Carolina Financial (CARO) 8-K/A Report on Consolidated Financial Statements

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial information and explanatory notes show the impact on the historical financial positions and results of operations of Carolina Financial Corporation (“Carolina Financial”) and Greer Bancshares Incorporated (“Greer”) and have been prepared to illustrate the effects of the merger involving Carolina Financial and Greer under the acquisition method of accounting with Carolina Financial treated as the acquirer. Under the acquisition method of accounting, the assets and liabilities of Greer, as of the effective date of the merger, will be recorded by Carolina Financial at their respective fair values and the excess of the merger consideration over the fair value of Greer’s net assets will be allocated to goodwill. The unaudited pro forma condensed combined balance sheet gives effect to the merger as if the merger had been consummated on December 31, 2016. The unaudited pro forma condensed combined income statement for the fiscal year ended December 31, 2016 is presented as if the merger had occurred on January 1, 2016. The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the merger and, with respect to the income statements only, expected to have a continuing impact on consolidated results of operations.

The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of the periods presented. The adjustments included in these unaudited pro forma condensed combined financial statements are preliminary and may be revised. The unaudited pro forma condensed combined financial information also does not consider any potential impacts of potential revenue enhancements, anticipated cost savings and expense efficiencies, or asset dispositions, among other factors.

As explained in more detail in the accompanying notes to the unaudited pro forma condensed combined financial information, the pro forma allocation of purchase price reflected in the unaudited pro forma condensed combined financial information is based on preliminary estimations and is subject to adjustment and may vary from actual recorded purchase price allocation.

The unaudited pro forma condensed combined financial information is provided for informational purposes only. The unaudited pro forma condensed combined financial information is not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the transaction been completed as of the dates indicated or that may be achieved in the future. The preparation of the unaudited pro forma condensed combined financial information and related adjustments required management to make certain assumptions and estimates.

Unaudited Pro Forma Condensed Combined Balance Sheet

As of December 31, 2016

($ In thousands)	Carolina Financial			Greer			Pro Forma Adjustments			Notes		Pro Forma Combined
ASSETS
Cash and due from banks	$	9,761			5,649			—					15,410
Interest-bearing cash		14,591			19,040			(8,047	)		A		25,584
Federal funds sold		—			1,465			—					1,465
Cash and cash equivalents		24,352			26,154			(8,047	)				42,459
Securities available-for-sale		335,352			123,502			—					458,854
Federal Home Loan Bank stock, at cost		11,072			1,595			—					12,667
Other investments		1,768			—			—					1,768
Derivative assets		2,219			—			—					2,219
Loans held for sale		31,569			381			—					31,950
Loans receivable, gross		1,178,266			211,812			(11,120	)		B		1,378,958
Allowance for loan losses		(10,688	)		(3,105	)		3,105			C		(10,688	)
Loans receivable, net		1,167,578			208,707			(8,015	)				1,368,270
Premises and equipment, net		37,054			3,987			4,200			D		45,241
Accrued interest receivable		5,373			1,362			—					6,735
Real estate acquired through foreclosure, net		1,179			42			—					1,221
Deferred tax assets, net		8,341			2,789			(1,420	)		E		9,710
Mortgage servicing rights		15,032			—			—					15,032
Cash value life insurance		28,984			8,519			—					37,503
Core deposit intangible		3,658			—			4,520			F		8,178
Goodwill		4,266			—			32,674			G		36,940
Other assets		5,939			1,315			—					7,254
Total assets	$	1,683,736			378,353			23,912					2,086,001
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Noninterest-bearing deposits	$	229,905			54,709			—					284,614
Interest-bearing deposits		1,028,355			240,417			201			H		1,268,973
Total deposits		1,258,260			295,126			201					1,553,587
Short-term borrowed funds		203,000			—			—					203,000
Long-term debt		38,465			53,712			(3,509	)		I		88,668
Derivative liabilities		342			—			—					342
Accrued expenses and other liabilities		20,479			3,337			175			J		23,991
Total liabilities		1,520,546			352,175			(3,133	)				1,869,588
Commitments and contingencies
Stockholders’ equity:
Preferred stock		—			—			—
Common stock		125			12,680			(12,662	)		K		143
Additional paid-in capital		66,156			4,140			49,940			K		120,236
Retained earnings		98,451			10,406			(11,281	)		L		97,576
Accumulated other comprehensive (loss) income, net of tax		(1,542	)		(1,048	)		1,048			M		(1,542	)
Total stockholders’ equity		163,190			26,178			27,045					216,413
Total liabilities and stockholders’ equity	$	1,683,736			378,353			23,912					2,086,001

Unaudited Pro Forma Condensed Combined Statement of Income

For the Year Ended December 31, 2016

	Carolina Financial				Greer			Pro Forma Adjustments			Notes		Pro Forma Combined
(In thousands, except share data)
Interest income
Loans		$	51,137			9,588								60,725
Investment securities			9,274			3,072								12,346
Federal Funds sold			5			10								15
Other interest income			498			108								606
Total interest income			60,914			12,778			—					73,692
Interest expense
Deposits			5,972			900			(186	)		N		6,686
Short-term borrowed funds			509			—								509
Long-term debt			2,272			1,387			175			O		3,834
Total interest expense			8,753			2,287			(10	)				11,030
Net interest income			52,161			10,491			(10	)				62,642
Provision for loan losses			—			—			—					—
Net interest income after provision for loan losses			52,161			10,491			(10	)				62,642
Noninterest income
Mortgage banking income			17,226			—								17,226
Deposit service charges			3,688			527			—					4,215
Net loss on extinguishment of debt			(1,868	)		(199	)		—					(2,067	)
Net gain on sale of securities			706			364			—					1,070
Fair value adjustments on interest rate swaps			590			—			—					590
Net increase in cash value life insurance			902			—			—					902
Mortgage loan servicing income			5,748			—			—					5,748
Other			2,305			2,756			—					5,061
Total noninterest income			29,297			3,448			—					32,745
Noninterest expense
Salaries and employee benefits			31,475			5,995								37,470
Occupancy and equipment			7,942			742								8,684
FDIC insurance			702			215								917
Recovery of mortgage loan repurchase losses			(1,000	)		—								(1,000	)
Other real estate (income) expense, net			(20	)		—								(20	)
Amortization of intangibles			407			—			452			P		859
Mortgage subservicing expense			1,857			—								1,857
Amortization of mortgage servicing rights			2,312			—								2,312
Merger related expenses			3,245			—								3,245
Other			9,120			3,270								12,390
Total noninterest expense			56,040			10,222			452					66,714
Income before income taxes			25,418			3,717								28,673
Income tax expense (1)			7,848			937								8,853
Net income		$	17,570			2,780								19,820
Earnings per common share:
Basic		$	1.45			1.12								1.43
Diluted		$	1.42			1.12								1.40
Average common shares outstanding:
Basic			12,080,128			2,492,496			(707,665	)				13,864,959
Diluted			12,352,246			2,492,496			(707,665	)				14,137,077

(1) Pro Forma Combined tax rate assumes Carolina Financial effective rate for the year ended December 31, 2016.

Note I — Pro Forma Adjustments

The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined consolidated financial information. All adjustments are based on current assumptions and valuations, which are subject to change.

A. Represents the cash portion of the merger consideration and merger-related charges that are expected to be incurred.

B. Estimated fair value adjustment of the acquired loan portfolio, based on Carolina Financial’s evaluation.

C. Existing Greer allowance for loan losses which is not carried over under applicable accounting rules.

D. Estimated fair market value adjustment to Greer’s land and buildings, based on Carolina Financial’s evaluation.

E. Estimated deferred tax liability associated with the fair market value adjustments at a 37% blended effective tax rate.

F. Estimated core deposit intangible related to acquired core deposit accounts.

G. Estimated goodwill that will be created in this transaction as a result of the consideration paid being greater than the net assets acquired.

H. Estimated fair market value adjustment associated with the interest rate paid on time deposits based on similar market products.

I. Estimated fair market value adjustments associated with Greer long-term debt based on the interest rate paid on similar market products.

J. Estimated adjustments to accrued liabilities.

K. Adjustment necessary to reflect the issuance of approximately 1,785,000 shares of Carolina Financial common stock based at a value of $30.30 per share (closing price on date of merger), resulting in stock merger consideration of approximately $54.1 million and the elimination of the Greer common stock and additional paid-in-capital as part of the accounting entries to reflect the transaction.

L. Elimination of Greer retained earnings as part of the accounting entries to reflect the transaction as well as the estimated merger-related expenses that are expected to be incurred by Carolina Financial.

M. Elimination of accumulated other comprehensive income of Greer as part of the accounting entries to reflect the transaction.

N. Estimated amortization expense associated with the fair market value adjustment related to time deposits.

O. Estimated amortization expense associated with the fair market value adjustments related to borrowings.

P. Estimated amortization expense of the core deposit intangible.

Note II — Merger Related Charges

The estimated transaction costs related to the merger are approximately $5.2 million or approximately $3.5 million net of tax. This cost is included in the Pro Forma Combined Consolidated Balance Sheet. These estimated transaction costs are still being developed and will continue to be refined over the next several months, and will include assessing personnel, benefit plans, premises, equipment, and service contracts to determine where they may take advantage of redundancies. These costs will be recorded as non-interest expense as incurred.

Note III — Preliminary Purchase Accounting Allocation

Under the terms of the Agreement and Plan of Merger between Carolina Financial and Greer, dated as of November 7, 2016, Greer shareholders have the right to receive either $18.00 in cash or 0.782 shares of Carolina Financial common stock, or a combination thereof, for each share of Greer common stock they owned immediately prior to the merger, subject to the limitation that 10% of the outstanding shares of Greer common stock will be exchanged for cash and 90% of the outstanding shares of Greer common stock will be exchanged for shares of Carolina Financial common stock. The unaudited pro forma combined consolidated financial information reflects the issuance of approximately 1,785,000 shares of Carolina Financial common stock with an aggregate value of $54.1 million based on the closing stock price of $30.30 per share at March 17, 2017, as well as cash consideration of approximately $4.6 million. The merger will be accounted for using the acquisition method of accounting; accordingly, Carolina Financial’s cost to acquire Greer will be allocated to the assets (including identifiable intangible assets) and liabilities of Greer at their respective estimated fair values as of the merger date. Accordingly, the pro forma purchase price was preliminarily allocated to the assets acquired and the liabilities assumed based on their estimated fair values, as summarized in the following table.

Preliminary Purchase Accounting Allocation
Stock Consideration	$	54,080
Cash Consideration		4,565
Total Merger Consideration		58,645
Equity at Greer		26,178
Preliminary goodwill		32,467
Deal charges, net of tax - assumed 75% incurred by Greer		2,625
Fair Market Value Adjustment Increase (Decrease) to Goodwill
Loan mark, net of allowance		8,015
PP&E mark		(4,200	)
Core Deposit Intangible		(4,520	)
Trust preferred security interest rate mark		(3,509	)
Other liabilities		175
CD Premium		201
Deferred tax liability associated with fair value adjustments		1,420
Total fair market value adjustments		(2,418	)
Total Goodwill	$	32,674