%		0.29	%		0.31	%		0.34	%		0.40	%
Nonperforming loans to total loans		0.17	%		0.33	%		0.38	%		0.42	%		0.48	%
Allowance for loan losses as a percentage of gross loans receivable (end of period) (2)		0.49	%		0.72	%		0.75	%		0.76	%		0.91	%
Allowance for loan losses as a percentage of non-acquired loans receivable (Non-GAAP)		0.80	%		0.87	%		0.93	%		0.96	%		1.01	%
Allowance for loan losses as a percentage of nonperforming loans (2)		291.79	%		216.53	%		196.85	%		180.66	%		190.01	%
Nonperforming Assets:
Loans 90 days or more past due and still accruing	$	—			—			—			—			—
Nonaccrual loans		3,934			4,924			5,461			5,931			5,625
Total nonperforming loans		3,934			4,924			5,461			5,931			5,625
Real estate acquired through foreclosure, net		3,106			1,640			1,417			1,479			1,179
Total nonperforming assets	$	7,040		$	6,564		$	6,878		$	7,410		$	6,804

(1) Net interest margin-tax equivalent reflects tax-exempt income on a tax-equivalent basis.

(2) Acquired loans represent 37.8%, 17.3%, 19.4%, 21.4%, and 10.1% of gross loans receivable at December 31, 2017, September 30, 2017, June 30, 2017, March 31, 2017, and December 31, 2016, respectively.

Carolina Financial Corporation

Segment Information

(Unaudited)

(Dollars in thousands)

	For the Three Months					For the Twelve Months						Increase (Decrease)
	Ended December 31,					Ended December 31,						Three			Twelve
	2017		2016			2017			2016			Months			Months
Segment net income:
Community banking	$	6,052		4,565			26,840			14,874			1,487			11,966
Wholesale mortgage banking		117		806			2,450			3,528			(689	)		(1,078	)
Other		124		(232	)		(786	)		(901	)		356			115
Eliminations		35		11			61			69			24			(8	)
Total net income	$	6,328		5,150			28,565			17,570			1,178			10,995

	For the Three Months Ended
	December 31, 2017		September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016
Segment net income:
Community banking	$	6,052		7,837			8,443			4,509			4,565
Wholesale mortgage banking		117		449			1,238			645			806
Other		124		(320	)		(346	)		(244	)		(232	)
Eliminations		35		27			5			(6	)		11
Total net income	$	6,328		7,993			9,340			4,904			5,150

	For the Three Months Ended December 31, 2017
	Community		Mortgage
	Banking		Banking		Other			Eliminations			Total
Interest income	$	31,911		441		10			7			32,369
Interest expense		4,050		53		402			(53	)		4,452
Net interest income (expense)		27,861		388		(392	)		60			27,917
Provision for (recovery of) loan losses		779		—		—			—			779
Noninterest income from external customers		4,821		4,758		—						9,579
Intersegment noninterest income		244		—		—			(244	)
Noninterest expense		19,399		4,171		217						23,787
Intersegment noninterest expense		—		241					(241	)		—
Income (loss) before income taxes		12,748		734		(609	)		57			12,930
Income tax expense (benefit)		6,696		617		(733	)		22			6,602
Net income (loss)	$	6,052		117		124			35			6,328

	For the Three Months Ended December 31, 2016
	Community			Mortgage
	Banking			Banking		Other			Eliminations			Total
Interest income	$	16,453			458		4			(12	)		16,903
Interest expense		2,084			51		155			(49	)		2,241
Net interest income (expense)		14,369			407		(151	)		37			14,662
Provision for (recovery of) loan losses		(24	)		24		—			—			—
Noninterest income from external customers		1,597			5,312		—			—			6,909
Intersegment noninterest income		261			—		—			(261	)		—
Noninterest expense		9,706			4,151		216			—			14,073
Intersegment noninterest expense		—			242		—			(242	)		—
Income (loss) before income taxes		6,545			1,302		(367	)		18			7,498
Income tax expense (benefit)		1,980			496		(135	)		7			2,348
Net income (loss)	$	4,565			806		(232	)		11			5,150

Carolina Financial Corporation

Segment Information, Continued

(Unaudited)

(Dollars in thousands)

	For the Twelve Months Ended December 31, 2017
	Community		Mortgage
	Banking		Banking		Other			Eliminations			Total
Interest income	$	93,319		1,743		31			(6	)		95,087
Interest expense		12,100		172		1,152			(172	)		13,252
Net interest income (expense)		81,219		1,571		(1,121	)		166			81,835
Provision for (recovery of) loan losses		779		—		—			—			779
Noninterest income from external customers		14,195		19,721		—			—			33,916
Intersegment noninterest income		1,034				—			(1,034	)		—
Noninterest expense		53,600		16,620		926						71,146
Intersegment noninterest expense		—		960		6			(966	)		—
Income (loss) before income taxes		42,069		3,712		(2,053	)		98			43,826
Income tax expense (benefit)		15,229		1,262		(1,267	)		37			15,261
Net income (loss)	$	26,840		2,450		(786	)		61			28,565

	For the Twelve Months Ended December 31, 2016
	Community			Mortgage
	Banking			Banking		Other			Eliminations			Total
Interest income	$	59,241			1,591		18			64			60,914
Interest expense		8,148			93		603			(91	)		8,753
Net interest income (expense)		51,093			1,498		(585	)		155			52,161
Provision for (recovery of) loan losses		(36	)		36		—			—			—
Noninterest income from external customers		8,389			20,953		—			(45	)		29,297
Intersegment noninterest income		966			—		—			(966	)		—
Noninterest expense		39,226			15,972		842			—			56,040
Intersegment noninterest expense		—			967		—			(967	)		—
Income (loss) before income taxes		21,258			5,476		(1,427	)		111			25,418
Income tax expense (benefit)		6,384			1,948		(526	)		42			7,848
Net income (loss)	$	14,874			3,528		(901	)		69			17,570

Impact of the Tax Cuts and Jobs Act on Income Tax Expense for the Three and Twelve Months Ended December 31, 2017:

	Community		Mortgage
	Banking		Banking		Other			Eliminations		Total
Increase (decrease) to tax expense	$	2,504		327		(511	)		—		2,320

	For the Three Months Ended December 31,
	Loan Originations				Mortgage Banking Income				Margin
	2017		2016		2017		2016		2017			2016
Additional segment information:
Community banking	$	27,221	$	29,121		569		476		2.09	%		1.63	%
Wholesale mortgage banking		212,585		234,915		3,050		3,783		1.43	%		1.61	%
Total	$	239,806		264,036		3,619		4,259		1.51	%		1.61	%

	For the Twelve Months Ended December 31,
	Loan Originations				Mortgage Banking Income				Margin
	2017		2016		2017		2016		2017			2016
Additional segment information:
Community banking	$	86,732	$	97,062		2,010		2,063		2.32	%		2.13	%
Wholesale mortgage banking		824,282		875,360		13,130		15,163		1.59	%		1.73	%
Total	$	911,014		972,422		15,140		17,226		1.66	%		1.77	%

Carolina Financial Corporation

Reconciliation of Non-GAAP Financial Measures - Consolidated

(Unaudited)

(In thousands, except share data)

	At the Month Ended
	December 31,		September 30,		June 30,		March 31,		December 31,
	2017		2017		2017		2017		2016
Core deposits:
Noninterest-bearing demand accounts	$	520,914		333,267		330,641		298,365		229,905
Interest-bearing demand accounts		551,308		309,241		298,123		309,961		191,851
Savings accounts		213,141		69,552		70,336		66,506		48,648
Money market accounts		452,734		377,754		380,108		363,600		292,639
Total core deposits (Non-GAAP)		1,738,097		1,089,814		1,079,208		1,038,432		763,043
Certificates of deposit:
Less than $250,000		754,137		567,483		539,177		524,836		467,937
$250,000 or more		107,995		50,357		45,344		44,452		27,280
Total certificates of deposit		862,132		617,840		584,521		569,288		495,217
Total deposits	$	2,600,229		1,707,654		1,663,729		1,607,720		1,258,260

	At the Month Ended
	December 31,			September 30,			June 30,			March 31,			December 31,
	2017			2017			2017			2017			2016
Tangible book value per share:
Total stockholders’ equity	$	475,381			290,224			281,818			271,454			163,190
Less intangible assets		(159,218	)		(44,953	)		(45,123	)		(45,292	)		(7,924	)
Tangible common equity (Non-GAAP)	$	316,163			245,271			236,695			226,162			155,266
Issued and outstanding shares		21,022,202			16,159,309			16,156,943			16,185,408			12,548,328
Less nonvested restricted stock awards		(134,302	)		(99,639	)		(101,489	)		(227,439	)		(211,908	)
Period end dilutive shares		20,887,900			16,059,670			16,055,454			15,957,969			12,336,420
Total stockholders equity	$	475,381			290,224			281,818			271,454			163,190
Divided by period end dilutive shares		20,887,900			16,059,670			16,055,454			15,957,969			12,336,420
Common book value per share	$	22.76			18			17.55			17.01			13.23
Tangible common equity (Non-GAAP)	$	316,163			245,271			236,695			226,162			155,266
Divided by period end dilutive shares		20,887,900			16,059,670			16,055,454			15,957,969			12,336,420
Tangible common book value per share (Non-GAAP)	$	15.14			15.27			14.74			14.17			12.59

	At the Month Ended
	December 31,			September 30,			June 30,			March 31,			December 31,
	2017			2017			2017			2017			2016
Acquired and non-acquired loans:
Acquired loans receivable	$	872,020			257,461			278,275			303,244			119,422
Non-acquired loans receivable		1,436,030			1,227,000			1,157,145			1,113,766			1,058,844
Total loans receivable	$	2,308,050			1,484,461			1,435,420			1,417,010			1,178,266
% Acquired		37.78	%		17.34	%		19.39	%		21.40	%		10.14	%
Non-acquired loans	$	1,436,030			1,227,000			1,157,145			1,113,766			1,058,844
Allowance for loan losses		11,479			10,662			10,750			10,715			10,688
Allowance for loan losses to non-acquired loans (Non-GAAP)		0.80	%		0.87	%		0.93	%		0.96	%		1.01	%
Total loans receivable	$	2,308,050			1,484,461			1,435,420			1,417,010			1,178,266
Allowance for loan losses		11,479			10,662			10,750			10,715			10,688
Allowance for loan losses to total loans receivable		0.50	%		0.72	%		0.75	%		0.76	%		0.91	%

Carolina Financial Corporation

Reconciliation of Non-GAAP Financial Measures - Consolidated

(Unaudited)

(In thousands, except share data)

	For the Three Months Ended															For the Twelve Months Ended
Operating Earnings and Performance Ratios:	December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			December 31, 2017			December 31, 2016
Income before income taxes	$	12,930			11,968			12,013			6,915			7,498			43,826			25,418
Gain/Loss on sale of securities		242			(368	)		(621	)		(185	)		(65	)		(933	)		(706	)
Net loss on extinguishment of debt		—			—			—			—			1,694			—			1,868
Fair value adjustments on interest rate swaps		(419	)		(90	)		69			58			(998	)		(382	)		(590	)
Merger related expenses		4,091			311			279			1,319			260			6,001			3,245
Operating earnings before income taxes		16,844			11,821			11,740			8,107			8,389			48,512			29,235
Tax expense (1)		5,721			3,926			2,612			2,358			2,627			14,706			9,027
Operating earnings (Non-GAAP)	$	11,123			7,895			9,128			5,749			5,762			33,806			20,208
Average equity	$	380,529			286,524			277,708			210,071			160,991			280,877			151,346
Less average intangible assets		(92,373	)		(45,035	)		(44,452	)		(13,510	)		(7,979	)		(49,096	)		(5,516	)
Average tangible common equity (Non-GAAP)	$	288,156			241,489			233,256			196,561			153,012			231,781			145,830
Average assets	$	3,048,214			2,230,586			2,166,803			1,768,323			1,651,653			2,306,667			1,537,654
Less average intangible assets		(92,373	)		(45,035	)		(44,452	)		(13,510	)		(7,979	)		(49,096	)		(5,516	)
Average tangible assets (Non-GAAP)	$	2,955,841			2,185,551			2,122,351			1,754,813			1,643,674			2,257,571			1,532,138
Operating return on average assets (Non-GAAP)		1.46	%		1.42	%		1.69	%		1.30	%		1.40	%		1.47	%		1.31	%
Operating return on average equity (Non-GAAP)		11.69	%		11.02	%		13.15	%		10.95	%		14.32	%		12.04	%		13.35	%
Operating return on average tangible assets (Non-GAAP)		1.51	%		1.44	%		1.72	%		1.31	%		1.40	%		1.50	%		1.32	%
Operating return on average tangible equity (Non-GAAP)		15.44	%		13.08	%		15.65	%		11.70	%		15.06	%		14.59	%		13.86	%
Weighted average common shares outstanding:
Basic		19,207,307			16,029,332			16,029,332			13,919,711			12,336,420			16,317,501			12,080,128
Diluted		19,443,353			16,187,869			16,180,171			14,139,241			12,585,518			16,550,357			12,352,246
Operating earnings per common share:
Basic (Non-GAAP)	$	0.58			0.49			0.57			0.41			0.47			2.07			1.67
Diluted (Non-GAAP)	$	0.57			0.49			0.56			0.41			0.46			2.04			1.64
As Reported:
Income before income taxes	$	12,930			11,968			12,013			6,915			7,498			43,826			25,418
Tax expense (2)		6,602			3,975			2,673			2,011			2,348			15,261			7,848
Net Income	$	6,328			7,993			9,340			4,904			5,150			28,565			17,570
Average equity	$	380,529			286,524			277,708			210,071			160,991			280,877			151,346
Average tangible equity (Non-GAAP)	$	288,156			241,489			233,256			196,561			153,012			231,780			145,831
Average assets	$	3,048,214			2,230,586			2,166,803			1,768,323			1,651,653			2,306,667			1,537,654
Return on average assets		0.83	%		1.43	%		1.72	%		1.11	%		1.25	%		1.24	%		1.14	%
Return on average equity		6.65	%		11.16	%		13.45	%		9.34	%		12.80	%		10.17	%		11.61	%
Return on average tangible equity (Non-GAAP)		8.78	%		13.24	%		16.02	%		9.98	%		13.46	%		12.32	%		12.05	%
Weighted average common shares outstanding:
Basic		19,207,307			16,029,332			16,029,332			13,919,711			12,336,420			16,317,501			12,080,128
Diluted		19,443,353			16,187,869			16,180,171			14,139,241			12,585,518			16,550,357			12,352,246
Earnings per common share:
Basic	$	0.33			0.50			0.58			0.35			0.42			1.75			1.45
Diluted	$	0.33			0.49			0.58			0.35			0.41			1.73			1.42

(1) Tax expense is determined using the effective tax rate reflected in the accompanying income statement for the applicable reporting period, adjusted to eliminate the impact of the application of the Tax Cuts and Jobs Act on deferred income tax assets and liabilities.

(2) Income tax expense increased approximately $2.3 million for the quarter and year ended December 31, 2017 due to application of the Tax Cuts and Jobs Act on deferred income tax assets and liabilities.

Carolina Financial Corporation

Reconciliation of Non-GAAP Financial Measures - Community Banking Segment

(Unaudited)

(In thousands, except share data)

	For the Three Months Ended															For the Year Ended
	December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			December 31, 2017			December 31, 2016
Segment net income:
Community banking	$	6,052			7,837			8,443			4,509			4,565		$	26,840			14,874
Wholesale mortgage banking		117			449			1,238			645			806			2,450			3,528
Other		124			(320	)		(346	)		(244	)		(232	)		(786	)		(901	)
Eliminations		35			27			5			(6	)		11			61			69
Total net income	$	6,328			7,993			9,340			4,904			5,150		$	28,565			17,570
Community banking segment operating earnings:
Income before income taxes	$	12,748			11,714			11,232			6,375			6,545		$	42,069			21,258
Tax expense (1) (3)		6,696			3,877			2,789			1,866			1,980			15,228			6,384
Bank segment net income	$	6,052			7,837			8,443			4,509			4,565		$	26,840			14,874
Weighted average common shares outstanding:
Basic		19,207,307			16,029,332			16,029,332			13,919,711			12,336,420			16,317,501			12,080,128
Diluted		19,443,353			16,187,869			16,180,171			14,139,241			12,585,518			16,550,357			12,352,246
Earnings per common share:
Basic	$	0.33			0.50			0.53			0.32			0.37		$	1.64		$	1.23
Diluted	$	0.33			0.49			0.52			0.32			0.36		$	1.62		$	1.20
Bank segment income before taxes	$	12,748			11,714			11,232			6,375			6,545		$	42,069		$	21,258
Gain on sale of securities		242			(368	)		(621	)		(185	)		(65	)		(932	)		(706	)
Net loss on extinguishment of debt		—			—			—			—			1,693			—			1,868
Fair value adjustments on interest rate swaps		(419	)		(90	)		69			58			(998	)		(382	)		(590	)
Merger related expenses (2)		4,091			311			279			1,311			254			5,992			3,137
Operating earnings before income taxes		16,662			11,567			10,959			7,559			7,429			46,747			24,967
Tax expense (1)		5,480			3,828			2,721			2,213			2,247			14,140			7,498
Operating bank segment earnings (Non-GAAP)	$	11,182			7,739			8,238			5,346			5,182		$	32,607		$	17,469
Operating bank segment earnings per common share:
Basic (Non-GAAP)	$	0.58			0.48			0.51			0.38			0.42		$	2.00		$	1.45
Diluted (Non-GAAP)	$	0.58			0.48			0.51			0.38			0.41		$	1.97		$	1.41

(1) Tax expense is determined using the effective tax rate for the applicable reporting segment for the applicable reporting period which includes the impact of the application of the Tax Cuts and Jobs Act on deferred income tax assets and liabilities.

(2) Remaining merger related costs were incurred within the category “Other” segment earnings.

(3) Income tax expense increased approximately $2.5 million in the Banking Segment for the quarter and year ended December 31, 2017 due to application of the Tax Cuts and Jobs Act on deferred tax assets and liabilities.