FIRST SOUTH BANCORP, INC. (NASDAQ:FSBK) Files An 8-K Entry into a Material Definitive Agreement

Item 1.01

Agreement and Plan of Merger and
Reorganization

On June 9, 2017, First South Bancorp, Inc. (the Registrant), the
holding company for First South Bank, Washington, North Carolina,
entered into an Agreement and Plan of Merger and Reorganization
(the Merger Agreement) with Carolina Financial Corporation
(CARO), the holding company for CresCom Bank, Charleston, South
Carolina. Under the Merger Agreement, the Registrant will merge
with and into CARO (the Merger) and First South Bank will merge
with and into CresCom Bank.

Subject to the terms and conditions of the Merger Agreement, the
Registrants shareholders will receive 0.52 shares of CARO common
stock for each share of the Registrants common stock. The
aggregate merger consideration equals $162 million as of June 9,
2017. The parties anticipate closing the Merger during the fourth
quarter of 2017.

The Merger Agreement has been unanimously approved by the boards
of directors of each of the Registrant and CARO. The closing of
the Merger is subject to the required approval of the Registrants
and CAROs shareholders, requisite regulatory approvals, the
effectiveness of the registration statement to be filed by CARO
with respect to the CARO common stock to be issued in the Merger,
and other customary closing conditions.

The Merger Agreement contains usual and customary representations
and warranties that the Registrant and CARO made to each other as
of specific dates. The assertions embodied in those
representations and warranties were made solely for purposes of
the contract between the Registrant and CARO, and may be subject
to important qualifications and limitations agreed to by the
parties in connection with negotiating its terms. Moreover,
certain representations and warranties are subject to a
contractual standard of materiality that may be different from
what may be viewed as material to shareholders, and the
representations and warranties may have been used to allocate
risk between the Registrant and CARO rather than establishing
matters as facts.

The Merger Agreement also provides that prior to the closing of
the Merger, CARO will appoint two members of the Registrants
board of directors, mutually agreed upon by the Registrant and
CARO, to the board of directors of CARO to be effective
immediately following the closing of the Merger. In addition,
CresCom Bank will appoint Bruce W. Elder to its board of
directors prior to the closing of the merger between CresCom Bank
and First South Bank and effective immediately following the
merger.

The Merger Agreement may be terminated in certain circumstances,
including: (i) by mutual written agreement of the parties; (ii)
by either party in the event of a breach by the other party of
any representation or warranty contained in the Merger Agreement
which has not been cured within thirty days and where such breach
is reasonably likely to permit such party to refuse to consummate
the Merger; (iii) by either party in the event that any consent
of any required regulatory authority is denied by final action or
any law or order prohibiting the Merger shall become final and
nonappealable; (iv) by either party if the requisite approval of
the other partys shareholders is not obtained; (v) by either
party in the event that the Merger shall not have been
consummated by March 31, 2018; (vi) by CARO in the event that the
Registrants board of directors has not recommended for approval
the Merger Agreement to its shareholders except as permitted by
the Merger Agreement; (vii) by CARO in the event that the
Registrants board of directors fails to duly convene and hold a
meeting of the Registrants shareholders for the purpose of voting
on the Merger Agreement; (vii) by the Registrant, if after a
shareholders meeting where the requisite approval of the
Registrants shareholders is not obtained and Registrant received
a superior penalty when certain events occur related to a
decrease in CAROs stock price. Upon termination of the Merger
Agreement by (i) CARO if the Registrants board of directors has
not recommended for approval the Merger Agreement to its
shareholders due to an alternate superior proposal, or (ii) by
the Registrant to enter into a superior proposal, the Registrant
may be required to pay to CARO a termination fee of $5.75
million.

In connection with entering into the Merger Agreement, the
Registrant has agreed to offer each of the current option 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 the Registrants 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 the Registrants subject to such stock
option. Any stock option not cancelled will convert into an
option to acquire shares of CARO common stock.

The foregoing summary of the Merger Agreement is qualified in its
entirety by reference to the complete text of such document,
which is filed as Exhibit 2.1 to this Current Report on Form 8-K
and which is incorporated herein by reference. The related press
release is filed as Exhibit 99.1 to this Current Report on Form
8-K and is incorporated herein by reference.

Support Agreements

In connection with entering into the Merger Agreement, each of
the directors and certain executive officers of the Registrant
have entered into a Shareholder Support Agreement (collectively,
the Support Agreements). The Support Agreements generally require
that the shareholder party thereto vote all of his or her shares
of the Registrants common stock in favor of the Merger and
against alternative transactions and generally prohibit such
shareholder from transferring his or her shares of the
Registrants common stock prior to the consummation of the Merger.
The Support Agreements will terminate upon the earlier of the
consummation of the Merger and the termination of the Agreement
in accordance with its terms.

Agreements with Bruce W. Elder and Cornelius F.
Sullivan

Simultaneously with the execution of the Merger Agreement, Bruce
W. Elder and Cornelius F. Sullivan each entered into an
Employment Agreement with CARO and CresCom Bank. Mr. Elder is the
Registrants president and chief executive officer and Mr.
Sullivan is a senior vice president and area executive of the
Registrant.

Director Non-Compete Agreements

Simultaneously with the execution of the Merger Agreement, each
of the Registrants non-employee directors entered into a
Non-Employee Director Non-Competition Agreement with CARO. The
Non-Employee Director Non-Competition Agreements contain
provisions related to non-disclosure of confidential information,
non-recruitment of employees, non-solicitation of customers, and
non-competition.

Participants in the Merger Solicitation.

The Registrant and CARO, and certain of their respective
directors, executive officers and other members of management and
employees may be deemed to be participants in the solicitation of
proxies from the shareholders of the Registrant in respect of the
Merger. Information regarding the directors and executive
officers of the Registrant and CARO and other persons who may be
deemed participants in the solicitation of the Registrants
shareholders in connection with the Merger will be included in
the joint proxy statement/prospectus for the Registrants special
meeting of shareholders, which will be filed with the SEC.
Information about the Registrants directors and executive
officers can also be found in the Registrants definitive proxy
statement in connection with its 2017 annual meeting of
shareholders, as filed with the SEC on June 2, 2017, and other
documents subsequently filed by the Registrant with the SEC.
Information about CAROs directors and executive officers can also
be found in CAROs definitive proxy statement in connection with
its 2017 annual meeting of stockholders, as filed with the SEC on
March 20, 2017, and other documents subsequently filed by CARO
with the SEC. Additional information regarding the interests of
such participants will be included in the joint proxy
statement/prospectus and other relevant documents regarding the
Merger filed with the SEC when they become available.

Item 8.01 Other Events.

On June 12, 2017, the Registrant issued a press release
announcing the execution of the Merger Agreement with CARO. The
complete text of the press release is attached to this report as
Exhibit 99.1.

Cautionary Statements Regarding Forward-Looking
Information.

This Current Report contains forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995.
In general, forward-looking statements usually use words such as
may, believe, expect, anticipate, intend, will, should, plan,
estimate, predict, continue and potential or the negative of
these terms or other comparable terminology, including statements
related to the expected timing of the closing of the Merger, the
expected returns and other benefits of the Merger, to
shareholders, expected improvement in operating efficiency
resulting from the Merger, estimated expense reductions resulting
from the transactions and the timing of achievement of such
reductions, the impact on and timing of the recovery of the
impact on tangible book value, and the effect of the Merger on
regulatory capital ratios. Forward-looking statements represent
managements beliefs, based upon information available at the time
the statements are made, with regard to the matters addressed;
they are not guarantees of future performance. Forward-looking
statements are subject to numerous assumptions, risks and
uncertainties that change over time and could cause actual
results or financial condition to differ materially from those
expressed in or implied by such statements.

Factors that could cause or contribute to such differences
include, but are not limited to, the possibility that expected
benefits may not materialize in the time frames expected or at
all, or may be more costly to achieve; that the Merger may not be
timely completed, if at all; that prior to completion of the
Merger or thereafter, the parties respective businesses may not
perform as expected due to transaction-related uncertainties or
other factors; that the parties are unable to implement
successful integration strategies; that the required regulatory,
shareholder, or other closing conditions are not satisfied in a
timely manner, or at all; reputational risks and the reaction of
the parties customers to the Merger; diversion of management time
to Merger-related issues; and other factors and risk influences
contained in the cautionary language included under the headings
Managements Discussion and Analysis of Financial Condition and
Results of Operations in the Registrants Form 10-K for the year
ended December 31, 2016 and other documents subsequently filed by
the Company with the SEC. Consequently, no forward-looking
statement can be guaranteed. Neither the Registrant nor CARO
undertakes any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events
or otherwise. For any forward-looking statements made in this
Current Report on Form 8-K, the exhibits hereto or any related
documents, the Registrant and CARO claim protection of the safe
harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.

Additional Information and Where to Find It.

This communication is being made in respect of the Merger
involving the Registrant and CARO. This communication does not
constitute an offer to sell or the solicitation of an offer to
buy any securities or a solicitation of any vote or approval. In
connection with the Merger, CARO will file with the Securities
and Exchange Commission (the SEC) a registration statement on
Form S-4 that will include a joint proxy statement/prospectus for
the Registrants shareholders. The Registrant and CARO also plan
to file other documents with the SEC regarding the Merger. The
Registrant will mail the final joint proxy statement/prospectus
to its shareholders. BEFORE MAKING ANY VOTING OR INVESTMENT
DECISION, INVESTORS AND SHAREHOLDERS ARE URGED TO READ THE JOINT
PROXY STATEMENT/PROSPECTUS REGARDING THE MERGER AND ANY OTHER
RELEVANT DOCUMENTS CAREFULLY IN THEIR ENTIRETY WHEN THEY BECOME
AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT
THE MERGER. The joint proxy statement/prospectus, as well as
other filings containing information about the Registrant and
CARO, will be available without charge, at the SECs website
(http://www.sec.gov). Copies of the joint proxy
statement/prospectus and other documents filed with the SEC in
connection with the Merger can also be obtained, when available,
without charge, from the Registrants website
(http://www.firstsouthnc.com) and CAROs website
(http://www.haveanicebank.com).

About FIRST SOUTH BANCORP, INC. (NASDAQ:FSBK)

First South Bancorp, Inc. is the bank holding company for First South Bank (the Bank). Through the Bank, the Company operates a commercial banking business. The Bank is a North Carolina chartered commercial bank. The Bank’s segment is providing general commercial banking services to its markets located in the state of North Carolina. The Bank’s principal business consists of attracting deposits from the general public and investing the funds in commercial real estate loans, commercial and industrial business loans, consumer loans and loans secured by first and second mortgages on owner-occupied, single-family residences in the Bank’s market area. The Bank provides both personal and business on-line banking services. Its services include mobile banking, mobile deposits, e-statements, bill paying, funds transfers between accounts, automated clearing house originations, wire transfers and stop payment orders for checks, as applicable by personal or business account type.