First South Bancorp, Inc. Reports June 30, 2017 Quarterly and Six Months Operating Results

Washington, North Carolina - First South Bancorp, Inc. (NASDAQ: FSBK) (the “Company”), the parent holding company of First South Bank (the “Bank”), reports its unaudited operating results for the quarter and six months ended June 30, 2017.

The Company generated net income of $2.1 million for the 2017 second quarter, a 27.5% increase from the $1.6 million of earnings for the 2016 second quarter. Net income for the first six months of 2017 was $3.9 million, a 27.8% increase from the $3.1 million earned for the first six months of 2016.

The Company’s diluted earnings per share (EPS) for the 2017 second quarter increased 29.4% to $0.22 per share, from $0.17 per share for the 2016 second quarter. Diluted EPS for the first six months of 2017 increased 28.1% to $0.41 per share, from $0.32 per share for the first six months of 2016. The Company’s strong loan growth continues to drive solid core revenue, enhancing its capital position while maintaining excellent credit quality.

Significant Event. The Company and Carolina Financial Corporation (“Carolina Financial”) previously announced the execution of an Agreement and Plan of Merger and Reorganization, dated June 9, 2017. The agreement provides that the Company will merge with and into Carolina Financial and the Bank will merge with and into Carolina Financial’s wholly owned bank subsidiary, CresCom Bank, with Carolina Financial and CresCom Bank as the surviving entities. It is currently anticipated that the legal merger will take place in the fourth quarter of 2017. The merger is subject to both regulatory and shareholder approval.

In connection with the merger transaction, the Company incurred $278,000 of professional fees and services expense that impacted our results of operations for the quarter and six months ended June 30, 2017. Excluding the net effects of these expenses, net income for the 2017 second quarter would have totaled $2.3 million, or $0.24 per diluted common share. Net income for the first six months of 2017 would have been $4.1 million, or $0.43 per diluted common share. The Company anticipates that it will incur additional expenses associated with the merger transaction prior to consummation in the fourth quarter. The following table presents net income and diluted EPS for the respective June 30, 2017 second quarter and six month periods adjusted for the impact of the merger-related transaction expenses:

Bruce Elder, President and CEO, commented, “We are excited about partnering with Carolina Financial and CresCom Bank to create the premier community bank in the Carolinas. We believe First South shareholders and customers will be rewarded as the combination of these two banks is expected to provide superior financial performance along with an exceptional customer experience. We plan to leverage the new resources and products available to us through CresCom Bank to attract new customers and expand our existing relationships.”

Mr. Elder further commented, “We continue to remain focused on growing our core earnings and increasing the volume of quality earning assets. Although our financial results were moderately impacted by merger-related expenses in the 2017 second quarter, we were still able to generate net income and EPS growth in the upper 20% range through increases in net interest income and core non-interest income while controlling non-interest expenses.”

Highlights:

The Company’s strong loan and deposit growth continues to result in increased revenue, allowing for growth in both net interest income (NII) and non-interest income. Our NII grew to $9.1 million in the 2017 second quarter, from $8.1 million in the comparative 2016 second quarter. NII for first six months of 2017 grew to $17.7 million, from the $15.9 million of NII generated in the first six months of 2016.

Total non-interest income was $3.6 million, or 28.2% of total revenue (net interest income plus non-interest income) in the 2017 second quarter, compared to $3.5 million, or 30.5%, in the comparative 2016 second quarter. Total non-interest income for first six months of 2017 was $6.9 million, or 27.9% of total revenue, compared to $7.1 million, or 31.0% for first six months of 2016. Excluding the impact of gains on the sales of investment securities of $184,000 for the 2016 second quarter and $467,000 for the first six months of 2016, the Company increased non-interest income by $194,000 and $199,000, respectively. In 2016, investment securities were sold primarily to fund growth in our loan portfolio.

Non-interest expenses in the 2017 second quarter were $9.2 million, compared to $9.0 million for the 2016 second quarter. Total non-interest expenses for the first six months of 2017 totaled $18.3 million, compared to $18.2 million for first six months of 2016. The moderate increase for the respective 2017 reporting periods is attributable to the $278,000 in merger-related expenses noted above.

Income tax expense was $879,000 for the 2017 second quarter, compared to $665,000 for the 2016 second quarter. The effective income tax rates were 29.96% and 29.20% for these reporting periods, respectively. For the first six months of 2017, income tax expense was $1.7 million versus $1.2 million for the first six months of 2016. The effective income tax rates were 29.68% and 28.72%, respectively for the 2017 and 2016 six-month periods.

Balance Sheet Growth. Loans and leases held for investment (HFI) totaled $776.7 million at June 30, 2017, increasing $76.0 million, or 10.8%, over the $700.6 million held at December 31, 2016. Loans held for sale totaled $6.4 million at June 30, 2017 versus $5.1 million held at December 31, 2016. Investment securities and interest-bearing deposits at other banks totaled to $212.9 million at June 30, 2017, versus $216.4 million at December 31, 2016, as some cash was redeployed to support growth in our loans and leases portfolios.

Deposits totaled $931.5 million at June 30, 2017, increasing $60.9 million, or 7.0%, from $870.6 million at December 31, 2016. Non-maturity deposits (personal and business checking, money market, and savings accounts) grew by $53.1 million, or 8.7%, to $667.2 million at June 30, 2017, from $614.1 million at December 31, 2016. CDs increased to $264.3 million at June 30, 2017, from $256.6 million at December 31, 2016. CDs represented 28.4% and 29.5% of total deposits at June 30, 2017, and December 31, 2016, respectively.

Stockholders' equity increased by $4.7 million to $91.9 million at June 30, 2017, from $87.2 million at December 31, 2016. This increase primarily reflects the $3.9 million of net income earned for the first six months of 2017 and a $1.4 million increase in accumulated other comprehensive income resulting from the mark-to-market adjustment of the available-for-sale securities portfolio, and is net of $665,000 of dividends declared.

The tangible equity to assets ratio* was 8.12% at June 30, 2017, compared to 8.21% at December 31, 2016. The tangible book value per common share* increased to $9.07 at June 30, 2017, from $8.57 at December 31, 2016.

Asset Quality. Solid asset quality metrics in the 2017 second quarter continue to reflect the Company’s disciplined credit culture. Non-performing assets (NPAs) declined to $5.0 million at June 30, 2017, or 0.47% of total assets, from $6.3 million, or 0.63% of total assets, at December 31, 2016. NPAs at June 30, 2017 included $2.4 million of other real estate owned (OREO), which declined by $791,000, or 24.5%, from $3.2 million at December 31, 2016. Nonaccrual loans and leases were $2.5 million at June 30, 2017, or 0.33% of loans and leases HFI, compared to $3.1 million, or 0.44%, at December 31, 2016.

The provision for credit losses in the 2017 second quarter was $485,000, compared to $325,000 for the 2016 second quarter. The provision for credit losses was $750,000 in the first six months of 2017, compared to $550,000 in the first six months of 2016. The allowance for loan losses represented 1.21% of loans and leases HFI at June 30, 2017, compared to 1.24% at December 31, 2016.

Regulatory Capital Strength. As of June 30, 2017, reported regulatory capital ratios at the Bank were 12.57% for total risk-based capital, 11.37% for tier 1 risk-based capital and common equity tier 1 risk-based capital and 8.84% for tier 1 leverage, compared to 13.01% for total risk-based capital, 11.80% for tier 1 risk-based capital and common equity tier 1 risk-based capital and 8.89% for tier 1 leverage at December 31, 2016.

Key Performance Ratios. Some of our key performance ratios are ROA, ROE and the efficiency ratio. ROA was 0.79% for the 2017 second quarter, compared with 0.68% for the 2016 second quarter. ROE was 9.01% for the 2017 second quarter, compared with 7.55% for the 2016 second quarter. The Company’s efficiency ratio for the 2017 second quarter improved to 71.65%, from 77.59% for the comparative 2016 second quarter. The efficiency ratio for the first six months of 2017 improved to 73.23%, from 79.14% for first six months of 2016. The efficiency ratio measures the proportion of net operating revenues that are absorbed by overhead expenses.

Corporate and Investor Information. The Bank has been serving the citizens of eastern and central North Carolina since 1902 and offers a variety of financial products and services to business and individual customers. The Bank operates through its main office headquartered in Washington, North Carolina, and has 28 full service branch offices located throughout eastern and central North Carolina. The Bank also provides a full menu of leasing services through its wholly-owned subsidiary, First South Leasing, LLC. In addition, under its First South Wealth Management division, the Bank makes securities brokerage services available through an affiliation with an independent broker/dealer.

Additional investor information for the Company and the Bank may be accessed on our website at www.firstsouthnc.com.

The Company’s common stock symbol as traded on the NASDAQ Global Select Market is “FSBK”.

Forward-Looking Statements. Statements contained in this release, which are not historical facts, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors which include failure to obtain all regulatory approvals and meet other closing conditions pursuant to the Agreement and Plan of Merger and Reorganization, dated as of June 9, 2017, by and between Carolina Financial Corporation (“CARO”) and the Company (the “CARO Merger”), including approval by the stockholders of CARO and the Company, respectively, on the expected terms and time schedule; delay in closing the CARO Merger; difficulties and delays in integrating CARO’s and the Company’s businesses or fully realizing cost savings and other benefits; business disruption as a result of the CARO Merger; customer acceptance of CARO products and services; potential difficulties encountered in expanding into a new market following the CARO Merger; the effects of future economic conditions; governmental fiscal and monetary policies; legislative and regulatory changes; the risks of changes in interest rates; the effects of competition; and including without limitation other factors that could cause actual results to differ materially as discussed in documents filed by the Company with the Securities and Exchange Commission from time to time. The Company assumes no obligation and does not intend to update these forward-looking statements, except as required by law.

*Non-GAAP Financial Measures. Important disclosures about and reconciliations of non-GAAP measures to the corresponding GAAP measures, are provided below and attached to this press release.

This press release and the accompanying Supplemental Financial Data contain financial information determined by methods other than in accordance with generally accepted accounting principles (GAAP) in the United States. Management uses these "non-GAAP" measures in their analysis of the Company's performance. Management believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of non-GAAP disclosures are provided within the accompanying tables to this press release.

First South Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

First South Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

Three and Six Months Ended June 30, 2017 and 2016

(Unaudited)

First South Bancorp, Inc.

Supplemental Financial Data (Unaudited)

First South Bancorp, Inc.

Supplemental Financial Data (Unaudited)